<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996
REGISTRATION NO. 333-15759
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
YURIE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3669 52-1778987
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
10000 DEREKWOOD LANE
LANHAM, MD 20706
(301) 352-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
DR. JEONG H. KIM
CHIEF EXECUTIVE OFFICER
YURIE SYSTEMS, INC.
10000 DEREKWOOD LANE
LANHAM, MD 20706
(301) 352-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
RICHARD A. STEINWURTZEL, ESQUIRE RICHARD C. TILGHMAN, JR., ESQUIRE
FRIED, FRANK, HARRIS, SHRIVER & PIPER & MARBURY L.L.P.
JACOBSON CHARLES CENTER SOUTH
1001 PENNSYLVANIA AVENUE, N.W. 36 SOUTH CHARLES STREET
SUITE 800 BALTIMORE, MD 21201
WASHINGTON, DC 20004-2505 (410) 539-2530
(202) 639-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DECEMBER 24, 1996
[LOGO OF YURIE APPEARS HERE]
4,000,000 Shares
YURIE SYSTEMS, INC.
Common Stock
--------
All of the 4,000,000 shares of Common Stock offered hereby are being sold by
Yurie Systems, Inc. Prior to this offering, there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $8.00 and $10.00 per share. See
"Underwriting" for the factors to be considered in determining the initial
public offering price. Management will beneficially own approximately 79.1% of
the Company's outstanding voting stock upon completion of this offering. The
Common Stock has been approved for quotation on the Nasdaq Stock Market
(National Market) upon completion of this offering under the trading symbol
"YURI."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 HEREOF.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS TO
PUBLIC AND COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- --------------------------------------------------------------------------------
Total(2)..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company estimated at $600,000.
(2) Certain stockholders of the Company have granted to the Underwriters a 30-
day option to purchase up to 600,000 additional shares of Common Stock on
the same terms and conditions as the securities offered hereby, solely to
cover over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares to the public at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and proceeds to the certain
stockholders of Company will be $ , $ and $ , respectively. See
"Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
Alex. Brown & Sons Wessels, Arnold & Henderson
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[GRAPHIC]
[LDR200 PICTURE WITH DESCRIPTION]
----------------
Yurie Systems(TM), Yurie(TM), LDR(TM), LANET(TM) and AQueMan(TM) are
trademarks of the Company. All other trade names and trademarks referred to in
this prospectus are the property of their respective owners.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements, including
the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise
indicated, information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
Yurie Systems, Inc. ("Yurie" or the "Company") designs, manufactures, markets
and services asynchronous transfer mode ("ATM") access products for
telecommunications service providers, corporate end users and government end
users. ATM is a standard for packaging and switching digital information that
facilitates high speed information transmission with a high degree of
efficiency. End users of telecommunications services have traditionally
maintained separate wide area networks ("WANs") for transmitting voice, data,
video and other electronic information among geographically dispersed
locations. ATM technology is conducive to consolidating these networks. The
network consolidation brought about by employing ATM access products can
provide savings in WAN communication costs and simplify network management.
Yurie is a leading supplier of ATM access products. The Company's LDR100,
introduced in February 1995, was one of the first commercially available ATM
access products. The LDR200, Yurie's second generation ATM access product, was
released in September 1996. The Company designed its ATM access products to be
flexible and scaleable, so that customers can realize the benefits of ATM while
preserving their investments in existing equipment. The LDR products adhere to
industry-wide technical standards, allowing users to integrate the products
into current networks operating with other standards-compliant products.
Yurie's proprietary adaptive queue management algorithm ("AQueMan") allows the
LDR products to reduce network congestion while maintaining quality of service.
The Company's Limitless ATM Network Protocol ("LANET") is capable of
transporting ATM traffic over circuits of varying speed and quality, including
poor quality circuits. The Company's ATM access products incorporate a variety
of value-added features, including compact size, scaleability, reliability,
encryption capabilities and a broad variety of access interfaces.
The Company's strategy centers on maintaining its technological leadership,
developing both the telecommunications service provider and corporate end user
markets while continuing to pursue government end user markets, developing
international markets and building strategic relationships. Since 1994, Yurie
has had a significant strategic relationship with AT&T. In August 1995,
pursuant to this relationship, AT&T and Yurie entered into an agreement (the
"AT&T Agreement") to facilitate the joint technical evaluation and marketing of
the Company's LDR products. Under the AT&T Agreement, as amended, AT&T has a
three-year exclusive right to market and sell the LDR100 and the LDR200 in U.S.
federal, state and local government markets, as well as certain foreign
government markets, and has committed to purchase at least $6.5 million, $10.0
million and $10.0 million of the LDR200 in 1996, 1997 and 1998, respectively.
The Company was founded in February 1992 by Dr. Jeong H. Kim, the Company's
Chief Executive Officer and Chairman of the Board of Directors. The Company
began developing ATM products in 1994 and began product shipments in February
1995. Prior to 1994, the Company's business operations consisted primarily of
telecommunications consulting and related service activities.
The Company was incorporated in Maryland in February 1992 as Integrated
Systems Technology, Inc. In April 1996, it changed its name to Yurie Systems,
Inc. and reincorporated in Delaware in August 1996. Yurie's executive offices
are located at 10000 Derekwood Lane, Lanham, Maryland 20706, its telephone
number is (301) 352-4600 and its e-mail address is [email protected].
3
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 4,000,000 shares
Common Stock outstanding after the offering........ 24,608,400 shares(1)
Use of proceeds.................................... General corporate purposes,
including working capital.
Nasdaq National Market symbol...................... YURI
</TABLE>
- --------
(1) Excludes 3,136,722 shares of Common Stock issuable upon the exercise of
stock options outstanding as of December 24, 1996 at a weighted average
exercise price of approximately $1.63 per share, substantially all of which
are not exercisable as of the date of this Prospectus. Also excludes
1,863,278 shares of Common Stock reserved for future issuance under the
Company's 1996 Non Statutory Stock Option Plan (the "Stock Option Plan"),
200,000 shares of Common Stock reserved for future issuance under the
Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan") and
200,000 shares of Common Stock reserved for future issuance under the
Company's 401(k) Savings Plan (the "401(k) Plan"). See "Management--Stock
Option Plan," "--Stock Purchase Plan" and "--401(k) Plan."
The following table presents summary audited and unaudited financial data
which has been derived from and should be read in conjunction with the
Company's Audited and Unaudited Balance Sheets and Statements of Operations and
related notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................... $ 194 $ 1,144 $ 5,971 $ 3,960 $ 15,038
Gross profit..................... 52 420 3,460 2,044 9,407
Income (loss) from operations.... (17) 161 1,444 673 4,503
Net income (loss)................ (23) 121 897 416 2,739
Net income per common share...... $ 0.04 $ 0.13
Weighted average common and
common equivalent shares
outstanding..................... 21,660 21,701
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 6,202 $11,002 $43,882
Working capital............................ 2,598 7,398 40,278
Total assets............................... 11,031 15,831 48,711
Total stockholders' equity................. 3,842 8,642 41,522
</TABLE>
- --------
(1) The pro forma data give effect to the sale of 400,000 shares of Common
Stock to Amerindo Technology Growth Fund Inc. ("Amerindo") on November 7,
1996 for $4.8 million (the "Amerindo Transaction"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) Adjusted to give effect to the issuance of the 4,000,000 shares of Common
Stock offered by the Company hereby (at an assumed initial public offering
price of $9.00 per share) and the application of the estimated net proceeds
therefrom as set forth in "Use of Proceeds."
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the shares of Common Stock offered
hereby.
Certain statements included in this Prospectus are forward-looking, such as
statements regarding the anticipated growth in demand for ATM access products,
the anticipated growth in the Company's revenues from the development,
manufacture and sale of ATM access products, the expectation that such revenue
growth will result largely from sales of ATM access products to
telecommunications service providers and corporate end users and the
anticipated expansion of the Company's international activities. Such forward-
looking statements, in addition to information contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Prospectus, are based on the Company's current expectations
and are subject to a number of risks and uncertainties that could cause actual
results in the future to differ significantly from results expressed or
implied in any forward-looking statements made by, or on behalf of, the
Company. These and other risks are detailed below.
Limited Operating History and Operating Results. The Company was founded in
1992, began developing ATM access products in 1994 and commenced shipping ATM
access products in February 1995. Accordingly, there is only a limited
operating history upon which to base an evaluation of the Company and its
prospects. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, develop its technologies, commercialize products
incorporating these technologies, and attract, retain and motivate qualified
employees. There can be no assurance that the Company will be successful in
addressing these risks. The Company expects that its operating expenses will
increase in the future, and there can be no assurance that its revenues will
increase sufficiently to allow it to maintain profitability, either on an
annual or quarterly basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on ATM; Product Concentration. Although ATM is an industry
standard, the ATM access market is still emerging and only a limited number of
telecommunications service providers have installed ATM networks. All of the
Company's product revenue to date has been derived from the sale of ATM access
products, and the Company expects that the sale of ATM access products and
related services will continue to account for substantially all of its
revenues for the foreseeable future. Virtually all of the Company's sales of
ATM access products have been to government agencies or third parties
deploying the Company's ATM access products on behalf of government agencies,
and there can be no assurance that the Company's ATM access products will
achieve acceptance in the corporate end user market to the same degree as in
the government end user market. The Company's success will depend on the
market acceptance of ATM technology as a preferred networking solution
relative to other existing or newly developed solutions. The failure of ATM-
based networking products to achieve widespread market acceptance would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Industry Background."
Sales of the Company's LDR access products have accounted for substantially
all of its revenue to date, and these products and related enhancements are
expected to continue to account for a majority of the Company's revenue at
least through 1997. The Company's success depends in large part on continued
sales of the LDR product line. A decline in either demand for or the average
sales prices of the Company's LDR products, whether as a result of new product
introductions by competitors, price competition, technological change,
inability to provide enhancements on a timely basis or otherwise, could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--The LDR Product Family and Supporting
Services."
5
<PAGE>
Dependence on Government Business. Sales of products and services to the
U.S. government or government contractors represented 100.0% of the Company's
revenue for the years ended December 31, 1994, December 31, 1995 and for the
nine months ended September 30, 1996. Such government customers are often
subject to budgetary pressures and may from time to time reduce their
expenditures and/or cancel orders. A reduction in sales to these government
customers would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Customers and
End Users."
Dependence on Strategic Relationships, Particularly the AT&T Relationship. A
major component of the Company's strategy involves the establishment of
strategic relationships with telecommunications equipment providers and
telecommunications service providers to leverage these entities' distribution
networks. The failure of the Company to establish these relationships would
have a material adverse effect on the Company's growth prospects. The Company
has had a significant strategic relationship with AT&T since 1994, pursuant to
which AT&T and the Company entered into the AT&T Agreement in August 1995. The
AT&T Agreement provides, among other things, for the joint technical
evaluation and marketing of LDR products by Yurie and AT&T. The AT&T
Agreement, as amended, grants AT&T a three-year exclusive right to market and
sell the LDR100 and the LDR200 products solely in U.S. federal, state and
local government markets as well as certain foreign government markets. Under
the AT&T Agreement, AT&T has guaranteed minimum annual purchase orders for the
LDR200 of $6.5 million, $10.0 million and $10.0 million for calendar years
1996, 1997 and 1998, respectively. Sales pursuant to the AT&T Agreement have
generated a majority of the Company's revenue to date. In 1994, 1995 and the
first nine months of 1996, sales to AT&T represented 52.4%, 71.8% and 91.4%,
respectively, of the Company's revenue. If the Company fails to fulfill any of
its material obligations under the AT&T Agreement, AT&T could terminate the
agreement. Any such termination would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--AT&T Relationship."
Fluctuations in Quarterly Operating Results. The Company may experience
significant fluctuations in future quarterly operating results. Fluctuations
may be caused by many factors, including the timing of new product
introductions or technological advances by the Company or its competitors;
market acceptance of enhanced or new versions of the Company's products,
including the LDR200 product line; the size and timing of individual orders of
the Company's products; price reductions by the Company or its competitors;
changes in the distribution channels through which the Company's products are
sold; the addition or loss of significant customers; the mix of the products
sold by the Company; the ability of the Company to obtain sufficient supplies
of sole or limited source components for the Company's products; and general
economic conditions. Quarterly fluctuations in purchase orders by AT&T, or
inventory buildups by AT&T and its customers, also will cause fluctuations in
the Company's operating results. In addition, changes in the mix of the
products sold by the Company or the distribution channels through which the
Company's products are sold may cause fluctuations in the Company's gross and
operating margins. Also, the Company's anticipated operating expense levels
are based, in part, on its expectations as to future revenue and, as a result,
net income may be disproportionately affected by a reduction in revenue.
The Company has recently experienced a period of revenue growth and a
substantial increase in orders, customers and employees. This growth, however,
is not necessarily indicative of future results. In addition, in view of the
significant growth of the Company's operations in the past two years, the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance. The Company
has not experienced seasonal trends to date, but the Company's business,
operating results and financial condition may be affected by such trends in
the future. Fluctuations in operating results may result in volatility in the
price of the Company's Common Stock. See "--No Prior Trading Market; Potential
Volatility of Stock Price" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
6
<PAGE>
New Management Team and Strategies; Management of Growth. Since January
1996, the Company has recruited and hired Barton Y. Shigemura as its Senior
Vice President of Sales and Marketing, Charles S. Marantz as its Chief
Financial Officer and most other key members of management, particularly in
the areas of sales, marketing, operations and administration. As a result, the
key members of the Company's management team have worked together for only a
short time. The new management team has recently initiated a series of
strategies designed to accelerate the Company's growth. There can be no
assurance that these strategies will be successful. In addition, the Company
expects to hire additional employees and there can be no assurance that it
will be successful in hiring, integrating or retaining these employees. See
"Business--Strategy" and "Management."
The Company's growth has placed, and will continue to place, strains on its
management, operations and systems. To manage its growth, the Company must
continuously evaluate the adequacy of its existing systems and procedures,
including its financial and internal control systems and management structure.
There can be no assurance that the Company's management will adequately
anticipate all of the changing demands that growth will impose on the
Company's systems, procedures and structure. Any failure by the Company's
management to anticipate effectively, implement and manage the changes
required to sustain the Company's growth would have a material adverse effect
on the Company.
Dependence on Proprietary Technology. The Company's ability to compete
successfully will depend, in part, on its ability to protect the proprietary
technology contained in its products. The Company currently relies upon a
combination of trade secret, copyright, patent and trademark laws, as well as
contractual restrictions, to establish and protect its proprietary rights. The
Company also seeks to enter into non-competition, proprietary information and
assignment of invention agreements with its employees and non-disclosure
agreements with certain of its suppliers, distributors and customers that are
designed to limit access to and disclosure of its proprietary information.
There can be no assurance that these statutory and contractual arrangements
can effectively deter misappropriation of the Company's technology or
independent third-party development of competing technologies.
The Company has one issued patent for its LANET protocol. The Company
intends to make the technology covered by the LANET patent available in
unmodified form, at no cost to the public, in the belief that this release
will create demand for and facilitate widespread use of LANET and increase
name recognition for Yurie as the developer of LANET. Two additional patent
applications have been filed for (i) the AQueMan algorithm developed by the
Company to regulate and prioritize the flow of traffic in ATM access products
and (ii) error-tolerant addressing to enhance the ability to transport ATM
cells over noisy links (e.g., wireless circuits). The Company intends to file
another patent application within the next six months for a method to simplify
authentication and key exchange in the establishment of secure data links.
There can be no assurance that the applications will result in issued patents
or that the Company's existing patent or future patents will be upheld as
valid or prevent the development of competing products. The failure of the
Company to obtain a patent for AQueMan, or to be granted patents for any of
its other Company-developed technologies, could have a material adverse effect
on the Company's business. Defense of patents can be very costly and
unsuccessful patent litigation could have a material adverse effect on the
Company's competitive position. In addition, there can be no assurance that
third parties will not accuse the Company of patent infringement with respect
to current or future products. Any such claims could require the Company to
spend significant sums in litigation, pay damages, develop non-infringing
technology or acquire technology licenses. Also, effective copyright and trade
secret protection may not be available in every foreign country in which the
Company's products are or may be deployed. See "Business--Intellectual
Property, Proprietary Information and Technical Know How."
Rapid Technological Development; New Products; Product Errors. The market
for the Company's products is generally characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions
that can render existing products obsolete or unmarketable. The Company's
success will depend to a substantial degree upon its ability to develop and
introduce in a timely fashion, enhancements to its existing products and new
products that meet changing customer
7
<PAGE>
requirements and emerging industry standards. The failure of the Company to
introduce new products and respond to industry changes on a timely basis could
have a material adverse affect on the Company's business, results of
operations and financial condition.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. Furthermore, the introduction
and marketing of new or enhanced products require the Company to manage the
transition from existing products in order to minimize disruption in customer
purchasing patterns. There can be no assurance that the Company will be
successful in developing and marketing, on a timely basis, new products or
product enhancements, that its new products will adequately address the
changing needs of the marketplace, or that it will successfully manage the
transition from existing products. Nor can there be any assurance that the
Company will be able to identify, develop, manufacture or support new products
successfully, that such new products will gain market acceptance or that the
Company will be able to respond effectively to technological changes, emerging
industry standards or product announcements by competitors. In addition, the
Company has on occasion experienced delays in the introduction of product
enhancements and new products. There can be no assurance that in the future
the Company will be able to introduce product enhancements or new products on
a timely basis. Products as complex as those offered by the Company may
contain undetected errors or failures when first introduced or as new versions
are released, and such errors have occurred in the Company's products in the
past. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products
after commencement of commercial shipments. The occurrence of such errors
could result in the loss or delay in market acceptance of the Company's
products, diversion of development resources, damage to the Company's
reputation or increased service or warranty costs, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business--The LDR Product Family and Supporting
Services" and "--Research and Development."
Furthermore, from time to time, the Company may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycle of the Company's existing product offerings. There can be no
assurance that announcements of product enhancements or new product offerings
will not cause customers to defer purchasing existing Company products or
cause resellers to return products to the Company. Failure to introduce new
products or product enhancements effectively and on a timely basis, customer
delays in purchasing products in anticipation of new product introductions and
any inability of the Company to respond effectively to technological changes,
emerging industry standards or product announcements by competitors, could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--The LDR Product Family and Supporting
Services" and "--Research and Development."
Highly Competitive and Consolidating Market. Although the market for ATM
access products is still evolving, the Company anticipates that it will become
intensely competitive. The Company's direct competitors include ADC Kentrox
and OnStream Networks, which recently entered into an agreement to be acquired
by 3Com. Both ADC Kentrox and OnStream Networks have already produced ATM
access products that are directly competitive with the Company's products. In
addition, Sahara Networks is reportedly developing an ATM access product that
will be directly competitive with the Company's products. Other companies,
including Cisco Systems/StrataCom, Cascade Communications, General DataComm
and Newbridge Networks have developed networking equipment that may be
competitive with the Company's products. The Company expects that some or all
of these companies and other networking and computer systems companies may in
the future announce plans to develop ATM access products that are directly
competitive with the Company's products. In addition, companies with interests
in other segments of the ATM market, such as central office equipment vendors,
cable television operators and long-distance telephone carriers, including
AT&T, may seek to apply their expertise to the ATM markets served by the
Company.
8
<PAGE>
The entrance of new competitors would be likely to intensify competition in
the ATM access market. Some of the Company's current and possible future
competitors have greater financial, technical, marketing and other resources
than the Company, and some have well established relationships with current
and potential customers of the Company. It is also possible that alliances
among competitors may emerge and rapidly acquire significant market share or
that competition will increase as a result of networking industry
consolidation. Increased competition may result in price reductions, reduced
profitability and loss of market share, any of which would have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Competition."
In addition, there has recently been an increase in acquisitions by large,
well-established networking companies of smaller networking companies that
possess technology that will allow the larger companies to offer a more
complete product line. Companies that have announced or completed acquisitions
include Cisco Systems, Bay Networks, Cabletron Systems and 3Com. Consolidation
within the industry could lead to even greater competition than currently
exists. In addition, the ability of these larger companies to offer customers
total networking solutions from one vendor in the future may have a material
adverse effect on the Company's sales.
Dependence on Manufacturers and Suppliers. The Company relies on one
manufacturer, Sanmina Corporation, to manufacture the majority of its common
equipment circuit packs, backplanes, chassis and printed circuit board
assemblies. Yurie does not have a contract with Sanmina Corporation or any
other manufacturer, and all of the Company's products are manufactured
pursuant to individual purchase orders. In the past, Yurie has also used
several other manufacturers as supplemental sources for backplanes, chassis
and printed circuit boards, and may use these manufacturers in the future as
necessary. Because the Company cannot control its third party manufacturers,
reliance on such manufacturers may reduce the Company's flexibility and
responsiveness to changes. To the extent the Company would be required to find
replacements for Sanmina Corporation and its other manufacturers, a change in
manufacturers could result in short term cost increases and time delays in
deliveries of finished assemblies, which would have a material adverse effect
on the Company's business and operating results and possibly on its
relationships with customers. While Yurie maintains some level of safety stock
on critical components and some level of reserve inventory, these levels would
not be sufficient to meet increases in demand occurring simultaneously with
delayed deliveries of common equipment circuit packs, backplanes, chassis and
printed circuit board assemblies. See "Business--Manufacturing and Suppliers."
Certain components used in the Company's products, including microprocessors
and communications chips that are manufactured by PMC-Sierra, Inc., Hewlett-
Packard Company, Integrated Device Technology, Inc., Xilinx, Inc. and Altera
Corporation, are currently available from only one supplier. In the past, the
Company has experienced shortages of certain of these components because of
vendor production problems and the inability of suppliers to increase delivery
rates to meet the Company's requirements. In addition, the Company has
experienced shortages of certain other key components. These component
shortages and delays have resulted in delays in the shipment of the Company's
products, and the component shortages have also resulted in higher component
costs. When these components are in short supply, Yurie must compete for them
with larger companies that often have longer established relationships with
these vendors. Certain components used in the Company's products require an
order lead time of up to 12 weeks. Other components that currently are readily
available may become difficult to obtain in the future. Failure of the Company
to predict accurately its required quantities of these long lead time
components could result in either shortages or excess inventory of such
components, which could have a material adverse effect on the Company's
business and operating results.
Any extended delay in deliveries of components or of finished printed
circuit board assemblies would have a material adverse effect on the Company's
business and operating results and possibly on its relationships with
customers. Although Yurie typically maintains some reserve inventory of
components,
9
<PAGE>
this inventory would not cover a significant delay in the delivery of such
components. See "Business-- Manufacturing and Suppliers."
Dependence on Key Personnel. The Company's success depends to a significant
extent upon a number of key technical and management employees, including
Jeong H. Kim, the Company's Chief Executive Officer and Chairman of the Board
of Directors, Kwok L. Li, the Company's President, Chief Operating Officer and
a Director, and Barton Y. Shigemura, the Company's Senior Vice President of
Sales and Marketing and a Director. The Company has employment agreements with
Dr. Kim and Mr. Li. The loss of the services of any of the Company's key
employees could have a material adverse effect on the Company. The Company
does not maintain life insurance policies on any key employees. In addition,
the Company believes that its future success will depend in large part upon
its ability to attract and retain additional highly-skilled technical,
managerial, sales and marketing personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting, hiring, integrating and retaining the personnel that it requires.
See "Management--Directors, Executive Officers and Key Employees."
Compliance with Regulations and Evolving Industry Standards. The Company's
products must meet a significant number of voice and data communications
regulations and standards, some of which are evolving as new technologies are
deployed. In the U.S., the Company's products must comply with various
regulations defined by the Federal Communications Commission and Underwriters
Laboratories, as well as standards established by Bell Communications Research
("Bellcore"). Internationally, the Company's products must comply with
standards established by telecommunications authorities in various countries,
as well as with recommendations of the International Telecommunications Union
("ITU"). In addition, telecommunications service providers require that
equipment connected to their networks comply with their own standards, which
may vary from industry standards.
Industry standards for ATM technology are still evolving. One of the bodies
setting industry standards is the ATM Forum, a group of industry participants
including equipment manufacturers, telecommunications service providers and
end users. As these standards evolve, the Company will be required to modify
its products or develop and support new versions of its products. The failure
of the Company's products to comply, or delays in achieving compliance, with
the various existing and evolving industry standards could delay introduction
of the Company's products, which could have a material adverse effect on the
Company's business and operating results.
Government regulatory policies are likely to continue to have a major impact
on the pricing of both existing and new public network services and therefore
are expected to affect demand for such services and the telecommunications
products that support such services. Tariff rates, whether determined
autonomously by telecommunications service providers or in response to
regulatory directives, may affect the cost effectiveness of deploying public
network services. Tariff policies are under continuous review and are subject
to change. User uncertainty regarding future policies may also affect demand
for telecommunications products, including the Company's products.
Risks Associated With International Sales, Regulatory Standards and Currency
Exchanges. To date, less than 1% of the Company's revenue in each of the years
ended December 31, 1994, December 31, 1995 and the nine months ended September
30, 1996 has been derived from orders from international customers. However,
the Company anticipates that international sales may increase in absolute
dollars and as a percentage of revenue during the year ending December 31,
1997. The Company intends to expand its sales and marketing efforts outside of
the U.S. and enter into international markets (excluding certain foreign
government markets for which AT&T has the exclusive right to market and sell
the LDR100 and the LDR200), which will require significant management
attention and financial resources. In order to sell its products
internationally, the Company must meet standards established by
telecommunications authorities in various countries, as well as the
recommendations of the ITU. A delay in obtaining, or the failure to obtain,
certification of its products in countries outside of the U.S. could delay or
preclude the
10
<PAGE>
Company's sales and marketing efforts in such countries, which could have a
material adverse effect on the Company's business and operating results.
Conducting business outside of the U.S. is subject to certain risks,
including longer payment cycles, unexpected changes in regulatory requirements
and tariffs, difficulties in staffing and managing foreign operations, greater
difficulty in accounts receivable collection and potentially adverse tax
consequences. Moreover, gains and losses on the conversion to U.S. dollars of
accounts receivable not denominated in U.S. dollars and accounts payable
arising from international operations may in the future contribute to
fluctuations in the Company's business and operating results. The Company
currently has no sales or purchase obligations that are denominated in foreign
currencies. Should the Company have a material amount of such sales or
purchase obligations in the future, the Company may engage in currency hedging
activities or derivative arrangements. Fluctuations in exchange rates could
affect demand for the Company's products. The imposition of exchange or price
controls or other restrictions on foreign currencies could have a material
adverse effect on the Company's business and operating results. As the Company
increases its international sales, its revenue may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the
world. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
General Economic Conditions. Demand for the Company's products depends in
large part on the overall demand for communications and networking products,
which has in the past and may in the future fluctuate significantly based on
numerous factors, including capital spending levels and general economic
conditions. There can be no assurance that the Company will not experience a
decline in demand for its products due to general economic conditions. Any
such decline would have a material adverse effect on the Company's business,
operating results and financial condition.
Control by Current Stockholders. Immediately following the consummation of
this offering, directors and officers of the Company and their affiliates will
beneficially own approximately 79.1% of the outstanding Common Stock
(approximately 76.7% if the Underwriters' over-allotment option is exercised
in full). As a result, these stockholders will be able to elect a majority of
the Company's Board of Directors and approve all matters requiring stockholder
approval, and will have significant control over the Company and the conduct
of its business. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company.
No Prior Trading Market; Potential Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock, and there can
be no assurance that an active trading market for the Common Stock will
develop upon consummation of this offering or, if one does develop, that it
will be maintained. Consequently, the offering price of the Common Stock will
be determined by negotiations between the Company and the representatives of
the Underwriters. In addition, the market price of the Common Stock may be
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or
its competitors, developments with respect to patents or proprietary rights,
and general market conditions may have a significant effect on the market
price of the Common Stock. Further, 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
or disproportionate to the operating performance of such companies. See
"Underwriting" for a description of the factors to be considered in
determining the initial public offering price.
Discretion as to Use Proceeds. The Company expects to use the net proceeds
of this offering primarily for general corporate purposes, including working
capital. A portion of the net proceeds also may be used for the acquisition of
complementary businesses, products or technologies, although the Company
currently has no agreements in place, no specified acquisition targets and is
not involved in
11
<PAGE>
any negotiation with respect to any such acquisitions. The Company also
expects that this offering will create a public market for the Common Stock,
facilitate future access for the Company to public equity markets and enhance
the Company's ability to use its Common Stock as consideration for potential
acquisitions and as a means of attracting and retaining key employees. In
addition, the Company believes that the offering will provide increased
visibility for the Company in a marketplace where many of its potential
competitors are publicly held.
The Company has no specific plans for a significant portion of the proceeds
of this offering and, as a consequence, management will have discretion over
the use of a significant portion of the proceeds. The failure of management to
apply such funds effectively could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Use of
Proceeds."
Benefits of the Offering to Existing Stockholders. After this offering, it
is expected that a public market will exist for the Common Stock. At an
assumed initial offering price of $9.00 per share, there will be a substantial
increase in the market value of the shares of Common Stock held by management
and existing shareholders over their original purchase price. As of December
24, 1996, the directors, officers, key employees and 5% stockholders of the
Company hold an aggregate of 19.4 million shares of Common Stock having an
aggregate original purchase price of $156,000 and a market value, based on an
assumed initial public offering price of $9.00, of $174.6 million. See
"Management" and "Principal Stockholders."
Shares Eligible for Future Sale. Sales of substantial amounts of the Common
Stock of the Company in the public market, or the prospect of such sales,
could have a material adverse affect on the market price of the Common Stock.
Immediately following this offering, the Company will have outstanding
24,608,400 shares of Common Stock. The 4,000,000 shares of Common Stock
offered hereby (4,600,000 if the Underwriters' over-allotment option is
exercised in full) will be eligible for public sale without restriction under
the Securities Act by persons other than Affiliates (as that term is defined
in Rule 144 under the Securities Act) of the Company. Sales of shares by
Affiliates of the Company will be subject to public resale in accordance with
Rule 144. Approximately 14,500,000 shares of Common Stock have been owned by
existing stockholders for more than two years and will be available for public
sale pursuant to Rule 144, subject to the volume and other limitations set
forth therein. See "Underwriting." In addition certain of the Company's
existing stockholders have registration rights that permit them to demand
registration under the Securities Act of their shares beginning 180 days after
the consummation of this offering. These registration rights, if exercised,
would permit such stockholders to sell, in the aggregate, up to 22,250,000
shares into the public market without being subject to the restrictions of
Rule 144.
The Company and its executive officers, directors and certain stockholders,
who will beneficially own an aggregate of 20,896,450 outstanding shares
immediately following this offering, have agreed with the Underwriters not to
offer, sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent
of Alex. Brown & Sons Incorporated. Based on shares outstanding as of December
24, 1996, following the expiration or waiver of the foregoing restrictions on
dispositions and any applicable holding periods under Rule 144, 20,608,400
shares of Common Stock owned by existing stockholders will be available for
sale into the public market pursuant to Rule 144 (including the volume and
other limitations set forth therein) and could impair the Company's future
ability to raise capital through an offering of its equity securities.
The Company intends to register on Form S-8 under the Securities Act as soon
as practicable after the effective date of this offering, 5,000,000 shares of
Common Stock issued or reserved for issuance under the Stock Option Plan,
200,000 shares of Common Stock reserved for issuance under the Stock Purchase
Plan and 200,000 shares of Common Stock reserved for issuance under the 401(k)
Plan. These registrations will be effective upon filing. As of December 24,
1996, there were 3,136,722 outstanding options for the purchase of shares
under the Stock Option Plan. See "Management--Stock Option Plan." Shares
registered and issued pursuant to such registration statement will be freely
tradable except to the extent that the holders thereof are deemed to be
Affiliates of the Company, in which case the
12
<PAGE>
transferability of such shares will be subject to the volume limitations set
forth in Rule 144 under the Securities Act. See "Description of Capital Stock"
and "Shares Eligible for Future Sale."
Absence of Dividends. The Company has never paid a cash dividend on its
Common Stock. The payment of cash dividends on the Common Stock is unlikely for
the foreseeable future. See "Dividend Policy."
Dilution. The purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution in the net tangible book value
per share of their Common Stock. At the assumed initial public offering price
of $9.00 per share, investors in this offering will incur dilution of $7.32 per
share. See "Dilution."
Antitakeover Effects of Certain Charter, Bylaws and Other Provisions. Certain
provisions of the Company's Certificate of Incorporation ("Certificate") and
Bylaws and Delaware law could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. Certain of such provisions allow the Company to issue
preferred stock with rights senior to those of the Common Stock and impose
various procedural and other requirements which could make it more difficult
for stockholders to effect certain corporate actions. In addition, the Company
is subject to the provisions of Section 203 of the Delaware General Corporation
Law ("DGCL"). See "Description of Capital Stock."
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 4,000,000 shares of Common Stock
offered by the Company hereby (at an assumed public offering price of $9.00
per share), after deduction of underwriting discounts and commissions and
estimated expenses payable by the Company will be approximately $32.9 million.
The Company intends to use the net proceeds for general corporate purposes,
including working capital, and expects that this offering will facilitate
future access for the Company to public equity markets. A portion of the net
proceeds also may be used for the acquisition of complementary businesses,
products or technologies, although the Company currently has no agreements in
place, no specified acquisition targets and is not involved in any negotiation
with respect to any such acquisitions. Pending their application, the net
proceeds of this offering will be invested in short-term U.S. government
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. The declaration and payment by the Company of any future dividends and
the amounts thereof will depend upon the Company's results of operations,
financial condition, cash requirements, future prospects, limitations imposed
by credit agreements or senior securities and other factors deemed relevant by
the Board of Directors.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 (i) on an actual basis, (ii) on a pro forma basis after
giving effect to the Amerindo Transaction and (iii) on an as adjusted basis to
reflect the sale by the Company of 4,000,000 shares of Common Stock offered
hereby (assuming an initial public offering price of $9.00 per share) and
application of the net proceeds therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity
Preferred Stock, $.01 par value, 10,000,000
shares authorized, none issued and
outstanding................................. $ -- $ -- $ --
Common Stock, $.01 par value, 50,000,000
shares authorized, 20,208,400 shares issued
and outstanding, 20,608,400 shares issued
and outstanding on a pro forma basis,
24,608,400 shares issued and outstanding on
an as adjusted basis(2)..................... 202 206 246
Additional paid-in capital..................... 120 4,916 37,756
Retained earnings.............................. 3,520 3,520 3,520
------ ------ -------
Total stockholders' equity..................... 3,842 8,642 41,522
------ ------ -------
Total capitalization....................... $3,842 $8,642 $41,522
====== ====== =======
</TABLE>
- --------
(1) The pro forma data give effect to the Amerindo Transaction.
(2) Excludes 3,136,722 shares of Common Stock issuable upon exercise of
outstanding stock options as of December 24, 1996 at a weighted average
exercise price of approximately $1.63 per share, substantially all of
which are not exercisable as of the date of this Prospectus. Also excludes
1,863,278 shares of Common Stock reserved for future issuance under the
Stock Option Plan, 200,000 shares of Common Stock reserved for future
issuance under the Stock Purchase Plan and 200,000 shares of Common Stock
reserved for future issuance under the 401(k) Plan. See "Management--Stock
Option Plan," "--Stock Purchase Plan" and "--401(k) Plan."
15
<PAGE>
DILUTION
As of September 30, 1996, after giving pro forma effect to the Amerindo
Transaction, the pro forma net tangible book value of the Company was
approximately $8.5 million, or $0.41 per share of Common Stock. Pro forma net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the offering
made hereby and the pro forma net tangible book value per share of Common
Stock immediately after completion of the offering. Net tangible book value is
defined as total assets less deferred offering and other intangible costs less
total liabilities. After giving effect to the sale by the Company of 4,000,000
shares of Common Stock offered hereby (after deducting underwriting discounts
and commissions and estimated offering expenses) at an assumed initial public
offering price of $9.00 per share and application of the estimated net
proceeds therefrom as set forth in "Use of Proceeds," the pro forma adjusted
net tangible book value of the Company at September 30, 1996, would have been
$41.4 million or $1.68 per share, representing an immediate increase in the
pro forma net tangible book value of $1.27 per share to existing stockholders
and an immediate dilution of $7.32 per share to investors purchasing shares in
this offering. The following table illustrates the resulting per share
dilution with respect to the shares offered hereby:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $9.00
Pro forma net tangible book value per share before this
offering .................................................$0.41
Increase per share attributable to new investors......... 1.27
-----
Adjusted pro forma net tangible book value per share after
this offering............................................. 1.68
-----
Dilution per share to new investors........................ $7.32
=====
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by existing
stockholders and by new investors (assuming the sale by the Company of
4,000,000 shares offered hereby), before deduction of underwriting discounts
and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
------------------ ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 20,608,400 83.7% $ 4,962,000 12.1% $0.24
New investors.............. 4,000,000 16.3 36,000,000 87.9 $9.00
---------- ----- ----------- -----
Total.................... 24,608,400 100.0% $40,962,000 100.0%
========== ===== =========== =====
</TABLE>
The above computations assume no exercise of any outstanding options. At
December 24, 1996, there were outstanding options to purchase 3,136,722 shares
of Common Stock at a weighted average exercise price of $1.63. To the extent
these options are exercised, there will be further dilution to the new
investors in this offering.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements of the Company and the notes
thereto included elsewhere in this Prospectus. The statements of operations
data for the years ended December 31, 1993, 1994 and 1995 and for the nine
months ended September 30, 1996, and the balance sheet data as of December 31,
1993, 1994 and 1995 and as of September 30, 1996, have been derived from the
financial statements of the Company which have been audited by Deloitte &
Touche LLP, independent auditors. The statement of operations data for the
nine months ended September 30, 1995 and the balance sheet data as of
September 30, 1995 have been derived from the Company's unaudited financial
statements which, in the opinion of management, include all significant,
normal and recurring adjustments necessary for a fair presentation of the
financial position and results of operations for such unaudited period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue................ $ -- $ -- $ 2,870 $2,666 $13,023
Service revenue................ 194 1,144 1,993 1,044 1,623
Other revenue.................. -- -- 1,108 250 392
------- ------- ------- ------ -------
Total revenue................. 194 1,144 5,971 3,960 15,038
Cost of revenue:
Cost of product revenue........ -- -- 1,327 1,220 4,536
Cost of service revenue........ 143 723 1,184 696 1,095
------- ------- ------- ------ -------
Total cost of revenue......... 143 723 2,511 1,916 5,631
------- ------- ------- ------ -------
Gross profit.................... 52 420 3,460 2,044 9,407
Operating expenses:
Research and development....... 8 40 428 86 2,380
Sales and marketing............ -- -- -- -- 790
General and administrative..... 61 219 1,588 1,285 1,733
------- ------- ------- ------ -------
Total operating expenses...... 68 259 2,016 1,371 4,903
------- ------- ------- ------ -------
Income (loss) from operations... (17) 161 1,444 673 4,503
Other income (expense).......... (6) 2 13 4 62
------- ------- ------- ------ -------
Income (loss) before income
taxes.......................... (23) 162 1,458 677 4,565
Income taxes.................... -- 42 561 260 1,826
------- ------- ------- ------ -------
Net income (loss)............... $ (23) $ 121 $ 897 $ 416 $ 2,739
======= ======= ======= ====== =======
Net income per common share..... $ (0.00) $ 0.01 $ 0.04 $ 0.02 $ 0.13
======= ======= ======= ====== =======
Weighted average common and
common equivalent shares
outstanding(1)................. 17,493 17,493 21,660 21,647 21,701
======= ======= ======= ====== =======
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents....... $ 5 $ 230 $ 3,780 $ 546 $ 6,202
Working capital................. (82) (130) 552 95 2,598
Total assets.................... 97 627 6,192 1,819 11,031
Stockholders' equity
(deficit)...................... (77) 44 1,103 461 3,842
</TABLE>
- --------
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Yurie, founded in 1992, designs, manufactures, markets and services ATM
access products for telecommunications service providers, corporate end users
and government end users. The Company began developing ATM access products in
1994 and began product shipments in February 1995. Prior to 1995, the
Company's revenue was derived primarily from telecommunications consulting and
related services.
Today, the Company generates revenue primarily from the sale of the LDR200,
an ATM access product released in September 1996. The Company's first
generation ATM access product, the LDR100, was first shipped in February 1995.
Yurie continues to generate revenue from providing telecommunications and
networking applications consulting services, though these services generate an
increasingly smaller portion of total revenue. Since the release of the LDR100
in 1995, revenue generated from the sale of the LDR products continues to
represent an increasingly larger portion of the Company's total revenue, and
the Company expects this trend to continue.
Since 1994, Yurie has had a strategic relationship with AT&T. In August
1995, pursuant to this relationship, AT&T and Yurie entered into the AT&T
Agreement to facilitate the joint technical evaluation and marketing of the
Company's LDR products. Under the AT&T Agreement, as amended, AT&T has the
exclusive right to market and sell the LDR100 and the LDR200 in U.S. federal,
state and local government markets and certain foreign government markets, and
has committed to purchase at least $6.5 million, $10.0 million and $10.0
million of the LDR200 in 1996, 1997 and 1998, respectively. Sales of the LDR
product line to AT&T represented 52.4%, 71.8% and 91.4% of total revenue in
1994, 1995 and the nine months ended September 30, 1996, respectively. In 1995
and for the nine months ended September 30, 1996, the Company also generated
non-recurring other revenue from one-time fees earned under the technology
evaluation portion of the AT&T Agreement, which called for a total of $1.5
million to be earned over six months beginning in August 1995. All product
revenue arising from sales to AT&T is presented net of the applicable
discount. See "Business--AT&T Relationship."
Prior to the Company's granting AT&T the exclusive right to market and sell
Yurie's products in government markets, the Company made direct sales to
certain government agencies. Since the Company granted this right to AT&T,
AT&T has marketed and sold the Company's products to the government agencies
to which the Company initially made direct sales, and the Company expects that
AT&T will continue to market and sell Yurie's products to a substantial
majority of these agencies as well as additional government agencies. The
Company has now developed a direct sales force in order to pursue the
telecommunications service provider and corporate end user markets. See
"Business--Customers and End Users."
Revenue from the sale of Yurie's LDR product line is recognized at shipment.
Revenue from the provision of telecommunications and networking applications
consulting services is recognized as the services are performed. Payments
received in advance of product delivery or the performance of services are
recorded as unearned revenue and recognized upon shipment of product or
performance of services by the Company. The LDR200 purchase price includes a
standard warranty on parts and service, which provides that the product will
be free from defects for a period of one year from the date of shipment. The
Company does not anticipate generating revenue from extended service
contracts. Beginning in 1997, extended service for the Company's products will
be provided by a third party.
Cost of product revenue consists primarily of the direct material, direct
labor and subcontract expenses associated with manufacturing and shipping the
Company's LDR products. This cost also
18
<PAGE>
includes a reserve for warranty expenses. Cost of service revenue consists
primarily of direct labor expenses associated with providing the Company's
telecommunications and networking applications consulting services. The
Company's other revenue has no associated direct costs.
The Company's operating expenses are composed of research and development,
sales and marketing and general and administrative expenses. Research and
development expenses consist primarily of personnel costs, as well as the cost
of materials, tools and other items associated with product development and
prototyping. All software development costs are included in research and
development expenses and have been expensed as incurred. Sales and marketing
expenses consist primarily of personnel costs, including commissions paid to
Company sales personnel, promotional costs and related operating expenses.
General and administrative expenses consist primarily of personnel costs
associated with general management, finance, information technology and
administration, as well as occupancy, accounting, legal and other general
operating expenses.
On November 7, 1996, the Company sold 400,000 shares of Common Stock to
Amerindo for $4.8 million. In connection with the Amerindo Transaction, Dr.
Kim and Mr. Li sold 500,000 and 100,000 shares of Common Stock, respectively,
to Amerindo for $6.0 million and $1.2 million, respectively. Prior to November
7, 1996, Amerindo did not own any shares of the Company's capital stock.
Amerindo now owns a total of 4.9% of the Company's outstanding Common Stock,
and will own 4.1% after the completion of this offering. Amerindo received
registration rights with respect to the Common Stock sold to it in these
transactions. See "Shares Eligible for Future Sale."
In view of the Company's rapid revenue growth, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance. In addition, the Company's results of operations may fluctuate
from period to period in the future.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of total revenue, except other data, which is expressed as a
percentage of the applicable revenue type.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPT.
DECEMBER 31, 30,
-------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue......................... 0.0 % 0.0% 48.1% 67.3% 86.6%
Service revenue......................... 100.0 100.0 33.4 26.4 10.8
Other revenue........................... 0.0 0.0 18.5 6.3 2.6
----- ----- ----- ----- -----
Total revenue......................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of product revenue................. 0.0 0.0 22.2 30.8 30.2
Cost of service revenue................. 73.5 63.3 19.8 17.6 7.3
----- ----- ----- ----- -----
Total cost of revenue................. 73.5 63.3 42.1 48.4 37.4
----- ----- ----- ----- -----
Gross profit.............................. 26.5 36.7 57.9 51.6 62.6
Operating expenses:
Research and development................ 3.9 3.5 7.2 2.2 15.8
Sales and marketing..................... 0.0 0.0 0.0 0.0 5.3
General and administrative.............. 31.3 19.2 26.6 32.4 11.5
----- ----- ----- ----- -----
Total operating expenses.............. 35.2 22.7 33.8 34.6 32.6
----- ----- ----- ----- -----
Income (loss) from operations............. (8.7) 14.1 24.2 17.0 29.9
Other income (expense).................... (3.2) 0.1 0.2 0.1 0.4
----- ----- ----- ----- -----
Income (loss) before income taxes......... (11.9) 14.2 24.4 17.1 30.4
Income taxes.............................. 0.0 3.6 9.4 6.6 12.1
----- ----- ----- ----- -----
Net income (loss)......................... (11.9)% 10.6% 15.0% 10.5% 18.2%
===== ===== ===== ===== =====
OTHER DATA:
Gross margin
Product................................. 0.0% 0.0% 53.8% 54.2% 65.2%
Service................................. 26.5 36.7 40.6 33.3 32.5
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue. For the first nine months of 1996, total revenue was $15.0 million
compared with $4.0 million for the first nine months of 1995. This increase
resulted primarily from an increase in sales of the Company's LDR products.
Product revenue was $13.0 million for the first nine months of 1996 compared
with $2.7 million for the comparable 1995 period. The Company also experienced
a 55.4% increase in service revenue and a 56.7% increase in other revenue for
the first nine months of 1996, each relative to the comparable period in 1995.
The increase in service revenue was attributable to growth in both the number
and size of contracts with U.S. government customers and government
contractors. The increase in other revenue was due to a higher percentage of
fees earned under the AT&T Agreement, which called for a total of $1.5 million
to be earned over the six months beginning in August 1995.
During the first nine months of both 1996 and 1995, product sales to and
service contracts with U.S. government customers and government contractors
comprised 100.0% of total revenue. Sales to or through AT&T represented $12.6
million, or 96.9% of product revenue for the first nine months of 1996
compared with $1.6 million, or 59.2% of product revenue for the first nine
months of 1995. Sales to or through AT&T represented 91.4% and 69.7% of total
revenue for the first nine months of 1996 and 1995, respectively.
20
<PAGE>
Gross Profit. Gross profit increased to $9.4 million in the first nine
months of 1996 from $2.0 million in the comparable 1995 period. Gross margins
were 62.6% and 51.6% for the 1996 and 1995 periods, respectively. The
improvement in gross margins was due primarily to the more rapid growth in
product revenue, which has a higher gross margin than the Company's service
revenue. In the first nine months of 1996, product gross margin was 65.2%
compared with service gross margin of 32.5%. In the first nine months of 1995,
product gross margin was 54.2% compared with service gross margin of 33.3%.
Research and Development. Research and development expenses were $2.4
million, or 15.8% of total revenue, for the first nine months of 1996,
compared with $86,000, or 2.2% of total revenue, for the comparable 1995
period. This increase was due primarily to the hiring of additional
engineering personnel and increased prototyping expenses related to the
development of the Company's LDR products.
Sales and Marketing. Sales and marketing expenses were $790,000, or 5.3% of
total revenue, during the first nine months of 1996. The Company incurred no
sales and marketing expenses for the comparable 1995 period. The expenses
incurred during the first nine months of 1996 resulted from the hiring of
sales and marketing personnel in anticipation of the release of the Company's
LDR200 product, and the Company's expected entry into the telecommunications
service provider and corporate end user markets.
General and Administrative. General and administrative expenses increased to
$1.7 million in the first nine months of 1996 from $1.3 million in the
comparable 1995 period. This increase was due primarily to higher personnel
expenses, related to increased staffing in finance, information technology and
administration undertaken in support of the Company's growth. Also, on June 1,
1996, the Company began a phased relocation of its operations to a larger,
leased facility, resulting in higher occupancy costs. As a percentage of total
revenue, general and administrative expenses were 11.5% and 32.4% during the
first nine months of 1996 and 1995, respectively. The decrease as a percent of
total revenue between the comparable nine month periods was due to the
Company's significant increase in total revenue.
Provision for Income Taxes. The provision for income taxes in the first nine
months of 1996 was $1.8 million, resulting in an effective tax rate of 40.0%.
For the comparable 1995 period, the provision was $260,000, resulting in an
effective tax rate of 38.5%.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenue. Total revenue in 1995 was $6.0 million, compared with $1.1 million
in 1994. This increase was due primarily to three factors. The Company had
$2.9 million in revenue from product sales in 1995 compared with none in 1994.
Service revenue increased to $2.0 million in 1995 from $1.1 million in 1994 as
a result of growth in both the number and size of contracts with U.S.
government customers and government contractors. Also, the Company had $1.1
million of other revenue in 1995 from fees earned under the AT&T Agreement
compared with none in 1994.
During both 1995 and 1994, U.S. government customers and government
contractors comprised 100.0% of total revenue. Sales to or through AT&T
represented 57.3% of product revenue in 1995 and 71.8% and 52.4 % of total
1995 and 1994 revenues, respectively.
Gross Profit. Gross profit increased to $3.5 million in 1995 from $420,000
in 1994. Gross margins were 57.9% and 36.7% for 1995 and 1994, respectively.
The improvement in 1995 was due primarily to the commencement of product
sales, which have higher gross margins than the Company's service revenue. In
1995, product gross margin was 53.8% compared with service gross margin of
40.6%. In 1994, service gross margin was 36.7%.
Research and Development. Research and development expenses were $428,000,
or 7.2% of total revenue in 1995, compared with $40,000, or 3.5% of total
revenue, in 1994. The increase was due primarily to the hiring of additional
engineering personnel related to development of the Company's LDR product
line.
21
<PAGE>
Sales and Marketing. The Company incurred no sales and marketing expenses
for either 1995 or 1994.
General and Administrative. General and administrative expenses were $1.6
million, or 26.6% of total revenue in 1995, compared with $219,000, or 19.2%
of total revenue, in 1994. Both the dollar amount and percent of total revenue
increases were due primarily to 1995 bonus payments totaling $1.1 million.
These bonuses were paid primarily to senior executives of the Company. The
Company also increased its personnel-related and general operating expenses in
support of its sales growth.
Provision for Income Taxes. The provision for income taxes in 1995 was
$561,000, resulting in an effective tax rate of 38.5%. In 1994, the provision
was $42,000, resulting in an effective tax rate of 25.6%. The lower effective
tax rate in 1994 was due primarily to the Company being in a lower tax bracket
and a net operating loss carryforward.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Revenue. Total revenue in 1994 was $1.1 million compared with $194,000 in
1993. This increase was due to growth in both the number and size of contracts
with U.S. government customers and government contractors. Revenue recognized
under contracts with AT&T totaled $600,000, or 52.4% of total revenue, in
1994. The Company did not generate any revenue associated with AT&T in 1993.
Gross Profit. Gross profit increased to $420,000 in 1994 from $52,000 in
1993. Gross margins were 36.7% and 26.5% for 1994 and 1993, respectively. The
increase in gross margin was attributable to improved absorption by the
Company of fixed, direct costs, primarily labor, due to its larger revenue
base.
Research and Development. Research and development expenses were $40,000, or
3.5% of total revenue, in 1994, compared with $8,000, or 3.9% of total
revenue, in 1993. This increase was due primarily to the hiring of engineering
personnel related to the development of the Company's LDR product line. The
decrease in research and development expenses as a percentage of revenue
resulted from the increase in 1994 total revenue over 1993 total revenue.
Sales and Marketing. The Company incurred no sales and marketing expenses
for either 1994 or 1993.
General and Administrative. General and administrative expenses were
$219,000, or 19.2% of total revenue, in 1994, compared with $61,000, or 31.3%
of total revenue, in 1993. This dollar increase was primarily due to increased
personnel-related and general operating expenses in support of the Company's
sales growth. The decrease in general and administrative expenses as a percent
of total revenue resulted from the increase in 1994 total revenue over 1993
total revenue.
Provision for Income Taxes. The provision for income taxes in 1994 was
$42,000, resulting in an effective tax rate of 25.6%. The effective tax rate
in 1994 was due primarily to the Company being in a lower tax bracket and its
utilization of a net operating loss carryforward. In 1993, there was no income
tax provision because of the loss incurred in that year.
QUARTERLY INFORMATION--UNAUDITED
The following table presents unaudited statement of operations data for each
of the seven quarters in the period ended September 30, 1996. This information
has been prepared by the Company on a basis consistent with the Company's
audited financial statements and includes all adjustments (consisting only of
normal recurring adjustments) that management considers necessary for a fair
presentation of the data. These quarterly results are not necessarily
indicative of future results of operations and may fluctuate, depending on the
timing of new product introductions, market acceptance of enhanced or new
versions of Yurie's products, the size and timing of individual orders of the
Company's products, price reductions
22
<PAGE>
by the Company, changes in the Company's distribution channels, the addition
or loss of significant customers, the Company's ability to obtain components
for its products and general economic conditions. This information should be
read in conjunction with the Company's Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue....... $695 $ 830 $1,140 $ 204 $2,804 $4,588 $5,632
Service revenue....... 156 354 534 949 591 430 601
Other revenue......... -- -- 250 858 392 -- --
---- ------ ------ ------ ------ ------ ------
Total revenue....... 851 1,184 1,924 2,011 3,787 5,018 6,233
Cost of revenue:
Cost of product
revenue.............. 318 375 526 107 735 1,623 2,179
Cost of service
revenue.............. 86 235 375 488 413 316 366
---- ------ ------ ------ ------ ------ ------
Total cost of
revenue............ 404 610 901 595 1,148 1,939 2,545
---- ------ ------ ------ ------ ------ ------
Gross profit............ 447 574 1,023 1,416 2,639 3,079 3,688
Operating expenses:
Research and
development.......... 20 30 36 342 402 944 1,034
Sales and marketing... -- -- -- -- 49 237 504
General and
administrative....... 374 192 719 303 471 365 897
---- ------ ------ ------ ------ ------ ------
Total operating
expenses........... 394 222 755 645 922 1,546 2,435
---- ------ ------ ------ ------ ------ ------
Income from operations.. 53 352 268 771 1,717 1,533 1,253
Other income............ -- -- 3 10 39 15 8
---- ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 53 352 271 781 1,756 1,548 1,261
Income taxes............ 20 135 104 300 702 619 504
---- ------ ------ ------ ------ ------ ------
Net income.............. $ 33 $ 217 $ 167 $ 481 $1,054 $ 929 $ 757
==== ====== ====== ====== ====== ====== ======
</TABLE>
23
<PAGE>
The following table sets forth certain financial data expressed as a
percentage of total revenue:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue........ 81.7% 70.1% 59.2% 10.1% 74.0% 91.4% 90.4%
Service revenue........ 18.3 29.9 27.8 47.2 15.6 8.6 9.6
Other revenue.......... 0.0 0.0 13.0 42.7 10.4 0.0 0.0
----- ----- ----- ----- ----- ----- -----
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of product reve-
nue................... 37.4 31.7 27.3 5.3 19.4 32.3 35.0
Cost of service reve-
nue................... 10.1 19.8 19.5 24.3 10.9 6.3 5.9
----- ----- ----- ----- ----- ----- -----
Total cost of revenue.. 47.5 51.5 46.8 29.6 30.3 38.6 40.8
----- ----- ----- ----- ----- ----- -----
Gross profit............ 52.5 48.5 53.2 70.4 69.7 61.4 59.2
Operating expenses:
Research and develop-
ment.................. 2.4 2.5 1.9 17.0 10.6 18.8 16.6
Sales and marketing.... 0.0 0.0 0.0 0.0 1.3 4.7 8.1
General and administra-
tive.................. 43.9 16.2 37.4 15.1 12.4 7.3 14.4
----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses................ 46.3 18.8 39.2 32.1 24.3 30.8 39.1
----- ----- ----- ----- ----- ----- -----
Income from operations.. 6.2 29.7 13.9 38.3 45.3 30.6 20.1
Other income............ 0.0 0.0 0.2 0.5 1.0 0.3 0.1
----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 6.2 29.7 14.1 38.8 46.4 30.8 20.2
Income taxes............ 2.4 11.4 5.4 14.9 18.5 12.3 8.1
----- ----- ----- ----- ----- ----- -----
Net income.............. 3.9% 18.3% 8.7% 23.9% 27.8% 18.5% 12.1%
===== ===== ===== ===== ===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital and capital expenditure
requirements primarily through cash generated from operations. At September
30, 1996, the Company had cash and cash equivalents of approximately $6.2
million and working capital of $2.6 million, as compared to cash and cash
equivalents of $3.8 million and working capital of $552,000 at December 31,
1995. The Company has available a $3.0 million revolving line of credit with
Commerce Bank, located in College Park, Maryland, under a facility which is
available through May 31, 1997 and bears interest at a floating rate ranging
from the prime rate to the prime rate plus one percent. At September 30, 1996,
the prime rate was 8.25%. Borrowings under this credit facility are secured by
accounts receivable and inventory and are subject to certain maximum advance
percentages against eligible accounts receivable, inventory and purchase
orders. The Company does not have any borrowings outstanding under the line of
credit, nor does it have any long-term debt.
The Company's operating activities provided cash of $3.4 million for the
first nine months of 1996 and $4.0 million and $428,000 for the years ended
December 31, 1995 and December 31, 1994, respectively. In the first nine
months of 1996, cash generated from operations increased significantly over
the comparable 1995 period. This increase was due to significantly higher net
income in the first nine months of 1996. The increase in cash generated from
operations in 1995 as compared to 1994 was due both to higher net income and
to cash received from payments made by AT&T in the fourth quarter of 1995,
prior to delivery of the associated product.
Cash used in investing activities was $860,000 for the first nine months of
1996 and $436,000 and $202,000 for the years ended December 31, 1995 and
December 31, 1994, respectively. In each period, cash was used for the
purchase of property and equipment, primarily computer hardware and software.
Financing activities used cash of $147,000 for the first nine months of
1996. In the first nine months of 1996, cash was used for certain expenses
related to the Company's anticipated initial public offering. There were no
financing activities in either 1994 or 1995.
24
<PAGE>
On November 7, 1996, the Company sold 400,000 shares of Common Stock for
$4.8 million to Amerindo in the Amerindo Transaction. Amerindo currently owns
a total of 4.9% of the Company's outstanding Common Stock, and will own 4.1%
after the completion of this offering. The Company plans to use the proceeds
received in the Amerindo Transaction for general corporate purposes, including
working capital.
The Company believes that the net proceeds of this offering, proceeds of the
Amerindo Transaction, existing sources of liquidity and internally generated
cash, will be sufficient to meet the Company's projected cash needs for at
least the next 12 months. In the longer term, the Company may require
additional sources of liquidity to fund future growth. Such sources of
liquidity may include additional equity offerings or debt financings.
To date, inflation has not had a material impact on the Company's financial
results.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation expense to be measured based on the fair market value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB No. 25, which recognizes compensation costs based on the intrinsic
value of the equity instrument awarded. The Company has adopted SFAS 123 for
disclosure purposes in 1996, but will continue to apply APB No. 25 with
respect to recognition and measurement of its stock-based compensation awards
to employees.
25
<PAGE>
BUSINESS
Yurie designs, manufactures, markets and services ATM access equipment for
telecommunications service providers, corporate end users and government end
users. ATM is a standard for packaging and switching digital information that
facilitates high speed information transmission with a high degree of
efficiency. End users of telecommunications services have traditionally
maintained separate WANs for transmitting voice, data, video and other
electronic information among geographically dispersed locations. ATM
technology is conducive to consolidating these networks. The network
consolidation brought about by employing ATM access platforms can provide
savings in WAN communications costs and simplify network management.
Yurie is a leading supplier of ATM access products. The Company's LDR100,
introduced in February 1995, was one of the first commercially available ATM
access products. The LDR200, Yurie's second generation ATM access product, was
released in September 1996. The Company designed its ATM access products to be
flexible and scaleable, so that customers can realize the benefits of ATM
while preserving their investments in existing equipment. The LDR products
adhere to industry-wide technical standards, allowing users to integrate the
products into current networks operating with other standards-compliant
products. Yurie's proprietary AQueMan algorithm allows the LDR products to
reduce network congestion while maintaining quality of service. The Company's
LANET framing protocol is capable of transporting ATM traffic over circuits of
varying speed and quality, including poor quality circuits. The Company's ATM
access products incorporate a variety of value-added features, including
compact size, scaleability, reliability, encryption capabilities and a broad
variety of access interfaces.
The Company's strategy centers on maintaining its technological leadership,
developing both the telecommunications service provider and corporate end user
markets while continuing to pursue government end users, developing
international markets and building strategic relationships. Since 1994, Yurie
has had a strategic relationship with AT&T. In August 1995, pursuant to this
relationship, the Company and AT&T entered into the AT&T Agreement to
facilitate the joint technical evaluation and marketing of the Company's LDR
products. Under the AT&T Agreement, as amended, AT&T has a three-year
exclusive right to market and sell the LDR100 and the LDR200 in U.S. federal,
state and local government markets, as well as certain foreign government
markets, and has committed to purchase at least $6.5 million, $10.0 million
and $10.0 million of the LDR200 in 1996, 1997 and 1998, respectively. To
enhance its distribution efforts and pursue the telecommunications service
provider and corporate end user markets, the Company has established a
nationwide direct sales force which currently consists of 13 sales personnel.
INDUSTRY BACKGROUND
Deregulation of the U.S. telecommunications industry, which began with the
breakup of AT&T in 1984, has triggered significant competition for the
provision of both long distance and local telecommunications services. The
recent adoption of the Telecommunications Act of 1996 is likely to create even
more competition over the next few years. The international market has also
experienced increased deregulation, liberalization, privatization and the
emergence of new wireline and wireless alternatives to traditional carrier
services. In this intensely competitive environment, telecommunications
service providers throughout the world are seeking to differentiate
themselves, in part, by offering enhanced services based on new and emerging
technologies.
Industry surveys show that both voice and data traffic are continuing to
expand. Businesses have increasingly deployed communications technology to
link remote sales offices, home offices, mobile offices and geographically
dispersed customers and suppliers. These businesses use increasingly powerful
computer technologies that enable new multimedia applications integrating
data, voice and video. The volume of network traffic has also grown
dramatically due to traffic on the Internet, a rapidly growing global web of
networks that permits users to communicate, share information and
26
<PAGE>
conduct business throughout the world. Businesses demand telecommunications
services that provide significantly higher transmission capacity or bandwidth,
the flexibility to choose among services with varying bandwidths and the
ability to access communications services from remote locations.
Driven by this combination of increased demand and competition, WAN
technology has made significant advances. Current WAN technology permits users
in geographically dispersed locations to communicate. However, most existing
networks have had difficulty keeping pace with the increase in WAN traffic,
resulting in network congestion and related performance inefficiencies.
Today's Networking Technologies
Time division multiplexing ("TDM") and frame relay are the networking
technologies currently most widely deployed in WANs. TDM, which was one of the
first technologies developed to send traffic through circuits across a WAN,
operates by dedicating a circuit--or fixed amount of bandwidth--to each end
device. TDM's use of dedicated circuits provides high quality service for all
network traffic, whether data, voice or video. Since information is not
continuously transmitted, however, the dedicated circuits are often idle. This
results in inefficient use of expensive bandwidth and high cost to TDM network
users.
Frame relay was introduced in 1990 as a method of connecting local area
networks ("LANs") over WANs by using flexible bandwidth allocation to lower
the cost of transmission. Frame relay uses "packets" or "frames" to transmit
traffic, thereby allowing the same bandwidth to be shared by many users, each
using the bandwidth only for the time required to transmit a packet. Designed
primarily for data transmission, frame relay cannot guarantee the high quality
transmission of voice and video. Currently, frame relay is widely used to
transmit data over WANs, including the Internet. Due to the substantial
increase in data traffic over WANs, however, today's frame relay networks are
being used to transmit more traffic than they were designed to support,
resulting in network congestion.
To increase a frame relay network's switching capacity to meet increased
data demands and alleviate congestion, sophisticated software is required. To
run this software, the network must be upgraded with powerful, intelligent
processors. The costs of these high-end processors required to switch frame
relay traffic at the speeds needed in today's data network backbones are very
high. Therefore, as data traffic increases, upgrading the frame relay network
becomes more costly and inefficient and ultimately impractical.
The Emergence of ATM as a Standard
Faced with the limitations of frame relay, telecommunications service
providers are installing ATM switches in the "backbones" of their existing
networks. ATM segments data, voice and video traffic into small, uniform-sized
"cells," rather than the larger, variable-size "packets" or "frames" used in
frame relay. The addition of ATM backbone switches upgrades a network's
performance by increasing switching capabilities at the network's core. ATM's
cell-based architecture increases bandwidth utilization and seeks to provide
consistent quality of service and predictability for all traffic types. ATM is
also an enabling technology, making possible new network applications such as
video distribution, medical imaging and collaborative computing, all of which
would be impractical with conventional network technologies.
ATM is the first standard protocol to permit reliable service for all
traffic types, allowing the consolidation of TDM and frame relay networks into
a single ATM network for data, voice and video. A single ATM network offers
the potential for economies of scale and streamlining of network operations.
ATM technology has been approved by both the ATM Forum, a group of equipment
manufacturers, telecommunications service providers and end users, and the ITU
as a standard in both the computer and telecommunications industries. The
standardization of ATM has allowed for compatibility of ATM equipment and
interoperability of ATM among a wide variety of interfaces and vendors, which
the Company believes will result in the widespread adoption of ATM.
27
<PAGE>
Current Status of ATM
The U.S. government was among the first to deploy ATM technology. Its
initial decision to use ATM was motivated by its desire to consolidate many
discrete networks onto a single network, thus significantly reducing cost. The
U.S. government was able to deploy ATM across geographic boundaries because
ATM was quickly accepted as an international standard, and the government soon
discovered the effectiveness and efficiency of ATM as a global networking
technology.
Several telecommunications service providers began offering trial ATM
services in the early 1990s. These services were available only for high speed
traffic and at high prices and, therefore, made ATM attractive only to
"bandwidth hungry" users and limited ATM deployment within the providers'
networks. Driven by increasing competition and the rapid growth of data
traffic on frame relay systems, a number of telecommunications service
providers began deploying ATM for use in their network backbones to manage
heavy loads of user traffic and thereby relieve network congestion. Until
recently, providers have continued to install ATM primarily in their network
backbones and typically have not offered ATM service directly to end users.
End users have generally continued to use a costly mix of frame relay and TDM,
along with leased communications lines, to meet their data, voice and video
transport needs.
In 1996, several telecommunications service providers announced plans to
begin offering ATM services directly to end users at prices competitive with
similar frame relay and TDM access services. To utilize these direct ATM
services, an end user needs ATM access products either located at the local
office of a telecommunications service provider (in close proximity to the end
user) or deployed by the end user in its private network. Access products
provide the end user with network access through multiple network interfaces,
traffic concentration and data protocol translation.
ATM access products are well suited to provide efficient connectivity to ATM
networks, facilitate transmission of a variety of traffic types at varying
speeds and accommodate a mix of end user applications on a single network. In
addition, ATM access products have the potential to lower the cost to end
users of transmitting data, voice and video communications. For these reasons,
the Company believes that ATM access products, over time, will supplant TDM
and frame relay access products in WANs. Vertical Systems, a leading industry
research firm, forecasts the aggregate ATM market, including the markets for
both ATM access and backbone equipment, to be $330.0 million in 1996 and
expects these markets to exceed $1.3 billion by 1999.
THE CHALLENGES OF WIDESPREAD ATM ACCESS
Before telecommunications service providers and end users can fully deploy
ATM, several problems relating to the ATM access layer must be solved.
Quality of Service and Network Congestion
The architects of early ATM products focused almost exclusively on data
applications and did not fully implement ATM's traffic management capabilities
for voice and video. However, today's mixed-services environment demands
sophisticated traffic management to provide the level of bandwidth utilization
that makes a single ATM network more cost effective than separate voice and
data networks. An ATM network must be capable of delivering high quality
service for all traffic types, notwithstanding high levels of utilization.
Support for Limited Circuit Types
ATM was originally conceived for use only on high quality fiber optic
circuits (e.g., T3/E3, OC-3c and STM-1). At the access layer, however,
circuits come in all varieties, including wireless, copper and satellite. On
these circuits, quality may be affected by atmospheric conditions, interfering
transmissions or defects in the circuits themselves. Transmission on lower
quality or "noisy" circuits frequently results in
28
<PAGE>
uncorrectable errors and corruption in the network. The inability of early ATM
products to transmit reliably over lower-quality circuits has limited the use
of ATM to high quality circuits, thereby limiting widespread ATM access.
Need for Additional Product Features
Early ATM access products did not meet the requirements of
telecommunications service providers and end users because they lacked
important features:
Size and Scaleability. Telecommunications service providers, who often house
thousands of pieces of equipment in their central offices, and end users, who
incur costs for each square foot of office space, place a premium on space. To
be attractive to telecommunications service providers and end users, an ATM
access product must offer the required functionality in a compact package. At
the same time, an access product must be scaleable to permit
telecommunications service providers and end users to upgrade performance and
capacity through minimal additions to existing equipment. Early ATM access
products were physically large relative to their capacities.
Reliability. Service interruptions can be disastrous to telecommunications
service providers and end users, who need reliable products designed for
continuous utilization. Redundant features are essential to the reliability of
an access product. Early ATM access products provided little redundancy,
typically limited to power supply. Products deployed to deliver public
services or to carry mission-critical traffic across a private network must
offer multiple levels of redundancy for a broad variety of features, including
central processing unit, clock, backplane and interface cards.
Encryption. ATM uses virtual circuits that convey data from many end users.
As a result, particularly because WANs are being used for commercial
transactions, preserving data privacy is critical to many end users. Early ATM
access products did not address this problem.
Access Interfaces. Early ATM access products generally did not interface
with a wide range of standard communications equipment, such as private branch
exchanges, video decoders, LAN routers, hubs and switches and IBM SNA-based
equipment. This limited the utility of these products because users frequently
employ a variety of non-ATM equipment.
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<PAGE>
THE YURIE SOLUTION
Yurie has developed ATM access products that are designed to meet the
challenges of widespread ATM deployment. These products are capable of
furnishing telecommunications service providers, corporate end users and
government end users with flexible, cost-effective and reliable access to
present and future ATM-based services. The Company's product family includes
the LDR100, released in February 1995, and the LDR200, released in September
1996. The LDR100 and the LDR200 have been engineered with a set of Company-
developed technologies designed to solve the current problems of ATM access.
These technologies include AQueMan, a proprietary queuing algorithm designed
to maximize bandwidth utilization while preserving quality of service, and
LANET, a robust framing protocol that facilitates ATM deployment over low
quality circuits. In addition, the LDR products offer value-added features,
such as compact size, scaleability and reliability. The LDR200 also offers
encryption capabilities and is compatible with a wide range of interfaces.
Quality of Service and Reduced Network Congestion
Yurie developed AQueMan to reduce network congestion while preserving
quality of service. AQueMan is a queuing algorithm that establishes separate
queues for time-sensitive traffic (typically voice) and loss-sensitive traffic
(typically data) and prioritizes traffic within these separate queues. This
technique reduces cell loss for loss-sensitive traffic and cell delay for
time-sensitive traffic, thereby allowing higher quality of service and more
optimal use of bandwidth. Time-sensitive cells are transmitted ahead of loss-
sensitive cells, but have a higher probability of being selectively deleted
during network congestion than loss-sensitive cells. In addition, when
comparing cells of the same traffic type (e.g., voice-to-voice or data-to-
data), AQueMan is able to ensure that more important time-sensitive traffic
will experience less delay and more important loss-sensitive traffic will have
a lower probability of being selectively deleted. With AQueMan, the LDR
products can meet the ATM Forum's quality of service standards for constant
bit rate, variable bit rate and unspecified bit rate traffic management even
during periods of network congestion. Through the use of AQueMan, Yurie's LDR
products substantially reduce the expense of sending information over a WAN by
achieving higher levels of bandwidth utilization.
Support for Many Circuit Types
Yurie developed LANET, a robust framing protocol that enables the transport
of ATM cells on any transmission medium, including low-speed and/or low-
quality circuits. LANET is particularly beneficial in wireless environments
(e.g., satellite, cellular and microwave), which often suffer from high bit
error rates and blocks of errors due to interfering transmissions or adverse
conditions such as inclement weather. LANET provides a framing structure that
allows ATM cells to be "multiplexed" into serial bit streams for transmission
over a single channel. This framing structure, which is scaleable to conform
to the transmission speed of the circuit, provides an embedded network
synchronization capability required for serving isochronous applications such
as voice and real-time video. LANET's simple framing structure makes the
required communication link synchronization relatively easy even in a noisy
environment. The Company's LDR products include a combination of LANET, Reed
Solomon forward error correction and error-tolerant addressing, which enable
the products to significantly increase the reliability of transmission of ATM
cells over noisy circuits.
Other Value-Added Product Features
Yurie's products incorporate a wide variety of value-added features,
including the following:
Size and Scaleability. The LDR products are compact and can be easily
upgraded. A single LDR200 platform occupies significantly less space than
early ATM access products and can be upgraded with minimal additional space
and at minimal cost.
Reliability. Yurie's ATM access products satisfy telecommunications service
providers' need for reliability, offering uninterrupted service through
comprehensive redundancy options, including power, central processing unit,
clock, backplane and interface cards.
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<PAGE>
Encryption. The algorithms embedded in the LDR200 support encryption to meet
end users' network security requirements. Yurie's encryption scheme allows
communication between secured and unsecured networks, easy generation and
distribution of passwords from a single personal computer or workstation and
adaptability to a variety of existing "block" encryption algorithms and modes
of operation.
Wide Variety of Access Interfaces. Yurie's ATM access products are built to
interface with a wide variety of standard communications equipment including
private branch exchanges, video decoders, LAN routers, hubs and switches and
IBM SNA-based equipment. In addition, the LDR product line is designed to
allow for the easy addition of new interfaces as they emerge.
STRATEGY
Yurie's objective is to become the leading provider of ATM access equipment
to both telecommunications service providers and end users. The key elements
of Yurie's strategy are as follows:
Maintain Technology Leadership. Yurie is a leader in developing new
technology for the ATM access market. The Company's LANET framing protocol was
among the first technologies to facilitate ATM access at low speeds and across
noisy circuits. Yurie's AQueMan queuing algorithm was one of the first to
establish separate queues for voice and data and prioritize traffic types
within each queue to improve quality and maximize bandwidth utilization. Yurie
intends to continue to develop additional product features and network
interfaces while reducing production costs. Yurie plans to continue to commit
substantial resources to its active research and development program so it can
remain in the forefront of ATM product development and maintain its position
as a technology leader in the emerging ATM access market.
Focus on ATM Access Solutions. Most ATM equipment suppliers have focused on
designing and marketing products that can be used as backbone switches at
major switching centers. Yurie, by contrast, has concentrated on developing
ATM access products which act as gateways for non-ATM equipment and
concentrators for lower speed ATM circuits. Yurie believes that by continuing
to focus on this market segment and developing cost effective products
designed specifically to provide ATM access, it can strengthen its current
market position.
Develop Both the Telecommunications Service Provider and Corporate End User
Markets. The Company has successfully marketed its ATM access products to
government end users and believes that the government's demand for these
products will increase. Yurie intends to continue to market its products to
the government through its strategic relationship with AT&T. The Company
believes, however, that the market for ATM access products among
telecommunications service providers and corporate end users has greater
potential than the government end user market. These customers should benefit
greatly from an ATM access platform that can combine voice, video and data on
a single ATM network. Yurie's LDR products are specifically designed to be
attractive to these customers because they can connect to a variety of
standard central office and customer premises equipment. Yurie has implemented
a sales and pricing strategy that targets both the telecommunications service
provider and corporate end user markets. In addition, the Company is expanding
its direct sales force, particularly in the geographic areas where the
telecommunications service provider and corporate end user markets are
concentrated. This direct sales force is comprised of sales personnel who have
all had prior experience in commercial sales of networking and/or
telecommunications products.
Pursue International Markets. Since ATM is an international standard, Yurie
believes that the potential market for its ATM access products is global in
scope. Yurie, therefore, intends to establish a sales and support organization
not only in North America, but also in Europe and Asia, and to develop the
product features and obtain the certifications required to pursue
international markets.
Build and Leverage Strategic Relationships. Yurie has established a
successful strategic relationship with AT&T to develop the U.S. government
markets. The Company is actively seeking to establish similar
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<PAGE>
relationships for other markets with other telecommunications industry
participants, including equipment suppliers and telecommunications service
providers. Once these relationships are established, Yurie intends to leverage
its position in the marketplace by using the marketing expertise, distribution
network, support capabilities and technologies of its strategic allies.
THE LDR PRODUCT FAMILY AND SUPPORTING SERVICES
Yurie's LDR family of ATM access products includes the LDR100, the LDR200
and the LDR5. All of Yurie's LDR products are based on an ATM "cell"
architecture that allows flexible transmission of all traffic types. The
following table provides an overview of the Company's LDR products:
<TABLE>
<CAPTION>
NUMBER OF BUS
PLATFORM USER SLOTS BANDWIDTH DIMENSIONS
-------- ---------- ---------- ------------------------
<S> <C> <C> <C>
LDR200 11 1.2 Gbps 7"H x 10.5"D x 19"W
LDR100S 10 64 Mbps 12.25"H x 15.25"D x 19"W
LDR100C 3 64 Mbps 8.75"H x 10"D x 19"W
LDR5 2 1.544 Mbps 3.5"H x 10"D x 19"W
</TABLE>
The LDR100
Yurie's first access product, the LDR100, was originally built as a
prototype to demonstrate the AQueMan queuing algorithm and the LANET framing
protocol. The LDR100 was designed to meet the needs of highly technical users.
Beginning in 1995, the LDR100 was delivered, through AT&T, to a variety of
U.S. government agencies and their support contractors for deployment in
mission-critical environments, including the U.S. military operations in Haiti
and Bosnia. In addition to ships, aircraft and ground vehicles, the LDR100 has
been deployed in centralized locations, such as telecommunications equipment
closets and desktops.
To further ensure quality over a wide variety of circuit types, the LDR100
employs Reed Solomon forward error correction, an industry standard method of
detecting and correcting transmission errors, and a simple error-tolerant
addressing scheme that ensures highly reliable communications over circuits of
varying speeds and quality.
The LDR100, with a bus bandwidth of 64 megabits per second, aggregates high
speed ATM LAN traffic and non-ATM voice and data traffic onto a low-speed ATM
WAN. Where bandwidth utilization is especially critical, the LDR100 compresses
voice prior to transmission over the WAN. The Company has shipped more than
150 LDR100 access concentrators since February 1995.
The following table describes the key features of the LDR100:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS SPEEDS PROTOCOLS SUPPORTED
------------------ ----- ----------------- --------------------------------
<S> <C> <C> <C>
DS3 1 45 Mbps ATM
High Speed Parallel/Serial 1 378 kbps--15 Mbps ATM/LANET
(RS422, V.35, DSS
Parallel)
Serial Data (RS232, RS422, 4 75bps--1.544Mbps ATM/LANET, frame relay,
RS530, V.35) synchronous, asynchronous
Analog Compressed Voice 2 8kbps, 16kbps Foreign exchange station ("FXS")
Foreign exchange office ("FXO")
TAXI 1 100/140 Mbps ATM
</TABLE>
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<PAGE>
The LDR200
Yurie's second generation product, the LDR200, was first shipped in September
1996. The LDR200 is designed to be easily deployed by telecommunications
service providers, corporate end users and government end users. The LDR200
incorporates AQueMan and LANET, along with Reed Solomon forward error
correction and error-tolerant addressing. In addition, the LDR200 expands the
capabilities of the LDR100 by offering higher throughput, greater port density,
a greater variety of interface types, encryption capabilities, enhanced
scaleability and higher speed.
The LDR200 has a bus bandwidth of 1.2 gigabits per second and is scaleable up
to 11 interface module slots. It also provides enhanced reliability, offering
redundancy for the power, central processing unit, clock, backplane and
interface cards. The LDR200 conforms to carrier equipment installation
requirements, such as Bellcore's Network Equipment Building Standards (NEBS).
Additionally, the LDR200 complies with the ATM Forum's User Network Interface
standard and the IISP 1.0 network/network interface standards, providing
connectivity and interoperability with ATM backbone switches.
Currently, the LDR200 supports high-speed WAN connections via DS3 cards. It
uses DS1 cards to support structured and unstructured service in compliance
with the ATM Forum's circuit emulation specification as well as ATM cell-
bearing capabilities. The Company plans to offer other interface cards in the
future, including OC-3c, HSSI, TAXI, E1, E3, PRI, analog voice and ethernet. It
will provide additional functionality via server cards, including voice
compression, silent suppression and encryption.
The current version of the LDR200 contains most of the features included in
the LDR100, and the Company is in the process of developing the LDR200 to
include all of the LDR100's attributes, along with additional value-added
features. The Company intends to phase out the LDR100 when the LDR200
development is completed but will continue to provide service support for the
LDR100 product.
The following table describes the key features of the LDR200:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS SPEEDS PROTOCOLS SUPPORTED
-------------------- ----- ------------------ --------------------------
<S> <C> <C> <C>
DS3 2 45 Mbps ATM
Channelized T1 (DS1) 6 1.544 Mbps ATM, Frame Relay,
TDM
Serial Data (RS232, 6 300 bps-2.048 Mbps ATM/LANET, Frame Relay,
RS422, RS530, V.35) Synchronous, Asynchronous,
HDLC
High Speed Serial
Interface* 1 56 kbps-30 Mbps ATM/LANET, Frame Relay
Multimode OC-3c 1 155Mbps ATM
Single Mode OC-3c* 1 155Mbps ATM
ISDN Primary Rate 6 1.544Mbps National ISDN-2,
Interface* AT&T 4ESS/5ESS,
Nortel DMS
Analog Voice* 8 N/A FXS, FXO
Parallel Data* 1 2Mbps-30 Mbps ATM/LANET
E1* 6 2.048Mbps ATM, Frame Relay,
HDLC, TDM
E3* 2 34Mbps ATM
TAXI* 1 100/140Mbps ATM
Ethernet* 6** 10Mbps** RFC 1483
</TABLE>
- --------
* In development.
** One port can be run at 100Mbps.
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<PAGE>
The LDR5
To augment its product family, Yurie has recently entered into an agreement
with DataLabs, Inc., under which Yurie has a non-exclusive license to market
DataLabs' Virtual Access 1000 product on a private label basis as the LDR5.
The LDR5 is an ATM access device that features full "CSU/DSU" capabilities,
thereby allowing frame relay and TDM equipment to interface with an ATM
network. The LDR5 offers low-cost ATM access for standard customer premises
equipment. It is designed for use in branch offices and other settings that do
not require the more sophisticated LDR100 or LDR200 access products. The LDR5
enables the Company to offer a full range of ATM access products, but Yurie
does not expect sales of the LDR5 to be significant.
The following table describes the key features of the LDR5:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS SPEEDS PROTOCOLS SUPPORTED
---------------------- ----- ---------------- ------------------------
NETWORK:
<S> <C> <C> <C>
T1 (DS1) 1 1.544 Mbps ATM
<CAPTION>
USER:
<S> <C> <C> <C>
Channelized T1 (DS1) 1 1.544Mbps Frame relay, TDM
Serial Data 1 56kbps-1.544Mbps Frame relay, synchronous
(RS422, RS530, V.35)
</TABLE>
Product Management Protocol; Pricing
Each of the Company's three LDR products can be managed using any software
package supported by the Simple Network Management Protocol ("SNMP"), such as
HP OpenView and SunNet Manager. The LDR200 can also be managed using a simple
"dumb" terminal interface.
The LDR100 and LDR200 products sell for prices ranging from $20,000 to
$90,000, and the LDR5's price ranges from $5,000 to $10,000. Actual price
depends on the configuration of the product selected.
Product Support
The Company offers comprehensive customer support for its LDR product line.
The Company's service organization offers installation, preventative
maintenance, multi-vendor services, repair, training and a variety of other
advanced services designed to enhance the reliability of a customer's
telecommunications network. The LDR200 is sold with a standard one-year
warranty. The Company's customer support representatives are located in
Lanham, Maryland and currently are available from 8:00 a.m. to 8:00 p.m.
Eastern time, Monday through Friday. At other times, the Company's customer
support representatives can page an on-call technical support person to
respond to technical support requests. Beginning in 1997, extended service for
the Company's products will be provided by a third party. The third-party
service provider will be available 24 hours a day, seven days a week to
supplement the Company's service organization.
AT&T RELATIONSHIP
The Company has had a significant strategic relationship with AT&T since
1994. Pursuant to this relationship, Yurie and AT&T entered into the AT&T
Agreement in August 1995. The AT&T Agreement, as amended, provides for the
joint technical evaluation and marketing of the LDR products by Yurie and
AT&T, and grants AT&T a three-year exclusive right to market and sell the
LDR100 and the LDR200 solely in U.S. federal, state and local government
markets, as well as certain foreign government markets. Sales pursuant to the
AT&T Agreement have generated a majority of the Company's revenue to date.
Under the AT&T Agreement, AT&T has guaranteed minimum annual purchase orders
for the LDR200 of $6.5 million, $10.0 million and $10.0 million for calendar
years 1996, 1997 and 1998, respectively. In the event that the Company fails
to fulfill any of its material obligations under the AT&T Agreement, AT&T
could
34
<PAGE>
terminate the contract. Such termination would have a material adverse effect
on the Company's business, results of operations and financial condition.
CUSTOMERS AND END USERS
To date, substantially all of the Company's products have been sold to AT&T
either for its own use or for resale to government agencies or their support
contractors. The principal end users of Yurie's ATM access products have been
U.S. government agencies and their support contractors. The Company has
recently begun to obtain purchase orders from commercial customers. Among the
more than 20 government organizations and commercial customers that have
purchased or used the Company's products are:
Advanced Research Project Agency/Defense
Information Systems Agency Joint Program
Office
U.S. Army Communications Electronics
Command
Defense Aerospace Reconnaissance
Organization
North Atlantic Treaty Organization
Naval Research Laboratory
Although there are more than 20 end users of Yurie's products, the Company's
customer base is highly concentrated and a small number of customers has
accounted for a significant portion of the Company's total revenue in recent
years. Sales to AT&T, either for its own use or for resale to government
agencies or their support contractors, accounted for 52.4%, 71.8% and 91.4% of
the Company's total revenues in 1994, 1995 and the nine months ended September
30, 1996, respectively. The Company is expanding its sales and marketing
efforts to pursue telecommunications service providers and corporate end
users.
RESEARCH AND DEVELOPMENT
The Company's objective is to be a leader in developing new technology for
the ATM access market. The Company has established an active research and
development program that is focused on the development of new and enhanced
products using ATM technology. In particular, the Company's research and
development team is seeking to expand the capabilities of the LDR200's
interface modules, develop new server modules (such as primary rate ISDN,
voice compression and encryption modules), expand network management
capabilities and enhance service interworking capabilities. The Company
actively solicits product development ideas from telecommunications service
providers and end users of the Company's products, and develops additional
ideas through participation in industry organizations and international
standards bodies such as the ITU and ATM Forum.
During 1993, 1994, 1995 and the nine months ended September 30, 1996, total
research and development expenditures were $8,000, $40,000, $428,000 and $2.4
million, respectively. The Company expects its future research and development
expenditures will grow commensurately with its revenue growth. As of December
24, 1996, 49 Company employees were engaged in research and development
programs, including hardware and software development, test and engineering
support personnel. Approximately two-thirds of the Company's research and
development employees hold masters or higher degrees. The Company believes
that recruiting and retaining qualified engineering personnel will be
essential to its continuing success.
SALES, MARKETING AND DISTRIBUTION
In order to pursue customers in the telecommunications service provider and
corporate end user markets, the Company has expanded its direct sales force by
hiring sales personnel who have all had experience in commercial sales of
networking and/or telecommunications products. To allow its sales
35
<PAGE>
force to concentrate on commercial markets, the Company will continue to rely
on AT&T to market and sell the LDR products in U.S. federal, state and local
government markets, as well as in certain foreign government markets. As of
December 24, 1996, the Company had 14 sales personnel in its direct sales
organization. Currently, sales offices are located in New York, Phoenix, San
Francisco, Los Angeles, Hartford, Chicago, Tampa and Lanham, MD. All of these
offices, except those in Phoenix and Lanham, MD are currently located in the
homes of sales personnel. In 1997, the Company plans to open sales offices in
Dallas, Denver, Seattle, Boston, Houston, Atlanta, Miami and Pittsburgh, all
of which are expected to be located in the homes of sales personnel.
International sales offices are also planned for 1997 in the U.K. and
Singapore.
Direct Sales
The Company continues to expand its direct sales force to market the
Company's products and to ensure direct contact with its customers. The
primary roles of the Company's sales force are (i) to provide support to AT&T
and seek additional strategic partners, (ii) to support end users by
addressing complex ATM access problems and (iii) to differentiate the features
and capabilities of the Company's LDR products from competitive products. In
addition, the Company believes that its investment in a direct sales force
will help the Company to monitor changing customer requirements, competing
products and the development of industry standards.
Yurie's 14 person direct sales force includes both sales persons and sales
engineers. Sales engineers provide support and services for the Company's
sales persons and for existing customers. Most of the members of the direct
sales force have had significant prior experience in sales with industry-
leading networking companies. The average Yurie sales person has had over 10
years of sales experience, and many of the sales persons have had experience
selling and managing end user, telecommunications service provider and
strategic private label accounts.
Marketing
The Company has recently established a marketing program to support the sale
and distribution of its products. The objective of this program is to inform
potential strategic allies and end users about the capabilities and benefits
of the Company's products. The marketing program includes participation in
industry trade shows and technical conferences, technology seminars,
publication of customer newsletters and technical and educational articles for
the trade press and other industry journals. In addition, the Company
communicates frequently with its installed base of end users regarding
evolving applications for the Company's products.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of materials
planning and procurement, test and manufacturing engineering, module testing
and quality control. Yurie relies on one manufacturer, Sanmina Corporation, to
manufacture the majority of its common equipment circuit packs, backplanes,
chassis and printed circuit board assemblies used in the Company's products.
Sanmina Corporation manufactures most of these products and assembles them at
its New Hampshire facility. Yurie does not have a contract with Sanmina
Corporation or any other manufacturer, and all of the Company's products are
manufactured pursuant to individual purchase orders. The Company believes that
its orders did not represent a significant portion of Sanmina Corporation's
total business in 1996. In the past, Yurie has also used several other
manufacturers as supplemental sources for backplanes, chassis and printed
circuit boards, and may use these manufacturers in the future as necessary.
The Company's reliance on a limited number of manufacturers may reduce the
Company's flexibility and responsiveness to changes. The Company believes,
however, that by using a limited number of manufacturers, it is in a better
position to reduce product costs, acquire additional capacity and reduce its
capital investment.
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<PAGE>
Final testing of the Company's products is performed by the Company at its
Lanham, Maryland facility. All products are rigorously tested using automated
test equipment prior to shipment to customers. All circuit boards are tested
individually. As each customer's network requires different product features
to provide the desired functionality, the products are not assembled into
complete units prior to shipment. Each feature is packaged and shipped
separately to the customers, who use instructions provided by Yurie to
configure the products at their locations. Yurie warrants all of its products
to be free from defects for a period of one year from the date of shipment.
Generally, the Company uses industry standard components for its access
products. It uses field programmable gate arrays with erasable programmable
memory rather than custom integrated circuits in order to maximize its ability
to customize products quickly for telecommunications service providers and add
product features. Certain components used in the Company's products, including
microprocessors and communications chips manufactured by PMC-Sierra, Inc.,
Hewlett-Packard Company, Integrated Device Technology, Inc., Xilinx, Inc. and
Altera Corporation, are currently available from only one supplier. In the
past, there have been shortages of certain of these components because of
vendor production problems and the inability of suppliers to increase delivery
rates. In addition, the Company has experienced shortages of certain other key
components. These component shortages and delays have resulted in delays in
the shipment of the Company's products, and the component shortages have also
resulted in higher component costs. When these components are in short supply,
Yurie must compete for them with larger companies that often have longer
established relationships with these vendors. Certain components that
currently are readily available may become difficult to obtain in the future.
COMPETITION
While the market for ATM access products is still evolving, the networking
industry as a whole is intensely competitive. Among the companies who have
already produced ATM access products are ADC Kentrox and OnStream Networks,
which recently entered into an agreement to be acquired by 3Com. In addition,
Sahara Networks is reportedly developing an ATM access product. Other
companies, including Cisco Systems/StrataCom, Cascade Communications, General
DataComm and Newbridge Networks, have already developed networking equipment
that may be competitive with the Company's products. The Company expects that
some of these companies and other networking and computer systems companies
may in the future announce plans to develop ATM access products that are
directly competitive with the Company's products.
The Company does not intend to compete solely on the basis of price.
Instead, it intends to compete by offering superior features, performance,
reliability and flexibility at competitive prices. Yurie's management is
adopting this strategy because equipment price is only one component in
overall communications costs. WAN bandwidth and network operating expenses
generally exceed the total cost of the network equipment for a typical
customer.
As competition in the ATM access market increases, the Company believes that
the ATM access industry may be characterized by the intense price competition
similar to that present in the broader networking market. In response to this,
the Company has already implemented cost improvement measures and will
continue to seek ways to improve upon the LDR products' price-to-performance
ratio.
INTELLECTUAL PROPERTY, PROPRIETARY INFORMATION AND TECHNICAL KNOW HOW
The Company believes that its future success depends, in part, upon its
ability to develop and protect proprietary technology contained in its
products. The Company currently relies upon a combination of trade secret,
copyright, patent and trademark laws, as well as contractual restrictions, to
establish and protect proprietary rights in its products. The Company also has
entered into nondisclosure, noncompete and invention assignment agreements
with substantially all of its employees and nondisclosure agreements
37
<PAGE>
with certain of its suppliers, distributors and customers so as to limit
access to and disclosure of its proprietary information. There can be no
assurance that these statutory and contractual arrangements will prove
sufficient to deter misappropriation of the Company's technologies or
independent third-party development of similar technologies. The Company also
possesses and relies upon a valuable body of technical know how related to the
design and operation of its products.
The U.S. Patent and Trademark Office recently issued U.S. Patent No.
5,568,482 to the Company for its LANET protocol. LANET is a significant
technological invention that allows ATM to run over transmission media of any
speed or quality. The Company intends to provide the technology covered by the
LANET patent at no cost to the public because it believes that making the
LANET technology freely available to the public would have greater benefits
than licensing the technology to third parties or preserving the technology
solely for its own use. The Company, however, retains its patent rights in the
LANET technology, although third parties are free to use the technology in
unmodified form for their own purposes. The Company anticipates that making
LANET available at no cost to the public will create demand for and facilitate
widespread use of LANET and increase name recognition for Yurie as the
developer of LANET.
Two additional patent applications have been filed for (i) the AQueMan
algorithm developed by the Company to regulate and prioritize the flow of
traffic in ATM access products and (ii) error-tolerant addressing to enhance
the ability to transport ATM cells over noisy links (e.g., wireless circuits).
The Company intends to file another patent application within the next six
months for a method to simplify authentication and key exchange in the
establishment of secure links. The Company does not now intend to make any of
the technologies described in these patent applications available to the
public at no cost. There can be no assurance that the Company's patent
applications will result in issued patents or that the Company's existing
patent or future patents will be upheld as valid or prevent the development of
competitive products. The failure of the Company to obtain a patent for
AQueMan, or to be granted patents for any of its other Company-developed
technologies, could have a material adverse effect on the Company's business
and its growth prospects.
FACILITIES
The Company's principal offices are located in a 45,000 square foot facility
leased by the Company at 10000 Derekwood Lane, Lanham, MD (a suburb of
Washington, DC). Approximately 20.0% of the space in this facility is used or
reserved for manufacturing, product development and testing; the balance is
used or reserved for sales, marketing and other general and administrative
activities. In December 1996, the building in which the Company's principal
offices are located was sold. In connection with the sale, the Company and the
purchaser of the building agreed to an amendment to the Company's lease, which
changes the expiration date of the lease from August 31, 1999 to June 30,
1997. The amendment also gives the purchaser the right to terminate the lease
with 60 days notice on either March 1, 1997 or April 1, 1997, and gives Yurie
the right to terminate the lease upon 30 days notice on either April 1, 1997
or May 1, 1997. The Company will either renegotiate the lease or relocate to
another facility. The Company believes that relocation would not materially
disrupt its operations.
The Company also leases 10,000 square feet of space for its federal division
at 4601 Presidents Drive, Suite 210, Lanham, MD, and sales office space at
3420 East Shea Boulevard, Phoenix, Arizona. Yurie believes that its present
facilities are well maintained and in good operating condition although
additional facilities may be needed to meet anticipated levels of operations
in the foreseeable future.
EMPLOYEES
On December 24, 1996, Yurie employed 141 individuals on a full-time
equivalent basis. Of these, 49 were involved in engineering, 24 were working
in applications engineering in the federal division, 22 were employed in
sales, marketing and customer support, 27 were engaged in manufacturing, and
the remaining 19 were devoted to administration, finance and strategic
planning. Approximately one-half of the Company's employees hold masters or
higher degrees. The Company considers its relations with its employees to be
good and has not experienced any interruption of operations as a result of
labor disagreements, nor are there any collective bargaining agreements in
place.
38
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Jeong H. Kim............ 36 Chief Executive Officer and Chairman of the
Board of Directors
Kwok L. Li.............. 39 President, Chief Operating Officer and Director
Barton Y. Shigemura..... 37 Senior Vice President, Sales and Marketing and
Director
Charles S. Marantz...... 50 Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
Quon S. Chow............ 56 Vice President, Engineering
Anthony J. DeMambro..... 54 Vice President, Operations
William F. Flynn........ 40 Vice President, Federal Division
Joseph Miller........... 40 Vice President, Marketing
John J. McDonnell....... 50 Corporate Counsel and Secretary
Kenneth D. Brody(1)..... 53 Director
Herbert Rabin(1)........ 68 Director
R. James Woolsey(1)..... 55 Director
Henry W. Sterbenz(2).... 52 Vice President, Quality
Catherine A. Graham(2).. 36 Vice President, Finance
</TABLE>
- --------
(1) Member of the Audit Committee and Compensation Committee.
(2) Key employee.
Dr. Kim is the founder of Yurie and has served as Chief Executive Officer and
a Director of the Company since its inception in February 1992, as well as
President from its inception until March 1996. From 1990 to 1993, Dr. Kim
served as Senior Project Engineer with AlliedSignal Technical Services
Corporation, a subsidiary of AlliedSignal Inc. Previously, he served as an
Engineering Consultant with SFA, Inc., a U.S. Department of Defense contractor
and as a Nuclear Submarine Officer in the U.S. Navy. Dr. Kim holds a Ph.D. in
Reliability Engineering from the University of Maryland, and an M.S. in
Technical Management and a B.E.S. in Electrical Engineering and Computer
Science from The Johns Hopkins University.
Mr. Li has served as President and Chief Operating Officer of the Company
since March 1996, a Director since 1995, and Executive Vice President and Chief
Technical Officer from August 1994 through March 1996. Mr. Li was employed by
Yurie on a part-time basis from its inception in 1992 through August 1994. From
1991 to 1994, Mr. Li was Director of Strategic Planning at WilTel, Inc., an
interexchange carrier, and from 1988 to 1991, he was Manager of Fiber Access
Systems Development for Bell Northern Research, Inc., a subsidiary conducting
technological research and development for Northern Telecom Limited. Mr. Li
holds a B.E.S. in Electrical Engineering from The Johns Hopkins University.
Mr. Shigemura has served as Senior Vice President, Sales and Marketing and a
Director of the Company since May 1996. From 1993 to 1996, Mr. Shigemura was
Vice President, Marketing and Services and an executive officer for Premisys
Communications, Inc., a manufacturer of integrated access products for
telecommunications service providers, and from 1990 to 1993, he was Director,
Product Line Management for Northern Telecom Limited, a telecommunications
equipment manufacturer. Prior to that, he served as an Area Vice President,
Sales for General DataComm Industries, Inc., a provider of wide area network
and telecommunication products. Mr. Shigemura holds a B.S. in Marketing and
Finance from the University of Southern California.
39
<PAGE>
Mr. Marantz has served as Vice President, Finance and Administration, Chief
Financial Officer and Treasurer since August 1996. From 1993 to 1996, he was
Director, Mergers and Acquisitions, of Global One, the joint venture among
Sprint Corporation, a telecommunications service provider, France Telecom, the
French telephone company, and Deutsche Telekom AG, the German telephone
company. From 1992 to 1993, he was an independent financial advisor. From 1991
to 1992, he was with LiTel Communications, Inc., an interexchange carrier,
first as a division CFO and then as Vice President of Corporate Development.
Prior to 1991, Mr. Marantz held Vice President positions with several
investment banking firms and was Chief Financial Officer of Omninet
Corporation, a satellite communications company. Mr. Marantz holds S.B. and
M.S. degrees in aeronautics and astronautics from the Massachusetts Institute
of Technology and Stanford University, respectively, and an M.B.A. from the
Harvard Business School.
Mr. Chow has served as Vice President, Engineering of the Company since June
1996. Prior to joining the Company, he spent 30 years with Bell Northern
Research, Inc. a subsidiary conducting technological research and development
for Northern Telecom Limited, where his last position was Director, Broadband
Systems Development. Mr. Chow holds an M.S. and a B.S. in Electrical
Engineering from the University of New Brunswick and the University of British
Columbia, respectively.
Mr. DeMambro has served as Vice President, Operations of the Company since
October 1996. From 1993 until to joining the Company, he was Vice President of
Operations for Steinbrecher Corporation, now Tellabs Wireless, Inc. From 1991
to 1993, he was Director of Operations for Aviv Corporation, a manufacturer of
data storage products. From 1989 to 1991 he was Vice President of
Manufacturing for EMC/2/ Corporation, also a manufacturer of data storage
products.
Mr. Flynn has served as Vice President, Federal Division of the Company
since July 1996, and was Director of Government Programs from May 1994 through
June 1996. From 1990 to 1994, he was a Senior Manager, Program Development and
Technical Liaison for McDonnell Douglas Aerospace, a manufacturer of aerospace
systems. Previously, Mr. Flynn was Marketing Manager, Exploitation Systems for
Unisys Defense Systems and a Naval Flight Officer in the U.S. Navy. Mr. Flynn
holds an M.B.A. from Averett College and a B.A. in Journalism from the
University of South Carolina.
Mr. Miller has served as Vice President, Marketing since May 1996. From 1993
to 1996, he was Director of Marketing for Premisys Communications, Inc., a
manufacturer of integrated access products for telecommunications service
providers. From 1986 to 1993, he held various management positions at Network
Equipment Technologies, a network equipment company. Mr. Miller holds a B.S.
in Business from Golden Gate University.
Mr. McDonnell has served as Corporate Counsel and Secretary of the Company
since June 1996 and is presently employed on a part time basis. He founded
Coagulation Diagnostics, Inc., a medical diagnostics device company, in 1995,
and serves as its Chief Executive Officer. From 1990 to 1995, he was Counsel
with Reed Smith Shaw & McClay, a law firm. He previously served as Executive
Vice President and General Counsel for Fairchild Space and Defense
Corporation, Senior Vice President and General Counsel for Fairchild
Industries, Inc. and Principal Deputy General Counsel of the Department of the
Navy. Mr. McDonnell serves on the Boards of Directors of Geraghty and Miller,
Inc., an environmental engineering firm and Sequoia National Bank. Mr.
McDonnell holds an A.B. from Boston College and a J.D. from Fordham Law
School.
Mr. Brody has served as a Director of the Company since June 1996. Mr. Brody
is the founding partner of Winslow Partners LLC, a private equity investment
firm in Washington, D.C. From 1993 to early 1996, Mr. Brody served as
President and Chairman of the Export-Import Bank of the United States. Prior
thereto, he was a Partner at Goldman, Sachs & Co., where he served as a member
of the firm's Management Committee and founded and headed the high technology
investment banking group. Mr. Brody holds an M.B.A. from the Harvard Business
School and a B.S. in Electrical Engineering from the University of Maryland.
40
<PAGE>
Dr. Rabin has served as a Director of the Company since 1995. Dr. Rabin is
Director of the Engineering Research Center and Associate Dean of the College
of Engineering at the University of Maryland, where he has been Professor of
Electrical Engineering since 1983. He was Deputy Assistant Secretary of the
Navy (Research, Applied and Space Technology) from 1979 through 1983 and
Associate Director of Research at the Naval Research Laboratory from 1971
through 1979. He currently serves as a Director of General Research
Corporation International and the National Technological University. Mr. Rabin
holds a Ph.D., an M.S. and a B.S. in Physics from the University of Maryland,
the University of Illinois and the University of Wisconsin, respectively.
Mr. Woolsey has served as a Director of the Company since April 1996. Mr.
Woolsey served the United States as the Director of Central Intelligence from
1993 to 1995, after which he returned to the law firm of Shea & Gardner, in
Washington, DC, where he became a partner in 1979. Mr. Woolsey is a Director
of United States Fidelity & Guaranty Company and Sun Healthcare Group, Inc.
Mr. Woolsey holds an L.L.B. from Yale Law School, an M.A. from Oxford
University and a B.A. from Stanford University.
Mr. Sterbenz has served as Vice President, Quality of the Company since July
1996 and was Vice President and Secretary from September 1995 through June
1996. From 1987 to 1995, he was a Program Manager at Kaman Sciences
Corporation, a systems development and integration company, working in weapon
systems engineering and corporate information management. From 1965 to 1987,
he served as an officer in the U.S. Army. Mr. Sterbenz holds an M.B.A. from
Long Island University, an M.S. in Physics from the Naval Post Graduate School
and a B.S. in Engineering from the U.S. Military Academy.
Ms. Graham has served as Vice President, Finance of the Company since
February 1996. From 1994 to 1995, she was a financial consultant with Smith
Barney. From 1991 to 1994, she was Chief Financial Officer, Treasurer and
Senior Investor Relations Officer at DavCo Restaurants, Inc., a franchisee of
Wendy's International, Inc., and from 1988 to 1991, she was Vice President,
Structured Finance for MNC Financial, Inc., a bank holding company. Ms. Graham
holds an M.B.A. from Loyola College and a B.A. in Economics from the
University of Maryland.
BOARD OF DIRECTORS AND COMMITTEES
The Certificate divides the Board of Directors of the Company into three
classes, each class to be as nearly equal in number of directors as possible.
Messrs. Shigemura and Brody are Class I directors with their terms of office
expiring in 1999, Messrs. Li and Woolsey are Class II directors whose terms
will expire in 1998, and Drs. Kim and Rabin are Class III directors whose
terms will expire in 1997.
The Board of Directors has created an Audit Committee and a Compensation
Committee. The Audit Committee is responsible for nominating the Company's
independent auditors for approval by the Board of Directors; reviewing the
scope, results and costs of the audit with the Company's independent auditors;
and reviewing the financial statements and audit practices of the Company. The
members of the Audit Committee are Messrs. Brody, Rabin and Woolsey
(Chairman).
The Compensation Committee is responsible for administering the Company's
Stock Option Plan, described below, and for recommending other compensation
decisions to the Board of Directors. The members of the Compensation Committee
are Messrs. Brody, Rabin (Chairman) and Woolsey.
41
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth information concerning
compensation for services rendered in all capacities to the Company by the
Chief Executive Officer and the three most highly compensated executive
officers of the Company other than the Chief Executive Officer for the fiscal
year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION(1)
--------------------------------- ---------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED ALL OTHER
POSITIONS(2) SALARY BONUS COMPENSATION(3) STOCK AWARDS COMPENSATION
- ------------------ -------- -------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Jeong H. Kim(4)......... $206,112 $656,865 $41,346 -- --
Chief Executive Officer
Kwok L. Li(4)........... 140,851 250,077 25,962 $154,000(5) $15,940(6)
President and Chief
Operating Officer
Henry W. Sterbenz(7).... 29,784 15,000 577 -- --
Vice President, Quality
William F. Flynn(8)..... 107,164 10,000 11,482 -- --
Vice President, Federal
Division
</TABLE>
- --------
(1) There were no stock options granted to the named executive officers in
1995.
(2) Messrs. Shigemura, Chow and Marantz, who joined the Company on May 6,
1996, July 8, 1996 and August 12, 1996, respectively, along with Dr. Kim
and Mr. Li, are expected to be included in the Fiscal 1996 Summary
Compensation Table.
(3) Includes payments for unused vacation and sick leave and, for Dr. Kim and
Messrs. Li and Flynn, the Company's contribution to their pension plans.
(4) The Company has entered into employment agreements with Dr. Kim and Mr.
Li. See "--Employment Agreements."
(5) Represents 4,000,000 shares of Common Stock granted to Mr. Li in March
1995. See "--Stock Grants."
(6) Represents reimbursed relocation expenses and applicable associated taxes.
(7) Mr. Sterbenz joined the Company in September 1995.
(8) Mr. Flynn was named Vice President, Federal Division and an Executive
Officer in July, 1996. Previously, he served as Director of Government
Programs for the Company.
42
<PAGE>
STOCK OPTION PLAN
Under the Company's Stock Option Plan, stock option awards may be made to
eligible employees, consultants, directors and officers of the Company. The
purpose of the Stock Option Plan is to secure for the Company and its
shareholders the benefits arising from capital stock ownership by key
individuals, who are expected to contribute to the Company's future growth and
services. Further, the Stock Option Plan will enable to the Company to attract
and retain competent personnel.
The Stock Option Plan was adopted by the Company's Board of Directors on
January 31, 1996 and amended on April 2, 1996, July 18, 1996, September 6, 1996
and December 20, 1996. A total of 5.0 million shares have been reserved for
issuance under the Stock Option Plan. As of December 24, 1996, options to
purchase 3,136,722 shares of Common Stock had been granted under the Stock
Option Plan. The Stock Option Plan will remain effective until all shares
available for issuance under the Plan have been issued, unless sooner
terminated by action of the Board of Directors. The number and kind of shares
subject to the Stock Option Plan may be adjusted by the Board to prevent
dilution or enlargement of rights in the event of a merger, consolidation, sale
of all or substantially all of the assets of the Company, reorganization,
reclassification, stock dividend, stock split, reverse stock split or other
similar distribution with respect to the outstanding shares of Common Stock. No
individual may be granted options to purchase more than 1,500,000 shares of
Common Stock in any year under the Stock Option Plan.
The Stock Option Plan is administered by the Board of Directors, although the
Board is authorized to delegate the administration of the Stock Option Plan to
a committee. The Board (or the committee) is authorized to modify or amend the
Stock Option Plan at any time. The Board (or the committee) is further
authorized to select the optionees and determine the terms of the options
granted, including: (i) the number of shares subject to each option; (ii) the
exercise price of the option; (iii) when the option becomes exercisable; (iv)
the duration of the option and (v) any other appropriate term of the option
agreement.
In December 1996, the Stock Option Plan was amended to provide for automatic
annual grants to directors of 5,000 stock options on June 30 of each year
beginning on June 30, 1997. At that time, the Stock Option Plan was also
amended to provide that in the event of a transaction that constitutes a Change
of Control (as defined in the Plan) of the Company, each outstanding option
will automatically become exercisable as to all of the option shares
immediately prior to the effective date of such transaction, subject to certain
exceptions.
As of December 24, 1996, options to acquire an aggregate of 3,136,722 shares
of Common Stock were outstanding pursuant to the Stock Option Plan. Neither Dr.
Kim or Mr. Li hold any options to purchase shares of Common Stock under the
Stock Option Plan. Other executive officers and key employees have been granted
options to purchase shares under the Stock Option Plan as of December 11, 1996
as follows: Barton Y. Shigemura--1,000,000 shares; Charles S. Marantz--100,000
shares; Quon S. Chow--100,000 shares; Anthony J. DeMambro--75,000 shares;
William F. Flynn--100,000 shares; Joseph Miller--110,000 shares; John J.
McDonnell--30,000 shares; Henry W. Sterbenz--50,000 shares; and Catherine A.
Graham--50,000 shares. These options have exercise prices ranging from $.52 to
$2.70 per share and a weighted average exercise price of $0.98. All of these
options vest periodically through October 2000.
The options granted under the Stock Option Plan are not incentive stock
options within the meaning of Section 422 of the Internal Revenue Code.
STOCK PURCHASE PLAN
In December 1996, the Board of Directors and the stockholders of the Company
approved the adoption of the 1997 Employee Stock Purchase Plan (the "Stock
Purchase Plan"). A total of 200,000 shares of Common Stock have been reserved
for issuance under the Stock Purchase Plan. Employees of the Company will be
eligible to participate in the Stock Purchase Plan if they have been employed
by the Company for at least three
43
<PAGE>
months. Employees who own 5% or more of the outstanding capital stock of the
Company will not be eligible to participate. The Stock Purchase Plan will
permit eligible employees to purchase Common Stock through payroll deductions,
at a price equal to 85% of the fair market value of the Common Stock at the
time of purchase.
The Stock Purchase Plan will be administered by a committee appointed by the
Board of Directors, which shall establish such rules and procedures as are
necessary or advisable to administer the Stock Purchase Plan. The Stock
Purchase Plan will become effective on the date on which a registration
statement on Form S-8 filed by the Company with respect thereto becomes
effective. The Stock Purchase Plan will remain effective until all the shares
available for issuance under the Plan have been issued, unless sooner
terminated by action of the Board of Directors.
401(K) PLAN
Effective January 1, 1996, the Company adopted a 401(k) Plan (the "401(k)
Plan"). Pursuant to the 401(k) Plan, participants may contribute up to 10% of
their compensation, not to exceed a statutorily prescibed annual maximum, to
the 401(k) Plan. The 401(k) Plan requires the Company to make dollar-for-dollar
matching contributions to the Plan on behalf of each participant up to a
maximum of 5% of the participant's base salary. An employee must have completed
one year of service (as defined in the 401(k) Plan) in order to participate in
the 401(k) Plan.
Under the 401(k) Plan, each participant vests immediately in his or her
salary contributions and vests in the Company's contributions at the rate of
20% per year of service beginning with two years of service. Distributions may
be made from a participant's account in the form of a lump-sum, installments or
direct rollover upon termination of employment, retirement, disability or death
or in the form of a lump-sum distribution in the event of financial hardship.
The 401(k) Plan is intended to qualify under Section 401 of the Code so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by the Company, if any, will be
deductible by the Company when made.
In December 1996, the Board of Directors (i) directed that the 401(k) Plan be
amended to provide that, at a participant's election, the Company's required
matching contributions may take the form of cash or stock and to provide that
employees may become participants in the 401(k) Plan for the purpose of making
salary contributions as of the first day of the quarter following their date of
hiring and (ii) reserved a total of 200,000 shares of Common Stock for issuance
in connection with the 401(k) Plan.
STOCK GRANTS
The Company has granted shares of stock as compensation to certain of its
officers and employees. On May 22, 1995, the Company issued (i) 4,000,000
shares of Common Stock to Kwok L. Li, (ii) 200 shares of Common Stock to each
of Joseph Aviles, Jr., David Brooks, Kawaldeep Chadha, John Randy Crout,
William F. Flynn, Lawrence Foster, Erin Holiday, Yvonne Julien, Cynthia Kim,
William Marshall, Arthur Mobley and Patrick O'Connor and (iii) 200,000 shares
of Common Stock to Yung-Lung Ho. On June 14, 1995, the Company issued 4,000
shares of Common Stock to Arthur Mobley and 2,000 shares of Common Stock to
David Brooks. See "--Summary Compensation Table."
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Dr. Kim, its Chief
Executive Officer, and Mr. Li, its President, on July 31, 1996. Pursuant to the
Company's employment agreement with Dr. Kim (the "Kim Employment Agreement"),
Dr. Kim will receive an annual salary of $200,000 and bonus of $40,000 or such
other amount as the Board of Directors may determine. Dr. Kim's employment is
for a one-year term that renews automatically unless terminated by either
party. If the Kim Employment Agreement is terminated by the Company for any
reason other than "disability" or "cause" or by Dr. Kim
44
<PAGE>
for any reason other than "good reason" (as those terms are defined in the Kim
Employment Agreement), the Company must make a cash lump sum severance payment
equal to Dr. Kim's base salary (as defined in the Kim Employment Agreement) and
a "bonus amount" for the then-current year, and continue his benefits for up to
one year. Throughout his employment, Dr. Kim is bound by a covenant not to
compete, which prevents him from engaging in any business in the United States
in which the Company is then involved. Dr. Kim will continue to be bound by
this covenant not to compete for one year after his termination. The Kim
Employment Agreement also provides for certain registration rights with respect
to Dr. Kim's shares of Common Stock pursuant to a registration rights agreement
(the "Kim Registration Rights Agreement"). See "Shares Eligible for Future
Sale."
Pursuant to the Company's employment agreement with Mr. Li (the "Li
Employment Agreement"), Mr. Li will receive an annual salary of $150,000 and
bonus of $30,000 or such other amount as the Board of Directors may determine.
Mr. Li's employment is for a one-year term that renews automatically unless
terminated by either party. If the Li Employment Agreement is terminated by the
Company for any reason other than "disability" or "cause" or by Mr. Li for any
reason other than "good reason" (as those terms are defined in the
Li Employment Agreement), the Company must make a cash lump sum severance
payment equal to Mr. Li's base salary for the then-current year and a "bonus
amount" (as defined in the Li Employment Agreement), and continue his benefits
for up to one year. Throughout his employment, Mr. Li is bound by a covenant
not to compete, which prevents him from engaging in any business in the United
States in which the Company is then involved. Mr. Li will continue to be bound
by this covenant not to compete for one year after his termination. The Li
Employment Agreement also provides for certain registration rights with respect
to Mr. Li's shares of Common Stock pursuant to a registration rights agreement
(the "Li Registration Rights Agreement"). See "Shares Eligible for Future
Sale."
COMPENSATION OF DIRECTORS
During 1995, each of the Company's independent directors received $5,000 for
serving as members of the Board of Directors, and the same amount is expected
to be paid for service in 1996. During 1996, Messrs. Rabin, Woolsey and Brody
received options to purchase 121,000, 100,000 and 75,000 shares of Common
Stock, respectively. These options have a weighted average exercise price of
$0.52 and vest periodically over 4 years. In addition, Mr. Brody purchased an
option for 1,000,000 additional shares of Common Stock from Dr. Kim. See
"Certain Transactions" and "Shares Eligible For Future Sale." The Company has
amended its Stock Option Plan to provide for annual automatic option grants of
5,000 options to all directors. Directors also are reimbursed for travel and
other expenses of attendance at meetings of the Board of Directors or
committees thereof.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The DGCL authorizes corporations to limit or eliminate the personal liability
of directors to corporations and their stockholders for monetary damages for
breach of directors' fiduciary duty of care. The Company's Certificate limits
the liability of directors of the Company to the Company or its stockholders to
the fullest extent permitted by Delaware law. See "Description of Capital
Stock--Certain Provisions of the Company's Certificate of Incorporation and
Bylaws."
The Certificate provides mandatory indemnification rights to any officer or
director of the Company who, by reason of the fact that he or she is an officer
or director of the Company, is involved in a legal proceeding of any nature.
Such indemnification rights include reimbursement for expenses incurred by such
officer in advance of the final disposition of such proceeding in accordance
with the applicable provisions of the DGCL.
45
<PAGE>
CERTAIN TRANSACTIONS
CERTAIN STOCK TRANSACTIONS
On July 1, 1996, Dr. Jeong H. Kim and Kenneth D. Brody entered into an option
purchase agreement (the "Option Purchase Agreement"), pursuant to which Mr.
Brody purchased for $500,000 an option (the "Brody Option") to buy 1,000,000
shares of the Common Stock from Dr. Kim at an exercise price of $4.00 per
share. The Brody Option vests in four equal installments, provided that Mr.
Brody is still serving or is willing to serve as a director of the Company, on
September 3, 1996, December 3, 1996, March 3, 1997 and June 3, 1997, subject to
early vesting immediately prior to any "Change of Control Event." A Change of
Control Event is defined as any event the result of which is that Dr. Kim
ceases to beneficially own 40% of the voting power of the Company's then
outstanding voting securities. To secure Dr. Kim's obligations to deliver
shares of Common Stock to Mr. Brody upon exercise of the Brody Option, Dr. Kim
granted Mr. Brody a security interest in all of the shares of Common Stock
subject to the Brody Option. Mr. Brody may assign the Brody Option, in whole or
in part, subject to the limitation that each assignee (with the exception of
Affiliates and family members) must be assigned a portion of the Brody Option
covering at least 200,000 shares of Common Stock. The Brody Option is
exercisable for a term of 20 years.
On May 22, 1995, the Company issued 4,000,000 shares of Common Stock to Kwok
Li as compensation for his services to the Company in connection with the
development of the LDR100. The Company also issued 200 Shares of Common Stock
to William F. Flynn as compensation for his services to the Company. Mr. Flynn
was not an officer of the Company at the time this stock was issued.
Certain executive officers and directors of the Company have been granted
options to purchase shares of the Common Stock of the Company as follows:
Barton Y. Shigemura--1,000,000 shares; Charles S. Marantz--100,000 shares; Quon
S. Chow--100,000 shares; Anthony J. DeMambro--75,000 shares; William F. Flynn--
100,000 shares; Joseph Miller--110,000 shares; John J. McDonnell--30,000;
Herbert Rabin--121,000 shares; R. James Woolsey--100,000 shares and Kenneth D.
Brody--75,000 shares. These options have exercise prices ranging from $.52 to
$2.70 per share.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must be
approved by a majority of the members of the Company's board of directors and
by a majority of the disinterested members of the Company's board of directors
and be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
CERTAIN RELATIONSHIPS
R. James Woolsey, a director of the Company, is a partner in the law firm of
Shea & Gardner, which is one of several firms that performs legal work for the
Company.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of Common Stock as of December 24, 1996, by (i)
each person who is known by the Company to beneficially own 5% or more of
outstanding Common Stock, (ii) each of the Company's directors, (iii) each
executive officer named in the Summary Compensation Table, (iv) certain key
employees of the Company and (v) all directors, executive officers and key
employees of the Company as a group. Unless otherwise indicated, the person or
persons named have sole voting and investment power.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY TO BE
PRIOR TO OWNED AFTER
OFFERING(1) OFFERING
------------------ ------------------
NAME NUMBER PERCENT NUMBER PERCENT
---- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Jeong H. Kim(2)(3)................... 15,000,000 72.8% 15,000,000 61.0%
Kwok L. Li(3)(4)..................... 3,750,000 18.2 3,750,000 15.2
Kenneth D. Brody(5).................. 500,000 2.4 500,000 2.0
Barton Y. Shigemura.................. 250,000 1.2 250,000 1.0
Quon S. Chow......................... 50,000 * 50,000 *
Joseph Miller........................ 50,000 * 50,000 *
R. James Woolsey(6).................. 50,000 * 50,000 *
Anthony J. DeMambro.................. 22,500 * 22,500 *
Herbert Rabin........................ 11,000 * 11,000 *
William F. Flynn..................... 10,450 * 10,450 *
Henry W. Sterbenz.................... 2,500 * 2,500 *
Catherine A. Graham.................. -- -- -- --
Charles S. Marantz................... -- -- -- --
John J. McDonnell.................... -- -- -- --
All executive officers, directors and
key employees as a group (14
persons)............................ 19,696,450 94.2% 19,696,450 79.1%
</TABLE>
- --------
* Less than 1%.
(1) Includes shares issuable pursuant to options exercisable currently or
within 60 days of the date of this Prospectus.
(2) Includes 500,000 shares subject to the Brody Option that have not vested
and will not vest within 60 days of the date of this Prospectus. In
November 1996, Dr. Kim sold 500,000 shares of Common Stock to Amerindo.
(3) Dr. Kim and Mr. Li have granted to the Underwriters a 30-day option to
purchase up to 500,000 and 100,000 shares of Common Stock, respectively,
solely to cover over-allotments, if any. To the extent the option is
exercised in full, Dr. Kim and Mr. Li will beneficially own 14,500,000
shares (58.9%) and 3,650,000 shares (14.8%), respectively.
(4) In May 1995, the Company granted 4,000,000 shares of Common Stock to Mr.
Li. In October 1996, he sold 150,000 shares to various employees and a
director of the Company. In November 1996, he sold 100,000 shares of
Common Stock to Amerindo. Includes 1,000,000 shares owned by Mr. Li's
spouse, as to which he disclaims beneficial ownership.
(5) Does not include 500,000 shares subject to the Brody Option that will vest
in 1997. See "Certain Transactions."
(6) Mr. Woolsey's shares are held jointly with his spouse.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Certificate provides that the authorized capital of the Company consists
of 50,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000
shares of undesignated Preferred Stock, par value $.01 per share. As of
December 24, 1996, there were 20,608,400 shares of Common Stock outstanding,
held by 20 persons, and no shares of Preferred Stock outstanding. In addition,
there were outstanding options to acquire 3,136,722 shares of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time 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, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive,
conversion or other subscription rights. There are no redemption or sinking
fund provisions available to the Common Stock. All outstanding shares of Common
Stock are fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the undesignated Preferred
Stock in one or more series and to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any wholly unissued series of undesignated Preferred Stock and to fix the
number of shares constituting any series and the designation of such series,
without any further vote or action by the stockholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company and may adversely affect the voting and other
rights of the holders of Common Stock. The Company has no present plans to
issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate of Incorporation provides that the liability of directors of
the Company is eliminated to the fullest extent permitted under Section
102(b)(7) of the Delaware General Corporation Law. As a result, no director of
the Company will be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (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) for any willful or
negligent payment of an unlawful dividend, stock purchase or redemption or (iv)
for any transaction from which the director derived an improper personal
benefit.
The Certificate divides the Board of Directors of the Company into three
classes, each class to be as nearly equal in number of directors as possible.
Messrs. Shigemura and Brody are Class I directors with their terms of office
expiring in 1999, Messrs. Li and Woolsey are Class II directors whose terms
will expire in 1998, and Drs. Kim and Rabin are Class III directors whose terms
will expire in 1997. At each annual meeting of stockholders, directors in each
class will be elected for terms of three years to succeed the directors of that
class whose terms are expiring. In accordance with the DGCL, directors serving
on classified boards of directors may only be removed from office for cause.
The Certificate provides that stockholders may take action by the written
consent of 66 2/3% of the stockholders, and that a special meeting of
stockholders may be called only by the Board of Directors. The Bylaws of the
Company provide that stockholders must follow an advance notification procedure
for certain stockholder nominations of candidates for the Board of Directors
and for certain other stockholder business to be conducted at an annual
meeting. These provisions could, under certain circumstances, operate to delay,
defer or prevent a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be American Stock
Transfer & Trust Company.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following this offering, the Company will have outstanding
24,608,400 shares of Common Stock. The 4,000,000 shares of Common Stock offered
hereby (4,600,000 if the Underwriters' over-allotment option is exercised in
full) will be eligible for public sale without restriction under the Securities
Act by persons other than Affiliates of the Company. Sales of shares by
affiliates of the Company will be subject to public resale in accordance with
Rule 144 under the Securities Act. Approximately 14,500,000 shares of Common
Stock have been owned by existing stockholders for more than two years and will
be available for public sale pursuant to Rule 144, subject to the volume and
other limitations set forth therein. See "Underwriting." The Company and its
executive officers, directors and certain stockholders who will beneficially
own 20,896,450 outstanding shares immediately following this offering, have
agreed with the Underwriters not to offer, sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated.
In general, under Rule 144 as presently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least two years has elapsed
since the later of the date shares of Common Stock that are "restricted
securities" (as that term is defined in Rule 144) were acquired from the
Company or the date they were acquired from an Affiliate of the Company, as
applicable, the holder of such restricted shares (including an Affiliate) is
entitled to sell a number of shares within any three-month period that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 246,084 shares immediately after the consummation of this
offering) or the average weekly trading volume of the Common Stock on the
Nasdaq National Market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements pertaining to the
manner of such sales, notices of such sales and the availability of current
public information concerning the Company. Affiliates may sell shares not
constituting restricted securities in accordance with the foregoing volume
limitations and other requirements but without regard to the two-year holding
period requirement.
Under Rule 144(k), if a period of at least three years has elapsed since the
later of the date restricted shares were acquired from the Company or the date
they were acquired from an Affiliate of the Company, as applicable, restricted
shares held by a person who is not an Affiliate of the Company at the time of
the sale and who has not been an affiliate for at least three months prior to
the sale would be entitled to sell the shares immediately without regard to the
volume limitations and other conditions described above.
The Company and Mr. Brody entered into a registration rights agreement (the
"Brody Registration Rights Agreement") with respect to 1,000,000 shares of
Common Stock issuable upon exercise of the Brody Option (the "Brody Shares").
Under the Brody Registration Rights Agreement, Mr. Brody and his assignees (the
"Holders") may, beginning 180 days after this Offering (360 days with respect
to assignees) and subject to certain limitations, require the Company to file
up to three registration statements under the Securities Act ("registration
demands") covering the public sale of all or any portion of the Brody Shares,
one of which may be for the sale of Brody Shares in an underwritten offering,
and two of which must be shelf registration statements. In addition, the
Holders have been granted piggyback registration rights with respect to certain
registration statements filed by the Company. In any registration, the Company
must pay the registration expenses of the Holders, including legal fees of up
to $10,000, other than underwriting commissions or discounts. The Company has
agreed to indemnify the Holders against certain liabilities, including
liabilities under the Securities Act, in connection with the registration of
the Brody Shares.
Pursuant to the Kim Registration Rights Agreement and the Li Registration
Rights Agreement (collectively, the "Registration Rights Agreements"), Dr. Kim
and Mr. Li were granted registration rights for 15,000,000 shares of Common
Stock (the "Kim Shares") and 4,000,000 shares of Common Stock (the "Li
Shares"), respectively. The Registration Rights Agreements provide that Dr. Kim
and his assignees or Mr. Li and his assignees, as the case may be, may,
beginning 180 days after this offering (360 days with
49
<PAGE>
respect to assignees) and subject to certain limitations, make up to five
registration demands with respect to the sale of all or any portion of the Kim
Shares or the Li Shares, respectively, three of which may be shelf registration
statements. Dr. Kim and Mr. Li and their assignees have also been granted
piggyback registration rights with respect to certain registration statements
filed by the Company. In any registration, the Company must pay the
registration expenses of Dr. Kim and Mr. Li and their assignees, including
legal fees of up to $10,000, other than underwriting commissions or discounts.
The Company has agreed to indemnify Dr. Kim and Mr. Li against certain
liabilities, including liabilities under the Securities Act, in connection with
the registration of the Kim Shares and the Li Shares.
Pursuant to a Stock Purchase Agreement between the Company and Amerindo, the
Company granted registration rights to Amerindo with respect to 1,000,000
shares of Common Stock (the "Amerindo Shares"). Amerindo acquired the shares on
November 7, 1996 from the Company (400,000 shares), Dr. Kim (500,000 shares)
and Mr. Li (100,000 shares). The Stock Purchase Agreement provides that
Amerindo may, beginning one year after the date of this offering and subject to
certain limitations, make one registration demand for a shelf registration for
all, but not less than all, of the Amerindo Shares. Amerindo has also been
granted piggyback registration rights with respect to certain registration
statements filed by the Company. In any registration, the Company must pay the
registration expenses of Amerindo, excluding Amerindo's legal fees,
underwriting commissions and discounts. The Company has agreed to indemnify
Amerindo against certain liabilities, including liabilities under the
Securities Act, in connection with the registration of the Amerindo Shares.
The Company intends to register on Form S-8 under the Securities Act as soon
as practicable after this offering, 5,000,000 shares of Common Stock issued or
reserved for issuance under the Stock Option Plan, 200,000 shares of Common
Stock reserved for issuance under the Stock Purchase Plan and 200,000 shares of
Common Stock reserved for issuance under the 401(k) Plan. See "Management--
Stock Option Plan," "--Stock Purchase Plan" and "--401(k) Plan" Shares
registered and issued pursuant to such registration statement will be freely
tradable unless held by Affiliates of the Company, for whom resale of the
shares will be subject to the volume limitations of Rule 144.
Prior to this offering, there has been no market for the Common Stock of the
Company, and the Company can make no prediction as to the effect, if any, that
sales of shares or the availability of shares for sale will have on market
prices prevailing from time to time. Nevertheless, sales of substantial amounts
of the Common Stock of the Company in the public market, or the prospect of
such sales, could adversely affect the market price of the Common Stock.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Wessels, Arnold & Henderson, L.L.C.
(collectively, the "Representatives"), have severally agreed to purchase from
the Company the following respective number of shares of Common Stock at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated...................................
Wessels, Arnold & Henderson, L.L.C................................
---------
Total........................................................... 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives.
Certain stockholders of the Company have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 600,000 additional shares of Common Stock at the initial
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it in the above table bears to the total number
of shares offered hereby, and the certain stockholders of Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 4,000,000 shares are being offered hereby.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company regarding certain liabilities,
including liabilities under the Securities Act.
The Company has agreed that until 180 days after the date of this Prospectus,
it will not, without the prior written consent of Alex. Brown & Sons
Incorporated, sell, offer to sell, issue, or otherwise distribute any shares of
Common Stock or any options, rights or warrants with respect to any Common
Stock, except for shares issued pursuant to the exercise of options granted
under the Company's stock option plan. Further, the executive officers,
directors, and certain stockholders of the Company have agreed not to directly
or indirectly sell or offer for sale or otherwise dispose of any Common Stock
of the Company for a period of 180 days after the date of this Prospectus
without the prior written consent of Alex. Brown & Sons Incorporated. See
"Shares Eligible for Future Sale."
51
<PAGE>
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock has been
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were prevailing market conditions,
the results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company
and the Representatives believed to be comparable to the Company, estimates of
the business potential of the Company, the present state of the Company's
development and other factors deemed relevant by the Company and the
Representatives.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Fried, Frank, Harris, Shriver & Jacobson, Washington, DC.
Certain legal matters related to this offering will be passed upon for the
Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The financial statements of the Company as of December 31, 1993, 1994 and
1995 and September 30, 1996, and for each of the years ended December 31, 1993,
1994 and 1995 and for the nine months ended September 30, 1996, included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus, which is part of the
Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the Registration Statement. For further information
pertaining to the Company and the Common Stock, reference is made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents or provisions of any documents
referred to herein are not necessarily complete, and in each instance,
reference is made to the copy of the document filed as an exhibit to the
Registration Statement. The Registration Statement may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the Registration Statement may be obtained from the
Commission at prescribed rates from the Public Reference Section of the
Commission at such address, and at the Commission's regional offices located at
7 World Trade Center, 13th Floor, New York, New York 10048, and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In
addition, registration statements and certain other filings made with the
Commission through its Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system are publicly available through the Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov. The Registration
Statement, including all exhibits thereto and amendments thereof, has been
filed with the Commission through EDGAR.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements certified by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
interim unaudited financial information.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996.... F-3
Statements of Operations for Years Ended December 31, 1993, 1994 and 1995
and the Nine Months Ended September 30, 1995 (Unaudited) and 1996........ F-4
Statements of Stockholders' Equity (Deficit) for Years Ended December 31,
1993, 1994 and 1995, and the Nine Months Ended September 30, 1996........ F-5
Statements of Cash Flows for Years Ended December 31, 1993, 1994 and 1995
and for the Nine Months Ended September 30, 1995 (Unaudited) and 1996.... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Yurie Systems, Inc.:
We have audited the accompanying balance sheets of Yurie Systems, Inc. as of
December 31, 1994 and 1995 and as of September 30, 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1995 and for the nine
months ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our 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 our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Yurie Systems, Inc. as of
December 31, 1994 and 1995 and as of September 30, 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995 and for the nine months ended September 30, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996, the Company
adopted the requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation."
/s/ Deloitte & Touche LLP
Washington, DC November 7, 1996
F-2
<PAGE>
YURIE SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
--------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 230,188 $3,779,800 $ 6,201,539
Accounts receivable--trade.............. 166,776 1,172,394 1,657,033
Accounts receivable--other.............. 8,130 2,828 4,855
Inventory............................... -- 654,447 1,276,337
Deferred offering costs................. -- -- 146,815
Deferred income taxes................... -- -- 225,608
Prepaid expenses........................ 11,015 5,164 198,847
--------- ---------- -----------
Total current assets.................. 416,109 5,614,633 9,711,034
--------- ---------- -----------
PROPERTY AND EQUIPMENT:
Furniture and equipment................. 47,706 90,250 120,403
Software................................ 4,087 50,622 204,395
Computer and office equipment........... 157,331 504,481 1,180,495
--------- ---------- -----------
Total property and equipment.......... 209,124 645,353 1,505,293
Less accumulated depreciation and amor-
tization............................... (13,008) (89,257) (237,679)
--------- ---------- -----------
Net property and equipment............ 196,116 556,096 1,267,614
--------- ---------- -----------
OTHER ASSETS.............................. 15,220 20,938 52,722
--------- ---------- -----------
$ 627,445 $6,191,667 $11,031,370
========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 50,056 $ 295,591 $ 2,235,197
Accrued salaries and employee benefits.. 189,564 269,386 1,239,795
Other accrued expenses.................. 7,555 893 599,124
Due to stockholder...................... 583 -- --
Unearned revenue........................ 275,437 4,000,000 2,846,235
Deferred income taxes................... 3,547 64,995 --
Income taxes payable.................... 19,220 432,059 193,139
--------- ---------- -----------
Total current liabilities............. 545,962 5,062,924 7,113,490
ACCRUED RENT.............................. 18,511 25,661 17,614
DEFERRED INCOME TAXES..................... 18,768 -- 57,957
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, autho-
rized 10,000,000 shares, none issued... -- -- --
Common Stock, par value $.01 per share;
authorized, 30,000,000 shares in 1994
and 1995 and 50,000,000 in 1996; issued
and outstanding, 16,000,000 and
20,208,400 shares at December 31, 1994
and 1995 and 20,208,400 shares at Sep-
tember 30, 1996........................ 160,000 202,084 202,084
Additional paid-in capital.............. -- 119,939 119,939
Retained earnings (deficit)............. (115,796) 781,059 3,520,286
--------- ---------- -----------
Total stockholders' equity............ 44,204 1,103,082 3,842,309
--------- ---------- -----------
$ 627,445 $6,191,667 $11,031,370
========= ========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Product revenue....... $ -- $ -- $2,869,937 $2,665,537 $13,023,251
Service revenue....... 194,489 1,143,520 1,992,669 1,044,206 1,622,614
Other revenue......... -- -- 1,108,333 250,000 391,667
---------- ---------- ---------- ---------- -----------
Total revenue....... 194,489 1,143,520 5,970,939 3,959,743 15,037,532
COSTS OF REVENUE:
Cost of product reve-
nue.................. -- -- 1,326,702 1,219,657 4,536,284
Cost of service reve-
nue.................. 142,988 723,481 1,184,093 696,292 1,094,741
---------- ---------- ---------- ---------- -----------
Total cost of reve-
nue................ 142,988 723,481 2,510,795 1,915,949 5,631,025
---------- ---------- ---------- ---------- -----------
GROSS PROFIT............ 51,501 420,039 3,460,144 2,043,794 9,406,507
---------- ---------- ---------- ---------- -----------
OPERATING EXPENSES:
Research and develop-
ment................. 7,524 39,875 427,815 85,990 2,379,923
Sales and marketing... -- -- -- -- 790,256
General and adminis-
trative.............. 60,948 219,344 1,588,154 1,284,817 1,733,013
---------- ---------- ---------- ---------- -----------
Total operating ex-
penses............. 68,472 259,219 2,015,969 1,370,807 4,903,192
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) FROM
OPERATIONS............. (16,971) 160,820 1,444,175 672,987 4,503,315
---------- ---------- ---------- ---------- -----------
OTHER INCOME (EX-
PENSES)................ (6,134) 1,583 13,341 3,576 62,064
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE IN-
COME TAXES............. (23,105) 162,403 1,457,516 676,563 4,565,379
PROVISION FOR INCOME
TAXES.................. -- 41,535 560,661 260,253 1,826,152
---------- ---------- ---------- ---------- -----------
NET INCOME (LOSS)....... $ (23,105) $ 120,868 $ 896,855 $ 416,310 $ 2,739,227
========== ========== ========== ========== ===========
NET INCOME (LOSS) PER
COMMON SHARE........... $ (0.00) $ 0.01 $ 0.04 $ 0.02 $ 0.13
========== ========== ========== ========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 17,492,751 17,492,751 21,660,407 21,646,676 21,701,151
========== ========== ========== ========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1993................... 16,000,000 $160,000 $ -- $ (213,559) $ (53,559)
Net loss.............. -- -- -- (23,105) (23,105)
---------- -------- -------- ---------- ----------
BALANCE, DECEMBER 31,
1993................... 16,000,000 160,000 -- (236,664) (76,664)
Net income............ -- -- -- 120,868 120,868
---------- -------- -------- ---------- ----------
BALANCE, DECEMBER 31,
1994................... 16,000,000 160,000 -- (115,796) 44,204
Common stock issu-
ance................. 4,208,400 42,084 119,939 -- 162,023
Net income............ -- -- -- 896,855 896,855
---------- -------- -------- ---------- ----------
BALANCE, DECEMBER 31,
1995................... 20,208,400 202,084 119,939 781,059 1,103,082
Net income............ -- -- -- 2,739,227 2,739,227
---------- -------- -------- ---------- ----------
BALANCE, SEPTEMBER 30,
1996................... 20,208,400 $202,084 $119,939 $3,520,286 $3,842,309
========== ======== ======== ========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- ----------------------
1993 1994 1995 1995 1996
-------- --------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income (loss)...... $(23,105) $ 120,868 $ 896,855 $ 416,310 $2,739,227
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation.......... 2,575 11,220 76,249 57,186 148,422
Loss on property and
equipment............ 3,385 -- -- -- --
Compensation due to
stock issuance....... -- -- 162,023 -- --
Deferred income tax-
es................... -- 22,315 42,680 -- (232,646)
Changes in assets and
liabilities:
Accounts receivable... (36,963) (137,943) (1,000,316) (508,904) (486,666)
Inventory............. -- -- (654,447) (167,396) (621,890)
Prepaid expenses...... -- (10,665) 5,851 (8,619) (193,683)
Other assets.......... 100 (15,220) (5,718) (5,294) (31,784)
Accounts payable and
accrued expenses..... -- 57,611 238,873 123,177 2,537,837
Accrued salaries and
employee benefits.... 123,807 15,757 79,822 685,376 970,409
Income taxes payable.. -- 19,220 412,839 242,750 (238,920)
Due to/from stockhold-
er................... (74,441) 50,601 (583) -- --
Unearned revenue...... -- 275,437 3,724,563 (275,437) (1,153,765)
Accrued rent.......... -- 18,511 7,150 -- (8,047)
-------- --------- ----------- --------- ----------
Net cash provided by
(used in) operating
activities.......... (4,642) 427,712 3,985,841 559,149 3,428,494
-------- --------- ----------- --------- ----------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchase of property
and equipment......... (4,309) (202,250) (436,229) (243,612) (859,940)
-------- --------- ----------- --------- ----------
Net cash used in in-
vesting activities.. (4,309) (202,250) (436,229) (243,612) (859,940)
-------- --------- ----------- --------- ----------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Deferred offering
costs................. -- -- -- -- (146,815)
-------- --------- ----------- --------- ----------
Net cash used in fi-
nancing activities.. -- -- -- -- (146,815)
-------- --------- ----------- --------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (8,951) 225,462 3,549,612 315,537 2,421,739
CASH AND CASH EQUIVA-
LENTS, BEGINNING OF PE-
RIOD................... 13,677 4,726 230,188 230,188 3,779,800
-------- --------- ----------- --------- ----------
CASH AND CASH EQUIVA-
LENTS, END OF PERIOD... $ 4,726 $ 230,188 $ 3,779,800 $ 545,725 $6,201,539
======== ========= =========== ========= ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for income
taxes................. $ -- $ -- $ 105,142 $ 91,432 $2,296,000
======== ========= =========== ========= ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During 1995, the Company issued 4,208,400 shares of Common Stock that was
recorded as compensation expense in the amount of $162,023.
See notes to financial statements.
F-6
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Yurie Systems, Inc. (formerly Integrated Systems Technology, Inc.) is a
Delaware corporation that was incorporated in February 1992. The Company
designs, manufactures, markets and services asynchronous transfer mode ("ATM")
access products for telecommunications service providers, corporate end users
and government end users. ATM is a standard for packaging and switching
digital information that facilitates high speed information transmission with
a high degree of efficiency.
Revenue Recognition--For financial reporting purposes, the Company records
revenue from product sales on the ship and bill method. Contract service
revenue is primarily generated from cost-reimbursable contracts, including
cost-plus-fixed-fee contracts, and is recorded on the basis of reimbursable
costs plus a pro rata portion of the fee. A portion of the Company's service
revenue is derived from various fixed-price contracts and is accounted for
using the percentage-of-completion method. Losses on contracts, if any, are
recorded when they become known. Contract costs for services supplied to the
U.S. government, including indirect expenses, are subject to audit by the
government's representatives. All revenue is recorded in amounts that are
expected to be realized upon final settlement.
Cash and Cash Equivalents--The Company considers all highly liquid temporary
investments including those with an original maturity of three months or less
to be cash equivalents. Cash and cash equivalents consist primarily of
interest bearing accounts.
Unbilled Receivables--Unbilled receivables include certain costs and a
portion of the fee and expected profit which is billable upon completion of
the contracts or the completion of certain tasks under terms of the contracts.
Inventories--Inventory is stated at the lower of cost or market using the
first-in, first-out method.
Depreciation and Amortization--Property and equipment is recorded at cost.
The cost of furniture and computer and office equipment is depreciated from
the date of installation using the straight-line method over the estimated
useful lives of the various classes of property, which range from three to
seven years. The costs of software are amortized using the straight-line
method over three years.
Software Development Costs--Software development costs incurred for products
to be sold are capitalized after technological feasibility has been
established, which is consistent with the guidance under SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." As of September 30, 1996, all costs related to software
development have been expensed as incurred.
Deferred Offering Costs--Legal and other incremental costs associated with
raising capital through an initial public offering are capitalized on the
balance sheet. Such costs are subsequently netted against the proceeds of the
stock offering to which they relate. In the event that the offering is not
successful, such costs would be written off to operations in the period in
which the related offering is abandoned. There are no deferred costs included
in the balance sheets at December 31, 1994 and 1995.
Income Taxes--The provision for income taxes includes Federal and state
income taxes currently payable plus the net change during the year in the
deferred tax liability or asset. The current or deferred tax consequences of
all events that have been recognized in the financial statements are measured
based on provisions of enacted tax law to determine the amount of taxes
payable or refundable in future periods.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported
F-7
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amounts of assets, liabilities, revenues and expenses in the financial
statements and in the disclosures of contingent assets and liabilities. Actual
results could differ from those estimates.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk principally consist of trade
accounts receivable. The Company's largest commercial customer accounted for
approximately 57%, 66% and 61% of gross accounts receivable as of December 31,
1994 and 1995 and September 30, 1996, respectively. In addition, other
customers with balances in excess of 10% accounted for approximately 32%, 23%
and 28% of gross accounts receivable as of December 31, 1994 and 1995 and
September 30, 1996, respectively. The Company performs ongoing credit
evaluations of its customers, but generally does not require collateral to
support customer receivables. Losses on uncollectible accounts have
consistently been within management's expectations and have historically been
minimal.
Net Income (Loss) Per Share--Net income per common and common share
equivalents at the effective date of the Registration Statement will be
computed based upon the weighted average number of common and common share
equivalents, outstanding during the period. Common share equivalents consist
of stock options calculated using the treasury stock method. Retroactive
restatement has been made for the forty-to-one stock split on January 3, 1995
and the two-to-one stock split on April 3, 1996. Primary and fully diluted
earnings (loss) per share are the same. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and options to
purchase common stock issued subsequent to December 11, 19995 at prices below
the assumed initial public offering price will be included as outstanding for
all periods presented, using the treasury stock method at the assumed initial
public offering price of $9 per share.
Interim Financial Information--The interim financial data for the nine
months ended September 30, 1995 is unaudited. The information reflects all
adjustments, consisting only of normal, recurring adjustments that, in the
opinion of management, are necessary to present fairly the results of
operations of the Company for the period indicated. Results of operations for
the interim period are not necessarily indicative of the results of operations
for the full year.
New Accounting Pronouncements--As of January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets to be Disposed Of. The adoption had no effect
on the financial position or the results of operations of the Company. SFAS
No. 123, Accounting for Stock-Based Compensation, has been adopted by the
Company as of September 30, 1996. However, the Company has not adopted the
recognition and measurement provisions of SFAS No. 123 and therefore, will
provide only the applicable disclosures. (see Note 11).
2. LINE OF CREDIT
From January 1, 1995 to June 28, 1996, the Company had a credit agreement
with Commerce Bank, which provided for maximum borrowings of $100,000. At
December 31, 1995, there were no borrowings under this agreement.
On June 28, 1996, the Company entered into a revolving loan agreement with
Commerce Bank, which provides for maximum borrowings of $3,000,000, based upon
certain percentages of accounts receivable and inventory as borrowing bases.
The interest varies from prime to prime plus 1% depending upon the amounts
borrowed. At September 30, 1996, the prime rate was 8.25%. The agreement
expires on May 31, 1997. At September 30, 1996, there were no borrowings under
this agreement.
F-8
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE--TRADE
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- ---------- -------------
<S> <C> <C> <C>
Billed..................................... $ 70,136 $ 748,372 $1,325,461
Unbilled................................... 96,640 424,022 331,572
-------- ---------- ----------
Total...................................... $166,776 $1,172,394 $1,657,033
======== ========== ==========
</TABLE>
4. INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
---- -------- -------------
<S> <C> <C> <C>
Raw materials.................................... $-- $246,291 $ 849,187
Work-in-process.................................. -- 325,101 187,713
Finished goods................................... -- 83,055 239,437
---- -------- ----------
Total............................................ $-- $654,447 $1,276,337
==== ======== ==========
</TABLE>
5. DUE FROM STOCKHOLDER
During 1993, the Company advanced funds to the sole stockholder and also
borrowed funds from the stockholder. The net amount advanced at December 31,
1993 was $50,018. This amount was repaid in full during 1994.
6. UNEARNED REVENUE
Unearned revenue at December 31, 1995 and September 30, 1996 represents
prepayment from AT&T for purchases of products which had not been delivered as
of the end of the reporting period.
7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ----------------------
1993 1994 1995 1995 1996
-------------- --------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current..................... $ -- $ 19,220 $ 519,700 $229,532 $2,069,899
Deferred.................... -- 22,315 40,961 30,721 (243,747)
----- -------- --------- -------- ----------
Total....................... $ -- $ 41,535 $ 560,661 $260,253 $1,826,152
===== ======== ========= ======== ==========
</TABLE>
F-9
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1993 1994 1995 1995 1996
------- -------- -------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected statutory
amount................. 0.0% 34.0% 34.0% 34.0% 34.0%
Utilization of NOL
carryforward........... -- (6.3) -- -- --
Benefit of lower tax
bracket................ -- (6.3) -- -- --
State income taxes, net
of federal benefit..... -- 4.6 4.6 4.6 4.6
Other................... -- -- (0.1) (0.1) 1.4
------- -------- -------- -------- --------
Effective Rate.......... 0.0% 26.0% 38.5% 38.5% 40.0%
======= ======== ======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued salaries and employee bene-
fits.................................. $ 28,621 $ -- $245,873
Warranty reserve....................... -- -- 100,986
Deferred rent.......................... 7,149 9,987 6,802
-------- -------- --------
Total deferred tax assets............ 35,770 9,987 353,661
-------- -------- --------
Deferred tax liabilities:
Depreciation........................... 18,768 25,685 57,957
Unbilled receivables................... 39,317 49,297 128,053
-------- -------- --------
Total gross deferred tax liabili-
ties................................ 58,085 74,982 186,010
-------- -------- --------
Net deferred tax assets (liabili-
ties)............................... $(22,315) $(64,995) $167,651
======== ======== ========
</TABLE>
As a result of operating losses in 1993 and the fact that the Company had a
limited operating history, a valuation allowance equal to the deferred tax
asset was recorded at December 31, 1993 which resulted in no tax benefit being
realized for the period. The Company was profitable for the first time in 1994
which allowed it to release the previously recorded deferred tax asset
valuation allowance.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents--The carrying amounts reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable--The carrying amounts reported
in the balance sheets for accounts receivable and accounts payable
approximate fair value.
F-10
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS
Lease Obligations--The Company currently leases two facilities in Lanham,
Maryland, which leases expire in 1998 and 1999. The Company is accounting for
the costs of these leases by recognizing rent expense on a straight-line basis
over the lease term. Each lease contains an escalation clause, one related to
increases in the Consumer Price Index and one providing a fixed 3% annual
increase. Both provide options for extension and one provides an option for
expansion. The following is a composite schedule, by year, of minimum rental
payments as of September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1996......................................................... $ 71,858
1997......................................................... 398,941
1998......................................................... 271,212
1999......................................................... 167,463
--------
Total minimum lease payments.................................. $909,474
========
</TABLE>
Rental expense for the years ended December 31, 1993, 1994 and 1995 was
$4,200, $38,500, and $112,615, respectively. Rental expense for the nine
months ended September 30, 1995 and 1996 was $78,296 (unaudited) and $180,547,
respectively.
Employment Agreements--The Company has employment agreements with two of its
executive officers. The agreements provide for a minimum salary level as well
as for bonuses which are determined by the Board of Directors. Each of the
employment agreements is for a one-year term that renews automatically unless
terminated by either party.
10. PENSION PLAN
Until December 31, 1995, the Company had an employee pension plan, which was
administered as a self-employment plan under Internal Revenue Service
regulations. It was Company policy to contribute annually an amount equal to
15% of qualified employees' salaries. Pension expense for the years ended
December 31, 1993, 1994, and 1995 was $22,767, $38,119 and $93,557,
respectively. There was no expense for the nine months ended September 30,
1995 (unaudited) as no contributions had been approved by the Company. The
investment options were employee directed. All employees are fully vested at
the end of one year of consecutive service.
Effective January 1, 1996, the plan is administered as a 401(k) profit
sharing plan that covers substantially all full time employees. Employees are
eligible to participate upon completion of one year of service and may
contribute up to 10% of their annual compensation not to exceed certain
statutory limitations. Eligible employees vest in employer contributions and
investment earnings thereon in 20% increments over a five year period. Pension
expense for the nine months ended September 30, 1996 totaled $33,293.
11. STOCKHOLDERS' EQUITY
On January 3, 1995, the Board of Directors approved a stock split in the
ratio of forty-to-one that increased the number of shares, all held at that
time by the President of the Company, from 200,000 to 8,000,000.
F-11
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On May 22, 1995, the Company issued 4,000,000 shares of Common Stock to Kwok
Li as compensation for his services in connection with the development of the
LDR100. Also on May 22, 1995, the Company issued 200,000 shares of Common
Stock to Yung Lung Ho as compensation for his services as Director of Advanced
Technology and 200 shares of Common Stock to each of the following persons as
compensation for their services to the Company: Joseph Aviles, Jr., David
Brooks, Kawaldeep Chadha, John Randy Crout, William Flynn, Lawrence Foster,
Erin Holiday, Yvonne Julien, Cynthia Kim, William Marshall, Arthur Mobley and
Patrick O'Connor. On June 14, 1995, the Company issued 4,000 shares of Common
Stock to Arthur Mobley and 2,000 shares of Common Stock to David Brooks as
compensation for their services to the Company. The Company recorded these
grants at $.077 per share, the then-current fair value of the Common Stock
based on an independent appraisal conducted as of May 22, 1995 by Willamette
Management Associates.
On April 3, 1996, the Board of Directors recommended, and the shareholders
approved, a two-for-one stock split on outstanding shares of common stock as
well as options outstanding. At the same time, the option price per share was
reduced by 50%.
The Company's Board of Directors approved a nonstatutory stock option plan
effective January 31, 1996, for which 395,800 shares of stock were approved to
be issued. On April 2, 1996, the Board of Directors recommended the stock
option plan be amended to increase the number of shares available under the
Plan to 1,250,000. This increase and the two-for-one stock split approved by
the shareholders on April 3, 1996, increased the number of shares available
under the plan to 2,500,000. Subsequently, on July 17, 1996, the Board of
Directors recommended and the shareholders approved another increase of
700,000 shares, bringing the total number of shares available under the plan
to 3,200,000. The exercise price per share was determined based upon estimated
fair value on the date of grant. Options are generally exercisable over a four
year period and expire ten years after the date of the grant.
A summary of stock option activity, described above, under the stock option
plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Outstanding, January 1, 1996....................................... --
Granted:
At exercise price of $.52 per share.............................. 2,103,642
At exercise price of $2.70 per share............................. 722,600
---------
Total Granted...................................................... 2,826,242
Exercised.......................................................... --
---------
Outstanding, September 30, 1996.................................... 2,826,242
=========
Exercisable options at September 30, 1996.......................... 271,000
=========
</TABLE>
The Company accounts for its stock-based compensation plans under APB No.
25. No compensation expense has been recognized in connection with the
options, as all options have been granted with an exercise price equal to the
fair value of the Company's common stock on the date of grant. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123
purposes, the fair value of each option grant has been estimated as of the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 6.17%, expected life
of three years, dividend rate of zero percent, and expected volatility of
66.0%. Using these assumptions, the fair value of the stock options granted in
1996 is $1,544,908, which would be amortized as compensation expense over the
vesting period of the options. The options generally vest equally over four
years. Had
F-12
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
compensation expense been determined consistent with SFAS No. 123, utilizing
the assumptions detailed above, the Company's net income and earnings per
share for the nine months ending September 30, 1996 would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Net Income:
As Reported..................................................... $2,739,227
Pro forma....................................................... $2,605,330
Net income per common share:
As Reported..................................................... $0.13
Pro forma....................................................... $0.12
</TABLE>
The resulting pro forma compensation cost may not be representative of that
expected in future years.
On November 7, 1996, the Amerindo Technology Growth Fund Inc. (Amerindo)
acquired 400,000 shares of common stock of the Company for a purchase price of
$12.00 per share. In addition, Amerindo acquired 600,000 shares from officers
of the Company for $12.00 per share. Pursuant to the stock purchase agreement,
the Company granted Amerindo certain registration rights that begin one year
after the date of the effective date of a registration statement relating to
an initial public offering effected by the Company.
12. SIGNIFICANT CUSTOMER
For the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996, approximately 53%, 72% and 91%, respectively, of total
revenues were generated from sales through or to one customer, AT&T. Included
in Other Revenue in the Statement of Operations for the year ended December
31, 1995 and the nine months ended September 30, 1996 are fees of $1,108,333
and $391,667, respectively, earned under an agreement entered into in August
1995 that granted AT&T certain rights to market and sell products of the
Company.
Under an amendment to this agreement, AT&T committed to purchase at least
$6,500,000, $10,000,000 and $10,000,000 of product in 1996, 1997 and 1998,
respectively.
F-13
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION 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 ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 26
Management............................................................... 39
Certain Transactions..................................................... 45
Principal Stockholders................................................... 46
Description of Capital Stock............................................. 47
Shares Eligible For Future Sale.......................................... 48
Underwriting............................................................. 50
Legal Matters............................................................ 51
Experts.................................................................. 51
Additional Information................................................... 51
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 Shares
[LOGO OF YURIE APPEARS HERE]
YURIE SYSTEMS, INC.
Common Stock
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
Wessels, Arnold & Henderson
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable by the Company in connection with the sale of the Common Stock offered
hereby are as follows:
<TABLE>
<S> <C>
Registration fee.................................................... $12,545.45
NASD filing fee..................................................... 5,100.00
Nasdaq National Market listing fee..................................
Printing and engraving expenses.....................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Blue Sky fees and expenses (including legal fees)...................
Transfer agent and registrar fees and expenses......................
Miscellaneous.......................................................
----------
Total............................................................. $ *
==========
</TABLE>
- --------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate provides that the Company shall indemnify to the
fullest extent authorized by the DGCL, each person who is involved in any
litigation or other proceeding because such person is or was a director or
officer of the Company or is or was serving as an officer or director of
another entity at the request of the Company, against all expense, loss or
liability reasonably incurred or suffered in connection therewith. The
Certificate provides that the right to indemnification includes the right to
be paid expenses incurred in defending any proceeding in advance of its final
disposition; provided, however, that such advance payment will only be made
upon delivery to the Company of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If the
Company does not pay a proper claim for indemnification in full within 60 days
after a written claim for such indemnification is received by the Company, the
Certificate of Incorporation and Bylaws authorize the claimant to bring an
action against the Company and prescribe what constitutes a defense to such
action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding brought by reason
of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (i.e.,
one brought by or on behalf of the corporation), indemnification may be made
only for expenses, actually and reasonably incurred by any director or officer
in connection with the defense or settlement of such an action or suit, if
such person acted in good faith and in a manner that he reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought shall determine that the defendant is
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, Article EIGHT of the Company's
Certificate eliminates the liability of a director to the corporation or its
stockholders for monetary damages for such breach of
II-1
<PAGE>
fiduciary duty as a director, except for liabilities arising (i) from any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) from acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, or (iv) from any transaction from which the director derived an
improper personal benefit.
The Company has obtained primary and excess insurance policies insuring the
directors and officers of the Company against certain liabilities that they
may incur in their capacity as directors and officers. Under such policies,
the insurers, on behalf of the Company, may also pay amounts for which the
Company has granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement
and persons who control the Company, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued shares of Common Stock in the following transactions, each
of which was intended to be exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereunder. The
shares in each of the following transactions are presented as adjusted for a
2:1 stock split which the Company effected on April 3, 1996.
On May 22, 1995, the Company issued 4,000,000 shares of Common Stock to Kwok
Li as compensation.
On May 22, 1995, the Company issued 200 shares of Common Stock to each of
the following persons as compensation: Joseph Aviles, Jr., David Brooks,
Kawaldeep Chadha, John Randy Crout, William Flynn, Lawrence Foster, Erin
Holiday, Yvonne Julien, Cynthia Kim, William Marshall, Arthur Mobley and
Patrick O'Connor.
On May 22, 1995, the Company issued 200,000 shares of Common Stock to Yung
Lung Ho as compensation.
On June 14, 1995, the Company issued 4,000 shares of Common Stock to Arthur
Mobley as compensation.
On June 14, 1995, the Company issued 2,000 shares of Common Stock to David
Brooks as compensation.
On November 7, 1996, the Company issued 400,000 shares of Common Stock to
Amerindo for $4.8 million.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Yurie Systems, Inc.
3.2 Bylaws of Yurie Systems, Inc.
4.1 Specimen Certificate representing the Common Stock
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson as to legality of
the securities registered hereunder
Yurie Systems, Inc. 1996 Non Statutory Stock Option Plan, as amended
10.1 December 20, 1996
10.2 Yurie Systems, Inc. Stock Option 1996 Non Statutory Grant Agreement
10.3 Jeong H. Kim Employment Agreement, dated as of July 31, 1996
10.4 Kwok Li Employment Agreement, dated as of July 31, 1996
10.5 Registration Rights Agreement between Yurie Systems, Inc. and Jeong
Kim, dated as of July 31, 1996
10.6 Registration Rights Agreement between Yurie Systems, Inc. and Kwok Li,
dated as of July 31, 1996
10.7 Registration Rights Agreement between Yurie Systems, Inc. and Kenneth
D. Brody, dated as of July 1, 1996
10.8 Equity Incentive Agreement between Yurie Systems, Inc., Jeong H. Kim
and Kenneth D. Brody, dated as of July 1, 1996
10.9 Agreement of Lease between Jon Glanz and Yurie Systems, Inc., dated as
of May 15, 1996 and First Amendment to Agreement of Lease, dated as of
July 3, 1996
10.10 Amended and Restated Agreement between AT&T Corp. Government
Markets/Defense Markets and Yurie Systems, Inc., dated as of December
4, 1996
10.11 Stock Purchase Agreement between Yurie Systems, Inc. and Amerindo
Technology Growth Fund Inc., dated as of October 31, 1996
10.12 Yurie Systems, Inc. 1997 Employee Stock Purchase Plan*
10.13 Yurie Systems, Inc. 401(k) Savings Plan*
10.14 Amendment to Agreement of Lease at 10000 Derekwood Lane between Mark
Cordover and Yurie Systems, Inc., dated November 22, 1996
11.1 Statement re computation of earnings per share
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1)
24.1 Power of Attorney (included on page II-5)
</TABLE>
(b) Financial Statement Schedules:
All schedules are omitted because they are not required, are not applicable
or the information is included in the financial statements or notes thereto.
- --------
* To be filed by amendment
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
II-3
<PAGE>
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILINGS ON FORM S-1 AND HAS DULY CAUSED THIS AMENDMENT NO. 2
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN LANHAM, MARYLAND ON DECEMBER 24, 1996.
Yurie Systems, Inc.
By: /s/ Jeong H. Kim
----------------------------------
JEONG H. KIM
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
The undersigned directors and officers of Yurie Systems, Inc. hereby
constitute and appoint Jeong H. Kim as our true and lawful attorney-in-fact
with full power to execute in our name and behalf in the capacities indicated
below this Registration Statement on Form S-1 and any and all amendments
thereto and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and hereby
ratify and conform all that such attorneys-in-fact, or any of them, or their
substitutes shall lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Jeong H. Kim Chairman of the
- ------------------------------------- Board and Chief December 24,
JEONG H. KIM Executive Officer 1996
/s/ Kwok Li President, Chief
- ------------------------------------- Operating Officer, December 24,
KWOK LI and a Director 1996
/s/ Barton Y. Shigemura Senior Vice
- ------------------------------------- President, Sales December 24,
BARTON Y. SHIGEMURA and Marketing and a 1996
Director
/s/ Charles S. Marantz Vice President,
- ------------------------------------- Finance and December 24,
CHARLES S. MARANTZ Administration, 1996
Chief Financial
Officer and
Treasurer (also
serves as Chief
Accounting Officer)
II-5
<PAGE>
SIGNATURE TITLE DATE
/s/ R. James Woolsey Director
- ------------------------------------- December 24,
R. JAMES WOOLSEY 1996
/s/ Herbert Rabin Director
- ------------------------------------- December 24,
HERBERT RABIN 1996
/s/ Kenneth D. Brody Director
- ------------------------------------- December 24,
KENNETH D. BRODY 1996
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Yurie Systems, Inc.
3.2 Bylaws of Yurie Systems, Inc.
4.1 Specimen Certificate representing the Common Stock
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson as to legality of
the securities registered hereunder
10.1 Yurie Systems, Inc. 1996 Non Statutory Stock Option Plan, as amended
December 20, 1996
10.2 Yurie Systems, Inc. Stock Option 1996 Non Statutory Grant Agreement
10.3 Jeong H. Kim Employment Agreement, dated as of July 31, 1996
10.4 Kwok Li Employment Agreement, dated as of July 31, 1996
10.5 Registration Rights Agreement between Yurie Systems, Inc. and Jeong
Kim, dated as of July 31, 1996
10.6 Registration Rights Agreement between Yurie Systems, Inc. and Kwok Li,
dated as of July 31, 1996
10.7 Registration Rights Agreement between Yurie Systems, Inc. and Kenneth
D. Brody, dated as of July 1, 1996
10.8 Equity Incentive Agreement between Yurie Systems, Inc., Jeong H. Kim
and Kenneth D. Brody, dated as of July 1, 1996
10.9 Agreement of Lease between Jon Glanz and Yurie Systems, Inc., dated as
of May 15, 1996 and First Amendment to Agreement of Lease, dated as of
July 3, 1996
10.10 Amended and Restated Agreement between AT&T Corp. Government
Markets/Defense Markets and Yurie Systems, Inc., dated as of December
4, 1996
10.11 Stock Purchase Agreement between Yurie Systems, Inc. and Amerindo
Technology Growth Fund Inc., dated as of October 31, 1996
10.12 Yurie Systems, Inc. 1997 Employee Stock Purchase Plan*
10.13 Yurie Systems, Inc. 401(k) Savings Plan*
10.14 Amendment to Agreement of Lease at 10000 Derekwood Lane between Mark
Cordover and Yurie Systems, Inc., dated November 22, 1996
11.1 Statement re computation of earnings per share
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1)
24.1 Power of Attorney (included on page II-5)
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 5.1
December 23, 1996
Board of Directors
Yurie Systems, Inc.
10000 Derekwood Lane
Lanham, Maryland 20706
Gentlemen:
We are acting as special counsel for Yurie Systems, Inc., a Delaware
corporation (the "Company"), in connection with the initial public offering (the
"Offering") pursuant to the Registration Statement on Form S-1 filed on November
7, 1996, as amended (the "Registration Statement") under the Securities Act of
1933, as amended (the "Act") covering 4,000,000 shares of the Company's common
stock, par value $.01 per share (the "Shares"), and an over-allotment option of
up to 600,000 shares of the Company's common stock, par value $.01 per share
(the "Additional Shares"), of which 500,000 Additional Shares will be offered by
Dr. Jeong H. Kim and 100,000 Additional Shares will be offered by Mr. Kwok L. Li
(Mr. Kim and Mr. Li together, the "Selling Stockholders").
In connection with this opinion, we have (i) investigated such questions of
law, (ii) examined originals or certified, conformed or reproduction copies of
such agreements, instruments, documents and records of the Company, (iii)
examined such certificates of public officials, officers or other
representatives of the Company, and other persons, and such other documents, and
(iv) reviewed such information from officers and representatives of the Company
and others as we have deemed necessary or appropriate for the purposes of this
opinion.
In all such examinations, we have assumed the legal capacity of all natural
persons executing documents (other than the capacity of officers of the Company
executing documents in such capacity), the genuineness of all signatures on
original or certified copies, and the conformity to original or certified
documents of all copies submitted to us as conformed or reproduction copies. As
to various questions of fact relevant to the
<PAGE>
Board of Directors
Yurie Systems, Inc.
December 23, 1996
Page 2
opinions expressed herein, we have relied upon, and assumed the accuracy of,
certificates and oral or written statements and other information of or from
public officials, officers or other representatives of the Company, and other
persons.
Based upon the foregoing, and subject to the limitations, qualifications
and assumptions set forth herein, we are of the opinion that (i) the Shares to
be offered by the Company, when issued, delivered and paid for as contemplated
by the Registration Statement, will be legally issued, fully paid and non-
assessable and (ii) the Additional Shares that may be offered by the Selling
Stockholders have been legally issued and are fully paid and non-assessable.
The opinions expressed herein are limited to the General Corporation Law of
the State of Delaware. We assume no obligations to supplement this letter if
any applicable laws change after the date hereof or if we become aware of any
facts that might change the opinions expressed herein after the date hereof.
The opinions expressed herein are solely for your benefit and may not be
relied upon in any manner or for any purpose by any other person and may not be
quoted in whole or in part without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus forming a part of the Registration Statement.
In giving this consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By: /s/ Stephen I. Glover
------------------------------------
Stephen I. Glover
<PAGE>
Exhibit 10.1
As amended through September 6, 1996
YURIE SYSTEMS, INC.
1996 NON STATUTORY STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this plan (the "Plan") is to secure for Yurie Systems, Inc.
(the "Company") and its shareholders, the benefits arising from capital stock
ownership by key employees, consultants, officers and members of the Board of
Directors of the Company who are expected to contribute to the Company's future
growth and success. Except where the context otherwise requires, the term
"Company" shall include the parent and all present and future subsidiaries of
the Company as defined in Section 424(e) and 424(f) of the Internal Revenue Code
of 1986, as amended or replaced from time to time (the "Code").
2. Type of Options and Administration.
----------------------------------
(a) Type of Options. Options granted pursuant to the Plan shall be
---------------
authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and shall be non-statutory options which
are not intended to meet the requirements of Section 422 of the Code.
(b) Administration. The Plan will be administered by the Board of
--------------
Directors of the Company, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. Except as set forth below,
the Board of Directors may in its sole discretion grant options to purchase
shares of the Company's Common Stock, $0.01 par value ("Common Stock"), and
issue shares upon exercise of such options as provided in the Plan. The Board
shall have authority subject to the express provisions of the Plan, to construe
the option agreements and the Plan, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of the
options agreements, which need not be identical, and to make any other
determination in the judgment of the Board of Directors necessary or desirable
for the administration of the Plan. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director shall be liable for any action or determination made in
good faith. The Board of Directors may, to the full extent permitted by or
consistent with applicable laws or regulations (including, without limitation,
applicable state law and Rule 16b-3 promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3"), delegate
any or all of its powers under the Plan to a committee (the "Committee")
appointed by the Board of Directors, and if the Committee is so appointed all
references to the Board of Directors in the Plan shall mean and relate to such
Committee.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which make
---------------------------
express reference to Rule 16b-3 of the Exchange Act shall apply only to such
persons as are required to file reports under Section 16(a) of the Exchange Act
(a "Reporting Person").
<PAGE>
- 2 -
Acquisition shall not constitute an acquisition which would cause
a Change in Control.
(b) The individuals who, as of January 1, 1997, are members of the
Incumbent Board, cease for any reason to constitute at least two-
thirds of the members of the Board of Directors; provided,
however, that if the election, or nomination for election by
Yurie's common stockholders, of any new director was approved by
a vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Plan, be considered as a
member of the Incumbent Board; provided further, however, that no
individual shall be considered a member of the Incumbent Board if
such individual initially assumed office as a result of either
an actual or threatened Election Contest (as described in Rule
14a-11 under the Exchange Act) or other actual or threatened
Proxy Contest (that is, solicitation of proxies or consents by or
on behalf of a Person other than the Board of Directors)
including by reason of any agreement intended to avoid or settle
any Election Contest or Proxy Contest; or
(c) Approval by stockholders of Yurie of:
(i) A merger, consolidation or reorganization involving Yurie,
unless such merger, consolidation or reorganization is a
Non-Control Transaction.
<PAGE>
- 3 -
(ii) A complete liquidation or dissolution of Yurie; or
(iii) An agreement for the sale or other disposition of all or
substantially all of the assets of Yurie to any Person
(other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person acquired Beneficial Ownership of
more than the permitted amount of the then outstanding Voting
Securities as a result of the acquisition of Voting Securities by the
Company which, by reducing the number of Voting Securities then
outstanding, increases the proportional number of shares Beneficially
Owned by such persons, provided that if a Change in Control would
occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such share
acquisition by the Company, such Person becomes the Beneficial Owner
of any additional Voting Securities which increases the percentage of
the then outstanding Voting Securities Beneficially Owned by such
Person, then a Change in Control shall occur.
(4) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(5) "Common Stock" means the common stock of Yurie Systems, Inc. having a
par value of $0.01.
<PAGE>
- 4 -
(6) "Company" means Yurie and any entities that are Subsidiaries of Yurie
or of which it is a Subsidiary.
(7) "Director" means a member of the Board of Directors of the Company.
(8) "Director's Automatic Grant Agreement" means an Option Agreement
referred to in Section 4(d) hereof.
(9) "Effective Date" means the date as of which an Option granted pursuant
to the Plan is effective.
(10) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
(11) "Fair Market Value of the Common Stock" on a given date means the
closing price of the Common Stock on the NASDAQ (National) System on
such date or on the nearest prior day on which trading of the Common
Stock occurred on the NASDAQ (National) System; provided that if the
Common Stock is not registered with the Securities and Exchange
Commission or there has been no trading of the Common Stock on or
reasonably near and prior to the given date, it shall be the fair
market value of the Common Stock on the given date as determined on
such basis as the Board of Directors shall establish for the purpose.
<PAGE>
- 5 -
(12) "Incumbent Board" means the Board of Directors as constituted on
January 1, 1997.
(13) "Merger Price" means, in the event of a merger described in Section
15(a) hereof, any cash payment that holders of Common Stock receive
for each share of Common Stock surrendered in the merger.
(14) "Non-Control Acquisition" means an acquisition by:(i) an employee
benefit plan (or a trust forming a part thereof) maintained by (A) the
Company or (B) any Subsidiary; (ii) the Company or its Subsidiaries;
(iii) a person who as of January 1, 1997 has Beneficial Ownership of
30 percent or more of the combined voting power of Yurie's then
outstanding Voting Securities; or (iv) any Person in connection with a
Non-Control Transaction.
(15) "Non-Control Transaction" means a merger, consolidation or
reorganization of Yurie where:
(a) the stockholders of Yurie, immediately before such merger,
consolidation or reorganization, own directly or indirectly
immediately following such merger, consolidation or
reorganization, at least 70 percent of the combined voting power
of the outstanding voting securities of the surviving corporation
in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger, consolidation
or reorganization,
<PAGE>
- 6 -
(b) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
surviving corporation, or a corporation beneficially directly or
indirectly owning a majority of the voting securities of the
surviving corporation, and
(c) no Person other than (i) Yurie, (ii) any Subsidiary, (iii) any
employee benefit plan (or any trust forming a part thereof)
maintained by Yurie, the surviving corporation, or any Subsidiary,
or (iv) any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of 30
percent or more of the then outstanding Voting Securities, has
Beneficial Ownership of 30 percent or more of the combined voting
power of the surviving corporation's then outstanding voting
securities.
(16) "Non-Employee Director" means that term as defined in Rule 16b-3.
(17) "Officer" means a person who is an officer of the Company for purposes
of Rule 16b-3.
(18) "Option" means a stock option granted pursuant to this Plan.
<PAGE>
- 7 -
(19) "Option Agreement" means an agreement entered into pursuant to
Section 7 hereof.
(20) "Option Shares" means shares of Common Stock that may be purchased
by an optionee, pursuant to this Plan and the optionee's Option
Agreement.
(21) "Option Term" means the period during which an Option is outstanding.
(22) "Person" means a person for purposes of Section 13(d) or 14(d) of the
Exchange Act.
(23) "Plan" means the Yurie Systems, Inc. 1996 Nonstatutory Option Plan, as
amended from time to time.
(24) "Pooling Transaction" means a business combination that qualifies for
use of the pooling of interests accounting method under generally
accepted accounting principles.
(25) "Rule 16b-3" means Rule 16b-3 under the Exchange Act of 1934, or any
successor rule.
<PAGE>
- 8 -
(26) "Subsidiary" means a corporation or other Person of which a majority
of its voting power or its voting equity interest is owned, directly
or indirectly, by the Company.
(27) "Triggering Event" means an event referred to in Section 10(b)(1)-(3)
hereof.
(28) "Voting Securities" means any voting securities of Yurie.
(29) "Yurie" means Yurie Systems, Inc.
3. Type of Options and Administration.
----------------------------------
a. Type of Options. The options granted pursuant to the Plan shall be
---------------
non-statutory options which are not intended to meet the requirements of Section
422 of the Code.
b. Administration. The Plan will be administered by the Board of
--------------
Directors. The Board shall have authority, subject to the express provisions of
the Plan, to construe the Option Agreements and the Plan, to prescribe, amend
and rescind rules and regulations relating to the Plan, to determine the terms
and provisions of the Option Agreements, which need not be identical, and to
make any other determination which, in the judgment of the Board of Directors,
is necessary or desirable for the administration of the Plan. The Board of
Directors' construction and interpretation of the terms and provisions of the
Plan and any determinations made by the Board pursuant thereto shall be final
and conclusive.
<PAGE>
- 9 -
c. Delegation. The Board of Directors may, to the full extent permitted
----------
by or consistent with applicable laws or regulations and the governing documents
of Yurie, delegate any or all of its powers under the Plan to a committee
appointed by the Board of Directors. If a committee is so appointed all
references to the Board of Directors in the Plan, except in Section 4(c), shall
mean and relate to such committee. Such committee shall consist solely of
Non-Employee Directors when exercising any powers relating to options granted to
Officers and Directors.
d. Applicable Law. The provisions of this Plan and the Option Agreements
--------------
shall be interpreted in a manner consistent with all applicable law, including
but not limited to the Exchange Act and the rules and regulations thereunder.
Any authority or discretion exercised under the Plan by the Board of Directors
or any other person or entity shall be exercised in a manner consistent with all
applicable law, including but not limited to the Exchange Act and the rules and
regulations thereunder.
4. Eligibility for and Issuance of Grants.
--------------------------------------
a. Eligibility. Options may be granted only to persons who are, at the
----------
time of the grant: (i) Directors, officers or employees of the Company or (ii)
consultants or advisors of the Company.
b. Grant of Options Generally. Subject to the express provisions of the
--------------------------
Plan, the Board of Directors may in its sole discretion grant Options to
purchase shares of the Common Stock and issue shares upon exercise of such
Options.
<PAGE>
- 10 -
c. Grant of Options to Officers. The selection of an Officer to receive
----------------------------
an Option hereunder, the time for exercising the Option, the Option Term, the
Option Price, and the number of shares for which an Option may be granted to
such Officer shall be determined by the Board of Directors.
d. Automatic Grants to Directors. Each member of the Board of Directors
-----------------------------
who has executed a Director's Automatic Grant Agreement shall receive a grant of
Options of 5,000 shares of Common Stock effective on the 30th day of June of
each year beginning on June 30, 1997. A Director's Automatic Grant Agreement
shall be approved by the Board of Directors prior to execution by the Director
and shall set forth the Option term, the time for exercising the Option, the
Option Price, and all other terms at which Common Stock may be purchased
pursuant to the Options granted to the Director. For this purpose, the exercise
price shall be the Fair Market Value of the Common Stock, as defined in Section
2(11) hereof, but without regard to the proviso clause, on the Effective Date of
the Option. A Director's Automatic Grant Agreement shall not be inconsistent
with the terms of the Plan, and in the event of a conflict between the terms of
the Plan and the Director's Automatic Grant Agreement, the terms of the Plan
shall supersede the terms of such agreement unless they are inconsistent with
the requirements of Rule 16b-3. Options granted pursuant to this Section 4(d)
shall otherwise be subject to the terms and conditions set forth in this Plan.
5. Stock Subject to Plan.
---------------------
a. Limitations on Number of Shares. Subject to adjustment as provided in
-------------------------------
Section 14 below, the maximum number of shares of Common Stock which may be
<PAGE>
- 11 -
issued and sold under the Plan is 5,000,000 shares. The maximum number of
shares of Common Stock that can be offered to any optionee in any year
shall be 1,500,000 shares. Such shares may be authorized and unused shares
or may be shares issued and thereafter acquired by Yurie. Until Yurie has a
class of common equity registered under the Exchange Act, the Board of
Directors will take steps to assure that sales of securities to optionees
under the Plan qualify under Rule 701 under the Securities Act of 1933,
including the limit imposed by Rule 701 on the amount of securities that
can be offered and sold.
b. Unpurchased Shares. If an Option shall expire or terminate for
------------------
any reason without having been exercised in full, the unpurchased shares
subject to such Option shall again be available for subsequent Option
grants under the Plan.
6. Term and Exercise.
-----------------
a. Option Term. Unless otherwise provided in the Option Agreement,
-----------
the Option Term of an Option granted under the Plan shall be ten years form
the Effective Date of the Option.
b. Exercise. Options issued hereunder shall become exercisable as
--------
follows:
i. General. Unless otherwise provided in the Option
-------
Agreement, Options issued hereunder shall become exercisable in
installments, the optionee having the right to purchase the following
number of Option Shares upon exercise of the Option, on or after the
following dates, in cumulative fashion: (i) on or after the first
<PAGE>
- 12 -
day of the month beginning on or after the first anniversary of the
Effective Date, up to one-fourth of the total number of Option Shares; (ii)
on or after the first day of each of the succeeding 35 months, up to 1/48th
of the total number of Option Shares; (iii) on or after the first day of
the 36th succeeding quarter, any remaining Option Shares. The optionee may
purchase fewer than the total number of Option Shares with respect to
which the Option is exercisable, provided that no partial exercise of the
Option may be for any fractional shares. If division of a number of shares
pursuant to the preceding sentence results in a fractional number of
shares, such fractional number shall be rounded up to the next highest
integer.
ii. Change in Control. Notwithstanding anything contained in
-----------------
the Plan or any Option Agreement to the contrary:
(a) Not a Pooling Transaction. In the event of a Change in Control
-------------------------
which is not intended to qualify as a Pooling Transaction, all
outstanding Options shall become exercisable in full immediately
prior to such event.
(b) Pooling Transactions. In the event of a Change in Control which
--------------------
also is intended to constitute a Pooling Transaction, the Board
of Directors shall take such actions, if any, as are specifically
recommended by an independent accounting firm retained by Yurie
to the extent reasonably necessary in order to assure that the
Pooling Transaction will qualify as such, including but not
limited to (i) deferring the vesting, exercise, payment,
settlement or lapsing of restrictions with respect to any Option,
(ii) providing that the payment or settlement in respect of any
Option be
<PAGE>
- 13 -
made in the form of cash, shares or securities of a successor or
acquirer of Yurie, or a combination of the foregoing, and (iii)
providing for the extension of the term of any Option to the
extent necessary to accommodate the foregoing, but not beyond the
maximum term permitted for any Option.
7. Forms of Option Agreements.
--------------------------
As a condition to the grant of an Option under the Plan, each
recipient of an Option shall execute an Option Agreement in such form not
inconsistent with the Plan as may be approved by the Board of Directors.
Option Agreements may differ among recipients, and each Option Agreement
shall state the price, the number of shares subject to the Option, and
other terms at which the underlying stock can be purchased pursuant to the
Option. In the event of a conflict between the terms of this Plan and an
Option Agreement entered into pursuant to this Plan, the terms of the Plan
shall supersede the terms of the Option Agreement.
8. Purchase Price.
--------------
a. General. The option price shall be the Fair Market Value of the
-------
Common Stock as of the Effective Date of the Option.
b. Payment of Purchase Price. Options granted under the Plan may
-------------------------
provide for the payment of the exercise price by delivery of cash or a
check to the order of Yurie in an amount equal to the exercise price of
such Options or by delivery to Yurie of
<PAGE>
- 14 -
shares of Common Stock then owned by the optionee having a Fair Market
Value equal in amount to the exercise price of such shares, or by any
combination of such methods of payment. Provided, however, that if an
Officer or Director elects to make payment by delivery to Yurie of shares
of Common Stock, such election must be approved in advance by the Board of
Directors.
c. Delivery of Shares. Yurie shall not be required to transfer or
------------------
deliver any certificate or certificates for shares purchased upon any
exercise of an Option until after (i) the stock has been paid for in
accordance with the terms of the Option Agreement, and (ii) compliance with
all the applicable requirements of law including, but not limited to,
collection by the Company from the optionee of all requisite income and
employment taxes and compliance with the federal and state securities
laws.
9. Transferability and Termination of Options.
------------------------------------------
a. General. Except as set forth herein, no Option granted under the
-------
Plan shall be assignable or transferable by the person to whom it is
granted, either voluntarily or by operation of law, and shall be
exercisable only by the optionee.
b. Effect of Death and Termination of Employment.
---------------------------------------------
The Board of Directors shall determine the period of time during which
an optionee may exercise an Option following (i) the termination of the
optionee's employment or other relationship with the Company or (ii) the
death or disability of the optionee. Such periods shall be set forth in the
Option Agreement.
<PAGE>
- 15 -
10. Additional Provisions.
---------------------
a. Additional Option Provisions. The Board of Directors may, in its
----------------------------
sole discretion, include additional provisions in any Option granted under
the Plan, including, without limitation, provisions relating to
restrictions on transfer, repurchase rights, or commitments to (i) pay cash
bonuses, (ii) make, arrange for or guaranty loans, or (iii) transfer other
property to optionees upon exercise of Options, or such other provisions as
shall be determined by the Board of Directors; provided that such
additional provisions shall not be inconsistent with any other term or
condition of the Plan.
b. Acceleration. The Board of Directors may, in its sole
------------
discretion, (i) accelerate the date or dates on which all or any particular
Option or Options granted under the Plan may be exercised; or (ii) extend
the dates during which all or any particular Option or Options granted
under the Plan may be exercised; provided, however, that no such
acceleration or extension shall be permitted if it would cause the Plan to
fail to comply with Rule 16b-3.
c. Cancellation and New Grant of Options. The Board of Directors
-------------------------------------
shall have the authority to effect, at any time and form time to time, with
the consent of the affected optionees, (i) the cancellation of any or all
outstanding Options under the Plan and the grant in substitution therefor
of new Options under the Plan covering the same or different numbers of
shares of Common Stock having an exercise price per share which may be
lower or higher than the exercise price per share of the canceled options
or (ii) the amendment of the terms of any and all outstanding Options under
the Plan to
<PAGE>
- 16 -
provide an Option price which is higher or lower than the then-current
Option price of such outstanding Options.
11. Yurie's Right Prior to Registration of Stock to Repurchase Shares
-----------------------------------------------------------------
Acquired By Exercise of Option.
------------------------------
a. Yurie's Right to Registration of Stock to Repurchase Upon
---------------------------------------------------------
Voluntary Sale of Stock by the Optionee. In the event an optionee who
---------------------------------------
has exercised his or her Option and has become a shareholder in Yurie
wishes to sell his or her Common Stock acquired upon exercise of said
Option (or in the event of his death or disability his or her personal
representative, guardian, or heirs wish to sell such Common Stock) and has
received a written bona fide binding offer, the optionee shall give written
notice to Yurie of the optionee's wish to sell such Common Stock, and such
notice shall set forth the per share sales price for such Common Stock
which has been offered by a third party and shall include a copy of the
written bona fide binding offer. Such notice shall be sent by certified
mail, return receipt requested, to the President of Yurie. Yurie shall have
the right of first refusal to purchase, within six months after the date it
receives such notice, such shares at the price set forth in the notice.
b. Yurie's Right to Initiate Repurchase of Optionee's Common Stock.
---------------------------------------------------------------
Yurie may, on its own initiative, repurchase all or any portion of such
optionee's Common Stock if any of the following Triggering Events occurs:
(1) the optionee's employment or service as a Director, consultant or
otherwise with the Company terminates for any reason, including death; (2)
such optionee's insolvency, bankruptcy or other making of an assignment for
the benefit of creditors; or (3) any purported or attempted sale or
<PAGE>
- 17 -
other assignment, gift, or other transfer of stock to a third party in
violation of the terms of the Plan.
In any such event, Yurie shall have the absolute right to repurchase
the shares of Common Stock owned by such optionee for a period of six
months immediately following the occurrence of the Triggering Event and the
shares shall not otherwise by transferable during such six month period.
c. Manner of Exercise. Following the date that Yurie receives
------------------
written notice of an optionee's desire to sell his or her Common Stock, or
following the date of the Triggering Event, Yurie shall notify such
optionee in writing of the number of shares, if any, that Yurie intends to
repurchase and of the date upon which Yurie shall purchase the shares.
Unless otherwise agreed by the parties, the aggregate repurchase price
shall be paid in cash to the optionee or the optionee's representative.
d. Price at Which Yurie May Repurchase Shares. If Yurie elects to
------------------------------------------
exercise its option pursuant to Section 10(b) hereof and purchase the
shares of Common Stock available from the optionee, Yurie shall pay such
optionee the fair market value of the stock being sold as determined by the
Board of Directors.
If Yurie elects to exercise its option pursuant to Section 10(a)
hereof and purchase the shares of Common Stock that such optionee seeks to
sell to a third party, Yurie shall pay the optionee the price per share
being offered by such third party, as set forth in the notice delivered to
Yurie pursuant to Section 10(a).
<PAGE>
- 18 -
e. Optionee's Right to Sell Shares. If Yurie does not elect to acquire such
-------------------------------
optionee's Common Stock pursuant to Section 10(a), the optionee may, within the
120-day period following the expiration of the right granted to Yurie set forth
in Section 11(a), sell his or her Common Stock specified in the notice to Yurie
to the third party, provided that the sale shall not be on terms and conditions
less favorable to the optionee than those contained in the notice to Yurie. If
the optionee does not sell his or her Common Stock in such fashion, such Common
Stock shall remain subject to Yurie's rights set forth in this Section 10.
f. Lapse of Repurchase Rights. Shares acquired pursuant to the exercise of any
--------------------------
Option granted hereunder shall remain subject to Yurie's right to repurchase
under Section 10(a) and (b) until the earliest to occur of the following:
i. The effective date of a Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 covering
securities of Yurie, whether or not such shares are covered:
ii. The date on which a class of securities of Yurie is registered under
Section 12 of the Exchange Act; or
iii. The date on which Yurie's right to repurchase pursuant to a Triggering
Event expires with respect to such shares, in accordance with Section 10(b)
hereof.
<PAGE>
- 19 -
g. In the case of an optionee who is an Officer or Director, any election by
Yurie to acquire such optionee's Common Stock pursuant to this Section 11 shall
be approved in advance by the Board of Directors.
h. This Section 11 shall apply to all Common Stock acquired upon the exercise
of Options granted pursuant to the Plan unless otherwise waived or amended
pursuant to an Option Agreement.
12. Sale or Other Disposition By Majority Interest Prior to Registration of
-----------------------------------------------------------------------
Stock.
- -----
An optionee shall irrevocably appoint Yurie and its chief executive officer,
or either of them, as such optionee's agents and attorneys-in-fact, with full
power of substitution in the optionee's name, to sell, exchange, transfer or
otherwise dispose of all or a portion of such optionee's Common Stock or
Options, or both, and to do any and all things and to execute any and all
documents and instruments (including, without limitation, any stock transfer
powers) in connection therewith, such power of attorney not to become operable
until such time as the holder or holders of a majority of the issued and
outstanding shares of Common Stock sell, exchange, transfer or otherwise dispose
of, or contract to sell, exchange, transfer or otherwise dispose of, all or
substantially all of their shares of Common Stock. Any sale, exchange, transfer
other disposition of all or a portion of an optionee's shares of Common Stock
pursuant to the foregoing powers of attorney shall be made upon substantially
the same terms and conditions (including sale price per share) applicable to a
sale, exchange, transfer or other dispositions of all or a portion of shares of
Common Stock owned by the holder or holders of a majority of the issued and
outstanding shares of Common Stock. For
<PAGE>
- 20 -
purposes of determining the sale price per share of Common Stock under this
Section 12, there shall be excluded the consideration (if any) paid or payable
to the holder or holders of a majority of the issued and outstanding shares of
Common Stock in connection with any employment, consulting, noncompetition or
similar agreements which such holder or holders may enter into in connection
with or subsequent to such sale, transfer, exchange or other disposition. The
foregoing powers of attorney shall be irrevocable and coupled with an interest
and shall not terminate by operation of law, whether by the death, bankruptcy or
adjudication of incompetency or insanity of the optionee or the occurrence of
any other event.
The provision in this Section 11 shall remain in effect until the earliest
to occur of the following:
a. The effective date of a Registration Statement filed with the Securities
and Exchange Commission under the Securities Act of 1933 covering securities of
Yurie whether or not such shares are covered; or
b. The date on which a class of securities of Yurie is registered under
Section 12 of the Exchange Act.
13. General Restrictions Prior to Registration of Stock.
---------------------------------------------------
a. Investment Representations. Yurie may require any person to whom an
--------------------------
option is granted, as a condition of exercising such Option, to give written
assurances in substance and form satisfactory to Yurie to the effect that such
person is acquiring the
<PAGE>
- 21-
Common Stock subject to the Option for his or her own account for investment and
not with any present intention of selling or otherwise distributing the same,
and to such other effects as Yurie deems necessary or appropriate in order to
comply with federal and applicable state securities law.
b. Compliance With Securities Laws. Each Option shall be subject to the
requirement that if, at any time, counsel to Yurie shall determine that the
listing, registration or qualification of the shares subject to the Option upon
any securities exchange or under any state or federal law, or the consent or
approval of any governmental or regulatory body, or of any other condition is
necessary as a condition of, or in connection with, the issuance or purchase of
shares thereunder, the option may not be exercised, in whole or in part, unless
such listing, registrations, qualification, consent or approval, or satisfaction
of such condition shall have been effected or obtained on conditions acceptable
to the Board of Directors. Nothing herein shall be deemed to require Yurie to
apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
Notwithstanding any other provision of this Plan, no transfer for value of
any stock acquired upon exercise of an Option shall be valid unless (i) the
stock has been held for a minimum period of two (2) years in the event that the
stock of Yurie is not listed on a national exchange or qualified for trading on
the NASDAQ system; (ii) there is an effective registration statement under the
Securities Act of 1933, as amended; (iii) registration thereunder is not
required; or (iv) the holder has furnished a "no-action" letter from the staff
of the Securities and Exchange Commission satisfactory to Yurie that such
registration is not required.
<PAGE>
- 22 -
All stock issued pursuant to the terms of this Plan shall bear the following
legend:
The securities represented by this Stock certificate have not been registered
under the Securities Act of 1933 or the Securities and Exchange Act of 1934 (the
"Act") or applicable state securities laws (the "State Acts"), and shall not be
sold, pledged, hypothecated, donated, or otherwise transferred (whether or not
for consideration) by the holder unless (i) they have first been registered
under the federal and/or state securities laws or (ii) a "no action letter" has
been received from the Securities and Exchange Commission and/or the applicable
State Securities Commission, to the effect that the registration of such shares
under federal and/or state securities laws, is not required in connection with
such transfer, or(iii) the Company has received a favorable opinion of its
counsel and/or submission to the Company of such other evidence as may be
satisfactory to counsel for the Company, to the effect that any such transfer
shall not be in violation of the Acts and the State Acts.
These securities are subject to certain rights of the Company, including a right
of first refusal and a right to repurchase, such rights being set forth in full
in the Yurie Systems, Inc. 1996 Non Statutory Stock Option Plan (the "Plan") and
the Yurie Systems, Inc. 1996 Non Statutory Stock Option Grant Agreement (the
"Grant Agreement"). The Company will furnish to each stockholder who so requests
a copy of the Plan and the Option Agreement.
<PAGE>
- 23 -
14. Adjustment Provisions for Recapitalizations and Related Transactions.
--------------------------------------------------------------------
a. General. If, through or as a result of any merger, consolidation, sale
-------
of all or substantially all of the assets of Yurie, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock-
split or other similar distribution with respect to the outstanding shares of
Common Stock or other securities, (i) the outstanding shares of Common Stock are
increased or decreased, or are exchanged for a different number or kind of
shares or other securities if Yurie or (ii) additional shares or new or
different shares or other securities of Yurie or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in (x) the maximuim number
and kind of shares reserved for issuance under the plan, (y) the number and kind
of shares or other securities subject to then outstanding Options under the
Plan, and (z) the price for each share subject to any then outstanding Options
under the Plan, without changing the aggregate purchase price as to which such
Options remain exercisable.
b. Board Authority to Make Adjustments. Adjustments under this Section 15
-----------------------------------
will be made by the Board of Directors, whose determination as to what
adjustments, if any, will be made and the extent to which adjustments, if any,
will be final, binding and conclusive. No fractional shares will be issued under
the Plan on account of any such adjustments.
15. Merger, Consolidation, Asset Sale, Liquidation.
----------------------------------------------
<PAGE>
- 24 -
a. Acquisition of Yurie. Subject to the provisions of Section 6(b) regarding
--------------------
Change of Control transactions, in the event of a merger, consolidation or
reorganization of the stock, business or assets of Yurie or a sale of all or
substantially all of the stock, business or assets of Yurie in which outstanding
shares of Common Stock are exchanged for securities, cash or other property of
any other corporation or business entity, or in the event of a liquidation of
Yurie, the Board of Directors, or the board of directors of any corporation
assuming the obligations of Yurie, may, in its discretion, take any one or more
of the following actions as to outstanding Options: (i) provide that such
Options shall be assumed, or equivalent options shall be substituted, by the
acquiring or succeeding corporation (or an affiliate thereof), (ii) upon written
notice to the optionees, provide that all unexercised Options will terminate
immediately prior to the consummation of such transaction unless exercised by
the optionee within a specified number of days following the date of such
notice, (iii) in the event of a merger under the terms of which holders of the
Common Stock will receive upon consummation thereof a cash payment for each
share surrendered in the merger, make or provide for a cash payment to the
optionees equal to the difference between (X) the Merger Price times the number
of shares of Common Stock subject to such outstanding Options to the extent
exercisable at prices not in excess of the Merger Price) and (Y) the aggregate
exercise price of all such outstanding Options in exchange for the termination
of such options, and (iv) provide that all or any outstanding Options shall
become exercisable in full immediately prior to such event. In any such case,
the Board of Directors may, in its discretion, advance the lapse of any waiting
or installment periods and exercise dates.
<PAGE>
- 25 -
b. Acquisition by Yurie. The Board of Directors may grant options under the
--------------------
Plan in substitution for options held by employees of another corporation who
become employees of the Company, as the result of a merger or consolidation of
the employing corporation with the Company, or as a result of the acquisition by
the Company, of property or stock of the employing corporation. Substitute
options may be granted on such terms and conditions as the Board of Directors
considers appropriate in the circumstances.
16. Rights as a Shareholder.
-----------------------
The holder of an Option shall have no rights as a shareholder with respect
to any shares covered by the Option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares.
Except as Section 15 provides, no adjustment shall be made for dividends or
other rights for which the record date is prior to the date such stock
certificate is issued.
17. Public offering.
---------------
In the event that Yurie proposes to engage in a public offering of its
Common Stock, Yurie shall have the right, prior to said offering, to cancel any
or all stock options that were granted within the six month period prior to the
scheduled date of said public offering.
18. No Special Employment Rights.
----------------------------
<PAGE>
- 26 -
Nothing contained in the Plan or in any Option Agreement shall confer upon
any optionee any right with respect to the continuation of his or her employment
by the Company or interfere in any way with the right of the Company at any time
to terminate such employment or to increase or decrease the compensation of the
optionee.
19. Other Employee Benefits.
-----------------------
Except as to plans which by their terms include such amounts as
compensation, neither the amount of any compensation deemed to be received by an
employee as a result of the exercise of an Option nor the sale of shares
received upon such exercise will constitute compensation with respect to which
any other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
20. Withholding.
-----------
a. The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee (or secure payment from the optionee in lieu of
such deduction) any federal, state or local taxes of any kind required by law to
be withheld with respect to any shares issued upon exercise of Options under the
Plan. Subject to the prior approval of the Company, which may be withheld by the
Company in its sole discretion, the optionee may elect to satisfy such
obligations, in whole or in part, (i) by causing the Company to withhold shares
of Common Stock otherwise issuable pursuant to the exercise of an option or (ii)
by delivering to the Company shares of
<PAGE>
- 27 -
Common Stock already owned by the optionee. The Common Stock so delivered or
withheld shall have a Fair Market Value equal to such withholding obligation.
b. Notwithstanding the foregoing, in the case of an Officer or Director,
no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16(b)-3.
21. Amendment and Termination of the Plan.
-------------------------------------
a. Except as set forth herein, the Board of Directors may at any time, and
from time to time, terminate the Plan or modify or amend the Plan in any
respect. If at any time the approval of the Board of Directors or a committee
composed of two or more Non-Employee Directors is required as to such
modification or amendment under Rule 16b-3 with respect to Options held by
Officers or Directors, the Board may not effect such modification or amendment
without such approval.
b. The termination or any modification or amendment of the Plan shall not,
without the consent of an optionee, affect his or her rights under an Option
previously granted to him or her. With the consent of the optionee affected, the
Board of Directors may amend outstanding Option Agreements in a manner not
inconsistent with the Plan. Notwithstanding the preceding sentences of this
Section 21(b), the Board of Directors shall have the right to amend or modify
the terms and provisions of the Plan and of any outstanding Option to the extent
necessary to ensure the qualification of the Plan under Rule 16b-3 of the
Exchange Act or any successor rule.
<PAGE>
- 28 -
22. Effective Date and Duration of the Plan.
---------------------------------------
a. Effective Date. The Plan shall become effective when adopted by the
--------------
Board of Directors and approved by the shareholders, provided that Options may
be granted to employees after approval of the Plan by the Board of Directors and
prior to shareholder approval, subject to the requirement that shareholder
approval of the Plan be obtained within one year of approval by the Board. If
such shareholder approval is not obtained within one year, all Options granted
hereunder shall be null and void. Amendments to the Plan not requiring
shareholder approval shall become effective as of the date they are made
effective by the Board of Directors.
b. Duration. Unless sooner terminated in accordance with Section 21, the
--------
Plan shall terminate upon the date on which all shares available for issuance
under the Plan shall have been issued pursuant to the exercise or cancellation
of options granted under the Plan.
<PAGE>
Exhibit 10.14
November 22, 1996
Mr. Mark Cordover
c/o Lawrence Katz, Esq.
Tucker, Flyer & Lewis
1615 L Street, N.W.
Suite 400
Washington, D.C. 20036
Re: Yurie Systems, Inc.
Lease at 10000 Derekwood Lane, Lanham, Maryland
Dear Mr. Cordover:
This letter will confirm the following agreement reached between you, 300
Fourth Street L.P., and Yurie Systems, Inc. regarding the above-referenced
property:
1. Yurie Systems, Inc. is a tenant at 10000 Derekwood Lane, Lanham,
Maryland 20706, pursuant to an amended lease made on or about May 15,
1996 between Jon Glanz, as a debtor-in-possession, and Yurie Systems,
Inc. (the "Lease"). The Lease has been approved by the Bankruptcy
Court and is effective and binding between landlord and tenant.
2. In the event that you or 300 Fourth Street L.P. or any entity
controlled by you or 300 Fourth Street L.P., acquires title to 10000
Derekwood Land, Lanham, Maryland (the "Property"), either by direct
purchase at a foreclosure sale, or in any other manner, it is hereby
agreed that the Lease as presently in effect between Jon Glanz and
Yurie Systems, Inc. will remain in full force and effect, subject only
to the following modifications:
(a) If the Property is acquired by direct purchase, Yurie Systems,
Inc. will begin paying rent on May 1, 1997 as follows: (i) on
May 1, 1997, Yurie Systems, Inc. will pay rent of $5,250.00;
(ii) on June 1, 1997 Yurie Systems will pay rent of $22,500.00.
If the Property is acquired by foreclosure or in any manner other
than by direct purchase, Yurie Systems, Inc. will begin paying
rent on March 1, 1997 in the amount of $22,500 and thereafter on
the first day of each month in the same amount.
<PAGE>
Mr. Mark Cordover
November 22, 1996
Page 2
(b) On either March 1, 1997 or April 1, 1997, you may give Yurie
Systems, Inc. a 60-day written notice to vacate and the building.
The Lease will terminate at the end of said 60-day notice.
(c) On April 1, 1997 or May 1, 1997, Yurie Systems, Inc. may give a
30-day written notice of intention to vacate and the Lease will
terminate 30 days after such notice.
(d) Except as set forth above, the Lease shall terminate on June 30,
1997, and upon termination, pursuant to this agreement, neither
party shall have any continuing liability or obligations for rent
under the Lease.
3. In the event you or any entity controlled by you acquires in any
manner or fashion an interest in the building occupied by Yurie
Systems, Inc., Yurie Systems, Inc. will not seek from you or such
entity a return of the security deposit in the amount of $22,500 paid
to its landlord at the inception of this Lease.
4. It is recognized by the parties that real estate taxes, for which
Yurie Systems, Inc. is responsible as part of its operating expenses,
have been prepaid through June 30, 1997. Yurie Systems, Inc. will
not, therefore, be responsible for payment of any taxes as part of its
operating expenses under the Lease.
5. In consideration of the agreements set forth herein, and for other
good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Yurie Systems, Inc. hereby absolutely,
unconditionally and forever releases and discharges Mark Cordover, 300
Fourth Street L.P., and its successors, predecessors, assigns and
past, present and future partners from and against any and all rights,
actions, causes of action (in law or in equity), claims, suits,
amounts owed or alleged to be owed, demands or other obligations or
liabilities of any nature whatsoever, whether known or unknown, which
Yurie Systems, Inc. and its stockholders, officers, successors and
assigns ever had or now have or may in the future have by reason of
any matter, cause or thing whatsoever, existing prior to or as of the
date hereof by reason of, pursuant to or otherwise with respect to the
Lease.
6. Any notices required or permissible under this agreement shall be sent
by certified mail to:
<PAGE>
Mr. Mark Cordover
November 22, 1996
Page 3
Yurie Systems, Inc.
c/o C. Graham
10000 Derekwood Lane
Lanham, Maryland 20706
and
John J. McDonnell, Esq.
1400 16th Street, N.W.
Suite 400
Washington, D.C. 20036
and
Mr. Mark Cordover
c/o Lawrence Katz, Esq.
Tucker, Flyer & Lewis
1615 L Street, N.W.
Suite 400
Washington, D.C. 20036
and
300 Fourth Street Limited Partnership
c/o Lawrence Katz, Esq.
Tucker, Flyer & Lewis
1615 L Street, N.W.
Suite 400
Washington, D.C. 20036
7. In all other respects, the parties affirm the respective rights,
obligations, and terms of the Lease executed on May 15, 1996 by and
between Jon Glanz and Yurie Systems, Inc., a copy of which is attached
hereto. The signatories hereto further agree to execute such
additional documents as may be reasonably requested to give effect to
this agreement.
<PAGE>
Mr. Mark Cordover
November 22, 1996
Page 4
8. In the event that Mark Cordover or any entity controlled by him
acquires the property which is the subject of this contract by
December 20, 1996, and simultaneously pays off the NationsBank Note,
Yurie Systems, Inc. will release Jon Glanz of any claims it may have
arising from its Lease with Jon Glanz as of the date of this contract
and any claims arising under the amended lease for unpaid operating
expenses or unpaid startup costs between the date of this Agreement
and the aforesaid acquisition.
Sincerely,
Francis P. Dicello
Enclosure
By: /s/ Mark Cordover
----------------------------------
Mark Cordover, President
MAC Investment Corp., Gen. Partner
300 4th Street Limited Partnership
YURIE SYSTEMS, INC.
By: [SIGNATURE APPEARS HERE]
----------------------------------
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement
of Yurie Systems, Inc. on Form S-1 of our report dated November 7, 1996
appearing in the Prospectus, which is part of the Registration Statement, and
the references to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Washington, D.C.
December 24, 1996
