<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1996
REGISTRATION NO. 333-15759
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 1
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.
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value............. $41,400,000 $12,545.45
</TABLE>
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(1) Includes shares which the Underwriters have the option to purchase from
certain stockholders of the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
----------------
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 11, 1996
4,000,000 Shares
YURIE SYSTEMS, INC.
Common Stock
[LOGO OF YURIE
APPEARS HERE]
--------
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
, 1996.
Alex. Brown & Sons Wessels, Arnold & Henderson
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<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 (i) 3,143,122 shares of Common Stock issuable upon the exercise of
stock options outstanding as of December 11, 1996 at a weighted average
exercise price of approximately $1.62 per share, substantially all of which
are not exercisable as of the date of this Prospectus; and (ii) 56,878
shares of Common Stock reserved for future issuance under the Company's
1996 Non Statutory Stock Option Plan (the "Stock Option Plan"). See
"Management--Stock Option 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
11, 1996, the directors, officers, key employees and 5% stockholders of the
Company hold an aggregate of 19.7 million shares of Common Stock having an
aggregate original purchase price of $3.2 million and a market value, based on
an assumed initial public offering price of $9.00, of $177.6 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
11, 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, 3,200,000 shares of
Common Stock issued or reserved for issuance under the Stock Option Plan.
These registrations will be effective upon filing. As of December 11, 1996,
there were 3,143,122 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 transferability of such shares will be subject to
the volume limitations set
12
<PAGE>
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 (i) 3,143,122 shares of Common Stock issuable upon exercise of
outstanding stock options as of December 11, 1996 at a weighted average
exercise price of approximately $1.62 per share, substantially all of
which are not exercisable as of the date of this Prospectus and (ii)
56,878 additional shares of Common Stock reserved for future grants under
the Stock Option Plan. See "Management--Stock Option 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% $ 4,800,000 11.8% $0.23
New investors.............. 4,000,000 16.3 36,000,000 88.2 $9.00
---------- ----- ----------- -----
Total.................... 24,608,400 100.0% $40,800,000 100.0%
========== ===== =========== =====
</TABLE>
The above computations assume no exercise of any outstanding options. At
December 11, 1996, there were outstanding options to purchase 3,143,122 shares
of Common Stock at a weighted average exercise price of $1.62. 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 1 378 kbps--15 Mbps ATM/LANET
Parallel/Serial
(RS422, V.35,
DSS Parallel)
Serial Data 4 75bps--1.544Mbps ATM/LANET, frame relay,
(RS232, RS422, synchronous, asynchronous
RS530, V.35)
Analog Compressed 2 8kbps, 16kbps Foreign exchange station ("FXS")
Voice 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,
HDLC, 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-50 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--50 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
---------------------- ----- ---------------- ------------------------
<S> <C> <C> <C>
NETWORK:
T1 (DS1) 1 1.544 Mbps ATM
USER:
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
11, 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 11, 1996, the Company had 13 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 13 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 1995. 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. The Company may choose to relocate all or a portion of its
operations to new or additional facilities. 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 11, 1996, Yurie employed 129 individuals on a full-time
equivalent basis. Of these, 49 were involved in engineering, 24 were working
in applications engineering in the federal division, 21 were employed in
sales, marketing and customer support, 18 were engaged in manufacturing, and
the remaining 17 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.
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
Board of Directors of the Company may, in its discretion, grant options to a
prospective employee if it determines that such action is in the best
interests of the Company's shareholders. 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 and September 6,
1996. The Stock Option Plan will remain effective, unless sooner terminated,
until the 3,200,000 shares available for issuance under the Stock Option Plan
have been issued pursuant to the exercise of options. The number and kind of
shares subject
42
<PAGE>
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.
As of December 11, 1996, options to acquire an aggregate of 3,143,122 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 a weighted average
exercise price of $0.98 and 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.
The Company is now considering whether to adopt a new stock option plan
which would provide, among other things, for (i) the automatic grant to all
directors on an annual basis of options to acquire a specified number of
shares, (ii) the grant of incentive stock options and other nonqualifying
stock options to officers, employees, agents and consultants of the Company
and (iii) the grant of restricted stock awards and performance awards.
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
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
43
<PAGE>
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
intends to consider the adoption of a stock option plan that provides, among
other things, for annual automatic option grants 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.
44
<PAGE>
CERTAIN 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.
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.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of Common Stock as of October 31, 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..................... 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."
46
<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 11, 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 3,143,122 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 and Bylaws 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.
47
<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 14,580,000
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 20,872,500 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
48
<PAGE>
Mr. Li and his assignees, as the case may be, may, beginning 180 days after
this offering (360 days with 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, 3,200,000 shares of Common Stock issued or
reserved for issuance under the Stock Option Plan. See "Management--Stock
Option 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.
49
<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."
50
<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.
51
<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 , 1996 (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
, 1996
===============================================================================
<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 and Bylaws provide 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 and Bylaws provide 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 September 6, 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
11.1 Statement re computation of earnings per share
23.1 Consent of Deloitte & Touche LLP
Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
23.2 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. 1
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN LANHAM, MARYLAND ON DECEMBER , 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jeong H. Kim Chairman of the December , 1996
- ------------------------------------- Board and Chief
JEONG H. KIM Executive Officer
/s/ Kwok Li President, Chief December , 1996
- ------------------------------------- Operating Officer,
KWOK LI and a Director
/s/ Barton Y. Shigemura Senior Vice December , 1996
- ------------------------------------- President, Sales
BARTON Y. SHIGEMURA and Marketing and a
Director
/s/ Charles S. Marantz Vice President, December , 1996
- ------------------------------------- Finance and
CHARLES S. MARANTZ Administration,
Chief Financial
Officer and
Treasurer (also
serves as Chief
Accounting Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ R. James Woolsey Director December , 1996
- -------------------------------------
R. JAMES WOOLSEY
/s/ Herbert Rabin Director December , 1996
- -------------------------------------
HERBERT RABIN
/s/ Kenneth D. Brody Director December , 1996
- -------------------------------------
KENNETH D. BRODY
</TABLE>
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*
Yurie Systems, Inc. 1996 Non Statutory Stock Option Plan, as amended
10.1 September 6, 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
11.1 Statement re computation of earnings per share
23.1 Consent of Deloitte & Touche LLP
Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
23.2 Exhibit 5.1)*
24.1 Power of Attorney (included on page II-5)
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Shares
---------------
YURIE SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1996
---------------
Alex. Brown & Sons Incorporated
Wessels, Arnold & Henderson, L.L.C.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Yurie Systems, Inc., a Delaware corporation (the "Company"), proposes
to sell to the several underwriters (the "Underwriters") named in Schedule I
hereto for whom you are acting as representatives (the "Representatives") an
aggregate of ________ shares of the Company's Common Stock, $.01 par value (the
"Firm Shares"). The respective amounts of the Firm Shares to be so purchased by
the several Underwriters are set forth opposite their names in Schedule I
hereto. The Company also proposes to sell at the Underwriters' option an
aggregate of up to __________ additional shares of the Company's Common Stock
(the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
-1-
<PAGE>
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form S-1 (File No. 333-15759) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462 (b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior
to the time it becomes effective or filed pursuant to Rule 424(a) under the
Act that is delivered by the Company to the Underwriters for delivery to
purchasers of the Shares, together with the term sheet or abbreviated term
sheet, if any, filed with the Commission pursuant to Rule 424(b)(7) under
the Act. Each preliminary prospectus included in the Registration
Statement prior to the time it becomes effective is herein referred to as a
"Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. The Company is
duly qualified to transact business in all jurisdictions in which the
conduct of its business requires such qualification.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be
-2-
<PAGE>
issued and sold by the Company have been duly authorized and when issued
and paid for as contemplated herein will be validly issued, fully paid and
non-assessable; and no preemptive rights of stockholders exist with respect
to any of the Shares or the issue and sale thereof. Neither the filing of
the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of
any shares of Common Stock.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct in all material respects. All of the
Shares conform to the description thereof contained in the Registration
Statement in all material respects. The form of certificates for the
Shares conforms to the corporate law of the jurisdiction of the Company's
incorporation.
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and
will conform, to the requirements of the Act and the Rules and Regulations
in all material respects. The Registration Statement and any amendment
thereto do not contain, and will not contain, any untrue statement of a
material fact and do not omit, and will not omit, to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading. The Prospectus and any amendments and supplements
thereto do not contain, and will not contain, any untrue statement of
material fact; and do not omit, and will not omit, to state any material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(f) The financial statements of the Company, together with related
notes and schedules as set forth in the Registration Statement, present
fairly the financial position and the results of operations and cash flows
of the Company, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data included in the
Registration Statement presents
-3-
<PAGE>
fairly the information shown therein and such data has been compiled on a
basis consistent with the financial statements presented therein and the
books and records of the company.
(g) Deloitte & Touche LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company before any court
or administrative agency or otherwise which if determined adversely to the
Company might result in any material adverse change in the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company or prevent the
consummation of the transactions contemplated hereby, except as set forth
in the Registration Statement.
(i) The Company has good and marketable title to all of the
properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the Registration
Statement) or which are not material in amount. The Company occupies its
leased properties under valid and binding leases conforming in all material
respects to the description thereof set forth in the Registration
Statement.
(j) The Company has filed all Federal, State, local and foreign
income tax returns which have been required to be filed and have paid all
taxes indicated by said returns and all assessments received by it to the
extent that such taxes have become due and are not being contested in good
faith. All tax liabilities have been adequately provided for in the
financial statements of the Company.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company, whether or not occurring in the
ordinary course of business, and there has not been any material
transaction entered into or any material transaction that is probable of
being entered into by the Company, other than transactions in the ordinary
course of business and changes and transactions described in the
Registration Statement, as it may be amended or supplemented. The Company
has no material contingent obligations which are not disclosed in the
Company's financial statements which are included in the Registration
Statement.
-4-
<PAGE>
(l) The Company is not or with the giving of notice or lapse of time
or both, will not be, in violation of or in default under its Certificate
of Incorporation or By-Laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by
which it, or any of its properties, is bound and which default is of
material significance in respect of the condition, financial or otherwise
of the Company or the business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company.
The execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust or other agreement or instrument to which the Company is a party,
or of the Certificate of Incorporation or By-Laws of the Company or any
order, rule or regulation applicable to the Company of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(n) The Company holds all material licenses, certificates and permits
from governmental authorities which are necessary to the conduct of its
businesses except where the failure to have such licenses, certificates or
permits would not, singly or in the aggregate, have a material adverse
effect on the business or financial condition of the Company; and the
Company has not received any notice of infringement of any patents, patent
rights, trade names, trademarks or copyrights, which infringement is
material to the business of the Company. The Company knows of no material
infringement by others of patents, patent rights, trade names, trademarks
or copyrights owned by or licensed to the Company.
(o) Neither the Company, nor to the Company's knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares.
-5-
<PAGE>
(p) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(r) The Company's management believes that the Company carries, or is
covered by, insurance in such amounts and covering such risks as is
commercially reasonable for the conduct of its business and the value of
its properties.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); the Company does not maintain any
"pension plan" (as defined in ERISA) that is subject to Title IV of ERISA
or Section 412 of the Internal Revenue Code of 1986, as amended, (the
"Code"); the Company will submit its only "pension plan" to the Internal
Revenue Service ("IRS") for an initial determination that the Plan is
qualified under Section 401(a) of the Code and will make any changes
required by the IRS for the issuance of the determination letter.
(t) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of doing Business with Cuba, and the
---------------------------------------------------------
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company
-6-
<PAGE>
will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $_____ per share, the
number of Firm Shares set forth opposite the name of each Underwriter in
Schedule I hereof, subject to adjustments in accordance with Section 9
hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in
same day funds via wire transfer to the order of the Company against
delivery of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be made at
the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business
day after the date of this Agreement or at such other time and date not
later than five business days thereafter as you and the Company shall agree
upon, such time and date being herein referred to as the "Closing Date."
(As used herein, "business day" means a day on which the New York Stock
Exchange is open for trading and on which banks in New York are open for
business and are not permitted by law or executive order to be closed.)
The certificates for the Firm Shares will be delivered in such
denominations and in such registrations as the Representatives request in
writing not later than the second full business day prior to the Closing
Date, and will be made available for inspection by the Representatives at
least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to purchase
the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in
whole or in part by giving written notice (i) at any time before the
Closing Date and (ii) only once thereafter within 30 days after the date of
this Agreement, by you, as Representatives of the several Underwriters, to
the Company setting forth the number of Option Shares as to which the
several Underwriters are exercising the option, the names and denominations
in which the Option Shares are to be registered and the time and date at
which such certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to as
the "Option Closing Date"). If the date of exercise of the
-7-
<PAGE>
option is three or more days before the Closing Date, the notice of
exercise shall set the Closing Date as the Option Closing Date. The number
of Option Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the
number of Firm Shares being purchased by such Underwriter bears to
__________, adjusted by you in such manner as to avoid fractional shares.
The option with respect to the Option Shares granted hereunder may be
exercised only to cover over-allotments in the sale of the Firm Shares by
the Underwriters. You, as Representatives of the several Underwriters, may
cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company. To the extent, if any, that the
option is exercised, payment for the Option Shares shall be made on the
Option Closing Date in same day funds via wire transfer to the order of the
Company against delivery of certificates therefor at the offices of Alex.
Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company.
------------------------
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the
Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a
form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A of the Rules and Regulations, and (B) not file any
amendment to the Registration Statement or supplement to the Prospectus of
which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations.
-8-
<PAGE>
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested),
including documents incorporated by reference therein, and of all
amendments thereto, as the Representatives may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus
is required by law to be delivered by an Underwriter or dealer, any
-9-
<PAGE>
event shall occur as a result of which, in the judgment of the Company or
in the reasonable opinion of the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading, or, if it is necessary at any
time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus so
that the Prospectus as so amended or supplemented will not, in the light of
the circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 16 months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earning statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise you in writing when such statement
has been so made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such), except for shares issued pursuant to
the exercise of stock options granted under the Company's Non Statutory
Stock Option Plan, will be made for a period of 180 days after the date of
this Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of Alex. Brown & Sons
Incorporated.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the The Nasdaq Stock Market (National Market).
(j) The Company has caused each executive officer and director and
specific shareholders of the Company to furnish to you, on or prior to the
date of this agreement, a letter or letters, in form and substance
satisfactory to the Underwriters, pursuant to which each such person shall
agree not to offer, sell, sell short or otherwise dispose of any shares of
Common Stock of the Company or other capital stock of the Company, or any
other securities convertible, exchangeable or exercisable for Common Shares
or
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<PAGE>
derivative of Common Shares owned by such person, except for bona fide
gifts by such shareholders to persons who agree in writing to be bound by
the terms of this restriction, or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 180 days after the date of this
Agreement, directly or indirectly, except with the prior written consent of
Alex. Brown & Sons Incorporated ("Lockup Agreements").
(k) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(l) The Company shall not invest or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company to register as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
5. Costs and Expenses.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company; the
cost of printing and delivering to, or as requested by, the Underwriters copies
of the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' Invitation Letter, the Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the filing
fees of the NASD; the Listing Fee of The Nasdaq Stock Market; and the expenses,
including the fees and disbursements of counsel for the Underwriters, incurred
in connection with the qualification of the Shares under State securities or
Blue Sky laws. The Company agrees to pay all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, which fees shall not exceed $5,000, incident to the offer and sale
of directed shares of the Common Stock by the Underwriters to employees and
persons having business relationships with the Company. The Company shall not,
however, be required to pay for any of the Underwriters' expenses (other than
those related to State securities or Blue Sky laws) except that, if this
Agreement shall not be
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<PAGE>
consummated because the conditions in Section 6 hereof are not satisfied, or
because this Agreement is terminated by the Representatives pursuant to Section
11 hereof, or by reason of any failure, refusal or inability on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement or
to comply with any of the terms hereof on its part to be performed, unless such
failure to satisfy said condition or to comply with said terms be due to the
default or omission of any Underwriter, then the Company shall reimburse the
several Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy in all material respects, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and warranties
of the Company contained herein, and to the performance by the Company in all
material respects of its covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing
Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Fried, Frank,
Harris, Shriver & Jacobson, counsel for the Company, dated the Closing Date
or the Option Closing Date, as the case may be, addressed to the
Underwriters (and stating that, to the extent stated in Section 6(c), it
may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly incorporated and is existing as a
corporation in good standing under the laws of the State of Delaware,
with
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<PAGE>
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; and
the Company is duly qualified to transact business in the
jurisdictions listed in such counsel's opinion.
(ii) The Company has authorized capital stock as set forth under
the caption "Capitalization" in the Prospectus; all of the Shares
conform to the description thereof contained in the Prospectus; the
certificates for the Shares, assuming they are in the form filed with
the Commission, are in due and proper form; the shares of Common
Stock, including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will be
validly issued, fully paid and non-assessable when issued and paid for
as contemplated by this Agreement; and neither the Delaware General
Corporation Law ("DGCL"), the Company's Certificate of Incorporation
nor its By-Laws creates any preemptive rights in favor of stockholders
with respect to any of the Shares or the issue or sale thereof.
(iii) Except as described in the Prospectus, to the knowledge of
such counsel, no holder of any securities of the Company or any other
person has the right, contractual or otherwise under the DGCL, the
Company's Certificate of Incorporation, its By-Laws or any agreement
listed as an exhibit to the Registration Statement, which has not been
satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of,
any of the Shares or the right to have any Common Shares or other
securities of the Company included in the Registration Statement or
the right, as a result of the filing of the Registration Statement, to
require registration under the Act of any shares of Common Stock or
other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or threatened by the
Commission.
(v) The Registration Statement and the Prospectus (except for
the financial statements, schedules, and notes hereto and other
financial data included therein or omitted therefrom, as to which
counsel does not express any opinion), as of their respective
effective or issue date, as the case may be, appeared on their face to
be responsive as to form in all material respects with the
requirements of the Act.
(vi) The statements in the Prospectus under the captions
underlying "Management - Stock Option Plan," "Employment
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<PAGE>
Agreements," "Certain Transactions," "Description of Capital Stock"
and "Shares Eligible for Future Sale", insofar as such statements
constitute a summary of documents referred to therein or matters of
law, fairly summarize in all material respects the information called
for with respect to such documents and matters.
(vii) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Certificate of
Incorporation or By-Laws of the Company, or any agreement or
instrument filed as an exhibit to the Registration Statement.
(viii) This Agreement has been duly authorized, executed and
delivered by the Company.
(ix) No consent, approval, authorization or order of, or
registration or filing with, any United States Federal or Delaware (as
it relates to the General Corporation Law of the State of Delaware)
court or government agency is required on the part of the Company
(except as have been obtained under the Act and the Securities
Exchange Act of 1934, as amended, or such as may be required by the
NASD or under state securities or Blue Sky laws, including in
connection with the purchase and distribution of the Shares, and
except as have been filed or made) for the valid issuance and sale of
the Shares to the Underwriters as contemplated by this Agreement.
(x) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
Investment Company Act of 1940.
In addition, such counsel shall state that the Registration Statement and
the Prospectus and any further amendments and supplements thereto made by the
Company prior to the Closing Date or the Options Closing Date, as the case may
be (other than the financial statements and related notes and schedules and
other financial data included therein, as to which such counsel need express no
opinion) as of their respective effective or issue dates, appear on their face
to be responsive as to form in all material respects with the requirements of
the Act and the rules and regulations thereunder; no facts have come to their
attention to cause them to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made by the Company
prior to the Closing Date or the Option Closing Date, as the case may be (other
than the financial statements and related notes or schedules and other financial
data included therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
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<PAGE>
statements therein not misleading or that, as of its date, the Prospectus or any
further amendment or supplement thereto made by the Company prior to the Closing
Date or the Option Closing Date, as the case may be (other than the financial
statements and related notes or schedules and other financial data included
therein, as to which counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading or that, as of the Closing Date or the Option Closing Date,
as the case may be, the Prospectus or any further amendment or supplement
thereto made by the Company prior to the Closing Date or the Option Closing
Date, as the case may be (other than the financial statements and related notes
or schedules and other financial data included therein, as to which such counsel
need express no opinion) contains an untrue statement of a material fact or
omits to state a material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the Federal law of the
United States, the District of Columbia and the General Corporation Law of the
State of Delaware.
(c) The Representatives shall have received from Piper & Marbury
L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Delaware. In rendering
such opinion Piper & Marbury L.L.P. may rely as to all matters governed
other than by the laws of the State of Maryland or Federal laws on the
opinion of counsel referred to in Paragraph (b) of this Section 6. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, or
any amendment thereto, as of the time it became effective under the Act
(but after giving effect to any modifications incorporated therein pursuant
to Rule 430A under the Act) as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to
the Rules and Regulations and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact, necessary in order to make the
statements, in the light of the circumstances under which they are made,
not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement, Piper & Marbury L.L.P. may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
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<PAGE>
(d) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Sixbey,
Friedman, Leedom & Ferguson, P.C., special patent counsel for the Company,
dated the Closing Date or the Option Closing Date, as the case may be,
addressed to the Underwriters to the effect that:
(i) Based on an examination of the appropriate documents, except
for rights reserved to the United States government, the Company has
clear title or exclusive right or license to use the patents, patent
applications and technology embodied therein, and any other technology
proprietary to the Company, and its trademarks, service marks,
tradenames, copyrights, trade secrets and other proprietary rights
referenced in the Registration Statement or the Prospectus
(collectively, the "Technology") necessary to conduct the Company's
business as described in the Prospectus.
(ii) Based on an examination of the appropriate documents,
neither the Company nor any of its officers or directors has received
any notice of infringement of or conflict with rights or claims of
others with respect to any of the Technology or any patent, trademark,
service mark, trade name, copyright, trade secret or other proprietary
right, and such counsel has no reason to believe that the Company's
use of the Technology and its patents, trademarks, service marks,
trade names, copyrights, trade secrets and other proprietary rights
would infringe the rights of third parties.
(iii) Such counsel has no reason to believe that patent
protection will not be obtainable for the products and methods claimed
in the patent applications referenced in the Registration Statement or
the Prospectus.
(iv) The statements under the captions "Risk Factors--Dependence
on Proprietary Technology" and "Business--Intellectual Property,
Proprietary Information and Technical Know How" in the Prospectus,
insofar as such statements constitute a summary of documents referred
to therein or matters of patent law, are accurate summaries and fairly
and correctly present the information called for with respect to such
documents and matters.
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<PAGE>
(e) The Representatives shall have received at or prior to the
Closing Date from Piper & Marbury L.L.P. a memorandum or summary, in form
and substance reasonably satisfactory to the Representatives, with respect
to the qualification for offering and sale by the Underwriters of the
Shares under the State securities or Blue Sky laws of such jurisdictions as
the Representatives may reasonably have designated to the Company.
(f) You shall have received, on each of the date hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance reasonably satisfactory to you, of Deloitte &
Touche LLP confirming that they are independent public accountants within
the meaning of the Act and the applicable published Rules and Regulations
thereunder and stating that in their opinion the financial statements and
schedules examined by them and included in the Registration Statement
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations;
and containing such other statements and information as is ordinarily
included in accountants' "comfort letters" to Underwriters with respect to
the financial statements and certain financial and statistical information
contained in the Registration Statement and Prospectus.
(g) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates
of the Chief Executive Officer and the Vice President, Finance and
Administration, Chief Financial Officer and Treasurer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the
Registrations Statement has been issued, and no proceedings for such
purpose have been taken or are, to his knowledge, contemplated by the
Commission;
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct in all material respects as
of the Closing Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, in his or her opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and
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<PAGE>
correct, and such Registration Statement and Prospectus did not omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the
effective date of the Registration Statement, no event has occurred
which should have been set forth in a supplement to or an amendment of
the Prospectus which has not been so set forth in such supplement or
amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development that has a substantial
likelihood of resulting in a material adverse change in or affecting
the condition, financial or otherwise, of the Company or the earnings,
business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company,
whether or not arising in the ordinary course of business.
(h) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters
as the Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on The Nasdaq Stock Market (National
Market).
(j) The Lockup Agreements described in Section 4(j) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects reasonably satisfactory to the Representatives and to Piper & Marbury
L.L.P., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
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<PAGE>
7. Conditions of the Obligations of the Company.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities
to which such Underwriter or any such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii)
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and will reimburse each Underwriter and each such controlling
person upon demand for any reasonable legal or other expenses by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or proceeding
or in responding to a subpoena or governmental inquiry related to the
offering of the Shares, whether or not such Underwriter or controlling
person is a party to any action or proceeding; provided, however, that the
Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made
in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities to which the Company or any such director,
officer or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue
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<PAGE>
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under
which they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however,
that each Underwriter will be liable in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made in the Registration Statement,
any Preliminary Prospectus, the Prospectus or such amendment or supplement,
in reliance upon and in conformity with written information furnished to
the Company by or through the Representatives specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of
Section 8(a) or (b). In case any such proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party and shall
pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred (or within 30 days
of presentation) the reasonable fees and expenses of the counsel retained
by the indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them
or (iii) the indemnifying party shall have failed
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<PAGE>
to assume the defense and employ counsel acceptable to the indemnified
party within a reasonable period of time after notice of commencement of
the action. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant
to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the prior
written consent of the indemnified party, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action or
proceeding of which indemnification may be sought hereunder (whether or not
any indemnified party is an actual or potential party to such claim, action
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the
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Company on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased
by such Underwriter, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the
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benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 8.
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<PAGE>
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company, you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:
Patrick J. Kerins, Managing Director; with a copy to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202 Attention:
General Counsel; if to the Company, to Yurie Systems, Inc., 10000 Derekwood
Lane, Lanham, Maryland
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<PAGE>
20706, Attention: Dr. Jeong H. Kim, Chief Executive Officer and Chairman of the
Board of Directors.
11. Termination.
-----------
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development that has a substantial likelihood of resulting in
a material adverse change in or affecting the condition, financial or
otherwise, of the Company or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration
of war or national emergency or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, escalation, declaration, emergency, calamity, crisis or change on
the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) suspension of trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or
numbers of days of trading) for securities on either such Exchange, (iv)
the enactment, publication, decree or other promulgation of any statute,
regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects or may materially
and adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by United States or New York State
authorities; (vi) the suspension of trading of the Company's common stock
by the Commission on The Nasdaq Stock Market or (vii) the taking of any
action by any governmental body or agency in respect of its monetary or
fiscal affairs which in your reasonable opinion has a material adverse
effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the
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<PAGE>
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign merely because
of such purchase.
13. Information Provided by Underwriters.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the Company
or its directors or officers and (c) delivery of and payment for the Shares
under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
YURIE SYSTEMS, INC.
By
------------------------------------------
Dr. Jeong H. Kim
Chief Executive Officer and Chairman
of the Board of Directors
-26-
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
WESSELS, ARNOLD & HENDERSON, L.L.C.
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By
-----------------------------------
Authorized Officer
-27-
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
Alex. Brown & Sons Incorporated
Wessels, Arnold & Henderson, L.L.C.
-----------
Total
===========
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<PAGE>
AT&T/YURIE AGREEMENT
No. SA-001
between
AT&T Corp.
Government Markets/Defense Markets
and
Yurie Systems, Inc.
(formerly Integrated Systems Technology, Incorporated or "IST")
Page 1
<PAGE>
This Agreement (hereinafter "Agreement") originally made and entered into
on 18 August 1995 and restated and amended on the 4th day of December, 1996 by
and between AT&T Corp., a New York corporation, through and on behalf of its
Government Markets/ Defense Markets organization, having an office at 2020 K
Street, NW, Washington, DC 20006 (hereinafter "AT&T"), and Yurie Systems, Inc.
(hereinafter "Yurie"), a Delaware corporation, having an office at 4601
Presidents Drive, Suite 210, Lanham, Maryland 20706.
WHEREAS, Yurie has designed and developed certain Asynchronous Transfer
Mode (ATM) switches in two generations--Limitless Data Rate Series 100
(LDR100) and Limitless Data Rate Series 200 (LDR200);
WHEREAS, AT&T has expressed its interest previously and continues to be
interested in evaluating such designs for the purpose of obtaining exclusive
marketing rights to the Government Markets; and,
WHEREAS, Yurie is desirous of granting to AT&T such rights under the terms
agreed to herein.
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the Parties agree as follows:
ARTICLE I - DEFINITIONS
ATM means Asynchronous Transfer Mode.
Confidential Information means information disclosed by a Party in tangible
form marked "Proprietary" or "Confidential" or disclosed orally and subsequently
reduced to a summary writing so marked which the disclosing Party does not wish
disclosed to others.
Government Markets means the U.S. Federal, State and Local governments;
contractors performing Government missions; NATO Governments and foreign
governments acting in concert with the U. S. Federal Government (including
Foreign Military Sales as administered by the U. S. Government). The term
"Government Markets" shall not include schools and educational institutions.
Intellectual Property means all intellectual property rights throughout the
world including all copyrights (including, without limitation, the right to
reproduce, prepare derivative works, distribute copies of, display and perform
the copyrighted work), rights in inventions (whether or not patentable),
patents, patent applications, mask work rights, trade secrets, know-how and
other intellectual property.
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<PAGE>
Yurie Intellectual Property means intellectual property created by or for
Yurie which is embodied in the LDR100 and/or LDR200 ATM switches or the
manufacture thereof.
Joint Invention means an invention made by one or more of each Party's
employees or agents jointly with one or more of the other Party's employees or
agents, which invention was first conceived or actually reduced to practice
during the term of this Agreement or during one (1) year after termination or
expiration of this Agreement.
LDR100 means an ATM switch having the functionality described in Exhibit A
attached hereto.
LDR200 means an ATM switch, of the current and future designs, upgrades,
features and functionalities, having a high capacity ATM access platform
designed for large-scale deployment in end-user and central office applications
with at least those features and functions made available by Yurie to their
commercial customers. The functionality to be contained in the LDR200 is
described in Exhibit B attached hereto. Such switch shall include, at a
minimum, chassis, power supply, CPU card, timing card, I/O boards, firmware for
all cards, appropriate system software and a User Manual.
Subsidiary of a company means a corporation or other legal entity ( i ) the
majority of whose shares or other securities entitled to vote for election of
directors (or other managing authority) is now or hereafter controlled by such
company either directly or indirectly; or ( ii ) which does not have outstanding
shares or securities but the majority of whose ownership interest representing
the right to manage such corporation or other legal entity is now or hereafter
owned and controlled by such company either directly or indirectly; but any such
corporation or other legal entity shall be deemed to be a SUBSIDIARY of such
company only as long as such control or ownership and control exists.
Technical Information means all software and other works of authorship
including but not limited to schematics, drawings, manufacturing information,
know-how, trade secrets and technical data operations manuals, maintenance and
testing procedures of Yurie directed to or otherwise specifically related to the
LDR100 and/or the LDR200 ATM switches.
ARTICLE II - FURNISHING OF PRODUCTS AND INFORMATION
2.01 Furnishing Products
As consideration for (AT&T PROPRIETARY - INFORMATION WITHDRAWN), Yurie has
delivered ten (10) LDR100 ATM switches to AT&T. AT&T now owns the entire right,
title and interest to such ATM switches and has an unrestricted right to use
such switches and to pass on to its customers and their successors in title a
similar right to use.
Page 3
<PAGE>
2.02 Furnishing Information
a. In accordance with a mutually agreed upon schedule, Yurie shall deliver
all Technical Information to AT&T at AT&T's facility at 101 Crawfords Corner
Road, Holmdel, New Jersey 07733. With the delivery of Technical Information,
AT&T shall also be furnished a list which identifies the Technical Information
delivered. AT&T shall promptly notify Yurie of any inaccuracies believed
present in the list. All information specified on said list shall be deemed to
be a part of the Technical Information with the following qualification:
Within thirty (30) days after receipt of the list, AT&T shall give Yurie written
notice specifying particular information identified therein which was not
actually received, such specified information shall be deemed deleted from the
list until such information is actually received by AT&T. The requirements of
this paragraph have been complied with accordingly.
b. Yurie shall also furnish AT&T with copies of all issued patents and
pending patent applications owned by Yurie which disclose inventions embodied in
(or to be embodied in) the LDR100 and/or LDR200 ATM switches or Yurie's
Technical Information. AT&T agrees to treat such pending patent applications as
Confidential Information in accordance with Article I.
c. Section 2.02a. does not apply to any Technical Information previously
furnished for limited use to AT&T. Any and all such previously furnished
information shall be deemed to be subject to this Agreement as of 18 August
1995.
2.03 U.S. Export Control
Each Party hereby assures the other that it does not intend to and will not
knowingly, without the prior written consent, if required, of the Bureau of
Export Administration of the U.S. Department of Commerce, Washington, D.C.
20230, United States of America, transmit directly or indirectly:
(i) the Technical Information; or
(ii) any immediate product (including processes and services) produced
directly by the use of the Technical Information; or
(iii) any commodity produced by such immediate product if the immediate
product of the Technical Information is a plant capable of producing a commodity
or is a major component of such plant;
to (1) Haiti, Iran, Iraq, the People's Republic of China, Syria, Yugoslavia, or
to any Group Q, S, Y or Z country specified in Supplement No. 1 to Part 770 of
the Export Administration Regulations issued by the U.S. Department of Commerce
or (2) any national or resident of the foregoing countries. As of June 1, 1994,
those country groups consist of the following: Albania, Armenia, Azerbaijan,
Belarus, Bulgaria, Cambodia, Cuba, Estonia, Georgia, Kazakhstan,
Page 4
<PAGE>
Kyrgystan, Laos, Latvia, Libya, Lithuania, Mongolia, North Korea, Romania,
Russia, Tajkistan, Turkmenistan, Ukraine, Uzbekistan, and Vietnam. In addition,
if the immediate product of the Technical Information is a plant or a major
component of a plant, each Party hereby assures the other than any and all
requirements of the Export Administration Regulations (including obtaining
necessary assurances or licenses) will be satisfied with respect to any
controlled commodity produced by such plant.
2.04 Grant to AT&T
a. Yurie grants to AT&T, for itself and its Subsidiaries, a right to use
Yurie Intellectual Property and Technical Information furnished for the purpose
of product evaluation, along with sales and marketing effort for the LDR100
and/or the LDR200 ATM switch design as mutually agreed. AT&T is, as an
attribute of such right, hereby authorized to furnish such information to its
Subsidiaries.
b. As of the effective date and for the duration of Phase I or such other
time as mutually agreed to elsewhere in this Agreement, Yurie grants to AT&T an
exclusive license to sell or lease the LDR100 switches and provide services
based on this product in the Government Markets.
2.05 Sales Support Obligations of AT&T
a. AT&T Government Markets will refer all orders for, or requests for
information about, the LDR100/200 from customers or potential customers, other
than customers in the Government Markets, to Yurie. AT&T Government Markets
will, at Yurie's request, continue to provide support to Yurie sales personnel
for any such referred customer or potential customer.
b. AT&T Government Markets will advise AT&T commercial account managers
about Yurie and the availability and capabilities of the LDR100/200 on a regular
basis, including distributing information and updates supplied by Yurie to such
account managers. At Yurie's reasonable request AT&T Government Markets will
distribute internal marketing messages to, or support product demonstrations
for, AT&T non-Government Markets staff.
c. AT&T Government Markets will support Yurie's commercial sales efforts
by arranging site visits to AT&T Government Markets customers for Yurie
customers, where approved by the AT&T Government Markets customer.
ARTICLE III - THE PROJECT
3.01 General
It is contemplated that the project will be undertaken in two phases,
namely Phase I and Phase II, AT&T having exercised its option to proceed with
Phase II accordingly herein.
Page 5
<PAGE>
3.02 Phase I
a. During Phase I, AT&T will evaluate the Technical Information and LDR100
to verify the LDR100's ability to perform the functionality set forth in
Exhibit A.
b. AT&T expects that the technical evaluation will be completed by the
latter of:
(i) the end of October, 1995; or
(ii) two months after delivery to AT&T of operational versions of the "up
grade" cards that will support voice compression and a frame relay interface for
the LDR100.
c. During Phase I, Yurie agrees not to seek, participate in, or enter into
licensing activities for LDR100 and/or LDR200 Yurie Intellectual Property and/or
Technical Information with any other party and will maintain the details of this
Agreement in confidence unless otherwise agreed to in writing by AT&T.
d. Phase I will end upon the latter of six (6) months from 18 August 1995
or two (2) months after delivery of "upgrade" cards per Section 3.02(b)(ii).
e. AT&T will purchase fifty (50) LDR100 ATM switches and 125 circuit cards
from Yurie at an average cost of (AT&T PROPRIETARY - INFORMATION WITHDRAWN), for
a total cost of (AT&T PROPRIETARY - INFORMATION WITHDRAWN). Such switches will
be purchased under a separate purchase order from AT&T.
f. Yurie agrees to sell to AT&T additional LDR100 ATM switches of similar
configuration to those acquired in Section 3.02e above at approximately (AT&T
PROPRIETARY - INFORMATION WITHDRAWN).
g. The Parties acknowledge and agree that Phase I was completed on or
before March 16, 1996.
3.03 Phase II
a. AT&T will evaluate the placement of the LDR200 in the network and the
functionality of the LDR200 with respect to the U.S. Department of Defense's
deployable requirements.
b. Yurie will continue the development and initial production of the
LDR200 to meet the technical functionality set forth in Exhibit B and
interoperate with InterSpan.
c. First Article Testing (AT&T) - Thirty (30) days prior to the
----------------------------
scheduled initial release of new products not described on Exhibit B, first
article testing will commence upon receipt by AT&T from Yurie of three (3) fully
conforming units configured in accordance with all features
Page 6
<PAGE>
scheduled for initial release. AT&T will have thirty (30) days in which to test
the features in order to determine whether or not all functional and performance
parameters, as mutually agreed to by Yurie and AT&T, have been met. Testing by
AT&T will be considered successfully completed when the first article LDR200
units furnished exhibit all agreed-upon functionalities. Upon successful
completion of the testing, AT&T shall provide Yurie a written notice of
successful completion. In the event that AT&T, in good faith, determines that
the units furnished fail to exhibit all the agreed-upon functionalities, AT&T
shall provide Yurie a written notice to that effect, specifying, with
particularity, the respects in which AT&T deems the units deficient, and Yurie
shall use its best efforts in which to cure such deficiencies. In the event that
Yurie is unable to, or fails to, cure identified deficiencies within ninety (90)
days from receipt of AT&T's written notice, AT&T shall be entitled to cancel any
outstanding purchase orders for such items without penalty. In the event that
AT&T does not provide Yurie with either a notice of successful completion or a
notice of deficiency within 30 days of delivery of the units for evaluation, the
evaluation will be deemed successfully completed.
d. Acceptance Testing - AT&T reserves the right to perform acceptance
------------------
testing on any hardware, firmware and software for the LDR200 switch that are
the subject of purchase orders by AT&T to determine conformance to
specifications and requirements under this Agreement. Acceptance testing will
begin with delivery to AT&T of product pursuant to issued purchase orders. AT&T
will have thirty (30) days from receipt of such product to perform acceptance
testing. In the event that items fail to pass acceptance testing, AT&T shall
have the option to return such items to Yurie for replacement or refund of any
monies paid. In the event AT&T returns items for replacement and Yurie fails to
replace such nonconforming items within forty-five (45) days, then in addition
to any credited or refunded amounts to which AT&T shall be entitled, the
guaranteed purchase obligations of AT&T in subsection h. below shall be reduced
by said amounts. In the event that AT&T does not provide Yurie with a notice of
non-conformance of product within 30 days of delivery, the product will be
deemed to have successfully completed acceptance testing.
e. AT&T will perform after-sale support functions (including network
management) as customary in the industry for the LDR200 throughout the world, on
terms and at rates agreed by AT&T and Yurie.
f. Yurie hereby grants to AT&T an exclusive right to market and sell the
LDR100 and LDR200 in Government Markets during the term of this Agreement.
Yurie will refer all orders for, or requests for information about, the
LDR100/200 from customers or potential customers in the Government Markets to
AT&T.
g. Upon receipt of duly authorized purchase orders from AT&T Corp.,
Government Markets/Defense Markets organization and acceptance by Yurie, Yurie
will sell LDR200 switches to AT&T at (AT&T PROPRIETARY - INFORMATION WITHDRAWN).
h. AT&T shall guarantee LDR200 purchases of $6,500,000 (U.S.) for CY1996,
Page 7
<PAGE>
$10,000,000 (U.S.) for CY1997 and $10,000,000 (U.S.) for CY1998.
3.04 Intellectual Property-Prior and Sole Inventions
a. All right, title and interest in and to inventions conceived or first
reduced to practice and patents existing prior to 18 August 1995 shall remain
vested in the Party which conceived, created, developed or patented it or first
reduced it to practice.
b. All right, title and interest in and to inventions conceived, created
or developed or first reduced to practice as a result of work performed under
this Agreement clearly and independently by one Party only, and not jointly by
the Parties, shall be owned by the Party which conceived it or first reduced it
to practice. Either Party may file patent applications for inventions conceived
or made by its employees or agents as a result of work performed under this
Agreement, if those inventions are made clearly and independently, as determined
by any reasonable person, by employees or agents of one Party only and not made
jointly with employees or agents of the other Party, but neither Party shall be
required to file such patent applications, secure any patent or maintain any
patent.
3.05 Patent Applications and Patents on Joint Inventions
The provisions of this Section 3.05, shall apply with respect to any Joint
Invention.
(i) The Parties shall mutually agree (a) on the proper method of
protection (e.g., patent, trade secret, etc.) for Joint Inventions, (b) the
country(ies) where patent applications are to be filed and (c) the Party who
is to file such application(s) in such country(ies), subject to Sections
3.05(ii) and (iii) hereof.
(ii) The expenses for preparing, filing and prosecuting each application,
and for issue of the respective patents, shall be borne by the Party which
prepares and files the application, except that expenses associated with
official patent office fees, taxes, annuities and translation costs, if
applicable, shall be equally divided between AT&T and Yurie, and paid as
specified in Section 3.05(iii) hereof. The non-filing Party shall have the
right to review and comment on each such application prior to its filing, and
shall furnish the filing Party with all documents, information, or other
assistance that may be necessary for the preparation, filing and prosecution of
each such application.
(iii) In the case of an application for patent which is filed in a
country which requires the translation of the application and/or the payment of
fees, taxes or annuities on pending applications or on issued patents, the Party
which files the application shall pay such translation costs, fees, taxes or
annuities and shall invoice the non-filing Party for one-half (1/2) of all such
expenses, which shall be payable to the filing Party within thirty (30) days of
receipt of the invoice.
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<PAGE>
(iv) In the event that one Party does not wish to pay its share of expenses
associated with a patent application or an issued patent in any country as
specified in Section 3.06(iii) hereof, such one Party shall notify the other
Party in writing of its refusal to share in such expenses, and shall assign all
its right, title and interest in such patent application or issued patent in
such country to the other Party, subject to existing licenses and rights granted
by such one Party to third parties. Concurrent with the execution by such one
Party of all necessary documents associated with such an assignment, the other
Party shall grant to the one Party and its Subsidiaries personal,
nontransferable, nonexclusive, royalty-free, perpetual, irrevocable and fully
paid-up licenses (with no sublicensing rights), under such patent application or
issued patent to make, have made, use, lease, sell and import. Such nonexclusive
licenses shall be for any and all products and services of the kinds furnished
or used in the operation of the one Party's and its Subsidiaries' businesses.
(v) Unless the provisions of Section 3.05(iv) apply, the Parties shall
each have an equal title interest in each application and patent for such Joint
Inventions, with Yurie holding an undivided one-half (1/2) interest and AT&T
holding an undivided one-half (1/2) interest.
(vi) Unless the provisions of Section 3.05(iv) apply, each Party shall
have the right to grant nonexclusive licenses under patents covering such joint
inventions. Each Party for itself and on behalf of its employees, its
Subsidiaries and employees of its Subsidiaries, agrees and consents to the grant
of such licenses by the other Party and the other Party retaining all royalties
that it receives for such licenses, without accounting therefor.
3.06 Other Intellectual Property
a. All right, title and interest in and to works of authorship, trade
secrets, know-how or any other intellectual property, existing prior to 18
August 1995 or conceived, created or developed solely by a Party in connection
with work performed under this Agreement, shall remain vested in the Party which
conceived, created or developed it.
b. For the purpose of this Agreement, the ownership of Yurie Intellectual
Property shall be determined by (i) with respect to Inventions, Title 35 of
the United States Code, and (ii) with respect to copyrighted works of
authorship, Title 17 of the United States Code.
c. Either Party may pursue, independently or jointly with any other third
party, opportunities that are similar to the subject matter of this Agreement
but not pursued under this Agreement, provided the Party pursuing such
opportunity does not utilize Confidential Information in a manner not permitted
herein without the prior written consent of the other Party. Any Yurie
Intellectual Property created under such other opportunity shall not be subject
to this Agreement.
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<PAGE>
3.07 Yurie Intellectual Property and Source Code Escrow
In consideration of AT&T agreeing to evaluate, purchase, sell, use and
provide Advance Payments on Yurie equipment and Intellectual Property and
connect customers to AT&T network services using the Yurie products, Yurie
agrees to provide under obligations of non-disclosure one copy of the Yurie
Intellectual Property and Source Code of the Software to an AT&T designee to be
mutually agreed-upon under the terms of a mutually agreed-upon Escrow Agreement.
AT&T shall make no use of said Yurie Intellectual Property including Source Code
unless and until Yurie ceases to meet its obligations to AT&T and its customers
as specified in the Escrow Agreement which should include one or more of the
following acts:
a. a decision by Yurie to cease doing business;
b. the filing of a voluntary or involuntary Petition in Bankruptcy
of Yurie;
c. an act of Force Majeure preventing Yurie from continuing to meet
its customer obligations for 180 days; or
In the event of any of the preceding, Yurie agrees that AT&T shall have the
right to use the Yurie Intellectual Property and Source Code, if AT&T so chooses
as specified in the Escrow Agreement to fulfill its business plan and customer
obligations. The provisions of this Section shall not survive the expiration or
termination of this Agreement.
ARTICLE IV - FEES
4.01 Phase I Fees
a. For the exclusive right to use the Technical Information and patent
applications for evaluation of the LDR100 and/or LDR200 ATM switches and AT&T's
exclusive option, as exercised by AT&T and accepted by Yurie, to acquire all
rights, title and interest in Yurie's Intellectual Property and Technical
Information during Phase I, AT&T has paid to Yurie an exclusive "option price"
amount of (AT&T PROPRIETARY-INFORMATION WITHDRAWN)
b. Payment of the amount specified in Section 4.01a. was made in monthly
installments of (AT&T PROPRIETARY-INFORMATION WITHDRAWN), with the final
payment having been made at the conclusion of Phase I.
4.02 Phase II Fees
a. AT&T has paid to Yurie an Advance Payment (AT&T PROPRIETARY-INFORMATION
WITHDRAWN) towards the purchase of 200 each LDR200 ATM switches,
including the sales taxes believed due thereon, to be delivered in accordance
with the fit, form
Page 10
<PAGE>
and function requirements as set forth in Exhibit B and in accordance with the
delivery schedule set forth therein.
b. In the event that during acceptance testing of the first 200 LDR200
ATM switches, the switches fail to comply with the requirements of Sections
3.03b and 3.03d and Yurie does not remedy any material nonconformance within
ninety (90) days of notice from AT&T of such nonconformance, then AT&T may elect
to terminate this Agreement for breach under Section 6.03 and all monies
advanced by AT&T under the provisions of Section 4.02a shall be returned by
Yurie to AT&T and AT&T shall return all LDR200 product delivered to AT&T by
Yurie.
4.03 How Paid
AT&T has paid Yurie the Advance Payment amount stated in Section 4.02a
on September 27, 1996. Payments for any future purchases under Sections 3.03g
and 3.03h will be paid in accordance with individual purchase orders issued by
AT&T. Yurie will tender invoices to AT&T for all payments due and AT&T will pay
Yurie within thirty (30) days of the receipt of a properly certified invoice
(Exhibit C) provided that if a product has been determined to be nonconforming
as a result of AT&T acceptance testing, AT&T shall notify Yurie's Customer
Service organization and shall be entitled to withhold payment for such
nonconforming product. AT&T shall have the right to accelerate payments made
pursuant to this Article.
4.04 Taxes
Yurie shall be responsible for proper payment of all taxes due and
payable, and invoicing AT&T for such charges. AT&T shall reimburse Yurie for all
such charges invoiced.
ARTICLE V - TECHNICAL SUPPORT
5.01 Phase I
Yurie shall render engineering support and technical assistance to AT&T
during the Phase I evaluation. The rates and personnel for these services will
be the same as those specified in Contract Number LGC-A70E dated June 6, 1995.
This support and technical assistance was accomplished as required.
5.02 Phase II
Yurie will provide technical marketing and sales engineering support to
AT&T in the continued development of the LDR200 in accordance with the rates and
personnel referenced in Section 5.01. This effort is ongoing and, to date, this
support assistance has been accomplished.
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5.03 Compliance with Rules and Regulations
a. Each Party's personnel (such Party being referred to as the
"Visitor") shall, while on any location of the other Party ("Host") in
connection with the joint development work under this Agreement shall comply
with the Host's rules and regulations with regard to safety and security. The
Host shall inform such visiting personnel of such rules and regulations. The
Visitor shall maintain full control over such personnel and shall be entirely
responsible for their complying with the Host's rules and regulations. The
Visitor agrees to indemnify and save the Host harmless from any claims or
demands, including the costs, expenses and reasonable attorneys' fees incurred
on account thereof, that may be made by anyone for injuries to persons or damage
to property to the extent they result from the willful misconduct or negligence
of the Visitor or its personnel. The Visitor agrees to defend the Host, at the
Host's request, against any such claim or demand, and the Host agrees to provide
reasonable cooperation for the defense on request of the Visitor.
b. AT&T and Yurie shall, at all times, retain the administrative
supervision of their respective personnel.
5.04 Independent Contractors
AT&T and Yurie are, and shall remain, independent contractors and the
employees of one shall not be considered to be employees of the other. This
Agreement is not intended by the Parties to constitute or create a joint
venture, partnership, or other form of business organization or combination of
any kind, and the rights and obligations of the Parties shall be only those
expressly set forth herein. Neither Party shall have the authority to bind the
other, except to the extent agreed upon herein. Further, each Party shall
continue to be free to engage in activities of a similar nature independently or
with third parties and to furnish information, other than the Confidential
Information or the deliverables of the other Party, and receive information to
and from such third parties regarding the same areas as this Agreement.
ARTICLE VI - TERM/TERMINATION
6.01 Term/Option to Extend Term
This Agreement is valid for the Phase I and Phase II periods as set
forth previously through 31 December 1998 unless terminated by the Parties as
provided herein. AT&T reserves the right to exercise an option under this clause
to extend the term of this Agreement, in one year periods, for up to three (3)
additional years (through 31 December 2001) so long as written notice is
provided to Yurie no later than ninety (90) days prior to the expiration of the
previous term in effect at the time of exercise. Any such option exercised shall
be based upon minimum guaranteed LDR200 purchases of (AT&T PROPRIETARY -
INFORMATION WITHDRAWN) per year for each option year exercised and each option
year exercised will be based on the same
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terms and conditions contained in this Agreement. Unless otherwise indicated
herein the license rights are granted in perpetuity.
6.02 Termination for Cause
a. This Agreement may be terminated at any time by either Party
serving a written notice to the other Party:
(i) if the Parties have agreed to terminate the Agreement in
writing signed by their respective duly authorized persons, or
(ii) by AT&T, if any of the "Released to AT&T" dates
identified in Exhibit B were delayed by more than three (3) months based upon
the latest agreed-to schedule of releases as set forth therein, and such delay
was not the result of actions or breaches by AT&T or the result of Force Majeure
or Excusable Delay,
b. Termination pursuant to this Section shall not relieve AT&T of any
obligation to make any payments required to be made by this Agreement while
still in force. However, AT&T shall be entitled to a refund of the balance of
any monies advanced for products not delivered as of the date of termination.
6.03 Termination for Breach
a. If Yurie fails to fulfill one or more of its material obligations
under this Agreement or purchase order, AT&T may, upon its election and in
addition to any other remedies that it may have, at any time terminate this
Agreement by not less that thirty (30) days written notice to Yurie specifying
any such breach, unless within the period of such notice all breaches specified
therein shall have been remedied. In the event that Yurie fails to make any
deliveries as set forth in Section 6.02a(ii), the provisions of that section
shall govern.
b. If AT&T fails to fulfill one or more of its material obligations
under this Agreement, Yurie may, upon its election and in addition to any other
remedies that it may have, at any time terminate this Agreement by not less than
thirty (30) days written notice to AT&T specifying any such breach, unless
within the period of such notice all breaches specified therein shall have been
remedied.
6.04 Effects of Termination
Any termination pursuant to Section 6.02 and/or 6.03 shall not
constitute any reason for claiming damages against the other Party based on any
losses, expenses, cost, loss of profit or loss of business opportunity, or any
liability to third parties arising from any termination or incompleteness of the
Project.
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6.05 Survival
The obligations of the Parties under this Agreement which by their very
nature would survive, shall continue and survive after any termination or
expiration of this Agreement.
ARTICLE VII - MISCELLANEOUS PROVISIONS
7.01 Agreement Prevails
This Agreement shall prevail in the event of any conflicting terms or
legends which may appear on AT&T's or Yurie's Confidential Information.
7.02 Nothing Construed
Neither the execution of this Agreement nor anything in it or in either
Party's Confidential Information or in Yurie's deliverables shall be construed
as an obligation upon either Party or their Subsidiaries to furnish, except as
specifically provided in this Agreement, any person, any assistance of any kind
whatsoever, or any products or information other than Yurie's or AT&T's
Confidential Information or Yurie's deliverables or to revise, supplement or
elaborate upon such information.
7.03 Infringement Indemnity
a. Yurie shall indemnify, defend and hold harmless AT&T, its
affiliates, directors, officers, employees and agents, from and against any
claim that the products delivered hereunder or products made or services offered
using any portion of the Technical Information delivered hereunder, infringes
any copyright or patent or is the subject of any claim of misappropriation of a
trade secret. Yurie shall pay any damages, including reasonable attorney's fees,
finally awarded as a result of any suit based on such claim. The aforesaid
obligations of Yurie are contingent upon the following: (i) AT&T promptly
notifying Yurie in writing of any such claim; (ii) Yurie shall have sole
control of the defense or settlement of the suit or claim; (iii) AT&T shall
cooperate with Yurie in a reasonable way to facilitate the settlement or defense
of the suit or claim; and (iv) the action does not arise directly from
adherence to design, modifications, specifications or written instructions from
AT&T or directly from AT&T's modifications of deliverables or Technical
Information following delivery thereof or AT&T's development of thereof. If such
claim or action does arise directly from adherence to AT&T's design,
modifications, specifications or written instructions, or directly from AT&T's
development, AT&T shall indemnify, defend and hold harmless Yurie, its
affiliates, directors, officers, employees and agents to the same extent, and
subject to the same terms and conditions as Yurie's indemnification obligation
set forth in this Section 7.05. In either event, the indemnified party shall
have the right, at its sole option and expense, to participate in the defense
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<PAGE>
thereof through counsel of its choice.
b. If the use of the Technical Information or products to be delivered
under this Agreement is enjoined as a result of a suit based on any claim of
infringement of a copyright or patent or any claim of misappropriation or a
trade secret, Yurie shall, at its option: (i) negotiate a license or other
agreement with the claimant so that the product or service is no longer subject
to such injunction, (ii) modify the product or service so that it becomes non-
infringing, provided such modification can be accomplished without materially
affecting the performance of the product, or (iii) refund the relevant portion
of the fees paid by AT&T. The entire liability of Yurie with respect to
infringement and/or misappropriation resulting from the use of Technical
Information or products delivered hereunder shall not exceed the monies paid
under Article IV for all costs, damages, attorney's fees and other expenses and
Yurie shall not be liable for any amount in excess of such monies.
7.04 Duties of the Parties
Yurie and AT&T, for itself and its subsidiaries, agree:
(i) that Yurie will not use any of AT&T's Confidential
Information and that AT&T will not use any of Yurie's Confidential Information
or Yurie's deliverables except as authorized herein;
(ii) that, with respect to information furnished hereunder,
Yurie shall hold all of AT&T's Confidential Information and AT&T shall hold all
of Yurie's Confidential Information in confidence for five (5) years from the
termination or expiration of this Agreement (except for software for which there
will be no time limit) and neither Party shall make any disclosure of any or all
of such other Party's Confidential Information to anyone, except to its
employees who have a need to know and to any others to whom such disclosure may
be expressly authorized hereunder and is necessary to implement the use
authorized hereunder, and that each Party shall appropriately notify each person
to whom any such disclosure is made that such disclosure is made in confidence
and shall be kept in confidence by such person; provided that neither Party
shall be required so to do in respect of portions of the other Party's
Confidential Information, if any, (a) which were previously known to the
receiving Party free of any obligations to keep confidential; or (b) which
have become generally known to the public, provided that such public knowledge
was not the result of any act of breach of confidentiality obligation hereof of
the receiving Party; or (c) which the disclosing Party otherwise explicitly
agrees in writing need not be kept confidential; or (d) which is independently
developed by the receiving Party outside the Agreement; or (e) which is
inherently disclosed in the manufacture, use, lease, sale or other distribution
of, or supporting documentation for, any present or future product by or for
either Party; or (f) which is received without restriction from a third party
who is under no obligation of confidentiality;
(iii) that the receiving Party will not, without the
disclosing Party's express
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written permission, make or have made, or permit to be made, more copies of any
of the Confidential Information furnished by the other Party, than are necessary
for its use hereunder, and that each such copy shall contain the same
proprietary notices or legends which appear on the furnished Confidential
Information;
(iv) that no right is granted herein to use by either Party
any identification (such as, but not limited to, trade names, trademarks, trade
devices, service marks or symbols, and abbreviations, contractions or
simulations thereof) owned by or used to identify the other Party or any of its
Subsidiaries or any of its or their products, services or organizations, and
that, with respect to the subject matter of this Agreement, each Party agrees it
will not without the prior written permission of the other Party (i) use any
such identification in advertising, publicity, packaging, labeling or in any
other manner to identify itself or any of its products, services or
organizations or (ii) represent directly or indirectly that any product,
service or organization of the other Party is a product, service or organization
of the one Party or any of its Subsidiaries, or that of any of its products or
services are made in accordance with or utilizes any information of the other
Party or any of its Subsidiaries;
(v) that upon termination of this Agreement, a receiving Party
may retain, in its legal counsel's files solely for archival purposes, one (1)
copy of the Confidential Information furnished to it by the disclosing Party
pursuant to this Agreement.
7.05 Addresses
Any notice, or other communication, shall be sufficiently given when
sent by certified mail addressed as follows:
To Yurie: William Flynn
Vice President, Federal Division
Yurie Systems, Inc.
4601 Presidents Drive, Suite 210
Lanham, Maryland 20706
Telephone: (301) 918-4503
To AT&T: Ronald M. Conklin
Sr. Contract Specialist
2020 K Street, NW, Suite 550
Washington, DC 20006
Telephone: (202) 496-8656
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7.06 Entire Agreement
This Agreement sets forth the entire agreement and understanding
between the Parties, and this Agreement supersedes all prior proposals,
communications and discussions between the Parties, representations and
understandings related to the subject matter herein, whether written or oral,
which includes, but is not limited to: the Technology Evaluation and License
Agreement dated 18 August 1995 (as amended by letters dated 15 March, 21 April
and 24 May 1996); an Agreement between the Parties dated 18 September 1996 as
amended (with initials, penned changes, and date) on 27 September 1996.
7.07 Non-Assignability
The Parties hereto have entered into this Agreement in contemplation of
personal performance, each by the other, and intend that the rights granted and
obligations hereunder to a Party not be extended to entities other than such
Party's Subsidiaries without the other Party's express prior written consent.
Each Party's rights, obligations and interest in this Agreement and any rights
granted to each Party hereunder may be assigned to any direct or indirect
successor to the business of such Party as the result of any internal
reorganization, merger, consolidation, or acquisition of substantially all of
the business and assets of Yurie, which successor shall thereafter be deemed
substituted for such Party as the Party hereof, mutatis mutandis, effective upon
such assignment; but neither this Agreement nor any rights hereunder shall be
otherwise assignable or transferable (in solvency proceedings or otherwise) by
either Party without the express prior written consent of the other Party.
7.08 No Patent Licenses
Except as explicitly set forth herein, nothing contained herein shall
be construed as conferring by implication, estoppel or otherwise any license or
right under any AT&T or Yurie patent, whether or not the exercise of any right
herein granted necessarily employs an invention of any existing or later issued
AT&T or Yurie patent.
7.09 Waiver
No failure, delay, relaxation or indulgence on the part of either Party
in exercising any power or right conferred upon such Party under the terms of
this Agreement will operate as a waiver of such power or right nor will any
single or partial exercise of any such power or right preclude any other or
further exercise thereof or the exercise of any other power or right under this
Agreement.
7.10 Warranty
Yurie warrants to AT&T and its customers that material furnished will
be new, free from defects in design, material and workmanship and will conform
to and perform in accordance with
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the specifications, drawings and samples. These warranties extend to the future
performance of the material and shall continue for the longer of (a) one year
after the material is accepted and installed by AT&T but not to exceed eighteen
(18) months from receipt of material by AT&T or (b) such greater period as may
be specified elsewhere in this Agreement or a purchase order. Yurie also
warrants to AT&T and its customers that services will be performed in a first
class, workmanlike manner. In addition, if material furnished contains one or
more manufacturers' warranties, Yurie hereby assigns such warranties to AT&T and
its customers. All warranties shall survive inspection, acceptance and payment.
Material or services not meeting the warranties will be, at AT&T's option,
returned for or subject to refund, repaired, replaced or reperformed by Yurie at
no cost to AT&T or its customers and with transportation costs and risk of loss
and damage in transit borne by Yurie. Repaired and replacement material shall be
warranted as set forth above in this clause.
7.11 Disclaimer/Warranty
a. NEITHER PARTY, ITS AFFILIATES OR ITS SUBSIDIARIES MAKES ANY
REPRESENTATIONS OR WARRANTIES, EXPRESSLY OR IMPLIEDLY, BY WAY OF EXAMPLE BUT NOT
OF LIMITATION. NEITHER PARTY, ITS AFFILIATES OR ITS SUBSIDIARIES MAKES ANY
REPRESENTATIONS OR WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
b. NOTWITHSTANDING THE FOREGOING AND SUBJECT TO SECTION 7.03, YURIE
WARRANTS THAT TO THE BEST OF ITS KNOWLEDGE AND BELIEF, THE USE OF YURIE'S
DELIVERABLES OR CONFIDENTIAL INFORMATION WILL NOT INFRINGE ANY PATENT OR OTHER
INTELLECTUAL PROPERTY RIGHT OF A THIRD PARTY.
c. NEITHER PARTY SHALL BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR
CONSEQUENTIAL LOSS OR DAMAGE, INCLUDING LOST PROFIT OR LOST REVENUE ARISING OUT
OF THIS AGREEMENT, WHETHER ARISING OUT OF BREACH OF WARRANTY, BREACH OF
CONTRACT, NEGLIGENCE, STRICT TORT LIABILITY OR OTHERWISE.
7.12 Amendments to this Agreement
Any supplement, modification or waiver of any provision of this
Agreement must be in writing and executed by an authorized representative of
both Parties.
7.13 Dispute Resolution
(a) If a dispute arises out of or relates to this Agreement, or the
breach, termination or validity thereof, the parties agree to submit the dispute
to a sole mediator selected by the parties or, at any time at the option of a
party, to mediation by the American Arbitration Association
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("AAA"). If not thus resolved, it shall be referred to a sole arbitrator
selected by the parties within thirty (30) days of the mediation, or in the
absence of such selection, to AAA arbitration which shall be governed by the
United States Arbitration Act.
(b) Any award made (i) shall be a bare award limited to a holding for
or against a party and affording such remedy as is deemed equitable, just and
within the scope of the Agreement; (ii) shall be without findings as to issues
(including but not limited to patent validity and/or infringement) or a
statement of the reasoning on which the award rests; (iii) may in appropriate
circumstances (other than patent disputes) include injunctive relief; (iv)
shall be made within four (4) months of the appointment of the arbitrator; and
(v) may be entered in any court.
(c) The requirement for mediation and arbitration shall not be deemed a
waiver of any right of termination under this Agreement and the arbitrator is
not empowered to act or make any award other than based solely on the rights and
obligations of the parties prior to any such termination.
(d) The arbitrator shall determine issues of arbitrability but may not
limit, expand or otherwise modify the terms of the Agreement.
(e) This Agreement shall be interpreted in accordance with the laws of
the State of New Jersey exclusive of its conflict of laws provisions and the
place of mediation and arbitration shall be in Washington, DC.
(f) Each party shall bear its own expenses but those related to the
compensation and expenses of the mediator and arbitrator shall be borne equally.
(g) A request by a party to a court for interim measures shall not be
deemed a waiver of the obligation to mediate and arbitrate.
(h) The arbitrator shall not have authority to award punitive or other
damages in excess of compensatory damages and each party irrevocably waives any
claim thereto.
(i) The parties, their representatives, other participants and the
mediator and arbitrator shall hold the existence, content and result of
mediation and arbitration in confidence.
7.14 Public Disclosure
(a) The Parties agree that the disclosure to third parties of the
existence and/or terms and conditions of this Agreement, including exhibits, and
the details of the relationship between the Parties shall not be made without
prior written agreement of both Parties, except as required to comply with
applicable law or regulation, provided that the disclosing party shall provide
reasonable prior notice of any such required disclosure. Disclosing party shall
make best efforts to have proprietary information withheld from disclosure.
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(b) Each Party agrees not to publish or use in advertising, sales
promotions, press releases or publicity matters, the existence or details of the
relationship under this Agreement without prior written approval of the other
Party. The contents of any announcement or press release shall be mutually
agreed to.
7.15 Software Program License and Warranty
Subject to the conditions set forth in Exhibit E, Yurie grants to AT&T
Corp. and its customers and AT&T accepts on behalf of itself and its customers
the Software Program License and Warranty as provided for therein.
-------------------------------------
7.16 Purchase Order Ordering Terms and Conditions
In addition to those clauses and provisions as contained herein, the
Parties agree that the Terms and Conditions set forth within the Purchase Order
Ordering Terms and Conditions (Exhibit D) will be incorporated into any
resultant purchase order(s) issued by AT&T. In the event of any conflict
between provisions contained in this Agreement and the clauses contained in
Exhibit D, the provisions contained in the Agreement shall govern.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed in duplicate originals by its duly authorized representative on the
respective dates entered below.
For: AT&T Corp. For: Yurie Systems, Inc.
By: By:
------------------------ --------------------------
Name: Name:
------------------------ --------------------------
Title: Title:
------------------------ --------------------------
Date: Date:
------------------------ --------------------------
THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY
IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED
REPRESENTATIVES OF BOTH PARTIES.
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EXHIBIT A
---------
PHASE I TECHNICAL CRITERIA
--------------------------
The LDR100 should be shown to exhibit its claimed functionalities.
Specifically, AT&T testing of the LDR100 must be able to verify:
- The ability to support the customer-side interfaces (e.g., TAXI,
RS-232, RS-422, RS-449, RS-485, EIA-530, two-wire analog, and frame-relay
interfaces).
- The ability to interconnect with the AT&T network (both for the ATM-
based InterSpan service and non-ATM network).
- The ability to operate with a FORE Systems ATM Switch.
- The ability to perform voice compression and modem demodulation and
remodulation.
- The ability to "fail gracefully" in the presence of traffic overload
(e.g., existing high-priority traffic should still be transmitted in the
presence of high-volume lower-priority traffic presented to the switch; and one
should be able to initiate new high-priority traffic when the switch is already
loaded with existing high- and low-priority traffic).
- The ability to support a "bandwidth-on-demand" capability.
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EXHIBIT B
---------
PHASE II TECHNICAL CRITERIA AND DELIVERY SCHEDULE
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EXHIBIT B
---------
PHASE II TECHNICAL CRITERIA AND DELIVERY SCHEDULE
(Continued)
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<PAGE>
EXHIBIT B
---------
PHASE II TECHNICAL CRITERIA AND DELIVERY SCHEDULE
(Continued)
Documentation
- -------------
Yurie shall furnish to AT&T, along with the equipment delivered, one copy
of the related documentation for each unit delivered by Yurie. Such related
documentation shall be that customarily provided by Yurie to its customers for
such equipment, consistent with the vintage, options and features of the
equipment on which it operates. Such related documentation shall be provided at
no additional charge to AT&T.
Software
- --------
Yurie shall promptly furnish to AT&T, for a period of one year from date of
acceptance of equipment, all Software enhancements (one copy), revisions
published by Yurie (one copy) and telephone assistance offered by Yurie to its
commercial customers for any equipment ordered under this Agreement; said
enhancements, revisions published and telephone assistance offered shall be
furnished at no additional charge to AT&T or its customers. Yurie will be
reimbursed for labor costs incurred at mutually agreeable rates if AT&T requests
Yurie's assistance in loading software provided in LDR200 units placed at
customer locations. Any Intellectual Property enhancements included in software
updates provided will be handled in accordance with the Changes to Equipment
--------------------
clause contained in Exhibit D.
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EXHIBIT B-1
-----------
SCHEDULE OF DELIVERY
--------------------
For the initial production units identified in Section 4.02, and as
specified in AT&T purchase orders YS96-006A and YS96-006B issued on 27 August
1996, the following schedule re-defines specific dates for the delivery of those
features specified:
<TABLE>
<CAPTION>
Item Description Qty Deliver o/b Qty Deliver o/b
- ---- ----------- --- ----------- --- -----------
<C> <S> <C> <C> <C> <C>
0001 19" Chassis 184 ea 30 Sep 96 16 ea 30 Dec 96
0002 16MB CPU 184 ea 30 Sep 96 26 ea 30 Dec 96
0003 STRATUM 4 184 ea 30 Sep 96 16 ea 30 Dec 96
0004 DC Power 110 ea 30 Dec 96
0005 AC Power 110 ea 30 Dec 96
0006 Multi Serial 150 ea 30 Dec 96
0007 DS-1 Board 22 ea 30 Sep 96 128 ea 30 Dec 96
0008 DS-3 Board 30 ea 30 Sep 96 10 ea 30 Dec 96
0009 OC-3 Board 50 ea 30 Dec 96
0010 TAXI Board 155 ea 30 Dec 96
0011 2-Wire Sink 40 ea 20 Apr 97
0012 2-Wire Source 150 ea 30 Dec 96
0013 High Speed Serial 50 ea 30 Dec 96
0014 Voice Compression Software 40 ea 30 Dec 96
0015 DSP I (@ N/C) 40 ea 30 Dec 96
0016 System Software 184 ea 30 Sep 96 16 ea 30 Dec 96
</TABLE>
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EXHIBIT C
---------
CERTIFICATION
-------------
Yurie will, upon request for payment for delivered equipment, include on
all invoices submitted to AT&T the following certification:
"This is to certify that materials and equipment delivered to AT&T as
represented by this invoice, descriptions and quantities as herein noted,
conform to the applicable Specifications, have been tested to parameters set
forth in the most current Yurie Test Plan identified to AT&T, and have
successfully passed all tests performed and therein identified.
[signature and title of responsible official]"
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EXHIBIT D
---------
PURCHASE ORDER ORDERING TERMS AND CONDITIONS
--------------------------------------------
CAPTIONS - The captions in the purchase order and this Exhibit are included for
convenience only and shall not be construed to define or limit any of the
provisions contained herein.
CFC PACKAGING - Yurie warrants that all packaging materials furnished under the
purchase order and all packaging associated with material furnished therein were
not manufactured using and do not contain chlorofluorocarbons. "Packaging"
means all bags, wrappings, boxes, cartons and any other packing materials used
for packaging. Yurie shall indemnify and hold AT&T harmless for any liability,
fine or penalty incurred by AT&T to any third party or governmental agency
arising out of AT&T's good faith reliance upon said warranty.
COMPLIANCE WITH LAWS - Yurie and all persons furnished by Yurie shall comply at
their own expense with all applicable federal, state, local and foreign laws,
ordinances, regulations and codes, including those relating to the use of
chlorofluorocarbons, and including the identification and procurement of
required permits, certificates, licenses, insurance, approvals and inspections
in performance under the purchase order. Yurie agrees to indemnify, defend (at
AT&T's request) and save harmless AT&T, its affiliates, its and their customers
and each of their officers, directors and employees from and against any losses,
damages, claims, demands, suits, liabilities, fines, penalties and expenses
(including reasonable attorney's fees) that arise out of or result from any
failure to do so.
Yurie and all persons furnished by Yurie shall comply with the same standards of
conduct required of employees of AT&T. By way of illustration only and not
limitation, such standards include those set forth in Section 27 or the Office
of Federal Procurement Policy Act (P.L. 100-679) as amended, and in Section 319
of the Byrd Amendment (P.L. 101-121), both as implemented in the Federal
Acquisition Regulation, and in the booklet Corporate/Personal Integrity Program,
a copy of which will be provided to Yurie by AT&T's Representative. Each of
Yurie's officers, agents, representatives or consultants performing under the
purchase order shall execute and promptly furnish the Pledge in the booklet to
AT&T. To the extent applicable to Yurie, Yurie shall promptly provide to AT&T a
Disclosure of Lobbying activities (OMB Std. Form LLL) as required by the Byrd
Amendment and executed by Yurie.
CHANGES TO EQUIPMENT - Any change that Yurie proposes to the equipment furnished
hereunder and the documentation related thereto that would impact upon (a)
reliability, (b) the equipment's specifications, or (c) form, fit, or function
requires the approval of AT&T. Yurie shall forward such proposed change to Mr.
Ronald M. Conklin, Sr. Contract Administrator, at least sixty (60) days prior to
the proposed effective date except for those cases where an extremely
unsatisfactory condition requires immediate action, in which case Yurie shall
promptly advise AT&T. Yurie shall at the time of notification, provide AT&T with
(a) a product change number, (b) a description of such change, (c) the reason
for such change, (d) a classification of
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such change in accordance with the change classifications below, (e) a
description of the impact of such change upon (1) reliability, (2) the
equipment's specifications, and (3) form, fit, or function; (f) proposed price
impact, if any, for B, and (g) proposed effective date for such change and
recommended implementation schedule therefor.
Any change in equipment shall be classified into one of the following two
classes:
"A" Changes which are needed to correct inoperative electrical or mechanical
conditions, or extremely unsatisfactory operating or maintenance conditions, or
conditions which result in safety hazards, and which are judged severe enough to
have to be made to all equipment in process, stock, or installed. (Any
conditional application criteria to be specified in the change notification
document.)
"B" Changes which are sufficiently important to justify their application to
equipment being manufactured (as soon as reasonably possible), and which are
recommended for application to existing installations in the field. Examples of
this class of change may include, but are not limited to:
(a) Providing new features that directly affect subscriber service.
(b) Providing design improvements which result in better service
capabilities, longer life or improved transmission margins.
(c) Providing changes in design which result in important cost savings to
AT&T.
(d) Conditions of a mandatory nature, for example, the fulfillment of federal
registration or future compatibility requirements, or for conditions of
sufficient importance to be intended for universal application (change to
be shown as "recommended").
The final classification of any product change proposed by Yurie will be by
mutual agreement between Yurie and AT&T.
For Class A changes, Yurie shall, to the extent required by the Warranty
provisions of the purchase order governing repair or replacement of equipment
under warranty, replace or modify, at no charge, all affected equipment
furnished hereunder and documentation related thereto. Yurie shall supply
relevant documentation to AT&T for all Class A changes. Yurie shall propose a
schedule for the application of these changes at all equipment locations which
shall not exceed one (l) year from date of change notice. This schedule shall be
mutually agreed upon by AT&T and Yurie.
For Class B changes, Yurie shall first notify AT&T of the exact nature of the
change. Details on the proposed implementation procedure for equipment which is
being or will be manufactured shall be discussed with AT&T. AT&T shall, at its
option, determine if equipment previously
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shipped will be replaced or modified. Should such replacements or modifications
be deemed necessary, Yurie shall, pursuant to the provisions of the purchase
order governing repair of equipment not covered under warranty, make
arrangements for the necessary equipment replacement or modification at prices
and schedules to be mutually agreed upon by AT&T and Yurie prior to
implementation. Documentation related thereto shall be provided by Yurie as
specified for Class A above.
In the event that Yurie and AT&T shall fail to reach agreement on any such
change in equipment to be made by Yurie, then in addition to all other rights
and remedies of law or equity or otherwise, AT&T shall, without any charge,
obligation or liability whatsoever, have the right to terminate the purchase
order and any or all purchase orders for equipment affected by such change.
CONTRACT PRICE - Yurie agrees to sell all equipment ordered by AT&T under the
purchase order based on discounts established in Section 3.03g. This equipment
shall be discounted based on the discount schedule set forth therein. AT&T
purchase orders will be for configured units configured to each Customer's
requirements and include staging to meet delivery schedules. Purchases for the
type of equipment under the purchase order which were acquired by a purchase
order for demonstration or trial prior to the execution of same shall be counted
in the cumulative total and the terms and conditions of the purchase order shall
govern these purchases. There shall be no increases in the discounts established
in Section 3.03g during the term of the purchase order. Should Yurie's
published commercial price for equipment be reduced before the delivery date,
the price to AT&T for such equipment shall be reduced accordingly. In such
event, the adjusted equipment price shall be discounted based on the discount
schedule set forth herein.
DELIVERY - Equipment shall be delivered by Yurie f.o.b. origin, unless otherwise
specified in AT&T's purchase order, within forty-five (45) days after receipt of
a written authorization on the purchase order by AT&T's Supplier Management
Division Representative or a mutually agreeable delivery date set prior to the
placement of a purchase order for this equipment. AT&T will make reasonable
effort to provide Yurie with periodic sales forecasts throughout the term of the
AT&T/Yurie Agreement in order to allow Yurie an opportunity to plan for product
needs, however any forecasts provided shall be provided by AT&T to Yurie for
information purposes only and shall not be considered firm offers by AT&T to
procure forecasted products at the times so indicated.
Yurie agrees not to deliver equipment prior to the agreed upon delivery date
without AT&T's prior written authorization.
DISPOSITION OF RECURRING NO-TROUBLE-FOUND RETURNS - The same production
equipment element/component shall not be returned by Yurie to AT&T with the
notation no-trouble-found (NTF) on more than one (1) occasion. On the second
occasion that a production equipment element/component has been classified by
Yurie as NTF, the production equipment element/component shall be scrapped by
Yurie and Yurie shall ship a new rather than
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reconditioned replacement to AT&T for the scrapped production equipment
element/component at no charge for that production equipment under warranty.
For out of warranty production equipment, Yurie shall invoice AT&T for the new
production equipment element/component at the discounts applicable under Section
3.03g of Yurie's current selling price for the production equipment
element/component.
DOCUMENTATION - Yurie agrees to furnish all documentation set forth in the basic
Agreement and/or purchase order applicable to equipment furnished hereunder, to
timely update documentation to reflect changes to equipment, and to furnish all
succeeding changes to such documentation. AT&T may reproduce such documentation
for use with equipment furnished hereunder. At a minimum, Yurie shall furnish
the type and quantity of documentation described herein at the times therein
required.
Whether or not specifically required by the purchase order, Yurie shall, with
each shipment by Yurie to AT&T, include all manuals covering the installation,
operation and maintenance of the equipment shipped.
All documentation and any subsequent changes or updates shall reference Yurie's
model numbers, issue numbers and date of issue.
Yurie agrees to maintain a mailing list of AT&T's recipients of such
documentation without charge.
ENVIRONMENTAL/RELIABILITY TESTING - Yurie shall perform environmental testing of
the production equipment in accordance with the AT&T Technical Reference-PUB
51001 entitled NETWORK EQUIPMENT - BUILDING SYSTEM (NEBS) GENERAL EQUIPMENT
REQUIREMENTS, Sections 3, 4, and 5. Yurie agrees to report the test results to
AT&T or its agents.
An initial sample of production equipment shall be subjected by AT&T to Product
Qualification Tests. These tests shall be more comprehensive than the normal
production tests and shall include checks of all functions, protocols and
interfaces and shall be repeated periodically at intervals not to exceed three
(3) months. Variables data (actual readings rather than go/no go data) shall be
recorded for these tests to ascertain any changes/drifts in the measured
parameters. Product Qualification Tests shall also be performed upon the
implementation of any major design changes requested by AT&T.
It is the responsibility of Yurie to demonstrate during the term of the purchase
order that the actual reliability of the delivered production equipment equals
or exceeds the reliability predictions. Yurie shall conduct studies to measure
the replacement/failure of supplied production equipment under actual operating
conditions or simulated operating conditions in a controlled laboratory
environment. These studies may be 1) factory based (where returns are compared
with shipment figures), 2) conducted at an operational site with a sufficient
population
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of production equipment in service to provide reasonable confidence in observed
replacement estimates, 3) an ongoing factory based (controlled) reliability test
of a sufficient sample of production equipment to provide a timely assessment of
production equipment reliability or 4) all of the above. At AT&T's request, the
results and the analysis of the collected data shall be provided by Yurie to
AT&T.
EQUIPMENT TESTING - In addition to any other tests to be requested by AT&T as
set forth in the purchase order, Yurie is responsible for the performance of
standard factory production tests which, in the absence of any other testing
requested by AT&T as set forth elsewhere in the purchase order, shall be deemed
to be the final tests under the order. Such tests shall be performed in
accordance with Yurie's normal testing and quality control procedures for
equipment of the type purchased here under in order to insure that the equipment
provided hereunder meets all applicable specifications. At the option of AT&T,
Yurie shall furnish a copy of its test plans and quality control procedures to
AT&T prior to initiating any such testing and AT&T, at its expense, may witness
any of the testing by giving prior notice to Yurie. Yurie also agrees to
maintain detailed records of all such tests and to provide AT&T, if requested,
with written results of these tests.
In the event that the equipment fails to meet the applicable specifications and
test requirements, Yurie shall make the necessary adjustments or repairs and
repeat the applicable tests. If, in the opinion of AT&T, the failure rates
experienced during these tests become unsatisfactory, all shipments of like
equipment to AT&T shall be suspended unless otherwise authorized by AT&T.
If Yurie is unable or unwilling to correct, at Yurie's expense, any deficiencies
found during testing provided hereunder within thirty (30) days of such
discovery or such longer period as may be mutually agreed upon, AT&T, at its
option, shall be relieved of all responsibilities under the purchase order
except for payment, as specified in the AT&T/Yurie Agreement and/or the purchase
order, for any equipment that has been received by AT&T and has satisfactorily
passed all applicable tests.
EXCUSABLE DELAYS - If Yurie or AT&T is delayed at any time in the performance of
their responsibilities hereunder by acts of God, Government action, regulatory
approval, fire, unavoidable casualties, unusually severe weather or any other
causes beyond the control and without the fault or negligence of the delayed
party or its subcontractors hereunder, then the other party may (a) extend the
time fixed for the completion of such responsibilities for a period equivalent
to the time lost by reason of any or all of the aforesaid causes, (b) secure
substitute performance at its own expense during the duration of the excusable
delay and reduce performance under the purchase order accordingly, or (c)
terminate all or a portion of the purchase order when the delay totally
precludes the delayed party's performance or materially affects it and the delay
continues for a period of forty-five (45) days. Absent notice to the delayed
party, (a) shall be deemed elected by the other party.
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FAILURE MODE ANALYSIS OF FAILED COMPONENTS - Yurie shall perform Failure Mode
Analysis on components with a persistent history of failure to determine the
specific cause of the component failure. The results of this analysis and
planned corrective action shall be provided to AT&T within fourteen (14)
calendar days of the completion of the analysis.
FCC REGISTRATION - When equipment furnished under the purchase order is subject
to Part 68 of the Federal Communications Commission's Rules and Regulations, as
amended from time to time, Yurie warrants that such equipment furnished
hereunder shall be registered under and comply with Part 68 of the Federal
Communications Commission's Rules and Regulations, including, but not limited
to, all labeling and customer instruction requirements.
FUTURE IMPROVEMENTS AND BENEFITS - As Yurie announces improvements, upgrades,
field modifications and the like, ("Enhancements"), Yurie shall advise AT&T of
their features and advantages. Yurie assures AT&T that the overall price
granted to AT&T is at least as favorable as those now granted by Yurie to any of
its similarly situated commercial customers for like, quantities, unless said
customer has provided a firm commitment for a specific level of incremental
business, or has specific discounts in certain areas as part of an overall
higher price than AT&T is then being charged, or has entered into an agreement
providing for a commitment for a longer term than AT&T.
GOVERNMENT CONTRACT PROVISIONS - The following provisions regarding equal
opportunity, and all applicable laws, rules, regulations and executive orders
specifically related thereto, including applicable provisions and clauses from
the Federal Acquisition Regulation and all supplements thereto are incorporated
in this Agreement as they apply to work performed under specific U.S.
Government contracts: 41 CFR 60-1.4, Equal Opportunity; 41 CFR 60-1.7, Reports
and Other Required Information; 41 CFR 60-1.8, Segregated Facilities; 41 CFR 60-
250.4, Affirmative Action For Disabled Veterans and Veterans of the Vietnam Era
(if in excess of $10,000); and 41 CFR 60-741.4, Affirmative Action for Disabled
Workers (if in excess of $2,500), wherein the terms "contractor" and
"subcontractor" shall mean "Yurie". In addition, orders placed under the
purchase order containing a notation that the material or services are intended
for use under Government contracts shall be subject to such other Government
provisions printed, typed or written thereon, or on the reverse side thereof, or
in attachments thereto.
HAZARDOUS MATERIAL - Yurie hereby warrants that, except as may be otherwise
expressly provided herein, all equipment furnished by Yurie is safe for its
normal use, is nontoxic, presents no abnormal hazards to persons or the
environment, and may be disposed of as normal refuse without special
precautions.
Yurie agrees to reimburse AT&T for any expense that AT&T may incur by reason of
the recall or prohibition against continued use or disposal of equipment
furnished by Yurie, whether such recall or prohibition against use or disposal
is directed by Yurie or under compulsion of law.
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HEAVY METALS IN PACKAGING - Yurie warrants to AT&T that no lead, cadmium,
mercury or hexavalent chromium have been intentionally added to any packaging or
packaging component (as defined under applicable laws) to be provided to AT&T
under the purchase order. Yurie further warrants to AT&T that the sum of the
concentration levels of lead, cadmium, mercury and hexavalent chromium in the
package or packaging component provided to AT&T under the purchase order does
not exceed 100 parts per million. Upon request, Yurie shall provide to AT&T
Certificates of Compliance certifying that the packaging and/or packaging
components provided under the purchase order are in compliance with the
requirements set forth above in this clause. Yurie shall indemnify and hold
AT&T harmless for any liability, fine or penalty incurred by AT&T to any third
party or governmental agency arising out of AT&T's good faith reliance upon said
warranties or any Certificates of Compliance.
IDENTIFICATION - Yurie shall not, without AT&T's prior written consent, engage
in advertising, promotion or publicity related to the purchase order, or make
public use of any Identification in any circumstances related to the purchase
order. "Identification" means any copy or semblance of any trade name,
trademark, service mark, insignia, symbol, logo, or any other product, service
or organization designation, or any specification or drawing of AT&T or its
affiliates, or evidence of inspection by or for any of them. Yurie shall remove
or obliterate any Identification prior to any use or disposition of any material
rejected or not purchased by AT&T, and, shall indemnify, defend (at AT&T's
request) and save harmless AT&T and its affiliates and each of their officers,
directors and employees from and against any losses, damages, claims, demands,
suits, liabilities, fines, penalties and expenses (including reasonable
attorneys' fees) arising out of Yurie's failure to so remove or obliterate.
IMPLEADER - Yurie shall not implead or bring an action against AT&T or its
customers or the employees of either based on any claim by any person for
personal injury or death to an employee of AT&T or its customers occurring in
the course or scope of employment and that arises out of material or services
furnished under the purchase order.
INDEMNITY - All persons furnished by Yurie shall be considered solely Supplier's
employees or agents, and Yurie shall be responsible for payment of all
unemployment, social security and other payroll taxes, including contributions
when required by law. Yurie agrees to indemnify and save harmless AT&T, its
affiliates, its and their customers and each of their officers, directors,
employees, successors and assigns (all hereinafter referred to in this clause as
"AT&T") from and against any losses, damages, claims, demands, suits,
liabilities, fines, penalties and expenses (including reasonable attorney's
fees) that arise out of or result from: (1) injuries or death to persons or
damage to property, including theft, in any way arising out of or occasioned by,
caused or alleged to have been caused by or on account of the performance of the
Work or services performed by Yurie or persons furnished by Yurie; (2)
assertions under Workers' Compensation or similar acts made by persons furnished
by Subcontractor or by any subcontractor or by reason of any injuries to such
persons for which AT&T would be responsible under Workers' Compensation or
similar acts if the persons were employed by AT&T; (3) any failure on the part
of Yurie to satisfy all claims for labor, equipment, materials and other
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obligations relating directly or indirectly to the performance of the Work; or
(4) any failure by Yurie to perform Yurie's obligations under this clause or the
INSURANCE clause. Yurie agrees to defend AT&T, at AT&T's request, against any
such claim, demand or suit. AT&T agrees to notify Yurie within thirty (30) days
of written claims or demands against AT&T for which Yurie is responsible under
this clause.
INFRINGEMENT - Yurie shall indemnify and save harmless AT&T, its affiliates, its
and their customers, and each of their officers, directors, employees,
successors and assigns from and against any losses, damages, liabilities,
fines, penalties, and expenses (including reasonable attorneys' fees) that arise
out of or result from any proved or unproved claim (1) of infringement of any
patent, copyright, trademark or trade secret right, or other intellectual
property right, private right, or any other proprietary or personal interest,
and (2) related by circumstances to the existence of the purchase order or
performance under or in contemplation of it (an Infringement Claim). If the
Infringement Claim arises solely from Yurie's adherence to AT&T's written
instructions regarding services or tangible or intangible goods provided by
Yurie (Items) and if the Items are not (1) commercial items available on the
open market or the same as such items, or (2) items of Yurie's designated
origin, design or selection, AT&T shall indemnify Yurie. AT&T or Yurie (at
AT&T's request) shall defend or settle, at its own expense, any demand, action
or suit on any Infringement Claim for which it is indemnitor under the preceding
provisions and each shall timely notify the other of any assertion against it of
any Infringement Claim and shall cooperate in good faith with the other to
facilitate the defense of any such Claim.
INSPECTION - AT&T's Representatives shall at all times have access to the Work
for the purpose of inspection or a Quality Review and Yurie shall provide safe
and proper facilities for such purpose.
INSTALLATION AND CUTOVER ASSISTANCE - If requested by AT&T, Yurie agrees to make
available at the installation site, at Yurie's customary charge, a field
engineer to render installation and cutover assistance as required by AT&T for
the first installation and cutover in each of AT&T's regions or at the location
were AT&T's equipment is located.
INSURANCE - Yurie shall maintain and cause Yurie's suppliers to maintain during
the term of the purchase order: (1) Workers' Compensation insurance as
prescribed by the law of the state or nation in which the Work is performed; (2)
employer's liability insurance with limits of at least $200,000 for each
occurrence; (3) comprehensive automobile liability insurance if the use of motor
vehicles is required, with limits of at least $1,000,000 combined single limit
for bodily injury and property damage for each occurrence; (4) Commercial
General Liability ("CGL") insurance, including Blanket Contractual Liability and
Broad Form Property Damage, with limits of at least $1,000,000 combined single
limit for bodily injury and property damage for each occurrence; and (5) if the
furnishing to Company (by sale or otherwise) of products or material is
involved, CGL insurance endorsed to include products liability and completed
operations coverage in the amount of $1,000,000 for each occurrence. All CGL
and automobile liability insurance shall designate AT&T Corp., its affiliates,
and each of their officers, directors and
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employees as an additional insured. All such insurance must be primary and
required to respond and pay prior to any other available coverage. Yurie agrees
that Yurie, Yurie's insurer(s) and anyone claiming by, through, under or in
Yurie's behalf shall have no claim, right of action or right of subrogation
against Yurie and its customers based on any loss or liability insured against
under the foregoing insurance. Yurie and Yurie's suppliers shall furnish prior
to the start of Work certificates or adequate proof of the foregoing insurance
including, if specifically requested by AT&T, copies of the endorsements and
insurance policies. AT&T shall be notified in writing at least thirty (30)
days prior to cancellation of or any change in the policy.
(NOTE: It was determined during discussion between the Parties that the levels
of insurance set forth above, specifically sub-items (2) and (5) were below what
AT&T considers to be minimum levels of insurance for these areas of liability
identified. The Parties agreed that these levels of liability would be reviewed
by Yurie to determine the economic feasibility of increasing these levels to
$300,000 and $5,000,000, respectively. This review will be completed within
forty-five (45) days following the ratification of this Agreement and AT&T will
be advised as to the course of action Yurie will take regarding the recommended
increases.)
INVOICING - Yurie shall: (1) render original invoice, or as otherwise specified
in the purchase order, showing the purchase order number, through routing and
weight; (2) render separate invoices for each shipment within twenty-four (24)
hours after shipment; and (3) mail invoices with copies of bills of lading and
shipping notices to the address shown on the purchase order. If prepayment of
transportation charges is authorized, Yurie shall include the transportation
charges from the FOB point to the destination as a separate item on the invoice
stating the name of the carrier used.
ISO 9000 - Yurie will actively pursue ISO Certification for the duration of the
purchase order.
LICENSES - No licenses, express or implied, under any patents, copyrights,
trademarks or other intellectual property rights are granted by AT&T to Yurie
hereunder.
MARKING - All equipment furnished hereunder shall be marked for identification
purposes with (a) Yurie's model/serial number; (b) month and year of
manufacture; and (c) other marking in accordance with the requirements outlined
in Technical Reference 52001 dated October, 1985 or Bellcore Document # TR-TAP-
000485 and Bellcore Document # TR795-25540-84-02, as amended from time to time.
OZONE DEPLETING SUBSTANCE LABELING - Yurie hereby warrants and certifies that
all products, including packaging and packaging components, provided to AT&T
under the purchase order have been accurately labeled in accordance with the
requirements of 40 CFR Part 82 entitled "Protection of Stratospheric Ozone,
Subpart E - The Labeling of Products Using Ozone Depleting Substances." Yurie
agrees to indemnify, defend and save harmless AT&T, its officers, directors and
employees from and against any losses, damages, claims, demands, suits,
liabilities, fines, penalties, and expenses (including reasonable attorneys'
fees) that may be
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sustained by reason of Yurie's non-compliance with such applicable law or the
terms of this warranty and certification.
PACKAGING AND SHIPPING - Equipment furnished hereunder shall be packaged by
Yurie at no additional charge in containers adequate to prevent damage during
shipping, handling and storage. Unless instructed otherwise by AT&T, Yurie
shall (a) ship orders complete, (b) ship to the destination designated in the
purchase order, (c) mark all subordinate documents with the AT&T/Yurie Agreement
number and the purchase order number, (d) enclose a packing memorandum with each
shipment and when more than one package is shipped, identify the one containing
the memorandum, (e) mark AT&T's purchase order number on all packages and
shipping papers and (f) ship according to routing instructions given by AT&T.
Unless otherwise directed by AT&T, Yurie shall (a) ship equipment from its
nearest facility capable of filling the purchase order, (b) use the lowest
published common carrier rates (rail, truck or freight forwarder) (c) prepay
transportation charges, and (d) add transportation charges at cost as a separate
item on Yurie's invoice when the cost of transportation is to be borne by AT&T .
If requested by AT&T, Yurie agrees to substantiate such charges by providing
AT&T with the original freight bill or a copy thereof. Shipping and routing
instructions may be altered, orally or in writing, as mutually agreed upon by
Yurie and AT&T.
Yurie warrants that all packaging associated with materials or products
furnished under the purchase order were not manufactured using, and do not
contain chlorofluorocarbons. "Packaging" means all bags, wrappings, boxes,
cartons and any other packing materials used for packaging.
PAYMENT TERMS - Unless payment terms more favorable to AT&T appear on Yurie's
invoice and AT&T elects to pay on such terms, invoices shall be paid in
accordance with the terms stated in the purchase order, and due dates for
payment of invoices shall be computed from the date of receipt of invoices by
AT&T.
RADIO FREQUENCY ENERGY STANDARDS - Equipment furnished hereunder shall comply,
to the extent applicable, with the requirements of Subpart J of Part 15 of the
Federal Communication Commission's Rules and Regulations, as amended from time
to time, including those Sections concerning the labeling of such equipment and
the suppression of radio frequency and electro magnetic radiation to specified
levels. Should the equipment during use generate harmful interference to radio
communications, Yurie shall provide to AT&T information relating to methods of
suppressing such interference. In the event such interference cannot reasonably
be suppressed, Yurie shall, at the option of AT&T, accept return of the
equipment and refund to AT&T the price paid for the equipment. Nothing herein
shall be deemed to diminish or otherwise limit Yurie's other warranty
obligations under the purchase order.
RELEASES VOID - Neither party shall require (i) waivers or releases of any
personal rights or (ii) execution of documents which conflict with the terms of
the purchase order, from employees,
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representatives or customers of the other in connection with visits to its
premises and both parties agree that no such releases, waivers or documents
shall be pleaded by them or third persons in any action or proceeding.
REPAIR UNDER WARRANTY - Defective or nonconforming equipment under warranty
will, at AT&T's option, either be returned to Yurie for repair or replacement,
or be repaired or replaced by Yurie. Unless otherwise agreed upon by Yurie and
AT&T, Yurie shall complete repairs and ship the repaired equipment within thirty
(30) calendar days of receipt of defective or nonconforming equipment, or at the
option of AT&T, ship replacement equipment within thirty (30) calendar days
after verbal notification is given to Yurie by AT&T. Yurie shall bear the cost
of transportation charges for the return of all shipments to AT&T designated
destinations of equipment for repair or replacement under warranty. If
requested by AT&T, Yurie, at Yurie's expense, shall begin on-site repairs within
five (5) calendar days after verbal notification is given to Yurie (written
confirmation provided by facsimile with purchase order number) by AT&T for an
expediting fee of $275.00.
Any replacement, repair, modification, installation or other service performed
by Yurie shall be warranted as herein provided for the unexpired period of the
original warranty or for a period of ninety (90) days from the date performance
of the service is completed and accepted by AT&T, whichever is longer.
REPAIR NOT UNDER WARRANTY - In addition to repair and replacement of equipment
under warranty, Yurie agrees to provide repair service on all equipment ordered
hereunder for a period of ten (10) years for LDR200's and five (5) years for
LDR100's after the conclusion of the period set forth in Article IV, Section
6.01. Equipment to be repaired which is not under warranty will be returned to
a location designated by Yurie, and unless otherwise agreed upon by Yurie and
AT&T, Yurie shall ship the repaired equipment within thirty (30) calendar days
of receipt of the equipment by Yurie. With the concurrence and scheduling of
AT&T, repairs may be made by Yurie on-site.
If equipment is returned to Yurie for repair as provided for in this Article,
and is determined by Yurie to be beyond repair, or repair costs are expected to
exceed (50%) fifty percent of the cost of a replacement, Yurie shall so notify
AT&T prior to proceeding with the repair. If requested by AT&T, Yurie will sell
to AT&T a replacement at the current agreed-to price or, if no such agreed-to
price exists, at a price agreed upon by Yurie and AT&T. Further, if requested
by AT&T, Yurie shall take the necessary steps to dispose of the unrepairable
equipment, consistent with sound commercial practices.
Yurie's warranties against defects in material and workmanship provided in the
purchase order shall apply to all repair of equipment not under warranty for a
period of ninety (90) days after receipt of same by AT&T. All replacement of
equipment not under warranty shall be warranted as provided in the WARRANTY
Article for equipment furnished under the purchase order.
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The purchase order does not grant Yurie an exclusive privilege to repair any or
all of the equipment purchased hereunder for which AT&T may require repair.
Yurie also agrees to support AT&T in obtaining out-of-warranty repairs by
assuring the availability of the necessary technical documentation, spare parts
and training at charges to be agreed upon by AT&T and Yurie.
AT&T shall bear the cost of transportation charges for all shipments of
equipment for repair or replacement not under warranty.
REPAIR PROCEDURES - AT&T may contact Yurie's Customer Service Representative
with any questions that may arise concerning repair, and if required, specify
any special packaging of equipment which might be necessary to provide adequate
in-transit protection from transportation damage.
AT&T shall furnish the following information with equipment returned to Yurie
for repair: (a) AT&T's name and complete address; (b) name(s) and telephone
number(s) of AT&T's employee(s) to contact in case of questions about the
equipment to be repaired; (c) ship to address for return of repaired equipment
if different than (a); (d) a complete list of equipment returned; (e) the nature
of the defect or failure, if known; and (f) whether or not returned equipment is
under warranty.
Equipment repaired by Yurie shall have the repair completion date stenciled or
otherwise identified in a permanent manner at a readily visible location on the
equipment and the repaired equipment shall be returned with a tag or other
papers describing the repairs which have been made.
All material returned to Yurie must be accompanied by a Return Material
Authorization (RMA) number. An RMA number is necessary to assure proper
tracking and handling of returned material at the factory. Yurie reserves the
right to refuse shipments not accompanied by an RMA number. Refused shipments
will be returned to the shipper via collect freight. To obtain an RMA number,
call Yurie Customer Services group at (301) 352-4911. Please provide serial
number of part when requesting an RMA.
All invoices originated by Yurie for repair services must be clearly identified
as such, and must contain in addition to the information required by other
provisions of the purchase order (a) a reference to AT&T's purchase order for
the repair services, (b) a detailed description of repairs made by Yurie and the
need therefor, and (c) an itemized listing of parts and labor charges, if any.
Replaced parts will, upon request, be available for inspection by, or returned
to, AT&T.
REPAIR AND REPLACEMENT, EMERGENCY SERVICE - In addition to the warranty and out-
of-warranty equipment repair and replacement provisions of the purchase order,
Yurie agrees to provide emergency repair and replacement service for a period of
ten (10) years for LDR200's and five (5) years for LDR100's after the conclusion
of the period set forth in Article
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IV, Section 6.01. Whenever an emergency out-of-service condition is caused by
equipment furnished hereunder, Yurie shall ship replacement equipment to be
received at the AT&T location within five (5) calendar days for an expediting
fee of $275.
In order to schedule shipment of replacement equipment, AT&T may call Yurie's
Customer Service Representative. This service will be available during normal
business hours, five days a week. For critical support, a process shall be
negotiated between the Parties.
Equipment under warranty replaced under this Article is to be returned to Yurie
by AT&T within thirty (30) days after AT&T's receipt of replacement equipment
hereunder. If such equipment is not returned, Yurie shall have the right to
invoice AT&T at the current AT&T/Yurie Agreement price, or if no such price
exists, at a price agreed upon by Yurie and AT&T.
REPAIR/REPLACEMENT PARTS-CONTINUING AVAILABILITY - Yurie agrees to offer parts
for maintenance, replacement, and repair of equipment for sale to AT&T, for a
period of ten (10) years for LDR200's and five (5) years for LDR100's after the
conclusion of the period set forth in Article IV, Section 6.01, which parts will
be compatible with and functionally equivalent to those provided under the
purchase order.
In the event Yurie fails to supply such parts (not for re-sale -- repair only)
or Yurie is unable to obtain another source of supply for AT&T, then such
inability shall be considered noncompliance with this Article and, in addition
to whatever other rights and remedies AT&T may have at law or in equity, AT&T
may require Yurie, without obligation or charge to AT&T, to provide AT&T with
the Technical Information and any other rights required so that AT&T can
manufacture, have manufactured or obtain such parts from other sources.
The Technical Information shall include, for example, (a) manufacturing drawings
and specifications of raw materials and components comprising such parts, (b)
manufacturing drawings and specifications covering special tooling and the
operation thereof, (c) a detailed list of all commercially available parts and
components purchased by Yurie on the open market disclosing the part number,
name and location of the supplier and price lists for the purchase thereof, and
(d) one complete copy of the then current source code used in the preparation of
any software licensed or otherwise acquired by from Yurie hereunder.
SUPPLIER'S INFORMATION - Yurie shall not provide under, or have provided in
contemplation of, the purchase order any idea, data, program, technical,
business or other intangible information, however conveyed, or any document,
print, tape, disk, semiconductor memory or other information-conveying tangible
article, unless Yurie has the right to do so, and Yurie shall not view any of
the foregoing as confidential or proprietary.
SURVIVAL OF OBLIGATIONS - The obligations of the parties under the purchase
order, which by their nature would continue beyond the termination, cancellation
or expiration of the purchase order, including, by way of illustration only and
not limitation, those in the clauses
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COMPLIANCE WITH LAWS, IDENTIFICATION, IMPLEADER, INFRINGEMENT, RELEASES VOID,
USE OF INFORMATION and WARRANTY (and INSURANCE and INDEMNITY if included in the
purchase order), shall survive termination, cancellation or expiration of the
purchase order.
TAXES - AT&T shall reimburse Yurie only for the following tax payments with
respect to transactions under the purchase order unless AT&T advises Yurie that
an exemption applies: state and local sales and use taxes, as applicable. Taxes
payable by AT&T shall be billed as separate items on Yurie's invoices and shall
not be included in Yurie's prices. AT&T shall have the right to have Yurie
contest any such taxes that AT&T deems improperly levied at AT&T's expense and
subject to AT&T's direction and control.
TECHNICAL SUPPORT - Yurie agrees to offer ongoing technical support, including
field service and assistance, to AT&T, for a period of ten (10) years for
LDR200's and five (5) years for LDR100's after the conclusion of the period set
forth in Article IV, Section 6.01. The availability or performance of this
technical support service, however, shall not be construed as altering or
affecting any of Yurie's other obligations set forth in the purchase order.
Ongoing technical support by telephone will be available to AT&T from Yurie at
no charge during normal business hours. During the warranty period set forth in
the purchase order, Yurie's field service technical support shall be provided to
AT&T, including emergency (service affecting) on-site twenty-four (24) hour
technical assistance at mutually agreeable rates. AT&T shall call Yurie's
Customer Service Representative to request such field service technical support.
Beyond the warranty period, charges, if any, for field service technical support
shall be agreed upon by AT&T and Yurie.
TERMINATION OF PURCHASE ORDER - AT&T may, with written notice given no later
than fifteen (15) calendar days prior to scheduled delivery, terminate any
purchase orders placed under the AT&T/Yurie Agreement. Unless otherwise
specified in the Agreement or in this purchase order, AT&T's liability to Yurie
with respect to such terminated purchase order or orders shall be limited to:
(1) Yurie's purchase price of all components for the material (not usable in
Yurie's other operations or salable to Yurie's other customers), plus (2) the
actual costs incurred by Yurie in procuring and manufacturing material (not
usable in Yurie's other operations or salable to Yurie's other customers) in
process at the date of the notice of termination; less (3) any salvage value
thereof. However, no such termination charges shall be payable if within sixty
(60) days after notice of termination material equivalent in kind to that being
terminated is ordered by AT&T from Yurie. If requested, Yurie agrees to
substantiate such costs with proof satisfactory to AT&T.
TITLE AND RISK OF LOSS - Title and risk of loss and damage to material purchased
by AT&T under the purchase order shall vest in AT&T when the material has been
delivered at the point of shipment. If a purchase order issued calls for
additional services including, but not limited to, unloading, installation, or
testing, to be performed after delivery, Yurie shall retain
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title and risk of loss and damage to the material until the additional services
have been performed. Notwithstanding the foregoing sentence, if Yurie is
expressly authorized to invoice AT&T for material upon shipment or prior to the
performance of additional services, title to such material shall vest in AT&T
upon payment of the invoice, but risk of loss and damage shall pass to AT&T as
provided in the foregoing sentence.
TOOLS AND EQUIPMENT - Unless otherwise specifically provided in the purchase
order, Yurie shall provide all labor, tools and equipment (the "tools") for
performance of the purchase order. Should Yurie actually use any tools owned or
rented by AT&T or its customer, Yurie acknowledges that it accepts the tools "as
is, where is," that neither AT&T nor its customer have any responsibility for
the condition or state of repair of the tools and that Yurie shall have risk of
loss and damage to such tools. Yurie agrees not to remove the tools from AT&T's
or its customer's premises and to return the tools to AT&T or its customer upon
completion of use, or at such earlier time as AT&T or its customer may request,
in the same condition as when received by Yurie, reasonable wear and tear
excepted.
USE OF INFORMATION - Yurie shall view as AT&T's property any idea, data,
program, technical, business or other tangible information, however conveyed,
and any document, print, tape, disk, tool, or other tangible information-
conveying or performance-aiding article owned or controlled by AT&T, and
provided to, or acquired by, Yurie under or in contemplation of the purchase
order (Information). Yurie shall, at no charge to AT&T, and as AT&T directs,
destroy or surrender to AT&T promptly at its request any such article or any
copy of such Information. Yurie shall keep Information confidential and use it
only in performing under the purchase order and obligate its employees,
subcontractors and others working for it to do so, provided that the foregoing
shall not apply to information previously known to Yurie free of obligation, or
made public through no fault imputable to Yurie.
WAIVER - The failure of either party at any time to enforce any right or remedy
available to it under the purchase order or otherwise with respect to any breach
or failure by the other party shall not be construed to be a waiver of such
right or remedy with respect to any other breach or failure by the other party.
WORK DONE BY OTHERS - If any of the Work is dependent on work done by others,
Yurie shall inspect and promptly report to AT&T's Representative any defect that
renders such other work unsuitable for Yurie's proper performance. Yurie's
silence shall constitute approval of such work as fit and suitable for Yurie's
performance.
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EXHIBIT E
---------
SOFTWARE PROGRAM LICENSE AND WARRANTY
-------------------------------------
1. LICENSE
1.1 Subject to the following terms and conditions, Yurie grants to AT&T Corp.
and its customers and AT&T accepts an irrevocable, perpetual, world-wide, non-
exclusive license to use the object code software provided by Yurie (the
Licensed Program) only with Yurie equipment with all copyright, patent and
intellectual property rights remaining the sole property of Yurie.
1.2 AT&T shall receive software support and upgrades for the Licensed Program
in accordance with the applicable then current Yurie software support policy in
effect and upon payment of any applicable fees.
2. PROTECTION AND SECURITY OF LICENSED PROGRAMS
2.1 AT&T acknowledges and agrees that the Licensed Program contains proprietary
and confidential information of Yurie and/or its third party supplier. AT&T
agrees to protect the confidential and proprietary nature of the Licensed
Program in the same manner that it protects its own confidential information of
like value, provided that AT&T will in all cases use reasonable care to protect
the Licensed Program.
2.2 AT&T shall not use, print, copy, translate, adapt, create derivative works
from, record, transmit, display, disclose, publish, encumber by way of security
interest or otherwise pledge or transfer, modify, assign, distribute, rent, loan
or make available to any third party the Licenses Program in whole or in part,
except as expressly provided in this Agreement.
2.3 AT&T shall refrain from decompiling or applying any procedure to the
Licensed Program, including reverse engineering or any similar process, in order
to derive and/or appropriate for use, the source code or source listings for the
Licensed Program.
3. TERM
3.1 This Agreement shall become effective for each Licensed Program upon
delivery of the Licensed Program to AT&T.
4. WARRANTY
4.1 The Software and Documentation (collectively referred to in all paragraphs
of this Section WARRANTY as Software) will be free from significant errors, will
conform to and perform in accordance with the Specifications, and will function
properly. The media conveying the Software will be free from defects in
material and workmanship. The Software will be
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compatible with and may be used in conjunction with other software as described
in the Specifications or elsewhere in this Agreement. If this Agreement states
that the Software is to be used in conjunction with certain data processing
equipment, the Software shall be compatible with that equipment. The foregoing
warranties extend to the future performance of the Software and shall continue
for the longer of ( a ) the warranty period applicable to AT&T's sublicense to
its customers of the Software or products which incorporate the Software, ( b )
twelve months after the Software is accepted by AT&T, or ( c ) such greater
period as may be specified elsewhere in this Agreement.
4.2 Services will be performed in a first-class, workmanlike manner.
4.3 There are no copy protection or similar mechanisms within the Software
which will, either now or in the future, interfere with the grants made in this
Agreement.
4.4 AT&T and its customers shall have quiet enjoyment of the Software during
the Software license term.
4.5 As to Software for which Licensor does not solely own all intellectual
property rights (including copyright) and other rights in the Software, Licensor
has full right, power and authority to license the Software to AT&T and its
customers as provided in this Agreement.
4.6 If the Software, or any portion thereof, is or becomes unusable, totally or
in any respect during the applicable warranty period, or if services fail to
meet the warranties, Licensor will reperform services, correct errors, defects
and nonconformities and restore the Software to conforming condition free of
significant errors at no cost to AT&T or its customers. Corrected Software
shall be warranted as set forth in this clause.
4.7 The Software does not contain any malicious code, program, or other
internal component (e.g. computer virus, computer worm, computer time bomb, or
similar component), which could damage, destroy, or alter software, firmware, or
hardware or which could, in any manner, reveal, damage, destroy, or alter any
data or other information accessed through or processed by the Software in any
manner. Licensor shall immediately advise AT&T, in writing, upon reasonable
suspicion or actual knowledge that the Software provided under this Agreement
may result in the harm described above. Licensor shall indemnify and hold AT&T
and its customers harmless from any damage resulting from the harm described
above.
4.8 All warranties shall survive inspection, acceptance and payment.
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<TABLE>
<CAPTION>
EXHIBIT 11.1
YURIE SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
Year Ended December 31 Year Ended September 30
---------------------------------- -----------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income $ (23,000) $ 121,000 $ 897,000 $ 416,000 $ 2,739,000
Average shares outstanding
during the period 16,000,000 16,000,000 20,168,000 20,154,000 20,208,000
Dilutive effect of stock
options after application
of treasury stock method
as described in Note 1 to
the Financial Statements 1,493,000 1,493,000 1,493,000 1,493,000 1,493,000
----------- ----------- ----------- ----------- -----------
Average number of shares and
equivalent shares outstanding
during the period 17,493,000 17,493,000 21,661,000 21,697,000 21,701,000
----------- ----------- ----------- ----------- -----------
Earnings per common and common
equivalent share $ (0.00) $ 0.01 $ 0.04 $ 0.02 $ 0.13
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 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 11, 1996
