<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 96
REGISTRATION NO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
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.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[_] ____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
[_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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............. $46,000,000 $13,939.39
</TABLE>
- -------------------------------------------------------------------------------
(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>
YURIE SYSTEMS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement Facing Page; Outside Front Cover
and Outside Front Cover of Prospectus.... Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back
Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Changes....... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Use of Proceeds
5. Determination of Offering Price.......... Underwriting
6. Dilution................................. Dilution
7. Selling Security Holders................. Not Applicable
8. Plan of Distribution..................... Outside and Inside Front Cover
Pages; Underwriting; Outside
Back Cover Page
9. Description of Securities to be Description of Capital Stock;
Registered............................... Shares Eligible for Future Sale
10. Interests of Named Experts and Counsel... Not Applicable
11. Information with Respect to the Outside and Inside Front Cover
Registrant............................... Pages; Prospectus Summary; Risk
Factors; Dividend Policy;
Dilution; Capitalization;
Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Certain
Transactions; Principal
Stockholders; Description of
Capital Stock; Shares Eligible
for Future Sale; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
<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
NOVEMBER 7, 1996
[LOGO]
4,000,000 Shares
YURIE SYSTEMS, INC.
Common Stock
--------
All of the 4,000,000 shares of Common Stock offered hereby are being sold by
Yurie Systems, Inc. Prior to this offering, there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $ and $ per share. See "Underwriting"
for the factors to be considered in determining the initial public offering
price. Application has been made for quotation of the Common Stock 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 in May 1996,
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.
Proposed Nasdaq National Market symbol............. YURI
</TABLE>
- --------
(1) Excludes (i) 2,957,242 shares of Common Stock issuable upon the exercise of
stock options outstanding as of November 7, 1996 at a weighted average
exercise price of approximately $1.15 per share, substantially all of which
are not exercisable as of the date of this Prospectus; and (ii) 242,758
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..................... 21,681 21,721
</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 $47,602
Working capital............................ 2,598 7,398 43,998
Total assets............................... 11,031 15,831 52,431
Total stockholders' equity................. 3,842 8,642 45,242
</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 $10.00 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 in May 1996, 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 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 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 79.9% of the outstanding Common Stock
(approximately 77.5% 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.
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
11
<PAGE>
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 20,872,500 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. Based on shares outstanding as of November
7, 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 November 7, 1996,
there were 2,957,242 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 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 $10.00 per share, investors in this offering will incur dilution of $8.16
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."
12
<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 $10.00
per share), after deduction of underwriting discounts and commissions and
estimated expenses payable by the Company will be approximately $36.6 million.
The Company intends to use the net proceeds 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 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.
13
<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 $10.00 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 41,476
Retained earnings.............................. 3,520 3,520 3,520
------ ------ -------
Total stockholders' equity..................... 3,842 8,642 45,242
------ ------ -------
Total capitalization....................... $3,842 $8,642 $45,242
====== ====== =======
</TABLE>
- --------
(1) The pro forma data give effect to the Amerindo Transaction.
(2) Excludes (i) 2,957,242 shares of Common Stock issuable upon exercise of
outstanding stock options as of November 7, 1996 at a weighted average
exercise price of approximately $1.15 per share, substantially all of
which are not exercisable as of the date of this Prospectus and (ii)
242,758 additional shares of Common Stock reserved for future grants under
the Stock Option Plan. See "Management--Stock Option Plan."
14
<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 $8.6 million, or $0.42 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. 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 $10.00 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 $45.2 million or $1.84 per share,
representing an immediate increase in the pro forma net tangible book value of
$1.42 per share to existing stockholders and an immediate dilution of $8.16
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........... $10.00
Pro forma net tangible book value per share before this
offering................................................. $0.42
Increase per share attributable to new investors........ 1.42
-----
Adjusted pro forma net tangible book value per share after
this offering............................................ 1.84
------
Dilution per share to new investors....................... $ 8.16
======
</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 10.7% $ 0.23
New investors.............. 4,000,000 16.3 40,000,000 89.3 $10.00
---------- ----- ----------- -----
Total.................... 24,608,400 100.0% $44,800,000 100.0%
========== ===== =========== =====
</TABLE>
The above computations assume no exercise of any outstanding options. At
November 7, 1996, there were outstanding options to purchase 2,957,242 shares
of Common Stock at a weighted average exercise price of $1.15. To the extent
these options are exercised, there will be further dilution to the new
investors in this offering.
15
<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 the balance
sheet data as of December 31, 1993, 1994 and 1995, 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 1996 and the balance sheet data as of
September 30, 1995 and 1996 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)
<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..... $ 0.04 $ 0.13
======== =========
Weighted average common and
common equivalent shares
outstanding(1)................. 21,681 21,721
======== =========
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.
16
<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 continue to
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 in May 1996, 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 fees earned under the
AT&T Agreement. All product revenue arising from sales to AT&T is presented
net of the applicable discount. See "Business--AT&T Relationship."
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 one-year warranty on parts and service. 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 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.
17
<PAGE>
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 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.
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>
18
<PAGE>
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.
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
19
<PAGE>
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.
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
20
<PAGE>
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 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>
21
<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 a
commercial bank 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. 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.
22
<PAGE>
On November 7, 1996, the Company sold 400,000 shares of Common Stock for
$4.8 million to Amerindo in the Amerindo Transaction. 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.
23
<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 in May 1996, 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 11 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 data traffic alone is currently expanding at a
rate of approximately 30% per year. 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
24
<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.
25
<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
26
<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.
27
<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.
28
<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.
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
29
<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 14"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
(RS232, RS422, ATM/LANET, frame relay,
RS530, V.35) synchronous, asynchronous
Analog Compressed 2 8kbps, 16kbps Foreign exchange station ("FXS")
Voice Foreign exchange office ("FXO")
TAXI 1 100/140 Mbps ATM
</TABLE>
30
<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.
31
<PAGE>
The LDR5
To augment its product family, Yurie has recently entered into an agreement
with DataLabs, Inc., under which Yurie has a non-exclusive license to market
DataLabs' Virtual Access 1000 product on a private label basis as the LDR5.
The LDR5 is an ATM access device that features full "CSU/DSU" capabilities,
thereby allowing frame relay and TDM equipment to interface with an ATM
network. The LDR5 offers low-cost ATM access for standard customer premises
equipment. It is designed for use in branch offices and other settings that do
not require the more sophisticated LDR100 or LDR200 access products. The LDR5
enables the Company to offer a full range of ATM access products, but Yurie
does not expect sales of the LDR5 to be significant.
The following table describes the key features of the LDR5:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS SPEEDS PROTOCOLS SUPPORTED
---------------------- ----- ---------------- ------------------------
NETWORK:
<S> <C> <C> <C>
T1 (DS1) 1 1.544 Mbps ATM
<CAPTION>
USER:
<S> <C> <C> <C>
Channelized T1 (DS1) 1 1.544Mbps Frame relay, TDM
Serial Data 1 56kbps-1.544Mbps Frame relay, synchronous
(RS422, RS530, V.35)
</TABLE>
Product Management Protocol; Pricing
Each of the Company's three LDR products can be managed using any software
package supported by the Simple Network Management Protocol ("SNMP"), such as
HP OpenView and SunNet Manager. The LDR200 can also be managed using a simple
"dumb" terminal interface.
The LDR100 and LDR200 products sell for prices ranging from $20,000 to
$90,000, and the LDR5's price ranges from $5,000 to $10,000. Actual price
depends on the configuration of the product selected.
Product Support
The Company offers comprehensive customer support for its LDR product line.
The Company's service organization offers installation, preventative
maintenance, multi-vendor services, repair, training and a variety of other
advanced services designed to enhance the reliability of a customer's
telecommunications network. The LDR200 is sold with a standard one-year
warranty. The Company's customer support representatives are located in
Lanham, Maryland and currently are available from 8:00 a.m. to 8:00 p.m.
Eastern time, Monday through Friday. At other times, the Company's customer
support representatives can page an on-call technical support person to
respond to technical support requests. Beginning in 1997, extended service for
the Company's products will be provided by a third party. The third-party
service provider will be available 24 hours a day, seven days a week to
supplement the Company's service organization.
AT&T RELATIONSHIP
The Company has had a significant strategic relationship with AT&T since
1994. Pursuant to this relationship, Yurie and AT&T entered into the AT&T
Agreement in August 1995. The AT&T Agreement, as amended in May 1996, 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
32
<PAGE>
could 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 October
31, 1996, 43 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 and
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 October 31, 1996, the Company had 11 sales personnel
in its direct sales
33
<PAGE>
organization. Currently, sales offices are located in 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 11 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.
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. The products are then shipped unassembled to the customers, who
use instructions provided by Yurie to assemble the products at their
locations.
34
<PAGE>
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 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
35
<PAGE>
the LANET patent at no cost to the public because it believes that making the
LANET technology freely available to the public would have greater benefits
than licensing the technology to third parties or preserving the technology
solely for its own use. The Company, however, retains its patent rights in the
LANET technology, although third parties are free to use the technology in
unmodified form for their own purposes. The Company anticipates that making
LANET available at no cost to the public will create demand for and facilitate
widespread use of LANET and increase name recognition for Yurie as the
developer of LANET.
Two additional patent applications have been filed for (i) the AQueMan
algorithm developed by the Company to regulate and prioritize the flow of
traffic in ATM access products and (ii) error-tolerant addressing to enhance
the ability to transport ATM cells over noisy links (e.g., wireless circuits).
The Company intends to file another patent application within the next six
months for a method to simplify authentication and key exchange in the
establishment of secure links. The Company does not now intend to make any of
the technologies described in these patent applications available to the
public at no cost. There can be no assurance that the Company's patent
applications will result in issued patents or that the Company's existing
patent or future patents will be upheld as valid or prevent the development of
competitive products. The failure of the Company to obtain a patent for
AQueMan, or to be granted patents for any of its other Company-developed
technologies, could have a material adverse effect on the Company's business
and its growth prospects.
FACILITIES
The Company's principal offices are located in a 45,000 square foot facility
leased by the Company at 10000 Derekwood Lane, Lanham, MD (a suburb of
Washington, DC). Approximately 20.0% of the space in this facility is used or
reserved for manufacturing, product development and testing; the balance is
used or reserved for sales, marketing and other general and administrative
activities. In the event that the Company should decide to relocate, ample
alternative space is available for lease in the same area as the current
facilities. Relocation would not materially disrupt the Company's 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 October 31, 1996, Yurie employed 119 individuals on a full-time
equivalent basis. Of these, 43 were involved in engineering, 25 were working
in applications engineering in the federal division, 16 were employed in
sales, marketing and customer support, 17 were engaged in manufacturing, and
the remaining 18 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.
36
<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........ 39 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)........ 67 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.
37
<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 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.
38
<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.
39
<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
40
<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 November 7, 1996, options to acquire an aggregate of 2,957,242 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 November
6, 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
41
<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.
42
<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.
43
<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 *
William F. Flynn..................... -- -- -- --
Catherine A. Graham.................. -- -- -- --
Charles S. Marantz................... -- -- -- --
John J. McDonnell.................... -- -- -- --
Herbert Rabin........................ -- -- -- --
Henry W. Sterbenz.................... -- -- -- --
All executive officers, directors and
key employees as a group (14
persons)............................ 19,672,500 94.2% 19,672,500 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 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."
44
<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
November 7, 1996, there were 20,608,400 shares of Common Stock outstanding,
held by 20 persons, and no shares of Preferred Stock. In addition, there were
outstanding options to acquire 2,957,242 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 .
45
<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
46
<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.
47
<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...........................................................
===
</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."
48
<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 for each of the three years in the period ended December 31, 1995
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.
49
<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
(Unaudited).............................................................. 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
(Unaudited).............................................................. F-4
Statements of Stockholders' Equity (Deficit) for Years Ended December 31,
1993, 1994 and 1995, and the Nine Months Ended September 30, 1996
(Unaudited).............................................................. 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
(Unaudited).............................................................. 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 the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Washington, DC March 8, 1996 (April 2, 1996, April 3, 1996, July 17, 1996 and
November 7, 1996 as to Note 13)
F-2
<PAGE>
YURIE SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
--------- ---------- -------------
(UNAUDITED)
<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 (unau-
dited); issued and outstanding,
16,000,000 shares at December 31, 1994
and 1995 and 20,208,400 shares at Sep-
tember 30, 1996 (unaudited)............ 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............ 17,513,050 17,513,050 21,680,706 21,666,976 21,721,450
========== ========== ========== ========== ===========
</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 (Unau-
dited)............... -- -- -- 2,739,227 2,739,227
---------- -------- -------- ---------- ----------
BALANCE, SEPTEMBER 30,
1996 (Unaudited)....... 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 2,104,200 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.
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 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.
F-7
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 (unaudited), 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 (unaudited), 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 November 7, 1995 at prices below
the assumed initial public offering price will be included as outstanding for
all period presented, using the treasury stock method at the assumed initial
public offering price of $10 per share.
Interim Financial Information--The interim financial data for the nine
months ended September 30, 1995 and 1996 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 periods 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, becomes effective and will
be adopted by the Company as of December 31, 1996. The Company does not plan
to adopt the recognition and measurement provisions of SFAS No. 123
2. LINE OF CREDIT
From January 1, 1995 to June 28, 1996, the Company had a credit agreement
with a 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
the same 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. 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
-------- ---------- -------------
(UNAUDITED)
<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
---- -------- -------------
(UNAUDITED)
<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
-------- -------- -------------
(UNAUDITED)
<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 (unaudited):
<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
(unaudited) 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
(unaudited).
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)
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% (unaudited), 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 (unaudited), 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 in May 1996, 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 (unaudited).
13. STOCKHOLDERS' EQUITY--SUBSEQUENT EVENTS
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.
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.
A summary of stock option activity, described above, under the Plan is as
follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
-----------
(UNAUDITED)
<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>
F-12
<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.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 37
Principal Stockholders................................................... 44
Description of Capital Stock............................................. 45
Shares Eligible For Future Sale.......................................... 46
Underwriting............................................................. 48
Legal Matters............................................................ 49
Experts.................................................................. 49
Additional Information................................................... 49
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]
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.................................................... $13,939.39
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 *
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 REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN LANHAM, MARYLAND ON NOVEMBER 7, 1996.
Yurie Systems, Inc.
By: /s/ Jeong H. Kim
----------------------------------
JEONG H. KIM
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
The undersigned directors and officers of Yurie Systems, Inc. hereby
constitute and appoint Jeong H. Kim as our true and lawful attorney-in-fact
with full power to execute in our name and behalf in the capacities indicated
below this Registration Statement on Form S-1 and any and all amendments
thereto and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and hereby
ratify and conform all that such attorneys-in-fact, or any of them, or their
substitutes shall lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Jeong H. Kim Chairman of the November 7, 1996
- ------------------------------------- Board and Chief
JEONG H. KIM Executive Officer
/s/ Kwok Li President, Chief November 7, 1996
- ------------------------------------- Operating Officer,
KWOK LI and a Director
/s/ Barton Y. Shigemura Senior Vice November 7, 1996
- ------------------------------------- President, Sales
BARTON Y. SHIGEMURA and Marketing and a
Director
/s/ Charles S. Marantz Vice President, November 7, 1996
- ------------------------------------- Finance and
CHARLES S. MARANTZ Administration,
Chief Financial
Officer and
Treasurer (also
serves as Chief
Accounting Officer)
II-5
<PAGE>
SIGNATURE TITLE DATE
/s/ R. James Woolsey Director November 7, 1996
- -------------------------------------
R. JAMES WOOLSEY
/s/ Herbert Rabin Director November 7, 1996
- -------------------------------------
HERBERT RABIN
/s/ Kenneth D. Brody Director November 7, 1996
- -------------------------------------
KENNETH D. BRODY
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 July 3,
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>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
YURIE SYSTEMS, INC.
(Pursuant to Section 102 of the General
Corporation Law of the State of Delaware)
The undersigned, in order to form a corporation pursuant to Section 102 of
the General Corporation Law of Delaware, does hereby certify:
FIRST: The name of the Corporation is Yurie Systems, Inc. (the
-----
"Corporation").
SECOND: The address of the Corporation's registered office in the State of
------
Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
-----
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of capital stock which
------
the Corporation shall have the authority to issue is 60,000,000 shares divided
into two classes of which (i) 50,000,000 shares of par value $.01 per share
shall be designated Common Stock and (ii) 10,000,000 shares of par value $.01
per share shall be designated Preferred Stock.
A. Common Stock.
------------
1. Dividends. Subject to the preferential rights, if any, of
---------
the Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of Common Stock.
2. Voting Rights. At every annual or special meeting of
-------------
stockholders of the Corporation, every holder of Common Stock shall be entitled
to one vote, in person or by proxy, for each share of Common Stock standing in
his name on the books of the Corporation.
3. Liquidation, Dissolution or Winding Up. In the event of any
--------------------------------------
voluntary or involuntary liquidation, dissolution, or winding up of the affairs
of the
<PAGE>
Corporation, after payment or provision for payment of the debts and other
liabilities of the Corporation and of the preferential amounts, if any, to which
the holders of Preferred Stock shall be entitled, the holders of all outstanding
shares of Common Stock shall be entitled to share ratably in the remaining net
assets of the Corporation.
B. Preferred Stock. The Board of Directors is authorized, subject
---------------
to limitations prescribed by law, to provide for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares to be
included in each such series, and to fix the designations, powers, preferences,
and rights of the shares of each such series, and any qualifications,
limitations or restrictions thereof. The number of authorized shares of
Preferred Stock may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of a majority of the
votes entitled to be cast by the holders of stock of the Corporation without the
separate vote of the holders of the Preferred Stock as a class.
FIFTH: The business and affairs of the Corporation shall be managed by and
-----
under the direction of the Board of Directors. The Board of Directors may
exercise all such authority and powers of the Corporation and do all such lawful
acts and things as are not by statute or this Certificate of Incorporation
directed or required to be exercised or done by the stockholders.
A. Number of Directors. The number of directors of the Corporation
-------------------
shall be fixed from time to time exclusively by a resolution of a majority of
the Board of Directors of the Corporation, but in no event shall the number of
directors be fewer than three (3) nor more than nine (9). Any change to the
number of directors set forth herein may only be made by amendment to this
Article FIFTH. No such change shall affect the term of any director then in
office. No director need be a stockholder.
B. Classes and Terms of Directors. The directors shall be divided
------------------------------
into three classes (I, II and III), as nearly equal in number as possible, and
no class shall include less than one director. The initial term of office for
members of Class I shall expire at the annual meeting of stockholders in 1997;
the initial term of office for members of Class II shall expire at the annual
meeting of stockholders in 1998; and the initial term of office for members of
Class III shall expire at the annual meeting of stockholders in 1999. At each
annual meeting of stockholders following such initial classification and
election, directors elected to succeed those directors whose terms expire shall
be elected for a term of office to expire at the third succeeding annual meeting
of stockholders after their election, and shall continue to hold office until
their respective successors are elected and qualified. In the event of any
increase in the number of directors fixed by the Board of Directors, the
additional directors shall be so classified that all classes of directors have
as nearly equal numbers of directors as may be possible.
-2-
<PAGE>
In the event of any decrease in the number of directors, all classes of
directors shall be decreased equally as nearly as may be possible.
C. Newly-Created Directorships and Vacancies. Subject to the rights
-----------------------------------------
of the holders of any class of Common Stock or series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
number of directors or any vacancies in the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or any
other cause may be filled by the Board of Directors, provided that a quorum is
then in office and present, or by a majority of the directors then in office, if
less than a quorum is then in office, or by the sole remaining director.
Directors elected to fill a newly created directorship or other vacancies shall
hold office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and until such
director's successor has been elected and has qualified.
D. Removal of Directors. Subject to the rights of the holders of
--------------------
any class of Common Stock or series of Preferred Stock then outstanding, the
directors or any director may be removed from office at any time, but only for
cause, at a meeting called for that purpose, and only by the affirmative vote of
the holders of at least 66-2/3% of the voting power of all shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
E. Rights of Holders of Preferred Stock. Notwithstanding the
------------------------------------
foregoing provisions of this Article FIFTH, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
rights and preferences of such Preferred Stock as set forth in this Certificate
of Incorporation or in the resolution or resolutions of the Board of Directors
relating to the issuance of such Preferred Stock, and such directors so elected
shall not be divided into classes pursuant to this Article FIFTH unless
expressly provided by such rights and preferences.
F. Written Ballot Not Required. Elections of directors need not be
---------------------------
by written ballot unless the Bylaws of the Corporation shall otherwise provide.
SIXTH: Pursuant to Section 228 of the Delaware General Corporation Law,
-----
any action required to be taken at any annual or special meeting of stockholders
of the Corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the
-3-
<PAGE>
holders of 66-2/3% of the voting power of all shares of the Corporation entitled
to vote generally in the election of directors, voting together as a single
class.
SEVENTH: The Board of Directors is expressly authorized to adopt, amend or
-------
repeal the by-laws of the Corporation. Any by-laws made by the directors under
the powers conferred hereby may be amended or repealed by the directors or by
the stockholders. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, the by-laws shall not be amended
or repealed by the stockholders, and no provision inconsistent therewith shall
be adopted by the stockholders, without the affirmative vote of the holders of
66-2/3% of the voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
EIGHTH: A director of the Corporation shall not be personally liable to
------
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that the foregoing shall not eliminate or
-------- -------
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of Delaware or (iv)
for any transaction from which the director derived an improper personal
benefit. If the General Corporation Law of Delaware is hereafter amended to
permit further elimination or limitation of the personal liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the General Corporation Law of
Delaware as so amended. Any repeal or modification of this Article EIGHTH by
the stockholders of the Corporation or otherwise shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
NINTH: Each person who was or is made a party or is threatened to be made
-----
a party to or is involved (including, without limitation, as a witness) in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he is or was a director or officer of the corporation or is or was
serving at the request of the Corporation as a director or officer of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"Indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director or officer or in any other capacity while so
serving, shall be indemnified and held harmless by the Corporation to the full
extent authorized by the General Corporation Law of Delaware, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the
-4-
<PAGE>
Corporation to provide prior to such amendment), or by other applicable law as
then in effect, against all expense, liability and loss (including attorneys'
fees and related disbursements, judgments, fines, excise taxes or penalties
under the Employee Retirement Income Security Act of 1974, as amended from time
to time ("ERISA"), penalties and amounts paid or to be paid in settlement)
actually and reasonably incurred or suffered by such indemnitee in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director, officer, partner, member or trustee and shall inure to the
benefit of his or her heirs, executors and administrators. Each person who is or
was serving as a director or officer of a subsidiary of the Corporation shall be
deemed to be serving, or have served, at the request of the Corporation.
A. Procedure. Any indemnification under this Article NINTH (unless
---------
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director or
officer is proper in the circumstances because he/she has met the applicable
standard of conduct set forth in the General Corporation Law of Delaware, as the
same exists or hereafter may be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment). Such determination shall be made (a) by the
Board of Directors by a majority vote of the directors who were not parties to
such action, suit or proceeding (the "Disinterested Directors"), even though
less than a quorum, (b) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (c) by the
stockholders.
B. Advances for Expenses. Costs, charges and expenses (including
---------------------
attorneys' fees) incurred by a director or officer of the Corporation in
defending a civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay all amounts so advanced in the event that it shall ultimately
be determined that such director or officer is not entitled to be indemnified by
the Corporation as authorized in this Article NINTH. The majority of the
Disinterested Directors may, in the manner set forth above, and upon approval of
such director or officer of the Corporation, authorize the Corporation's counsel
to represent such person, in any action, suit or proceeding, whether or not the
Corporation is a party to such action, suit or proceeding.
C. Procedure for Indemnification. Any indemnification or advance of
-----------------------------
costs, charges and expenses under this Article NINTH, shall be made promptly,
and in any event within 60 days upon the written request of the director or
officer, and shall be accompanied by a written undertaking by or on behalf of
Indemnitee to repay such amount if it shall ultimately be determined that
Indemnitee is not entitled to be
-5-
<PAGE>
indemnified therefor pursuant to the terms of this Article NINTH. The right to
indemnification of advances as granted by this Article NINTH shall be
enforceable by the director or officer in any court of competent jurisdiction,
if the Corporation denies such request, in whole or in part, or if no
disposition thereof is made within 60 days. Such person's costs and expenses
incurred in connection with successfully establishing his/her right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the advance of costs, charges and
expenses under this Article NINTH where the required undertaking, if any, has
been received by the Corporation) that the claimant has not met the standard of
conduct set forth in the General Corporation Law of Delaware, as the same exists
or hereafter may be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, its independent legal counsel and its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he/she has met the
applicable standard of conduct set forth in the General Corporation Law of
Delaware, as the same exists or hereafter may be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights that said law permitted
the Corporation to provide prior to such amendment), nor the fact that there has
been an actual determination by the Corporation (including its Board of
Directors, its independent legal counsel and its stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct.
D. Other Rights; Continuation of Right to Indemnification. The
------------------------------------------------------
indemnification and advancement of expenses provided by this Article NINTH shall
not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any law (common
or statutory), by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his/her official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for the Corporation, and shall continue as to a person who has ceased
to be a director or officer, and shall inure to the benefit of the estate,
heirs, executors and administers of such person. All rights to indemnification
under this Article NINTH shall be deemed to be a contract between the
Corporation and each director or officer of the Corporation who serves or served
in such capacity at any time while this Article NINTH is in effect. Any repeal
or modification of this Article NINTH or any repeal or modification of relevant
provisions of the General Corporation
-6-
<PAGE>
Law of Delaware or any other applicable laws shall not in any way diminish any
rights to indemnification of such director or officer or the obligations of the
Corporation arising hereunder with respect to any action, suit or proceeding
arising out of, or relating to, any actions, transactions or facts occurring
prior to the final adoption of such modification or repeal. For the purposes of
this Article NINTH, references to "the Corporation" include all constituent
corporations absorbed in a consolidation or merger as well as the resulting or
surviving corporation, so that any person who is or was a director or officer of
such a constituent corporation or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article NINTH, with respect to the
resulting or surviving corporation, as he would if he/she had served the
resulting or surviving corporation in the same capacity.
E. Insurance. The Corporation shall have power to purchase and
---------
maintain insurance on behalf of any person who is or was or has agreed to become
a director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him/her and incurred by him/her or on his/her behalf in any such capacity, or
arising out of his/her status as such, whether or not the Corporation would have
the power to indemnify him/her against such liability under the provisions of
this Article NINTH, provided, however, that such insurance is available on
-------- -------
acceptable terms, which determination shall be made by a vote of a majority of
the Board of Directors.
F. Savings Clause. If this Article NINTH or any portion hereof
--------------
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each person entitled to
indemnification under the first paragraph of this Article NINTH as to all
expense, liability and loss (including attorneys' fees and related
disbursements, judgments, fines, ERISA excise taxes and penalties, penalties and
amounts paid or to be paid in settlement) actually and reasonably incurred or
suffered by such person and for which indemnification is available to such
person pursuant to this Article NINTH to the full extent permitted by any
applicable portion of this Article NINTH that shall not have been invalidated
and to the full extent permitted by applicable law.
TENTH: The Corporation reserves the right to amend, alter, change or
-----
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation. Notwithstanding
any other provision of this Certificate of Incorporation or the Bylaws of the
Corporation, and notwithstanding the fact that a lesser percentage or separate
class vote may be specified by law, this Certificate of
-7-
<PAGE>
Incorporation, the Bylaws of the Corporation or otherwise, but in addition to
any affirmative vote of the holders of any particular class or series of the
capital stock required by law, this Certificate of Incorporation, the Bylaws of
the Corporation or otherwise, the affirmative vote of the holders of at least
66-2/3% of the voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to adopt any provision inconsistent with, to amend or repeal any
provision of, or to adopt a by-law inconsistent with, any of Articles FOURTH,
FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, and/or TENTH of this Certificate of
Incorporation.
IN WITNESS WHEREOF, I have hereunto set my hand this 21st day of
August, 1996 and I affirm that the foregoing certificate is my act and deed
and that the facts stated therein are true.
/s/ Gary L. Melhuish
---------------------------------
Gary L. Melhuish, Incorporator
1001 Pennsylvania Avenue, N.W. Suite 800
Washington, D.C. 20004-2505
-8-
<PAGE>
Exhibit 3.2
BYLAWS
OF
YURIE SYSTEMS, INC.
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of the
-----------------
Corporation within the State of Delaware shall be in the City of Wilmington,
County of New Castle.
SECTION 2. Other Offices. The principal office of the Corporation shall
-------------
be at 10000 Derekwood Lane, Lanham, Maryland 20706. The Corporation may also
have an office or offices other than said registered and principal offices at
such place or places, either within or without the State of Delaware, as the
Board of Directors shall from time to time determine or the business of the
Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. Place of Meetings. All meetings of the stockholders for
-----------------
the election of directors or for any other purpose shall be held at any such
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of meeting
or in a duly executed waiver thereof.
SECTION 2. Annual Meeting. The annual meeting of stockholders shall be
--------------
held at such date and time as shall be designated from time to time by the Board
of Directors and stated in the notice of meeting or in a duly executed waiver
thereof. At such annual meeting, the stockholders shall elect, by a plurality
vote, a Board of Directors and transact such other business as may properly be
brought before the meeting.
SECTION 3. Special Meetings. Special meetings of stockholders, unless
----------------
otherwise prescribed by statute, may be called at any time by the Board of
Directors. Such request shall state the purpose or purposes of the proposed
meeting.
SECTION 4. Notice of Meetings. Except as otherwise expressly required
------------------
by statute, written notice of each annual and special meeting of stockholders
stating the date, place and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall be given
to each stockholder of record
<PAGE>
entitled to vote thereat not less than ten (10) nor more than sixty (60) days
before the date of the meeting. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice. Notice shall
be given personally or by mail and, if by mail, shall be sent in a postage
prepaid envelope, addressed to the stockholder at his address as it appears on
the records of the Corporation. Notice by mail shall be deemed given at the time
when the same shall be deposited in the United States mail, postage prepaid.
Notice of any meeting shall not be required to be given to any person who
attends such meeting, except when such person attends the meeting in person or
by proxy for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened, or who, either before or after the meeting, shall submit a signed
written waiver of notice, in person or by proxy. Neither the business to be
transacted at, nor the purpose of, an annual or special meeting of stockholders
need be specified in any written waiver of notice.
SECTION 5. List of Stockholders. The officer who has charge of the stock
--------------------
ledger of the Corporation shall prepare and make, at least ten (10) days before
each meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, showing the address of and
the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting, either at a place within the city, town or village
where the meeting is to be held, which place shall be specified in the notice of
meeting, or, if not specified, at the place where the meeting is to be held.
The list shall be produced and kept at the time and place of the meeting during
the whole time thereof, and may be inspected by any stockholder who is present.
SECTION 6. Quorum, Adjournments. The holders of a majority of the voting
--------------------
power of the issued and outstanding stock of the Corporation entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at all meetings of stockholders, except as
otherwise provided by statute or by the Certificate of Incorporation. If,
however, such quorum shall not be present or represented by proxy at any meeting
of stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented by proxy. At such adjourned meeting at which a
quorum shall be present or represented by proxy, any business may be transacted
which might have been transacted at the meeting as originally called. If the
adjournment is for more than thirty days, or, if after adjournment a new record
date is set, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
-2-
<PAGE>
SECTION 7. Organization. At each meeting of stockholders, the Chairman
------------
of the Board, if one shall have been elected, or, in his absence or if one shall
not have been elected, the Chief Executive Officer or President shall act as
chairman of the meeting. The Secretary or, in his absence or inability to act,
the person whom the chairman of the meeting shall appoint secretary of the
meeting, shall act as secretary of the meeting and keep the minutes thereof.
SECTION 8. Order of Business. The order of business at all meetings of
-----------------
the stockholders shall be as determined by the chairman of the meeting.
SECTION 9. Voting. Except as otherwise provided by statute or the
------
Certificate of Incorporation, each stockholder of the Corporation shall be
entitled at each meeting of stockholders to one vote for each share of capital
stock of the Corporation standing in his name on the record of stockholders of
the Corporation:
(a) on the date fixed pursuant to the provisions of Section 7 of
Article V of these Bylaws as the record date for the determination of
the stockholders who shall be entitled to notice of and to vote at
such meeting; or
(b) if no such record date shall have been so fixed, then at the
close of business on the day next preceding the day on which notice
thereof shall be given, or, if notice is waived, at the close of
business on the date next preceding the day on which the meeting is
held.
Each stockholder entitled to vote at any meeting of stockholders may authorize
another person or persons to act for him by a proxy signed by such stockholder
or his attorney-in-fact, but no proxy shall be voted after three years from its
date, unless the proxy provides for a longer period. Any such proxy shall be
delivered to the secretary of the meeting at or prior to the time designated in
the order of business for so delivering such proxies. When a quorum is present
at any meeting, the vote of the holders of a majority of the voting power of the
issued and outstanding stock of the Corporation entitled to vote thereon,
present and voting, in person or represented by proxy, shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of statute or of the Certificate of Incorporation or of these Bylaws,
a different vote is required, in which case such express provision shall govern
and control the decision of such question. Unless required by statute, or
determined by the chairman of the meeting to be advisable, the vote on any
question need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted and the number of votes to which each
share is entitled.
-3-
<PAGE>
SECTION 10. Inspectors. The Board of Directors may, in advance of any
----------
meeting of stockholders, appoint one or more inspectors to act at such meeting
or any adjournment thereof. If any of the inspectors so appointed shall fail to
appear or act, the chairman of the meeting shall, or if inspectors shall not
have been appointed, the chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares of capital stock of the
Corporation outstanding and the voting power of each, the number of shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the results, and do such acts
as are proper to conduct the election or vote with fairness to all stockholders.
On request of the chairman of the meeting, the inspectors shall make a report in
writing of any challenge, request or matter determined by them and shall execute
a certificate of any fact found by them. No director or candidate for the office
of director shall act as an inspector of an election of directors. Inspectors
need not be stockholders.
SECTION 11. Notice of Stockholder Business; Nominations.
-------------------------------------------
(a) Annual Meeting of Stockholders.
------------------------------
(1) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the stockholders
shall be made at an annual meeting of stockholders (A) pursuant to the
Corporation's notice of such meeting, (B) by or at the direction of the Board of
Directors or (C) by any stockholder of the Corporation who is a stockholder of
record at the time of giving of the notice provided for in this Section 11 and
who complies with the notice procedures set forth in this Section 11.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (C) of paragraph
(a)(1) of this Section 11, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a stock-
holder's notice must be delivered to the principal executive offices of the
Corporation no later than the close of business on the sixtieth (60th) day nor
earlier than the close of business on the ninetieth (90th) day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
-------- -------
that in the event that the date of the annual meeting is more than thirty (30)
days before or more than sixty (60) days after such anniversary date, notice by
the stockholder to be timely
-4-
<PAGE>
must be so delivered not earlier than the close of business on the ninetieth
(90th) day prior to such annual meeting and not later than the close of business
on the later of the sixtieth (60th) day prior to such annual meeting or the
close of business on the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made by the Corporation. Such
stockholder's notice shall set forth (A) as to each person whom the stockholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (B)
as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (C) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (1) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner, and (2)
the class and number of shares of the Corporation that are owned beneficially
and held of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (a)(2) of this Section 11 to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the Corporation
is increased and there is no public announcement by the Corporation naming all
of the nominees for director or specifying the size of the increased Board of
Directors at least seventy (70) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (70) days prior to such annual meeting), a stockholder's notice required
by this Section 11 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive office of the Corporation
not later than the close of business on the tenth (10th) day following the day
on which such public announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (A) by or at the direction of the Board of
Directors or (B) provided that the Board of Directors has
-5-
<PAGE>
determined that directors shall be elected at such meeting by any stockholder of
the Corporation who is a stockholder of record at the time of giving of notice
of the special meeting, who shall be entitled to vote at such meeting and who
complies with the notice procedures set forth in this Section 11. If the
Corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be) for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (a)(2) of this Section 11 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than ninetieth (90th) day prior to such special meeting nor later
than the later of (A) the close of business of the sixtieth (60th) day prior to
such special meeting or (B) the close of business of the tenth (10th) day
following the day on which public announcement is first made of the date of such
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(c) General.
-------
(1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 11 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 11. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, the chairman of the meeting shall
have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this Section 11 and, if any
proposed nomination or business is not in compliance herewith, to declare that
such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 11, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the forgoing provisions of this Section
11, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in this Section 11 shall be deemed to affect
any rights (A) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(B) of the holders of any series of Preferred Stock to elect directors under
specified circumstances.
-6-
<PAGE>
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
--------------
shall be managed by or under the direction of the Board of Directors. The Board
of Directors may exercise all such authority and powers of the Corporation and
do all such lawful acts and things as are not by statute or the Certificate of
Incorporation directed or required to be exercised or done by the stockholders.
SECTION 2. Place of Meetings. Meetings of the Board of Directors shall
-----------------
be held at such place or places, within or without the State of Delaware, as the
Board of Directors may from time to time determine or as shall be specified in
the notice of any such meeting.
SECTION 3. Annual Meetings. The Board of Directors shall meet for the
---------------
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting shall be held. In
the event such annual meeting is not so held, the annual meeting of the Board of
Directors may be held at such other time or place (within or without the State
of Delaware) as shall be specified in a notice thereof given as hereinafter
provided in Section 7 of this Article III.
SECTION 4. Regular Meetings. Regular meetings of the Board of Directors
----------------
shall he held at such time and place as the Board of Directors may fix. If any
day fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting which would otherwise be held on that
day shall be held at the same hour on the next succeeding business day.
SECTION 5. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the Chairman of the Board, if one shall have been elected, or
by two or more directors of the Corporation or by the Chief Executive Officer or
the President.
SECTION 6. Notice of Meetings. Notice of regular meetings of the Board
------------------
of Directors need not be given except as otherwise required by law or these
Bylaws. Notice of each special meeting of the Board of Directors, and of each
regular and annual meeting of the Board of Directors for which notice shall be
required, shall be given by the Secretary as hereinafter provided in this
Section 6, in which notice shall be stated the time and place of the meeting.
Except as otherwise required by these Bylaws, such notice need not state the
purposes of such meeting. Notice of any special meeting, and of any
-7-
<PAGE>
regular or annual meeting for which notice is required, shall be given to each
director at least (a) four (4) hours before the meeting if by telephone or by
being personally delivered or sent by telex, telecopy, or similar means or (b)
two (2) days before the meeting if delivered by mail to the director's residence
or usual place of business. Such notice shall be deemed to be delivered when
deposited in the United States mail so addressed, with postage prepaid, or when
transmitted if sent by telex, telecopy, or similar means. Neither the business
to be transacted at, nor the purpose of, any special meeting of the Board of
Directors need be specified in the notice or waiver of notice of such meeting.
Any director may waive notice of any meeting by a writing signed by the director
entitled to the notice and filed with the minutes or corporate records. The
attendance at or participation of the director at a meeting shall constitute
waiver of notice of such meeting, unless the director at the beginning of the
meeting or promptly upon his arrival objects to holding the meeting or
transacting business at the meeting.
SECTION 7. Quorum and Manner of Acting. A majority of the entire Board
---------------------------
of Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, and, except as otherwise expressly required
by statute or the Certificate of Incorporation or these Bylaws, the act of a
majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board of Directors. In the absence of a quorum at any
meeting of the Board of Directors, a majority of the directors present thereat
may adjourn such meeting to another time and place. Notice of the time and
place of any such adjourned meeting shall be given to all of the directors
unless such time and place were announced at the meeting at which the
adjournment was taken, in which case such notice shall only be given to the
directors who were not present thereat. At any adjourned meeting at which a
quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called. The directors shall act only as
a Board and the individual directors shall have no power as such.
SECTION 8. Organization. At each meeting of the Board of Directors, the
------------
Chairman of the Board, if one shall have been elected, or, in the absence of the
Chairman of the Board or if one shall not have been elected, the Chief Executive
Officer or the President (or, in his absence, another director chosen by a
majority of the directors present) shall act as chairman of the meeting and
preside thereat. The Secretary or, in his absence, any person appointed by the
chairman, shall act as secretary of the meeting and keep the minutes thereof.
SECTION 9. Resignations. Any director of the Corporation may resign at
------------
any time by giving written notice of his resignation to the Corporation. Any
such resignation shall take effect at the time specified therein or, if the time
when it shall become effective
-8-
<PAGE>
shall not be specified therein, immediately upon its receipt. Unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 10. Compensation. The Board of Directors shall have authority to
------------
fix the compensation, including fees and reimbursement of expenses, of directors
for services to the Corporation in any capacity.
SECTION 11. Committees. The Board of Directors may, by resolution passed
----------
by a majority of the entire Board of Directors, designate one or more
committees, including an executive committee, each committee to consist of one
or more of the directors of the Corporation. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
Except to the extent restricted by statute or the Certificate of Incorporation,
each such committee, to the extent provided in the resolution creating it, shall
have and may exercise all the powers and authority of the Board of Directors and
may authorize the seal of the Corporation to be affixed to all papers which
require it. Each such committee shall serve at the pleasure of the Board of
Directors and have such name as may be determined from time to time by
resolution adopted by the Board of Directors. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors.
SECTION 12. Action by Consent. Unless restricted by the Certificate of
-----------------
Incorporation, any action required or permitted to be taken by the Board of
Directors or any committee thereof may be taken without a meeting if all members
of the Board of Directors or such committee, as the case may be, consent thereto
in writing, and the writing or writings are filed with the minutes of the
proceedings of the Board of Directors or such committee, as the case may be.
SECTION 13. Telephonic Meeting. Unless restricted by the Certificate of
------------------
Incorporation, any one or more members of the Board of Directors or any
committee thereof may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other.
Participation by such means shall constitute presence in person at a meeting.
-9-
<PAGE>
ARTICLE IV
Officers
SECTION 1. Number and Qualifications. The officers of the Corporation
-------------------------
shall be elected by the Board of Directors and shall include the Chief Executive
Officer, the President and Chief Operating Officer, one or more Vice-Presidents
(including Senior, Executive or other classifications of Vice-Presidents) and
the Secretary. If the Board of Directors wishes, it may also elect as an officer
of the Corporation a Chairman of the Board and may elect other officers
(including a Treasurer, one or more Assistant Treasurers and one or more
Assistant Secretaries) as may be necessary or desirable for the business of the
Corporation. Any two or more offices may be held by the same person, and no
officer except the Chairman of the Board need be a director. Each officer shall
hold office until his successor shall have been duly elected and shall have
qualified, or until his death, or until he shall have resigned or have been
removed, as hereinafter provided in these Bylaws.
SECTION 2. Resignations. Any officer of the Corporation may resign at
------------
any time by giving written notice of his resignation to the Corporation. Any
such resignation shall take effect at the time specified therein or, if the time
when it shall become effective shall not be specified therein, immediately upon
receipt. Unless otherwise specified therein, the acceptance of any such
resignation shall not be necessary to make it effective.
SECTION 3. Removal. Any officer of the Corporation may be removed,
-------
either with or without cause, at any time, by the Board of Directors at any
meeting thereof.
SECTION 4. Chairman of the Board. The Chairman of the Board, if one
---------------------
shall have been elected, shall be a member of the Board and an officer of the
Corporation and, if present, shall preside at each meeting of the Board of
Directors or the stockholders. He shall advise and counsel with the Chief
Executive Officer and the President, and in their absence with other executives
of the Corporation, and shall perform such other duties as may from time to time
be assigned to him by the Board of Directors.
SECTION 5. The Chief Executive Officer. The Chief Executive Officer shall
---------------------------
be the chief executive officer of the Corporation. He shall, in the absence of
the Chairman of the Board or if a Chairman of the Board shall not have been
elected, preside at each meeting of the Board of Directors or the stockholders.
He shall perform all duties incident to the office of chief executive officer,
and have authority over the business and affairs of the Corporation and over its
officers, agents and employees, subject to the control and direction of the
Board of Directors, and shall have such other duties as may from time to time be
assigned to him by the Board of Directors.
-10-
<PAGE>
SECTION 6. The President and Chief Operating Officer. The President
-----------------------------------------
shall be the chief operating officer of the Corporation. He shall perform all
duties incident to the office of President, and be responsible for the general
direction of the operations of the business, reporting to the Chief Executive
Officer, and shall have such other duties as may from time to time be assigned
to him by the Board of Directors. At the written request of the Chief Executive
Officer, or in his absence or in the event of his inability to act, the
President shall perform the duties of the Chief Executive Officer, and, when so
acting, shall have the powers of and be subject to the restrictions placed upon
the Chief Executive Officer in respect of the performance of such duties.
SECTION 7. Vice-President. Each Vice-President shall perform all such
--------------
duties as from time to time may be assigned to him by the Board of Directors,
the Chief Executive Officer or the President. At the written request of the
Chief Executive Officer or the President, a Vice-President shall perform the
duties of the Chief Executive Officer or the President, and, when so acting,
shall have the powers of and be subject to the restrictions placed upon the
Chief Executive Officer or the President in respect of the performance of such
duties.
SECTION 8. Treasurer. The Treasurer shall
---------
(a) have charge and custody of, and be responsible for, all the
funds and securities of the Corporation;
(b) keep full and accurate accounts of receipts and disbursements
in books belonging to the Corporation;
(c) deposit all moneys and other valuables to the credit of the
Corporation in such depositories as may be designated by the Board
of Directors or pursuant to its direction;
(d) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investments of its funds, taking proper vouchers therefor;
(f) render to the Board of Directors, whenever the Board of
Directors may require, an account of the financial condition of
the Corporation; and
-11-
<PAGE>
(g) in general, perform all duties incident to the office of
Treasurer and such other duties as from time to time may be assigned
to him by the Board of Directors.
SECTION 9. Secretary. The Secretary shall
--------
(a) keep or cause to be kept in one or more books provided for
the purpose, the minutes of all meetings of the Board of Directors,
the committees of the Board of Directors and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law;
(c) be custodian of the records and the seal of the Corporation
and affix and attest the seal to all certificates for shares of the
Corporation (unless the seal of the Corporation on such certificates
shall be a facsimile, as hereinafter provided) and affix and attest
the seal to all other documents to be executed on behalf of the
Corporation under its seal;
(d) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and
(e) in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned
to him by the Board of Directors.
SECTION 10. The Assistant Treasurer. The Assistant Treasurer, or if
-----------------------
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors (or, if there be no such determination, then in the
order of their election), shall, in the absence of the Treasurer or in the event
of his inability to act or his failure to act (in violation of a duty to act or
in contravention of direction to act by the Board of Directors), perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties as from time to time may be assigned by the Board of Directors.
SECTION 11. The Assistant Secretary. The Assistant Secretary, or if
-----------------------
there be more than one, the Assistant Secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election), shall, in the absence of the Secretary or in the event of his
inability to act or his failure to act (in violation of a duty to act or in
contravention of direction to act by the Board of Directors),
-12-
<PAGE>
perform the duties and exercise the powers of the Secretary and shall perform
such other duties as from time to time may be assigned by the Board of
Directors.
SECTION 12. Officers' Bonds or Other Security. If required by the Board
---------------------------------
of Directors, any officer of the Corporation shall give a bond or other security
for the faithful performance of his duties, in such amount and with such surety
as the Board of Directors may require.
SECTION 13. Compensation. The compensation of the officers of the
------------
Corporation for their services as such officers shall be fixed from time to time
by the Board of Directors. An officer of the Corporation shall not be prevented
from receiving compensation by reason of the fact that he is also a director of
the Corporation.
ARTICLE V
Stock Certificates and Their Transfer
SECTION 1. Stock Certificates. Every holder of stock in the Corporation
------------------
shall be entitled to have a certificate, signed by, or in the name of the
Corporation by, the Chairman of the Board, the Chief Executive Officer, the
President or a Vice-President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by him in the Corporation. If the Corporation shall be
authorized to issue more than one class of stock or more than one series of any
class, the designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock,
provided that, except as otherwise provided in Section 202 of the General
Corporation Law of the State of Delaware, in lieu of the foregoing requirements,
there may be set forth on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, a statement
that the Corporation will furnish without charge to each stockholder who so
requests the designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
SECTION 2. Facsimile Signatures. Where a certificate is signed by a
--------------------
transfer agent or transfer clerk and by a registrar, the signatures of the
Chairman of the Board, Chief Executive Officer, President, Vice-President,
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary upon such
certificate may be facsimiles engraved or
-13-
<PAGE>
printed. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
SECTION 3. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as it may direct sufficient to indemnify it
against any claim that may be made against the Corporation on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
SECTION 4. Transfers of Stock. Upon surrender to the Corporation or the
------------------
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its records; provided, however, that the Corporation shall be
entitled to recognize and enforce any lawful restriction on transfer. Whenever
any transfer of stock shall be made for collateral security, and not absolutely,
it shall be so expressed in the entry of transfer if, when the certificates are
presented to the Corporation for transfer, both the transferor and the
transferee request the Corporation to do so.
SECTION 5. Transfer Agents and Registrars. The Board of Directors may
------------------------------
appoint, or authorize any officer or officers to appoint, one or more transfer
agents and one or more registrars.
SECTION 6. Regulations. The Board of Directors may make such additional
-----------
rules and regulations, not inconsistent with these Bylaws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation.
SECTION 7. Fixing the Record Date. In order that the Corporation may
----------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the
-14-
<PAGE>
Board of Directors may fix, in advance, a record date, which shall not be more
than sixty (60) nor less than ten (10) days before the date of such meeting, nor
more than sixty (60) days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 8. Registered Stockholders. The Corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its records as the owner
of shares of stock to receive dividends and to vote as such owner, shall be
entitled to hold liable for calls and assessments a person registered on its
records as the owner of shares of stock, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares of stock on the
part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VI
General Provisions
SECTION 1. Dividends. Subject to the provisions of statute and the
---------
Certificate of Incorporation, dividends upon the shares of capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting. Dividends may be paid in cash, in property or in shares of stock of
the Corporation, unless otherwise provided by statute or the Certificate of
Incorporation.
SECTION 2. Reserves. Before payment of any dividend, there may be set
--------
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors may, from time to time, in its absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation or for such other purpose as the Board of Directors may think
conducive to the interests of the Corporation. The Board of Directors may
modify or abolish any such reserves in the manner in which it was created.
SECTION 3. Seal. The seal of the Corporation shall be in such form as
----
shall be approved by the Board of Directors, which form may be changed by
resolution of the Board of Directors.
SECTION 4. Fiscal Year. The fiscal year of the Corporation shall end on
-----------
December 31 of each fiscal year and may thereafter be changed by resolution of
the Board of Directors.
-15-
<PAGE>
SECTION 5. Checks, Notes, Drafts, Etc. All checks, notes, drafts or
--------------------------
other orders for the payment of money of the Corporation shall be signed,
endorsed or accepted in the name of the Corporation by such officer, officers,
person or persons as from time to time may be designated by the Board of
Directors or by an officer or officers authorized by the Board of Directors to
make such designation.
SECTION 6. Execution of Contracts, Deeds, Etc. The Board of Directors
----------------------------------
may authorize any officer or officers, agent or agents, in the name and on
behalf of the Corporation to enter into or execute and deliver any and all
deeds, bonds, mortgages, contracts and other obligations or instruments, and
such authority may be general or confined to specific instances.
SECTION 7. Voting of Stock in Other Corporations. Unless otherwise
-------------------------------------
provided by resolution of the Board of Directors, the Chairman of the Board, the
Chief Executive Officer or the President, from time to time, may (or may appoint
one or more attorneys or agents to) cast the votes which the Corporation may be
entitled to cast as a shareholder or otherwise in any other corporation, any of
whose shares or securities may be held by the Corporation, at meetings of the
holders of the shares or other securities of such other corporation. In the
event one or more attorneys or agents are appointed, the Chairman of the Board,
the Chief Executive Officer or the President may instruct the person or persons
so appointed as to the manner of casting such votes or giving such consent. The
Chairman of the Board, the Chief Executive Officer or the President may, or may
instruct the attorneys or agents appointed to, execute or cause to be executed
in the name and on behalf of the Corporation and under its seal or otherwise,
such written proxies, consents, waivers or other instruments as may be necessary
or proper in the circumstances.
ARTICLE VII
Amendments
These Bylaws may be amended or repealed or new Bylaws adopted only in
accordance with Article SEVENTH of the Certificate of Incorporation.
-16-
<PAGE>
A Delaware Corporation
Yurie Systems, Inc.
Common Stock, Par Value $.01 Per Share
SPECIMEN
This Certifies that _____________________________________________________ is the
registered holder of ____________________________________________________ Shares
Common Stock
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed
this ____________ day of _________________ A.D. 19___
<PAGE>
For Value Received, ________ hereby sell, assign and transfer unto
_________________________________________________________________________
__________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
__________________________________________________________________ Attorney to
transfer the said Shares on the books of the within named Corporation with full
power of substitution in the premises.
Dated __________ 19___
In presence of
-------------------------------
- ------------------------------------
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
Exhibit 10.1
As amended through September 6, 1996
YURIE SYSTEMS, INC.
1996 NON STATUTORY STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this plan (the "Plan") is to secure for Yurie Systems, Inc.
(the "Company") and its shareholders, the benefits arising from capital stock
ownership by key employees, consultants, officers and members of the Board of
Directors of the Company who are expected to contribute to the Company's future
growth and success. Except where the context otherwise requires, the term
"Company" shall include the parent and all present and future subsidiaries of
the Company as defined in Section 424(e) and 424(f) of the Internal Revenue Code
of 1986, as amended or replaced from time to time (the "Code").
2. Type of Options and Administration.
----------------------------------
(a) Type of Options. Options granted pursuant to the Plan shall be
---------------
authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and shall be non-statutory options which
are not intended to meet the requirements of Section 422 of the Code.
(b) Administration. The Plan will be administered by the Board of
--------------
Directors of the Company, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. Except as set forth below,
the Board of Directors may in its sole discretion grant options to purchase
shares of the Company's Common Stock, $0.01 par value ("Common Stock"), and
issue shares upon exercise of such options as provided in the Plan. The Board
shall have authority subject to the express provisions of the Plan, to construe
the option agreements and the Plan, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of the
options agreements, which need not be identical, and to make any other
determination in the judgment of the Board of Directors necessary or desirable
for the administration of the Plan. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director shall be liable for any action or determination made in
good faith. The Board of Directors may, to the full extent permitted by or
consistent with applicable laws or regulations (including, without limitation,
applicable state law and Rule 16b-3 promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3"), delegate
any or all of its powers under the Plan to a committee (the "Committee")
appointed by the Board of Directors, and if the Committee is so appointed all
references to the Board of Directors in the Plan shall mean and relate to such
Committee.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which make
---------------------------
express reference to Rule 16b-3 of the Exchange Act shall apply only to such
persons as are required to file reports under Section 16(a) of the Exchange Act
(a "Reporting Person").
<PAGE>
3. Eligibility.
-----------
(a) General. Options may be granted only to persons who are, at the time
-------
of the grant, (i) employees or directors of the Company or (ii) consultants or
advisors to the Company; provided that the Company may agree, by action of the
Board of Directors, to grant an option to a prospective employee of the Company
(contingent upon such individual accepting employment with the Company) if the
Board determines that such a grant is in the best interests of the Company.
(b) Grant of Options to Officers and Directors. From and after the
------------------------------------------
registration of the Common Stock of the Company under the Exchange Act, the
selection of an officer or a director (as the terms "officer" and "director" are
defined for purposes of Rule 16b-3) as a participant, the timing of the option
grant, the exercise price of the option and the number of shares for which an
option or options may be granted to such officer or director shall be determined
either (i) by the Board of Directors, of which all members shall be
"disinterested persons" (as hereinafter defined), or (ii) by a committee of two
or more directors having full authority to act in the matter, of which all
directors shall be "disinterested persons". For the purposes of the Plan, a
director shall be deemed to be "disinterested" only if such person qualifies as
a "disinterested person" within the meaning of Rule 16b-3, as such term is
interpreted from time to time.
4. Stock Subject to Plan.
---------------------
Subject to adjustment as provided in Section 17 below, the maximum number
of shares of Common Stock of the Company which may be issued and sold under the
Plan is 3,200,000 shares. The maximum number of shares of Common Stock that can
be offered to any individual in any year shall be 1,500,000 shares. Such shares
may be authorized and unused shares or may be shares issued and thereafter
acquired by the Company. Until the Company has a class of common equity
registered under the Exchange Act, the Board of Directors will take steps to
assure that sales of securities to optionees under the Plan qualify under Rule
701 under the Securities Act of 1933, including the limit imposed by Rule 701 on
the amount of securities that can be offered and sold. If an option granted
under the Plan shall expire or terminate for any reason without having been
exercised in full, the unpurchased shares subject to such option shall again be
available for subsequent option grants under the Plan.
5. Forms of Option Agreements.
--------------------------
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients. Each option shall state price and other terms at
which the underlying stock can be purchased pursuant to the option. In the event
of a conflict between the terms of this Plan and an option agreement granted
pursuant to this Plan, the terms of this Plan shall supersede the terms of the
Option Agreement.
2
<PAGE>
6. Purchase Price.
--------------
(a) General. The purchase price per share of stock deliverable upon the
-------
exercise of an option shall be determined by the Board of Directors and set
forth in the Option Agreement.
(b) Payment of Purchase Price. Options granted under the Plan may
-------------------------
provide for the payment of the exercise price by delivery of cash or a check to
the order of the Company in an amount equal to the exercise price of such
options or by delivery to the Company of shares of Common Stock of the Company
then owned by the Optionee having a fair market value equal in amount to the
purchase price of such shares, or by any combination of such methods of payment.
7. Option Period.
-------------
Each option and all rights thereunder shall expire on such date as the
Board of Directors shall determine and shall be set forth in the option
Agreement.
8. Exercise of Options.
-------------------
(a) Each option granted under the Plan shall be exercisable either in
full or in installments at such time or times and during such period as shall be
set forth in the Option Agreement.
(b) The Company shall not be required to transfer or deliver any
certificate or certificates for shares purchased upon any such exercise of said
option until after (i) the stock has been paid for in accordance with the terms
of the Option Agreement, and (ii) compliance with all then applicable
requirements of law including, but not limited to, collection by the Company
from the optionee of all requisite income and employment taxes and compliance
with the federal and state securities laws.
9. Nontransferability of Options.
-----------------------------
Except as set forth herein, no option granted under the Plan shall be
assignable or transferable by the person to whom it is granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and during the life of the optionee, shall be exercisable only by
the optionee.
10. Effect of Termination of Employment or Other Relationship.
---------------------------------------------------------
The Board of Directors shall determine the period of time during which an
optionee may exercise an option following (i) the termination of the optionee's
employment or other relationship with the Company or (ii) the death or
disability of the optionee. Such periods shall be set forth in the Option
Agreement.
11. The Company's Right to Repurchase Shares Acquired By Exercise of Option.
-----------------------------------------------------------------------
(a) Voluntary Sale of Stock by the Optionee. In the event an optionee,
---------------------------------------
who has exercised his option and has become a shareholder in the Company, wishes
to sell his stock
3
<PAGE>
acquired upon exercise of said option (or in the event of his death or
disability his personal representative, guardian, or heirs wish to sell the
stock) and has received a written bona fide binding offer, he shall give written
notice to the Company of his wish to sell his stock, and such notice shall set
forth the per share sales price for such stock which has been offered by a third
party and shall include a copy of the written bona fide binding offer. Such
notice shall be sent by certified mail, return receipt requested, to the
President of the Company. The Company shall have the right of first refusal to
purchase such shares at the price set forth in the notice.
(b) Company's Right to Initiate Repurchase of Optionee's Stock. The
----------------------------------------------------------
Company may, on its own initiative, repurchase all or any portion of such
optionee's stock under any of the following circumstances: (1) the optionee's
employment or service as a director, consultant or otherwise with the Company
terminates for any reason, including death; (2) such optionee's insolvency,
bankruptcy or other making of an assignment for the benefit of creditors; or (3)
any purported or attempted sale or other assignment, gift, or other transfer of
stock to a third party in violation of the terms of the Plan (any of (1), (2) or
(3), a "Triggering Event").
In any such event, the Company shall have the absolute right to repurchase
the shares of stock owned by such optionee for a period of six (6) months
immediately following the occurrence of the Triggering Event and the shares
shall not otherwise be transferable during such six (6) month period.
(c) Manner of Exercise. Within six (6) months following the date that
------------------
the Company receives written notice of an optionee's desire to sell his stock in
the Company, or following the date of the Triggering Event, the Company shall
notify such optionee in writing of the number of shares, if any, that the
Company intends to repurchase and of the date, within the six (6) month period,
upon which the Company shall purchase the shares. Unless otherwise agreed by the
parties, the aggregate repurchase price shall be paid in cash to the optionee or
his representative.
(d) Price at Which the Company May Repurchase Shares. If the Company
------------------------------------------------
elects to exercise its option pursuant to Section 11(b) hereof and purchase the
shares of stock available from the optionee, the Company shall pay such optionee
the fair market value of the stock being sold as determined by the Board of
Directors.
If the Company elects to exercise its option pursuant to Section 11(a)
hereof and purchase the shares of stock that such optionee seeks to sell to a
third party, the Company shall pay the optionee the price per share being
offered by such third party, as set forth in the notice delivered to the Company
pursuant to Section 11(a).
(e) If the Company does not elect to acquire such optionee's stock
pursuant to Section 11(a), the optionee may, within the 120-day period following
the expiration of the right granted to the Company set forth in Section 11(c),
sell his or her stock specified in the notice to the Company to the third party,
provided that the sale shall not be on terms and conditions less favorable to
- -------------
the optionee than those contained in the notice to the Company. If the optionee
does not sell his or her stock in such fashion, such stock shall remain subject
to the Company's rights set forth in this Section 11.
4
<PAGE>
(f) Lapse of Repurchase Rights. Shares acquired pursuant to the exercise
--------------------------
of any option granted hereunder shall remain subject to the Company's right to
repurchase until the earliest to occur of the following:
i. The effective date of a Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 covering
securities of the Company whether or not such shares are covered;
ii. The date on which a class of securities of the Company is
registered under Section 12 of the Exchange Act; or
iii. The date of which the Company's right to repurchase pursuant to
a Triggering Event expires with respect to such shares, in accordance with
Section 11(b) hereof.
(g) This Section 11 shall apply to all stock acquired upon the exercise
of options granted pursuant to the Plan unless otherwise waived or amended
pursuant to an optionee's option agreement.
12. Sale or Other Disposition By Majority Interest.
----------------------------------------------
An optionee shall irrevocably appoint the Company and its Chief Executive
Officer, or either of them, as such optionee's agents and attorneys-in-fact,
with full power of substitution in the optionee's name, to sell, exchange,
transfer or otherwise dispose of all or a portion of such optionee's shares of
Common Stock or options, or both, and to do any and all things and to execute
any and all documents and instruments (including, without limitation, any stock
transfer powers) in connection therewith, such power of attorney not to become
operable until such time as the holder or holders of a majority of the issued
and outstanding shares of Common Stock of the Company sell, exchange, transfer
or otherwise dispose of, or contract to sell, exchange, transfer or otherwise
dispose of, all or substantially all of their shares of Common Stock of the
Company. Any sale, exchange, transfer other disposition of all or a portion of
an optionee's shares of Common Stock pursuant to the foregoing powers of
attorney shall be made upon substantially the same terms and conditions
(including sale price per share) applicable to a sale, exchange, transfer or
other dispositions of all or a portion of shares of Common Stock of the Company
owned by the holder or holders of a majority of the issued and outstanding
shares of Common Stock of the Company. For purposes of determining the sale
price per share of Common Stock under this Section 12, there shall be excluded
the consideration (if any) paid or payable to the holder or holders of a
majority of the issued and outstanding shares of Common Stock of the Company in
connection with any employment, consulting, noncompetition or similar agreements
which such holder or holders may enter into in connection with or subsequent to
such sale, transfer, exchange or other disposition. The foregoing powers of
attorney shall be irrevocable and coupled with an interest and shall not
terminate by operation of law, whether by the death, bankruptcy or adjudication
of incompetency or insanity of the optionee or the occurrence of any other
event.
The provision in this Section 12 shall remain in effect until the earliest
to occur of the following:
5
<PAGE>
i. The effective date of a Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 covering
securities of the Company whether or not such shares are covered; or
ii. The date on which a class of securities of the Company is
registered under Section 12 of the Exchange Act.
13. Additional Provisions.
---------------------
(a) Additional Option Provisions. The Board of Directors may, in its
----------------------------
sole discretion, include additional provisions in any option granted under the
Plan, including, without limitation, restrictions on transfer, repurchase
rights, or commitments (i) to pay cash bonuses, (ii) to make, arrange for or
guaranty loans, or (iii) to transfer other property to optionees upon exercise
of options, or such other provisions as shall be determined by the Board of
Directors; provided that such additional provisions shall not be inconsistent
-------------
with any other term or condition of the Plan.
(b) Acceleration. The Board of Directors may, in its sole discretion,
------------
(i) accelerate the date or dates on which all or any particular option or
options granted under the Plan may be exercised; or (ii) extend the dates during
which all or any particular option or options granted under the Plan may be
exercised; provided, however, that no such extension shall be permitted if it
would cause the Plan to fail to comply with Rule 16b-3.
14. General Restrictions.
--------------------
(a) Investment Representations. The Company may require any person to
--------------------------
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities law.
(b) Compliance With Securities Laws. Each option shall be subject to the
-------------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to this option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or of any other condition is
necessary as a condition of, or in connection with, the issuance or purchase of
shares hereunder, this option may not be exercised, in whole or in part, unless
such listing, registrations, qualification, consent or approval, or satisfaction
of such condition shall have been effected or obtained on conditions acceptable
to the Board of Directors. Nothing herein shall be deemed to require the
Company to apply for or to obtain such listing, registration or qualification,
or to satisfy such condition.
Notwithstanding any other provision of this Plan, no transfer for value of
any stock acquired upon exercise of the option shall be valid unless (i) the
stock has been held for a minimum period of two (2) years in the event that the
stock of the Company is not listed on a
6
<PAGE>
national exchange or qualified for trading on the NASDAQ System; (ii) there is
an effective registration statement under the Securities Act of 1933, as
amended; (iii) registration thereunder is not required; or (iv) the holder has
furnished a "no-action" letter from the staff of the Securities and Exchange
Commission satisfactory to the Company that such registration is not required.
All stock issued pursuant to the terms of this plan shall bear the
following legend:
The securities represented by this Stock certificate have not been
registered under the Securities Act of 1933 or the Securities and
Exchange Act of 1934 (the "Act") or applicable state securities laws
(the "State Acts"), and shall not be sold, pledged, hypothecated,
donated, or otherwise transferred (whether or not for consideration)
by the holder unless (i) they have first been registered under the
federal and/or state securities laws or (ii) a "no action letter" has
been received from the Securities and Exchange Commission and/or the
applicable State Securities Commission, to the effect that the
registration of such shares under federal and/or state securities
laws, is not required in connection with such transfer, or (iii) the
Company has received a favorable opinion of its counsel and/or
submission to the Corporation of such other evidence as may be
satisfactory to counsel for the Company, to the effect that any such
transfer shall not be in violation of the Acts and the State Acts.
These securities are subject to certain rights of the Company,
including a right of first refusal and a right to repurchase, such
rights being set forth in full in the Yurie Systems, Inc. 1996 Non
Statutory Stock Option Plan (the "Plan") and the Yurie Systems, Inc.
1996 Non Statutory Stock Option Grant Agreement (the "Grant
Agreement"). The Company will furnish to each stockholder who so
request a copy of the Plan and the Grant Agreement.
15. Rights as a Shareholder.
-----------------------
The holder of an option shall have no rights as a shareholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares.
Except as Section 16 provides, no adjustment shall be made for dividends or
other rights for which the record date is prior to the date such stock
certificate is issued.
16. Adjustment Provisions for Recapitalizations and Related Transactions.
--------------------------------------------------------------------
(a) General. If, through or as a result of any merger, consolidation,
-------
sale of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock-
split or other similar distribution with respect to the outstanding shares of
Common Stock or other securities, (i) the outstanding shares of Common Stock are
increased or decreased, or are exchanged for a different number or kind of
shares or other securities of the Company or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in
7
<PAGE>
(x) the maximum number and kind of shares reserved for issuance under the Plan,
(y) the number and kind of shares or other securities subject to then
outstanding options under the Plan, and (z) the price for each share subject to
any then outstanding options under the Plan, without changing the aggregate
purchase price as to which such options remain exercisable, provided that no
adjustment shall be made pursuant to this Section 16 if such adjustment would
cause the Plan to fail to comply with Rule 16b-3.
(b) Board Authority to Make Adjustments. Adjustments under this
-----------------------------------
Section 16 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent to which adjustments, if
any, will be final, binding and conclusive. No fractional shares will be issued
under the Plan on account of any such adjustments.
17. Merger, Consolidation, Asset Sale, Liquidation, etc.
---------------------------------------------------
(a) General. In the event of a consolidation or merger of the Company or
-------
a sale of all or substantially all of the assets of the Company, in which
outstanding shares of Common Stock are exchanged for securities, cash or other
property of any other corporation or business entity, or in the event of a
liquidation of the Company, the Board of Directors of the Company, or the board
of directors of any corporation assuming the obligations of the Company, may, in
its discretion, take any one or more of the following actions as to outstanding
options: (i) provide that such options shall be assumed, or equivalent options
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof), (ii) upon written notice to the optionees, provide that all
unexercised options will terminate immediately prior to the consummation of such
transaction unless exercised by the optionee within a specified number of days
following the date of such notice, (iii) in the event of a merger under the
terms of which holders of the Common Stock of the Company will receive upon
consummation thereof a cash payment for each share surrendered in the merger
(the "Merger Price"), make or provide for a cash payment to the optionees equal
to the difference between (A) the Merger Price times the number of shares of
Common Stock subject to such outstanding options (to the extent exercisable at
prices not in excess of the Merger Price) and (B) the aggregate exercise price
of all such outstanding options in exchange for the termination of such options,
and (iv) provide that all or any outstanding options shall become exercisable in
full immediately prior to such event. In any such case, the Board of Directors
may, in its discretion, advance the lapse of any waiting or installment periods
and exercise dates.
(b) Substitute Options. Notwithstanding the eligibility requirements of
------------------
Section 3 hereof, the Company may grant options under the Plan in substitution
for options held by employees of another corporation who become employees of the
Company, or a subsidiary of the Company, as the result of a merger or
consolidation of the employing corporation with the Company or a subsidiary of
the Company, or as a result of the acquisition by the Company, or one of its
subsidiaries, of property or stock of the employing corporation. The Company
may direct that substitute options be granted on such terms and conditions as
the Board of Directors considers appropriate in the circumstances.
8
<PAGE>
18. Public offering.
---------------
In the event that the Company proposes to engage in a public offering of
its Common Stock, the Company shall have the right, prior to said offering, to
cancel any or all stock options that were granted within the six(6) month period
prior to the scheduled date of said public offering.
19. No Special Employment Rights.
----------------------------
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
20. Other Employee Benefits.
-----------------------
Except as to plans which by their terms include such amounts as
compensation, neither the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option nor the sale of shares
received upon such exercise will constitute compensation with respect to which
any other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
21. Amendment of the Plan.
---------------------
(a) Except as set forth herein, the Board of Directors may at any time,
and from time to time, modify or amend the Plan in any respect, except that if
at any time the approval of the shareholders of the Company is required as to
such modification or amendment under Rule 16b-3 with respect to options held by
Reporting Persons, the Board of Directors may not effect such modification or
amendment without such approval.
(b) The termination or any modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Board of Directors may amend outstanding option agreements in a
manner not inconsistent with the Plan. The Board of Directors shall have the
right to amend or modify the terms and provisions of the Plan and of any
outstanding option to the extent necessary to ensure the qualification of the
Plan under Rule 16b-3 of the Exchange Act or any successor rule.
22. Withholding.
-----------
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the
9
<PAGE>
optionee may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company to withhold shares of Common Stock otherwise issuable
pursuant to the exercise of an option or (ii) by delivering to the Company
shares of Common Stock already owned by the optionee. The shares so delivered or
withheld shall have a fair market value equal to such withholding obligation.
The fair market value of the shares used to satisfy such withholding obligation
shall be determined by the Company as of the date that the amount of tax to be
withheld is to be determined.
(b) Notwithstanding the foregoing, in the case of a Reporting Person, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3.
23. Cancellation and New Grant of Options.
-------------------------------------
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock having an option exercise price per
share which may be lower or higher than the exercise price per share of the
canceled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
24. Effective Date and Duration of the Plan.
---------------------------------------
(a) Effective Date. The Plan shall become effective when adopted by the
--------------
Board of Directors and approved by the shareholders, provided that options may
be granted to employees after approval of the Plan by the Board of Directors and
prior to shareholder approval, subject to the requirement that shareholder
approval of the Plan be obtained within one year of approval by the Board. If
such shareholder approval is not obtained within one year, all options granted
hereunder shall be null and void. Amendments to the Plan not requiring
shareholder approval shall become effective when adopted by the Board of
Directors; amendments requiring shareholder approval (as provided in Section 21)
shall become effective when adopted by the Board of Directors and approved by
the Company's shareholders.
(b) Termination. Unless sooner terminated in accordance with Section 17,
-----------
the Plan shall terminate upon the date on which all shares available for
issuance under the Plan shall have been issued pursuant to the exercise or
cancellation of options granted under the Plan.
Adopted by the Board of Directors on January 31, 1996 and amended by
the Board of Directors on April 2, 1996.
Approved by the Shareholders on April 3, 1996
10
<PAGE>
Exhibit 10.2
YURIE SYSTEMS, INC.
1996 NON STATUTORY STOCK OPTION GRANT AGREEMENT
1. Grant of Option: Yurie Systems, Incorporated (the "Company"), hereby grants
---------------
to (the "Optionee") an option, pursuant to the Company's 1996 Non Statutory
Stock Option Plan (the "Plan"), to purchase shares of common stock, $0.01 par
value (the "Common Stock"), of the Company in an amount and at a price as set
forth in Schedule A to this Agreement. The Common Stock shall be purchasable as
set forth in, and subject to the terms and conditions of, this option and the
Plan. This option is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Exercise of Option and Provisions for Termination:
-------------------------------------------------
(a) Time for Exercising Option: The optionee may exercise the option as
to all or any portion of the shares covered at any time on or after the
associated vesting date as set forth in Schedule A to this Agreement.This option
shall expire as of the close business on the tenth anniversary of the grant date
hereof and the optionee may not exercise the option after said date.
(b) Exercise Procedure: Subject to the conditions set forth in this
Agreement, this option shall be exercised by the Optionee's delivery of written
notice of exercise to the Treasurer of the Company specifying the number of
shares of Common Stock to be purchased and the purchase price to be paid
therefor and accompanied by payment in full. Such exercise shall be effective
upon receipt by the Treasurer of the Company of such written notice together
with the required payment. The Optionee may purchase fewer than the total number
of shares covered hereby, provided that no partial exercise of this option may
be for any fractional share.
(c) Continuous Relationship Required: Except as otherwise provided
elsewhere herein, this option may not be exercised unless the Optionee, at the
time he or she exercises this option is, and has been at all times since the
date of grant of this option, an employee, consultant, officer or director of
the Company.
(d) Termination of Relationship: If the Optionee ceases to be employed by
the Company for any reason other than death or disability, as provided below,
the right to exercise this option shall terminate immediately upon such
cessation of employment.
(e) Exercise Period Upon Death or Disability: If the Optionee dies or
becomes disabled (within the meaning of Section 22(e)(3) of the Code or any
successor provision thereto) prior to exercising his/her Option, but while
he/she is an employee, consultant, officer or director of the Company, this
option shall be exercisable, within the period of ninety days following the date
of death or disability by the Optionee or by the person to whom this option is
transferred by will or the laws of descent and distribution, provided, that,
this option shall be exercisable only to the extent that this option was
exercisable by the Optionee on the date of his or her death or disability.
Except as otherwise indicated by the context, the term "Optionee", as used in
this option, shall be deemed to include the estate of the Optionee or any person
who acquires the right
<PAGE>
to exercise this option by bequest or inheritance or otherwise by reason of the
death of the Optionee.
3. Payment of Purchase Price:
-------------------------
(a) Method of Payment: Payment of the purchase price for shares purchased
upon exercise of this option shall be made by delivery to the Company of cash or
a check to the order of the Company in any amount equal to the purchase price of
such shares or by delivery to the Company of shares of Common Stock of the
Company then owned by the Optionee having a fair market value equal in amount to
the purchase price of such shares, or by any combination of such methods of
payment.
(b) Valuation of Shares Tendered in Payment: For the purposes hereof, the
fair market value of any share of the Company's Common Stock which may be
delivered to the Company in exercise of this option shall be determined in good
faith by the Board of Directors of the Company.
(c) Delivery of Shares Tendered in Payment of Purchase Price: If the
Company permits the Optionee to exercise options by delivery of shares of Common
Stock of the company, the certificate or certificates representing the shares of
Common Stock of the Company to be delivered shall be duly executed in blank by
the Optionee or shall be accompanied by stock power duly executed in blank
suitable for purposes of transferring such shares to the Company. Fractional
shares of Common Stock of the Company will be accepted in payment of the
purchase price of shares acquired upon exercise of this option.
4. Delivery of Share; Compliance with Securities Law Etc.:
------------------------------------------------------
(a) General: The Company shall, upon payment of the option price for the
number of shares purchased and paid for, make prompt delivery of such shares to
the Optionee, provided that if any law or regulation requires the Company to
take any action with respect to such shares before the issuance thereof, then
the date of delivery of such shares shall be extended for the period necessary
to complete such action.
(b) Listing, Qualification, Etc.: This option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject hereto upon any
securities exchange or under any state or federal law, or the consent or
approval of any governmental or regulatory body, is necessary as a condition of,
or in connection with, the issuance or purchase of shares hereunder, this option
may not be exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained on
conditions acceptable to the Board of Directors. Nothing herein shall be deemed
to require the Company to apply for or to obtain such listing, registration or
qualification.
5. Nontransferability of Option: Except as provided in paragraph (e) of
----------------------------
Section 2, this option is personal and no rights granted hereunder may be
transferred, assigned, pledged or
2
<PAGE>
hypothecated in any way (whether by operation of law or otherwise) nor shall any
such rights be subject to execution, attachment or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this
option or of such rights contrary to the provisions hereof, or upon the levy of
any attachment or similar process upon this option or such rights, this option
and such rights shall, at the election of the Company, become null and void.
6. Rights to Work Product and Non-Compete Agreement: In consideration for the
------------------------------------------------
granting of options pursuant to this Plan, the Optionee hereby grants to the
Company the entire and exclusive right, title, and interest in and to his work
product, including the following:
(i) all original technical data or written material prepared for the
Company;
(ii) all ideas, concepts, know-how, or techniques relating to such
technical data or written material; and
(iii) all inventions, discoveries, or improvements, including ideas,
concepts know-how, or techniques relating to the software industry that were (a)
developed during the Optionee's employment by the Company or (b) conceived or
originated by the Optionee solely or jointly with others (i) at the Company's
request or expense, at its facility, (ii) in the course of the Optionee's
employment, or (iii) based on knowledge or information obtained from the Company
during the course of such employment.
The Optionee will promptly communicate and disclose to the Company all such
information, inventions, discoveries, and improvements. If requested by the
Company, the Optionee shall also execute all papers necessary to assign them to
the Company free of encumbrances and restrictions. All such assignments shall
include the patent rights, if any, in this and all foreign countries.
In addition, for a period of one (1) year from the time the Optionee's
employment with the Company terminates, the Optionee shall not work for any
business, corporation, joint venture, partnership, or other entity (as an owner,
employee, consultant independent contractor, or investor) engaged in providing
the same or similar services as the Company to the same or similar customers as
the Company. In no event during said one-year (1) term shall the Optionee
solicit customers of the Company, inform customers of the Company of the name
and location of his new place of employment, and/or do any work, in any capacity
whatsoever, for any customers of the Company.
If the Optionee violates this Section 6, the Company shall be entitled to
obtain injunctions enforcing this provision, to money damages and to such other
remedies as may be available.
The parties agree that they have attempted to limit the Optionee's right to
compete only to the extent necessary to protect the Company from unfair
competition. The parties recognize, however, that reasonable people may differ
in making such a determination. Consequently, the parties hereby agree that, if
the scope or enforceability of the restrictive covenant is in any way
3
<PAGE>
disputed at any time, a court or other trier of fact may modify and enforce the
covenant to the extent that it believes to be reasonable under the circumstances
existing at that time.
The Optionee recognizes that the covenant not to compete and the granting
to the Company of the Optionee's work product as defined above are an integral
part of this Agreement without which the Company could not afford to grant the
Optionee the stock options granted herein.
7. Rights as a Shareholder: The Optionee shall have no rights as a
-----------------------
shareholder with respect to any shares which may be purchased by exercise of
this option unless and until a certificate representing such shares is duly
issued and delivered to the Optionee. Except as Section 8 provides, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
8. Recapitalization:
----------------
(a) General: If, as a result of a merger, consolidation, sale of all or
substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other distribution with respect to the outstanding shares of Common
Stock or other securities, the outstanding shares of Common Stock are increased
or decreased, or are exchanged for a different number or kind of shares or other
securities, or if additional shares or new or different shares or other
securities are distributed with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment may be made in (i) the
number and kind of shares or other securities subject to this option and/or (ii)
the price for each share subject to this option, without changing the aggregate
purchase price as to which this option remains exercisabie.
(b) Board Authority to Make Adjustments: Adjustments under this Section 8
will be made by the Board of Directors, whose determination as to what
adjustments, if any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under this option on account
of any such adjustments.
9. Mergers, Etc. In the event of a merger or consolidation in which the
-------------
Company is not the surviving corporation, or which results in the acquisition of
substantially all of the Company's outstanding Common Stock by a single person,
entity or group of persons or entities acting in concert, or in the event of the
sale or transfer of all or substantially all of the assets of the Company, or in
the event of a reorganization or liquidation of the Company, prior to the
Expiration Date or termination of this option, the Optionee shall, with respect
to this option or any unexercised portion hereof, be entitled to the rights and
benefits and be subject to the limitations, set forth in Section 18 of the Plan.
10. Withholding Taxes: The Company's obligation to deliver shares upon the
-----------------
exercise of this option shall be subject to the Optionee's satisfaction of all
applicable federal, state and local income and employment tax withholding
requirements.
4
<PAGE>
11. The Company's Right to Repurchase Shares Acquired By Exercise of Option:
-----------------------------------------------------------------------
(a) Voluntary Sale of Stock by the Optionee: In the event the Optionee,
who has exercised his option and has become a shareholder in the Company, wishes
to sell his stock acquired upon exercise of this option in the Company (or in
the event of his death or disability his personal representative, guardian, or
heirs wish to sell the stock) and has received a written bona fide binding
offer, he shall give written notice to the Company of his wish to sell his
stock, and such notice shall set forth the per share sales price for such stock
which has been offered by a third party and shall include a copy of the written
bona fide binding offer. Such notice shall be sent by certified mail, return
receipt requested, to the President of the Company. The Company shall have the
right of first refusal to purchase such shares at the price set forth in the
notice.
(b) Company's Right to Initiate Repurchase of Optionee's Stock: The
Company may, on its own initiative, repurchase the Optionee' s stock under any
of the following circumstances: (1) The optionee's employment with the Company
terminates for any reason, including death; (2) the Optionee's insolvency,
bankruptcy, or other making of an assignment for the benefit of creditors; (3)
any purported or attempted sale or other assignment, gift, or other transfer of
stock to a third party in violation of the terms of the Plan.
In any such event, the Company shall have the absolute right to repurchase
the shares of stock owned by the Optionee for a period of six (6) months
immediately following the termination of the employment (or other triggering
event) of the Optionee.
(c) Manner of Exercise: Within six (6) months following the date that the
Company receives written notice of an Optionee's desire to sell his stock in the
Company, or following the date of the triggering repurchase event, the Company
shall notify the Optionee in writing of the number of shares, if any, that the
Company intends to repurchase and of the date, within the six-month (6) period,
upon which the Company shall purchase the shares. Unless otherwise agreed by the
parties, the aggregate repurchase price shall be paid in cash to the Optionee or
his representative.
(d) Price at Which the Company May Repurchase Shares: If the Company
elects to exercise its option pursuant to Section llb hereof and purchase the
shares of stock available from the Optionee, the Company shall pay the Optionee
the book value of the stock being sold as of the most recent fiscal year end
prior to the date of the event triggering the Company's right to repurchase. The
book value of a share of stock shall be the value, computed in accordance with
generally accepted accounting principles, of the common stockholders' equity of
the Company divided by the total number of shares of common stock of the Company
outstanding as of the date on which the book value is computed.
If the Company elects to exercise its option pursuant to Section lla hereof
and purchase the shares of stock that the Optionee seeks to sell to a third
party, the Company shall pay the Optionee the price per share being offered by
such third party, as set forth in the notice delivered to the Company pursuant
to Section lla.
5
<PAGE>
(e) If the Company does not elect to acquire such Optionee's stock
pursuant to Section lla, the Optionee may, within the 120-day period following
the expiration of the right granted to the Company set forth in Section llc,
sell his or her stock specified in the notice to the Company to the third party,
provided that the sale shall not be on terms and conditions less favorable to
- -------------
the Optionee than those contained in the notice to the Company. If the Optionee
does not sell his or her stock in such fashion such stock shall remain subject
to the Company's rights set forth in this Section 11.
(f) Lapse of Repurchase Rights. Shares acquired pursuant to the exercise
of any option granted hereunder shall remain subject to the Company's right to
repurchase until the earliest to occur of the following:
(i) The effective date of a Registration Statement filed with the
Securities and Exchange Commission under the 1933 Act covering
securities of the Company whether or not such shares are covered;
(ii) The date of which a class of securities of the Company is registered
under Section 12 of the Securities Exchange Act of 1934; or
(iii)The date on which the Company's right to repurchase pursuant to a
triggering event expires with respect to such shares, in accordance
with Section ll(c) hereof.
12. Sale Or Other Disposition By Majority Interest: The Optionee shall
----------------------------------------------
irrevocably appoint the Company and its Chief Executive Officer, or either of
them, as the Optionee's agents and attorneys-in-fact, with full power of
substitution in the Optionee's name, to sell, exchange, transfer or otherwise
dispose of all or a portion of the Optionee's shares of Common Stock or options,
or both, and to do any and all things and to execute any and all documents and
instruments (including, without limitation, any stock transfer powers) in
connection therewith, such power of attorney not to become operable until such
time as the holder or holders of a majority of the issued and outstanding shares
of Common Stock of the company sell, exchange, transfer or otherwise dispose of,
or contract to sell, all or substantially all of their shares of Common Stock of
the Company. Any sale, exchange, transfer or other disposition of all or a
portion of the Optionee's shares of Common Stock pursuant to the foregoing
powers of attorney shall be made upon substantially the same terms and
conditions (including sale price per share) applicable to a sale, exchange,
transfer or other dispositions of all or a portion of shares of Common Stock of
the Company owned by the holder or holders of a majority of the issued and
outstanding shares of Common Stock of the Company. For purposes of determining
the sale price per share of Common Stock under this Section 12, there shall be
excluded the consideration (if any) paid or payable to the holder or holders of
a majority of the issued and outstanding shares of Common Stock of the Company
in connection with any employment, consulting, noncompetition or similar
agreements which such holder or holders may enter into in connection with or
subsequent to such sale, transfer, exchange or other disposition. The foregoing
powers of attorney shall be irrevocable and coupled with an interest and shall
not terminate by operation of law, whether by the death, bankruptcy or
adjudication of incompetency or insanity of the Optionee or the occurrence of
any other event.
6
<PAGE>
The provisions of this Section 12 shall remain in effect until the earliest
to occur of the following:
(i) The effective date of a Registration Statement filed with the
Securities and Exchange Commission under the 1933 Act covering
securities of the Company whether or not such shares are covered; or
(ii) The date of which a class of securities of the Company is registered
under Section 12 of the Securities Exchange Act of 1934.
13. Investment Representations; Legend:
----------------------------------
(a) Representations: The Optionee represents, warrants and covenants
that:
(i) Any shares purchased upon exercise of this option shall be
acquired for the Optionee's account for investment only, and not with
a view to, or for sale in connection with, any distribution of the
shares in violation of the Securities Act of 1933 (the "Securities
Act"), or any rule or regulation under the Securities Act.
(ii) The Optionee has had such opportunity as he or she has deemed
adequate to obtain from representatives of the Company such
information as is necessary to permit the Optionee to evaluate the
merits and risks of his or her investment in the Company.
(iii) The Optionee is able to bear the economic risk of holding such
shares acquired pursuant to the exercise of this option for an
indefinite period.
(iv) The Optionee understands that (A) the shares acquired pursuant
to the exercise of this option will not be registered under the
Securities Act and are "restricted securities" within the meaning of
Rule 144 under the Securities Act; (B) such shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently
registered under the Securities Act or an exemption from registration
is then available; (C) in any event, the exemption from registration
under Rule 144 will not be available for at least two years and even
then will not be available unless a public market then exists for the
Common Stock, adequate information concerning the Company is then
available to the public, and other terms and conditions of Rule 144
are complied with; and (D) there is now no registration statement on
file with the Securities and Exchange Commission with respect to any
stock of the Company and the Company has no obligation or current
intention to register any shares acquired pursuant to the exercise of
this option under the Securities Act.
By making payment upon exercise of this option, the Optionee shall be
deemed to have reaffirmed, as of the date of such payment the representations
made in this Section 10.
7
<PAGE>
(b) Legend on Stock Certificate: All stock certificates representing
shares of Common Stock issued to the Optionee upon exercise of this option shall
have affixed thereto a legend substantially in the following form, in addition
to any other legends required by applicable state law:
The securities represented by the stock certificate have not been
registered under the Securities Act of 1933 or the Securities and
Exchange Act of 1934 (the "Act"), or applicable state securities laws
(the "State Acts"), and shall not be sold, pledged hypothecated,
donated, or otherwise transferred (whether or not for consideration)
by the holder unless (i) they have first been registered under the
federal and/or state securities laws or (ii) a "no action letter" has
been received from the Securities and Exchange Commission and/or the
applicable State Securities Commission, to the effect that
registration of such shares under federal and/or state securities
laws, is not required in connection with such transfer, or (iii) the
Company has received a favorable opinion of its counsel and/or
submission to the Corporation of such other evidence as may be
satisfactory to counsel for the Corporation, to the effect that any
such transfer shall not be in violation of the Acts and the State
Acts.
These securities are subject to certain rights of the Company,
including a right of first refusal and a right to repurchase, such
rights being set forth in full in the Yurie Systems, Inc. 1996 Non
Statutory Stock Option Plan (the "Plan") and the Yurie Systems, Inc.
1996 Non Statutory Stock Option Grant Agreement (the "Grant
Agreement"). The Company will furnish to each stockholder who so
requests a copy of the Plan and the Grant Agreement.
14. Miscellaneous:
-------------
(a) Except as provided herein, this option may not be amended or otherwise
modified unless evidenced in writing and signed by the Company and the Optionee.
(b) All notices under this option shall be mailed or delivered by hand to
the parties at their respective addresses set forth beneath their names below or
at such other address as may be designated in writing by either of the parties
to one another.
8
<PAGE>
(c) This option shall be governed by and construed in accordance with the
laws of the State of Maryland.
Yurie Systems, Inc.
-------------------
By:
--------------------------------------
Title:
-----------------------------------
Address: 4601 Presidents Drive, Suite 210
--------------------------------
Lanham, MD 20706
----------------
OPTIONEE'S ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the terms
and conditions thereof. The undersigned hereby acknowledges receipt of a copy of
the Company's 1996 Stock Option Plan.
OPTIONEE
-------------------------------------------
Address
------------------------------------
-------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Date of Total Number of Price Vesting Shares Vesting
Grant Shares Granted per Share Date(s) on Vesting Date
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
Yurie Systems, Inc.:
By:
----------------------------------------------------------
Title Date:
--------------------------------- --------------
Optionee:
Date:
- -------------------------------------- --------------
10
<PAGE>
Exhibit 10.3
JEONG H. KIM
EMPLOYMENT AGREEMENT
Agreement, dated as of July 31, 1996, by and between Yurie Systems,
Inc., a Delaware corporation (the "Company") and Jeong H. Kim, an individual
residing in the State of Maryland (the "Executive").
WHEREAS, the Executive has heretofore been employed by the Company as
its Chief Executive Officer and is experienced in all phases of the business of
the Company and the Company desires to retain the services of the Executive on
the terms set forth herein;
WHEREAS, in order to induce the Executive to remain in the employ of
the Company, the Company desires by this writing to set forth the continued
employment relationship of the Executive with the Company;
WHEREAS, in partial consideration for the execution of this Agreement
by the Company, the Executive is willing to enter into a covenant not to compete
with the Company, which covenant is contained in this Agreement;
WHEREAS, in partial consideration for the execution of this Agreement
by the Executive, the Company has entered into a registration rights agreement
dated as of even date herewith (the "Registration Rights Agreement") with the
Executive, under which the Company has agreed to grant registration rights to
the Executive for 15,000,000 shares of common stock of the Company held by the
Executive; and
NOW, THEREFORE, in consideration wherefore, the Company and the
Executive agree as follows:
1. Term. The initial term of employment under this Agreement shall
----
begin on the date hereof and end on January 1, 1998; provided, however, that the
-------- -------
term of this Agreement shall be automatically extended for one (1) year on
January 1, 1998 and on each January 1 thereafter unless either the Company or
the Executive shall have given written notice to the other at least ninety (90)
days prior thereto that the term of this Agreement shall not be so extended.
2. Employment.
----------
(a) The Executive shall be employed as the Chief Executive Officer of
the Company and/or in such other senior executive capacity as may be mutually
agreed to
<PAGE>
in writing by the parties. The Executive shall perform the duties, undertake the
responsibilities and exercise the authority customarily performed, undertaken
and exercised by persons situated in a similar executive capacity. He shall also
promote, by entertainment or otherwise, the business of the Company.
(b) Excluding periods of vacation and sick leave to which the
Executive is entitled, the Executive agrees to devote his attention and time
during usual business hours to the business and affairs of the Company to the
extent necessary to discharge the responsibilities assigned to the Executive
hereunder. The Executive may (i) serve on corporate, civil or charitable boards
or committees, (ii) manage personal investments and (iii) deliver lectures and
teach at educational institutions, so long as such activities do not
significantly interfere with the performance of the Executive's responsibilities
hereunder.
3. Base Salary and Bonus.
---------------------
(a) Base Salary. The Company agrees to pay or cause to be paid to the
-----------
Executive during the term of this Agreement a base salary at the rate of
$200,000 per annum or such larger amount as the Board may from time to time
determine (hereinafter referred to as the "Base Salary"). Such Base Salary
shall be payable in accordance with the Company's customary practices applicable
to its executives. Such rate of salary, or increased rate of salary, if any, as
the case may be, shall be reviewed at least annually by the Board and may be
further increased (but not decreased) in such amounts as the Board in its
discretion may decide.
(b) Bonus. The Company agrees to pay or cause to be paid to the
-----
Executive each year during the term of this Agreement a bonus equal to 20% of
the Base Salary or such other amount as the Board may from time to time
determine (hereinafter referred to as the "Bonus"). Such Bonus shall be payable
in accordance with the Company's customary practices applicable to its
executives. Such Bonus, if any, shall be reviewed at least annually by the
Board and may be further increased or decreased in such amounts as the Board in
its discretion may decide.
4. Benefits.
--------
(a) Employee Benefits. The Executive shall be entitled to participate
-----------------
in all employee benefit plans, practices and programs now maintained or
hereafter established by the Company and made available to employees generally
including, without limitation all pension, retirement, profit sharing, savings,
medical, hospitalization, disability, dental, life or travel accident insurance
benefit plans. The Executive's participation in such plans, practices and
programs shall be on the same basis and terms as are applicable to employees of
the Company generally.
-2-
<PAGE>
(b) Executive Benefits. The Executive shall be entitled to
------------------
participate in all executive benefit or incentive compensation plans now
maintained or hereafter established by the Company for the purpose of providing
compensation and/or benefits to executives of the Company.
5. Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement of all expenses reasonably incurred by him in connection with the
performance of his duties hereunder or for promoting, pursuing or otherwise
furthering the business or interests of the Company.
6. Registration Rights. The Executive shall be entitled to receive
-------------------
registration rights with respect to 15,000,000 shares of common stock of the
Company owned by him on the date hereof in accordance with the terms of the
Registration Rights Agreement.
7. Vacation and Sick Leave. At such reasonable times as the Board shall
-----------------------
in its discretion permit, the Executive shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, provided that:
(a) The Executive shall be entitled to annual vacation in accordance
with the policies as periodically established by the Board for similarly
situated executives of the Company.
(b) In addition to the aforesaid paid vacations, the Executive shall
be entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment for such additional periods of time and for such
valid and legitimate reasons as the Board in its discretion may determine.
Further, the Board shall be entitled to grant to the Executive a leave or leaves
of absence with or without pay at such time or times and upon such terms and
conditions as the Board in its discretion may determine.
(c) The Executive shall be entitled to sick leave (without loss of
pay) in accordance with the Company's policies as in effect from time to time.
8. Termination. The Executive's employment hereunder may be terminated
-----------
under the following circumstances:
(a) Disability. The Company may terminate the Executive's employment
----------
after having established the Executive's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties under this Agreement
which continues for a period of at least one hundred eighty (180) consecutive
days. The Executive shall be entitled to the compensation and benefits provided
for under this Agreement for any period during the term of this Agreement and
prior to the establishment of the Executive's Disability during which the
Executive is unable to work
-3-
<PAGE>
due to a physical or mental infirmity. Notwithstanding anything contained in
this Agreement to the contrary, until the Termination Date specified in a Notice
of Termination (as each term is hereinafter defined) relating to the Executive's
Disability, the Executive shall be entitled to return to his position with the
Company as set forth in this Agreement in which event no Disability of the
Executive will be deemed to have occurred.
(b) Cause. The Company may terminate the Executive's employment for
-----
"Cause." A termination for Cause is a termination evidenced by a resolution
adopted in good faith by two-thirds (2/3) of the Board that the Executive (i)
willfully and continually failed to substantially perform his duties with the
Company (other than a failure resulting from the Executive's incapacity due to
physical or mental illness) which failure continued for a period of at least
thirty (30) days after a written notice of demand for substantial performance
has been delivered to the Executive specifying the manner in which the Executive
has failed to substantially perform, or (ii) willfully engaged in conduct which
is demonstrably and materially injurious to the Company, monetarily or
otherwise; provided, however that no termination of the Executive's employment
-------- -------
shall be for Cause as set forth in clause (ii) above until (x) there shall have
been delivered to the Executive a copy of a written notice setting forth that
the Executive was guilty of the conduct set forth in clause (ii) and specifying
the particulars thereof in detail, and (y) the Executive shall have been
provided an opportunity to be heard by the Board (with the assistance of the
Executive's counsel if the Executive so desires). No act, nor failure to act,
on the Executive's part, shall be considered "willful" unless he has acted or
failed to act, with an absence of good faith and without a reasonable belief
that his action or failure to act was in the best interest of the Company.
Notwithstanding anything contained in this Agreement to the contrary, no failure
to perform by the Executive after Notice of Termination is given by the
Executive shall constitute Cause for purposes of this Agreement.
(c) Good Reason. The Executive may terminate his employment for "Good
-----------
Reason." For purposes of this Agreement, Good Reason shall mean either of the
following:
(i) any material breach by the Company of any provision of this
Agreement.
(ii) the insolvency or the filing (by any party, including the
Company) of a petition for bankruptcy, of the Company.
(d) Voluntary Termination. The Executive may voluntarily terminate
---------------------
his employment hereunder at any time upon ninety (90) days notice.
-4-
<PAGE>
(e) Notice of Termination. Any purported termination by the Company
---------------------
or by the Executive shall be communicated by written Notice of Termination to
the other. For purposes of this Agreement, a "Notice of Termination" shall mean
a notice which indicates the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. For purposes of this Agreement, no such purported
termination of employment shall be effective without such Notice of Termination.
(f) Termination Date, Etc. "Termination Date" shall mean in the case
----------------------
of the Executive's death, his date of death, or in all other cases, the date
specified in the Notice of Termination subject to the following:
(i) If the Executive's employment is terminated by the
Company for Cause or due to Disability, the date specified in the
Notice of Termination shall be at least thirty (30) days from the date
the Notice of Termination is given to the Executive, provided that in
the case of Disability the Executive shall not have returned to the
full-time performance of his duties during such period of at least
thirty (30) days; and
(ii) If the Executive's employment is terminated for Good
Reason, the date specified in the Notice of Termination shall not be
more than sixty (60) days from the date the Notice of Termination is
given to the Company.
9. Compensation Upon Termination. Upon termination of the Executive's
-----------------------------
employment during the term of this Agreement (including any extensions thereof),
the Executive shall be entitled to the following benefits:
(a) If the Executive's employment is terminated by the Company for
Cause or Disability or voluntarily by the Executive, or by reason of the
Executive's death, the Company shall pay the Executive all amounts earned or
accrued hereunder through the Termination Date but not paid as of the
Termination Date, including (i) Base Salary, (ii) reimbursement for any and all
monies advanced or expenses incurred in connection with the Executive's
employment for reasonable and necessary expenses incurred by the Executive on
behalf of the Company for the period ending on the Termination Date, (iii) any
Bonus or incentive compensation and (iv) any previous compensation which the
Executive has previously deferred (including any interest earned or credited
thereon) (collectively, "Accrued Compensation"). In addition to the foregoing,
if the Executive's employment is terminated by the Company for Disability or by
reason of the Executive's death, the Company shall pay to the Executive or his
beneficiaries an amount equal to the Bonus or incentive award that the Executive
would have been entitled to receive in
-5-
<PAGE>
respect of the fiscal year in which the Executive's Termination Date occurs had
he continued in employment until the end of such fiscal year, calculated as if
all performance targets and goals (if applicable) had been fully met by the
Company and by the Executive, as applicable, for such year, multiplied by a
fraction the numerator of which is the number of days in such fiscal year
through the Termination Date and the denominator of which is 365 (a "Pro Rata
Bonus"). Executive's entitlement to any other compensation or benefits shall be
determined in accordance with the Company's employee benefit plans and other
applicable programs and practices then in effect.
(b) If the Executive's employment by the Company shall be terminated
(1) by the Company other than for Cause, death or Disability or (2) by the
Executive for Good Reason, then the Executive shall be entitled to the benefits
provided below:
(i) the Company shall pay the Executive all Accrued Compensation
and a Pro Rata Bonus;
(ii) the Company shall pay the Executive as severance pay and in
lieu of any further salary for periods subsequent to the Termination
Date, in a single payment an amount in cash equal the sum of (A) the
Executive's Base Salary for the then-current fiscal year and (B) the
"Bonus Amount" (as defined below). The term "Bonus Amount" shall mean
(x) the amount of any Bonus or incentive compensation received by the
Executive during the fiscal year immediately preceding the Termination
Date or (y) if no Bonus was received by the Executive during the
preceding fiscal year, then an amount equal to the Executive's maximum
Bonus which could be awarded for the fiscal year in which the
Termination Date occurs had he continued in employment until the end of
such fiscal year, assuming all performance targets and goals (if
applicable) had been fully met by the Company and by the Executive, as
applicable, for such year; and
(iii) the Company shall at its expense continue on behalf of the
Executive and his dependents and beneficiaries all life insurance,
disability, medical, dental and hospitalization benefits which were
being provided to the Executive at the time Notice of Termination. The
benefits provided in this Section 9(b)(iii) shall be no less favorable
to the Executive, in terms of amounts and deductibles and costs to him,
than the coverage provided the Executive under the plans providing such
benefits at the time Notice of Termination is given. The Company's
obligation hereunder with respect to the foregoing benefits shall
terminate on the earlier of (x) the date on which the Executive obtains
benefits pursuant to a subsequent employer's benefit plans and (y) one
year after the Termination Date.
-6-
<PAGE>
(c) The amounts provided for in Sections 9(a) and 9(b)(i) and (ii)
shall be paid within ten (10) days after the Executive's Termination Date.
(d) The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment.
10. Executive's Covenants
---------------------
(a) Non-Competition. During the Executive's employment with the
---------------
Company and for one (1) year after the Termination Date (the "Applicable
Period"), the Executive shall not, without the prior written consent of the
Company, directly or indirectly engage in any business or activity, whether as
an employee, consultant, partner, principal, agent, representative, stockholder
(other than as the holder of an interest of five percent (5%) or less in the
equity of a publicly traded corporation) or other individual, corporate or
representative capacity, or render any services or provide any advice or
substantial assistance to any business, person or entity, if such business,
person or entity, directly or indirectly, competes (or, to the Executive's
knowledge after due inquiry, intends to compete or is preparing to compete
during the Applicable Period in the United States in any material manner with
(i) the Company, or any entity directly or indirectly controlled by, controlling
or under common control with the Company, or any corporation or other entity
acquiring, directly or indirectly, all or substantially all the assets and
business of the Company, whether by operation of law or otherwise (an
"Affiliate") (ii) any then-current material product, service or business of the
Company or any Affiliate of the Company or (iii) any material product, service
or business which is under serious consideration by the Company or any Affiliate
of the Company as of the Termination Date or at any time during the twelve (12)
month period prior thereto. If the Executive's employment shall be terminated
(x) by the Company other than for Cause or Disability or (y) by the Executive
for Good Reason, then for purposes of this Section 10(a) only, the Applicable
Period shall terminate upon the Termination Date, and the restrictions contained
in this Section 10(a) shall thereupon be of no further force or effect. The
parties hereto recognize that the laws and public policies of the various states
of the United States may differ as to the validity and enforceability of
covenants similar to those set forth in this Section. It is the intention of
the parties that the potential restrictions on the Executive's activities
imposed by this Section be reasonable in both duration and geographic scope and
in all other respects. It is also the intention of the parties that the
provisions of this Section be enforced to the fullest extent permissible under
the laws and policies of each jurisdiction in which enforcement may be sought,
and that in the event that any provision of this Section shall, for any reason,
be held invalid or unenforceable in any respect, it shall not invalidate, render
unenforceable or otherwise affect any other provision hereof, and such invalid
or unenforceable provision shall be construed by
-7-
<PAGE>
limiting it so as to be valid and enforceable to the fullest extent permissible
under applicable law. Accordingly, if any provision of this Section shall be
determined to be invalid or unenforceable, such invalidity or unenforceability
shall be deemed to apply only with respect to the operation of such provision in
the particular jurisdiction in which such determination is made and not with
respect to any other provision or jurisdiction.
(b) Non-Solicitation. During the Applicable Period, except as is
----------------
required or appropriate in the furtherance of the business of the Company and
its Affiliates, the Executive shall not, directly or indirectly, divert, solicit
or lure away, in competition with the Company, the patronage of (i) any customer
or business of the Company or any Affiliate as of or at any time prior to the
Termination Date, or (ii) any prospective customer or business of the Company or
any Affiliate. As used herein, "prospective customer" means any customer that
the Company or any of its Affiliates (1) has actively solicited within twelve
months prior to the Termination Date, (2) as of the Termination Date, is
soliciting or (3) within the twelve (12) month period prior to the Termination
Date has seriously considered soliciting and, in fact, solicits within the nine
(9) month period following the Termination Date. Except as is required or
appropriate in the furtherance of the business of the Company and its
Affiliates, the Executive shall not, during the Applicable Period, directly or
indirectly, recruit, hire or assist others in recruiting or hiring, or otherwise
solicit for employment, any employees of the Company or any of its Affiliates,
customers or subcontractors. The provisions of this Section shall not be deemed
to limit in any way the provisions of any other Section of this Agreement.
(c) Non-Publication. During the Applicable Period, the Executive
---------------
shall not publish any statement or make any statement (under circumstances
reasonably likely to become public) critical of the Company or in any way
adversely affecting or otherwise maligning the reputation of the Company or any
of its affiliates.
(d) Confidentiality. The Executive shall not, without the prior
---------------
express written consent of the Company, directly or indirectly, use for any
purpose not reasonably believed by the Executive in good faith to be in
furtherance of the business of the Company and/or any Affiliate of the Company
any Confidential Information (as defined below) in any way, or divulge, disclose
or make available or accessible any Confidential Information to any person,
firm, partnership, corporation, trust or any other entity or third party (other
than when required to do so in good faith to perform the Executive's duties and
responsibilities to the Company and its Affiliates or when required to do so by
a lawful order of a court of competent jurisdiction or if required to do so to
defend the Executive in connection with a dispute arising under this Agreement).
The Executive shall also, upon request of the Company, proffer to the Company,
no later than the Termination Date, and without retaining any copies, notes or
excerpts thereof, all memoranda, computer disks or other media, computer
programs, diaries, notes, records,
-8-
<PAGE>
data, customer or client lists, marketing plans and strategies, and any other
documents consisting of or containing any Confidential Information that are in
the Executive's possession or which are subject to the Executive's control at
such time (other than when required to do so in good faith to perform the
Executive's duties and responsibilities to the Company and its Affiliates or
when required to do so by a lawful order of a court of competent jurisdiction or
if required to do so to defend the Executive in connection with a dispute
arising under this Agreement). In consideration of the Executive's employment by
the Company, any and all inventions, improvements, discoveries, processes,
programs or systems developed or discovered by the Executive shall be fully
disclosed by the Executive to the President or Chief Executive Officer of the
Company and the same shall be the sole and absolute property of the Company and,
upon request of the Company, the Executive shall execute, acknowledge and
deliver such assignments, clarifications and other documents as the Company may
consider necessary or appropriate to properly vest all rights, title and
interests therein to the Company.
"Confidential Information" means all information respecting the
business and activities of the Company and any of its Affiliates, including,
without limitation, the clients, customers, suppliers, employees, consultants,
computer or other files, projects, products, computer disks or other media,
computer hardware or computer software programs, marketing plans, financial
information, methodologies, know-how, processes, trade secrets, practices,
projections, forecasts, formats, systems data gathering methods and/or
strategies of the Company and any of its Affiliates. Notwithstanding the
immediately preceding sentence, Confidential Information shall not include (x)
any information that is, or becomes, a part of the public domain or generally
available to the public (unless such availability occurs as a result of any
breach by the Executive of this paragraph or any other obligation the Executive
owes to the Company or any of its Affiliates) or (y) any business knowledge and
experience of the type usually acquired by persons engaged in positions similar
to the Executive's position with the Company, to the extent such knowledge and
experience is non-Company specific and not proprietary to the Company or any of
its Affiliates.
11. Successors and Assigns.
----------------------
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns and the Company shall require
any successor or assign to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place. The term "the
Company" as used herein shall include such successors and assigns. The term
"successors and assigns" as used herein shall mean a corporation or other entity
acquiring all or substantially all the assets and
-9-
<PAGE>
business of the Company (including this Agreement) whether by operation of law
or otherwise.
(b) Neither this Agreement nor any right or interest hereunder shall
be assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal personal representative.
12. Fees and Expenses. The Company shall pay all legal fees and
-----------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (i) the Executive's
termination of employment (including all such fees and expenses, if any,
incurred in contesting or disputing any such termination of employment), (ii)
the Executive's hearing before the Board as contemplated in Section 8(b) of this
Agreement, or (iii) the Executive's seeking to obtain or enforce any right or
benefit provided by this Agreement or by any other plan or arrangement
maintained by the Company under which the Executive is or may be entitled to
receive benefits.
13. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including the Notice of
Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective parties addressed as follows:
If to the Company, to:
Yurie Systems, Inc.
10,000 Derekwood Lane
Lanham, Maryland 20706
Attn: Secretary
With a copy to:
John J. McDonnell, Esq.
1400 16th Street, NW, Suite 400
Washington, D.C. 20036
If to the Executive, to:
Jeong H. Kim
1627 Nordic Hill Circle
Silver Spring, Maryland 20906
-10-
<PAGE>
All notices and communications shall be deemed to have been received on the date
of delivery thereof or on the third business day after the mailing thereof,
except that notice of change of address shall be effective only upon receipt.
14. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company or any of its
subsidiaries and for which the Executive may qualify, nor shall anything herein
limit or reduce such rights as the Executive may have under any other agreements
with the Company or any of its subsidiaries. Amounts which are vested benefits
or which the Executive is otherwise entitled to receive under any plan or
program of the Company or any of its subsidiaries shall be payable in accordance
with such plan or program, except as explicitly modified by this Agreement.
15. Settlement of Claims. The Company's obligation to make the payments
--------------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others.
16. Miscellaneous. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreement or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement.
17. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Delaware without giving
effect to the conflict of law principles thereof.
18. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
19. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto and supersedes all prior agreements, if any,
understandings and
-11-
<PAGE>
arrangements, oral or written, between the parties hereto with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Executive has executed this Agreement as of
the day and year first above written.
YURIE SYSTEMS, INC.
ATTEST: By:------------------------
Name:
Title:
- -------------------- JEONG H. KIM
Secretary
By:------------------------
Jeong H. Kim
-12-
<PAGE>
Exhibit 10.4
KWOK LI
EMPLOYMENT AGREEMENT
Agreement, dated as of July 31, 1996, by and between Yurie Systems, Inc., a
Delaware corporation (the "Company") and Kwok Li, an individual residing in the
State of Maryland (the "Executive").
WHEREAS, the Executive has heretofore been employed by the Company as its
President and Chief Operating Officer and is experienced in all phases of the
business of the Company and the Company desires to retain the services of the
Executive on the terms set forth herein;
WHEREAS, in order to induce the Executive to remain in the employ of the
Company, the Company desires by this writing to set forth the continued
employment relationship of the Executive with the Company;
WHEREAS, in partial consideration for the execution of this Agreement by
the Company, the Executive is willing to enter into a covenant not to compete
with the Company, which covenant is contained in this Agreement;
WHEREAS, in partial consideration for the execution of this Agreement by
the Executive, the Company has entered into a registration rights agreement
dated as of even date herewith (the "Registration Rights Agreement") with the
Executive, under which the Company has agreed to grant registration rights to
the Executive for 4,000,000 shares of common stock of the Company held by the
Executive; and
NOW, THEREFORE, in consideration wherefore, the Company and the Executive
agree as follows:
1. Term. The initial term of employment under this Agreement shall begin
----
on the date hereof and end on January 1, 1998; provided, however, that the term
-------- -------
of this Agreement shall be automatically extended for one (1) year on January 1,
1998 and on each January 1 thereafter unless either the Company or the Executive
shall have given written notice to the other at least ninety (90) days prior
thereto that the term of this Agreement shall not be so extended.
2. Employment.
----------
(a) The Executive shall be employed as the President and Chief
Operating Officer of the Company and/or in such other senior executive capacity
as may
<PAGE>
be mutually agreed to in writing by the parties. The Executive shall perform the
duties, undertake the responsibilities and exercise the authority customarily
performed, undertaken and exercised by persons situated in a similar executive
capacity. He shall also promote, by entertainment or otherwise, the business of
the Company.
(b) Excluding periods of vacation and sick leave to which the
Executive is entitled, the Executive agrees to devote his attention and time
during usual business hours to the business and affairs of the Company to the
extent necessary to discharge the responsibilities assigned to the Executive
hereunder. The Executive may (i) serve on corporate, civil or charitable boards
or committees, (ii) manage personal investments and (iii) deliver lectures and
teach at educational institutions, so long as such activities do not
significantly interfere with the performance of the Executive's responsibilities
hereunder.
3. Base Salary and Bonus.
---------------------
(a) Base Salary. The Company agrees to pay or cause to be paid to the
-----------
Executive during the term of this Agreement a base salary at the rate of
$150,000 per annum or such larger amount as the Board may from time to time
determine (hereinafter referred to as the "Base Salary"). Such Base Salary
shall be payable in accordance with the Company's customary practices applicable
to its executives. Such rate of salary, or increased rate of salary, if any, as
the case may be, shall be reviewed at least annually by the Board and may be
further increased (but not decreased) in such amounts as the Board in its
discretion may decide.
(b) Bonus. The Company agrees to pay or cause to be paid to the
-----
Executive each year during the term of this Agreement a bonus equal to 20% of
the Base Salary or such other amount as the Board may from time to time
determine (hereinafter referred to as the "Bonus"). Such Bonus shall be payable
in accordance with the Company's customary practices applicable to its
executives. Such Bonus, if any, shall be reviewed at least annually by the
Board and may be further increased or decreased in such amounts as the Board in
its discretion may decide.
4. Benefits.
--------
(a) Employee Benefits. The Executive shall be entitled to participate
-----------------
in all employee benefit plans, practices and programs now maintained or
hereafter established by the Company and made available to employees generally
including, without limitation all pension, retirement, profit sharing, savings,
medical, hospitalization, disability, dental, life or travel accident insurance
benefit plans. The Executive's participation in such plans, practices and
programs shall be on the same basis and terms as are applicable to employees of
the Company generally.
-2-
<PAGE>
(b) Executive Benefits. The Executive shall be entitled to
------------------
participate in all executive benefit or incentive compensation plans now
maintained or hereafter established by the Company for the purpose of providing
compensation and/or benefits to executives of the Company.
5. Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement of all expenses reasonably incurred by him in connection with the
performance of his duties hereunder or for promoting, pursuing or otherwise
furthering the business or interests of the Company.
6. Registration Rights. The Executive shall be entitled to receive
-------------------
registration rights with respect to 4,000,000 shares of common stock of the
Company owned by him on the date hereof in accordance with the terms of the
Registration Rights Agreement.
7. Vacation and Sick Leave. At such reasonable times as the Board shall
-----------------------
in its discretion permit, the Executive shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, provided that:
(a) The Executive shall be entitled to annual vacation in accordance
with the policies as periodically established by the Board for similarly
situated executives of the Company.
(b) In addition to the aforesaid paid vacations, the Executive shall
be entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment for such additional periods of time and for such
valid and legitimate reasons as the Board in its discretion may determine.
Further, the Board shall be entitled to grant to the Executive a leave or leaves
of absence with or without pay at such time or times and upon such terms and
conditions as the Board in its discretion may determine.
(c) The Executive shall be entitled to sick leave (without loss of
pay) in accordance with the Company's policies as in effect from time to time.
8. Termination. The Executive's employment hereunder may be terminated
-----------
under the following circumstances:
(a) Disability. The Company may terminate the Executive's employment
----------
after having established the Executive's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties under this Agreement
which continues for a period of at least one hundred eighty (180) consecutive
days. The Executive shall be entitled to the compensation and benefits provided
for under this Agreement for any period during the term of this Agreement and
prior to the establishment of the Executive's Disability during which the
Executive is unable to work
-3-
<PAGE>
due to a physical or mental infirmity. Notwithstanding anything contained in
this Agreement to the contrary, until the Termination Date specified in a Notice
of Termination (as each term is hereinafter defined) relating to the Executive's
Disability, the Executive shall be entitled to return to his position with the
Company as set forth in this Agreement in which event no Disability of the
Executive will be deemed to have occurred.
(b) Cause. The Company may terminate the Executive's employment for
-----
"Cause." A termination for Cause is a termination evidenced by a resolution
adopted in good faith by two-thirds (2/3) of the Board that the Executive (i)
willfully and continually failed to substantially perform his duties with the
Company (other than a failure resulting from the Executive's incapacity due to
physical or mental illness) which failure continued for a period of at least
thirty (30) days after a written notice of demand for substantial performance
has been delivered to the Executive specifying the manner in which the Executive
has failed to substantially perform, or (ii) willfully engaged in conduct which
is demonstrably and materially injurious to the Company, monetarily or
otherwise; provided, however that no termination of the Executive's employment
-------- -------
shall be for Cause as set forth in clause (ii) above until (x) there shall have
been delivered to the Executive a copy of a written notice setting forth that
the Executive was guilty of the conduct set forth in clause (ii) and specifying
the particulars thereof in detail, and (y) the Executive shall have been
provided an opportunity to be heard by the Board (with the assistance of the
Executive's counsel if the Executive so desires). No act, nor failure to act,
on the Executive's part, shall be considered "willful" unless he has acted or
failed to act, with an absence of good faith and without a reasonable belief
that his action or failure to act was in the best interest of the Company.
Notwithstanding anything contained in this Agreement to the contrary, no failure
to perform by the Executive after Notice of Termination is given by the
Executive shall constitute Cause for purposes of this Agreement.
(c) Good Reason. The Executive may terminate his employment for "Good
-----------
Reason." For purposes of this Agreement, Good Reason shall mean either of the
following:
(i) any material breach by the Company of any provision of this
Agreement.
(ii) the insolvency or the filing (by any party, including the
Company) of a petition for bankruptcy, of the Company.
(d) Voluntary Termination. The Executive may voluntarily terminate
---------------------
his employment hereunder at any time upon ninety (90) days notice.
-4-
<PAGE>
(e) Notice of Termination. Any purported termination by the Company
---------------------
or by the Executive shall be communicated by written Notice of Termination to
the other. For purposes of this Agreement, a "Notice of Termination" shall mean
a notice which indicates the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. For purposes of this Agreement, no such purported
termination of employment shall be effective without such Notice of Termination.
(f) Termination Date, Etc. "Termination Date" shall mean in the case
----------------------
of the Executive's death, his date of death, or in all other cases, the date
specified in the Notice of Termination subject to the following:
(i) If the Executive's employment is terminated by the
Company for Cause or due to Disability, the date specified in the
Notice of Termination shall be at least thirty (30) days from the date
the Notice of Termination is given to the Executive, provided that in
the case of Disability the Executive shall not have returned to the
full-time performance of his duties during such period of at least
thirty (30) days; and
(ii) If the Executive's employment is terminated for Good
Reason, the date specified in the Notice of Termination shall not be
more than sixty (60) days from the date the Notice of Termination is
given to the Company.
9. Compensation Upon Termination. Upon termination of the Executive's
-----------------------------
employment during the term of this Agreement (including any extensions thereof),
the Executive shall be entitled to the following benefits:
(a) If the Executive's employment is terminated by the Company for
Cause or Disability or voluntarily by the Executive, or by reason of the
Executive's death, the Company shall pay the Executive all amounts earned or
accrued hereunder through the Termination Date but not paid as of the
Termination Date, including (i) Base Salary, (ii) reimbursement for any and all
monies advanced or expenses incurred in connection with the Executive's
employment for reasonable and necessary expenses incurred by the Executive on
behalf of the Company for the period ending on the Termination Date, (iii) any
Bonus or incentive compensation and (iv) any previous compensation which the
Executive has previously deferred (including any interest earned or credited
thereon) (collectively, "Accrued Compensation"). In addition to the foregoing,
if the Executive's employment is terminated by the Company for Disability or by
reason of the Executive's death, the Company shall pay to the Executive or his
beneficiaries an amount equal to the Bonus or incentive award that the Executive
would have been entitled to receive in
-5-
<PAGE>
respect of the fiscal year in which the Executive's Termination Date occurs had
he continued in employment until the end of such fiscal year, calculated as if
all performance targets and goals (if applicable) had been fully met by the
Company and by the Executive, as applicable, for such year, multiplied by a
fraction the numerator of which is the number of days in such fiscal year
through the Termination Date and the denominator of which is 365 (a "Pro Rata
Bonus"). Executive's entitlement to any other compensation or benefits shall be
determined in accordance with the Company's employee benefit plans and other
applicable programs and practices then in effect.
(b) If the Executive's employment by the Company shall be terminated
(1) by the Company other than for Cause, death or Disability or (2) by the
Executive for Good Reason, then the Executive shall be entitled to the benefits
provided below:
(i) the Company shall pay the Executive all Accrued
Compensation and a Pro Rata Bonus;
(ii) the Company shall pay the Executive as severance pay and in
lieu of any further salary for periods subsequent to the Termination
Date, in a single payment an amount in cash equal the sum of (A) the
Executive's Base Salary for the then-current fiscal year and (B) the
"Bonus Amount" (as defined below). The term "Bonus Amount" shall mean
(x) the amount of any Bonus or incentive compensation received by the
Executive during the fiscal year immediately preceding the Termination
Date or (y) if no Bonus was received by the Executive during the
preceding fiscal year, then an amount equal to the Executive's maximum
Bonus which could be awarded for the fiscal year in which the
Termination Date occurs had he continued in employment until the end of
such fiscal year, assuming all performance targets and goals (if
applicable) had been fully met by the Company and by the Executive, as
applicable, for such year; and
(iii) the Company shall at its expense continue on behalf of the
Executive and his dependents and beneficiaries all life insurance,
disability, medical, dental and hospitalization benefits which were
being provided to the Executive at the time Notice of Termination. The
benefits provided in this Section 9(b)(iii) shall be no less favorable
to the Executive, in terms of amounts and deductibles and costs to him,
than the coverage provided the Executive under the plans providing such
benefits at the time Notice of Termination is given. The Company's
obligation hereunder with respect to the foregoing benefits shall
terminate on the earlier of (x) the date on which the Executive obtains
benefits pursuant to a subsequent employer's benefit plans and (y) one
year after the Termination Date.
-6-
<PAGE>
(c) The amounts provided for in Sections 9(a) and 9(b)(i) and (ii)
shall be paid within ten (10) days after the Executive's Termination Date.
(d) The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment.
10. Executive's Covenants
---------------------
(a) Non-Competition. During the Executive's employment with the
---------------
Company and for one (1) year after the Termination Date (the "Applicable
Period"), the Executive shall not, without the prior written consent of the
Company, directly or indirectly engage in any business or activity, whether as
an employee, consultant, partner, principal, agent, representative, stockholder
(other than as the holder of an interest of five percent (5%) or less in the
equity of a publicly traded corporation) or other individual, corporate or
representative capacity, or render any services or provide any advice or
substantial assistance to any business, person or entity, if such business,
person or entity, directly or indirectly, competes (or, to the Executive's
knowledge after due inquiry, intends to compete or is preparing to compete
during the Applicable Period in the United States in any material manner with
(i) the Company, or any entity directly or indirectly controlled by, controlling
or under common control with the Company, or any corporation or other entity
acquiring, directly or indirectly, all or substantially all the assets and
business of the Company, whether by operation of law or otherwise (an
"Affiliate") (ii) any then-current material product, service or business of the
Company or any Affiliate of the Company or (iii) any material product, service
or business which is under serious consideration by the Company or any Affiliate
of the Company as of the Termination Date or at any time during the twelve (12)
month period prior thereto. If the Executive's employment shall be terminated
(x) by the Company other than for Cause or Disability or (y) by the Executive
for Good Reason, then for purposes of this Section 10(a) only, the Applicable
Period shall terminate upon the Termination Date, and the restrictions contained
in this Section 10(a) shall thereupon be of no further force or effect. The
parties hereto recognize that the laws and public policies of the various states
of the United States may differ as to the validity and enforceability of
covenants similar to those set forth in this Section. It is the intention of
the parties that the potential restrictions on the Executive's activities
imposed by this Section be reasonable in both duration and geographic scope and
in all other respects. It is also the intention of the parties that the
provisions of this Section be enforced to the fullest extent permissible under
the laws and policies of each jurisdiction in which enforcement may be sought,
and that in the event that any provision of this Section shall, for any reason,
be held invalid or unenforceable in any respect, it shall not invalidate, render
unenforceable or otherwise affect any other provision hereof, and such invalid
or unenforceable provision shall be construed by
-7-
<PAGE>
limiting it so as to be valid and enforceable to the fullest extent permissible
under applicable law. Accordingly, if any provision of this Section shall be
determined to be invalid or unenforceable, such invalidity or unenforceability
shall be deemed to apply only with respect to the operation of such provision in
the particular jurisdiction in which such determination is made and not with
respect to any other provision or jurisdiction.
(b) Non-Solicitation. During the Applicable Period, except as is
----------------
required or appropriate in the furtherance of the business of the Company and
its Affiliates, the Executive shall not, directly or indirectly, divert, solicit
or lure away, in competition with the Company, the patronage of (i) any customer
or business of the Company or any Affiliate as of or at any time prior to the
Termination Date, or (ii) any prospective customer or business of the Company or
any Affiliate. As used herein, "prospective customer" means any customer that
the Company or any of its Affiliates (1) has actively solicited within twelve
months prior to the Termination Date, (2) as of the Termination Date, is
soliciting or (3) within the twelve (12) month period prior to the Termination
Date has seriously considered soliciting and, in fact, solicits within the nine
(9) month period following the Termination Date. Except as is required or
appropriate in the furtherance of the business of the Company and its
Affiliates, the Executive shall not, during the Applicable Period, directly or
indirectly, recruit, hire or assist others in recruiting or hiring, or otherwise
solicit for employment, any employees of the Company or any of its Affiliates,
customers or subcontractors. The provisions of this Section shall not be deemed
to limit in any way the provisions of any other Section of this Agreement.
(c) Non-Publication. During the Applicable Period, the Executive
---------------
shall not publish any statement or make any statement (under circumstances
reasonably likely to become public) critical of the Company or in any way
adversely affecting or otherwise maligning the reputation of the Company or any
of its affiliates.
(d) Confidentiality. The Executive shall not, without the prior
---------------
express written consent of the Company, directly or indirectly, use for any
purpose not reasonably believed by the Executive in good faith to be in
furtherance of the business of the Company and/or any Affiliate of the Company
any Confidential Information (as defined below) in any way, or divulge, disclose
or make available or accessible any Confidential Information to any person,
firm, partnership, corporation, trust or any other entity or third party (other
than when required to do so in good faith to perform the Executive's duties and
responsibilities to the Company and its Affiliates or when required to do so by
a lawful order of a court of competent jurisdiction or if required to do so to
defend the Executive in connection with a dispute arising under this Agreement).
The Executive shall also, upon request of the Company, proffer to the Company,
no later than the Termination Date, and without retaining any copies, notes or
excerpts thereof, all memoranda, computer disks or other media, computer
programs, diaries, notes, records,
-8-
<PAGE>
data, customer or client lists, marketing plans and strategies, and any other
documents consisting of or containing any Confidential Information that are in
the Executive's possession or which are subject to the Executive's control at
such time (other than when required to do so in good faith to perform the
Executive's duties and responsibilities to the Company and its Affiliates or
when required to do so by a lawful order of a court of competent jurisdiction or
if required to do so to defend the Executive in connection with a dispute
arising under this Agreement). In consideration of the Executive's employment by
the Company, any and all inventions, improvements, discoveries, processes,
programs or systems developed or discovered by the Executive shall be fully
disclosed by the Executive to the President or Chief Executive Officer of the
Company and the same shall be the sole and absolute property of the Company and,
upon request of the Company, the Executive shall execute, acknowledge and
deliver such assignments, clarifications and other documents as the Company may
consider necessary or appropriate to properly vest all rights, title and
interests therein to the Company.
"Confidential Information" means all information respecting the
business and activities of the Company and any of its Affiliates, including,
without limitation, the clients, customers, suppliers, employees, consultants,
computer or other files, projects, products, computer disks or other media,
computer hardware or computer software programs, marketing plans, financial
information, methodologies, know-how, processes, trade secrets, practices,
projections, forecasts, formats, systems data gathering methods and/or
strategies of the Company and any of its Affiliates. Notwithstanding the
immediately preceding sentence, Confidential Information shall not include (x)
any information that is, or becomes, a part of the public domain or generally
available to the public (unless such availability occurs as a result of any
breach by the Executive of this paragraph or any other obligation the Executive
owes to the Company or any of its Affiliates) or (y) any business knowledge and
experience of the type usually acquired by persons engaged in positions similar
to the Executive's position with the Company, to the extent such knowledge and
experience is non-Company specific and not proprietary to the Company or any of
its Affiliates.
11. Successors and Assigns.
----------------------
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns and the Company shall require
any successor or assign to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place. The term "the
Company" as used herein shall include such successors and assigns. The term
"successors and assigns" as used herein shall mean a corporation or other entity
acquiring all or substantially all the assets and
-9-
<PAGE>
business of the Company (including this Agreement) whether by operation of law
or otherwise.
(b) Neither this Agreement nor any right or interest hereunder shall
be assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal personal representative.
12. Fees and Expenses. The Company shall pay all legal fees and
-----------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (i) the Executive's
termination of employment (including all such fees and expenses, if any,
incurred in contesting or disputing any such termination of employment), (ii)
the Executive's hearing before the Board as contemplated in Section 8(b) of this
Agreement, or (iii) the Executive's seeking to obtain or enforce any right or
benefit provided by this Agreement or by any other plan or arrangement
maintained by the Company under which the Executive is or may be entitled to
receive benefits.
13. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including the Notice of
Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective parties addressed as follows:
If to the Company, to:
Yurie Systems, Inc.
10,000 Derekwood Lane
Lanham, Maryland 20706
Attn: Secretary
With a copy to:
John J. McDonnell, Esq.
1400 16th Street, NW, Suite 400
Washington, D.C. 20036
If to the Executive, to:
Kwok Li
12400 Ellen Court
Silver Spring, Maryland 20904
-10-
<PAGE>
All notices and communications shall be deemed to have been received on the date
of delivery thereof or on the third business day after the mailing thereof,
except that notice of change of address shall be effective only upon receipt.
14. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company or any of its
subsidiaries and for which the Executive may qualify, nor shall anything herein
limit or reduce such rights as the Executive may have under any other agreements
with the Company or any of its subsidiaries. Amounts which are vested benefits
or which the Executive is otherwise entitled to receive under any plan or
program of the Company or any of its subsidiaries shall be payable in accordance
with such plan or program, except as explicitly modified by this Agreement.
15. Settlement of Claims. The Company's obligation to make the payments
--------------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others.
16. Miscellaneous. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreement or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement.
17. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Delaware without giving
effect to the conflict of law principles thereof.
18. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
19. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto and supersedes all prior agreements, if any,
understandings and
-11-
<PAGE>
arrangements, oral or written, between the parties hereto with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Executive has executed this Agreement as of
the day and year first above written.
YURIE SYSTEMS, INC.
ATTEST: By: /s/ Jeong H. Kim
--------------------------------
Name: Jeong H. Kim
Title: Chairman and CEO
[SIGNATURE APPEARS HERE] KWOK LI
- ------------------------
Secretary
By: /s/ Kwok Li
--------------------------------
Kwok Li
-12-
<PAGE>
Exhibit 10.5
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into as of
_________, 1996, by and between Jeong H. Kim, an individual residing in the
State of Maryland ("Executive"), and Yurie Systems, Inc., a Delaware corporation
(the "Company").
WHEREAS, as a condition of that certain Employment Agreement dated as of
the date hereof (the "Employment Agreement") by and among the Executive and the
Company, and as partial consideration for the covenants of the Executive
contained therein, the Company has agreed to grant registration rights to the
Executive with respect to 15,000,000 shares currently owned by the Executive
(the "Kim Shares"), of common stock, $.01 par value, of the Company (the
"Shares") on the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the mutual promises contained herein,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
Section 1. Piggy-Back Registration and Qualification.
-----------------------------------------
(a) Registration and Qualification. If the Company or any security
------------------------------
holder of the Company proposes to register any securities of the Company under
the Securities Act of 1933, as amended (such Act, together with any successor
federal statute, and the rules and regulations of the Securities and Exchange
Commission (the "Commission") promulgated thereunder, all as in effect from time
to time, being the "Securities Act"), on any registration form (otherwise than
for the registration of securities to be offered and sold by the Company
pursuant to (i) an employee benefit plan, (ii) a dividend or interest
reinvestment plan, (iii) other similar plans, (iv) reclassifications of
securities, mergers, consolidations and acquisitions of assets or (v) an initial
public offering of the Shares in which no other stockholder is offering to sell
Shares), not less than forty-five (45) days prior to each such registration the
Company shall give to each Holder (as defined below) written notice of such
proposal which shall describe in detail the proposed registration and
distribution (including those jurisdictions where registration or qualification
under the securities or blue sky laws is intended) and, upon the written
<PAGE>
request of any Holder furnished within fifteen (15) days after the date of any
such notice, which request shall specify the maximum number of Kim Shares
intended to be sold by such Holder, proceed to include in such registration such
Kim Shares ("Piggy-Back Shares") as have been requested by such Holder to be
included in such registration. The term "Holder" means (i) the Executive, (ii)
each Exempt Assignee (defined below) and (iii) each Permitted Assignee (as
defined below). The Company will upon receipt of each such written request use
its best efforts in each instance to cause all such Piggy-Back Shares to be
registered under the Securities Act and qualified under the securities or blue
sky laws of any jurisdiction requested by a Holder. "Exempt Assignee" means any
affiliate of the Executive or the Executive's spouse, direct lineal ancestors
and descendants, legal dependents, beneficiaries under a will or the laws of
intestacy or a trust exclusively for the benefit of some or all of the
foregoing. "Permitted Assignee" means any person to whom the Executive transfers
a minimum of 1,000,000 Kim Shares.
(b) Inclusion in Offerings. If the proposed registration giving
----------------------
rise to registration rights under this Section 1 is in connection with an
underwritten public offering (an "Offering') of Shares or securities exercisable
or convertible into Shares, the Company shall use its best efforts to ensure
that any Piggy-Back Shares registered pursuant to this Section 1 shall be
included in such Offering, if so requested, by the Holder who requested
registration of such Piggy-Back Shares. If the underwriter or underwriters of
such Offering (the "Underwriter") advises the Company in writing that, in its
opinion, the inclusion of the Piggy-Back Shares with securities being registered
by the Company would materially adversely affect the distribution of securities
to be sold by the Company ("Primary Shares") in such Offering, then the Piggy-
Back Shares (or such part thereof as is necessary to avoid such adverse effect)
may be excluded from such proposed registration. If any Shares other than
Primary Shares are registered in connection with any such Offering, then the
number of Piggy-Back Shares which must be registered in connection with such
Offering pursuant to this Section 1 shall be not less than either (A) if the
proposed registration was initiated by the Company, one-third of the number of
Shares other than Primary Shares registered in connection with such Offering or
(B) if the registration was initiated by a stockholder other than a Holder, one-
half of the number of Shares other than Primary Shares registered in connection
with such Offering. In the event fewer than all of the Piggy-Back Shares
requested to be registered by all Holders in connection with an Offering are
registered in connection with such Offering, the number of each Holder's Piggy-
Back Shares which are to be registered shall be determined on a pro rata basis,
according to the number of Piggy-Back Shares which such Holder has requested to
be registered.
(c) Underwriter. Each Holder who pursuant to subsection l(b)
-----------
requests Piggy-Back Shares to be included in an Offering initiated by the
Company agrees to the selection by the Company of the Underwriter.
-2-
<PAGE>
(d) No Requirement to Proceed with Registration. Nothing in this
-------------------------------------------
Section 1 shall be deemed to require the Company to proceed with any
registration of its securities after giving notice as provided herein; provided,
--------
however, that the Company shall pay all expenses incurred pursuant to such
- -------
notice in accordance with Section 4.
Section 2. Demand Registration. At any time and from time to time
-------------------
commencing one year after the Company has had a registration statement become
effective and has become a reporting company under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), any one or more of the Holders,
subject to the limitations set forth below, may request the Company to effect
the registration under the Securities Act of some or all of their Kim Shares in
accordance with this Section (a "Registration Demand"); provided that,
--------
notwithstanding the foregoing, the Executive may request the Company to effect a
registration in accordance with this Section at any time commencing six months
after the Company has had a registration statement become effective and has
become a reporting company under the Exchange Act. The Registration Demand
shall specify whether the Holder(s) desires an underwritten offering or a shelf
registration. The Company will promptly, but in any event within 20 days, give
written notice of such requested registration and the intended method of
distribution thereof to all Holders and thereupon the Company will use its best
efforts to effect such registration under the Securities Act of (i) the Kim
Shares which the Company has been requested to register and (ii) all other Kim
Shares which the Company has been requested to register by Holders thereof by
written request given to the Company within 30 days after the giving of such
written notice by the Company. Thereafter, the Company will use its best
efforts to keep the registration statement current and effective for a period
(the "Registration Demand Period") of not less than six (6) months with respect
to a Registration Demand in connection with an underwritten public offering and
nine (9) months with respect to a Registration Demand in connection with a shelf
registration; provided, however, that the Company shall not be obligated to
-------- -------
effect any registration under the Securities Act under this Section 2 except in
accordance with the following provisions:
(a) the Company shall not be obligated to file more than five
registration statements initiated pursuant to this Section 2 (not more than
three of which may be in connection with an underwritten public offering) which
become effective or are rescinded by the Holders without reimbursement referred
to in the Section 2(f);
(b) the Company may delay the filing or effectiveness of any
registration statement for a period not to exceed 90 days after the date of a
request for registration pursuant to this Section 2 if at the time of such
request the Company is engaged, or has
-3-
<PAGE>
fixed plans to engage within 45 days of the time of such request, in a firm
commitment underwritten public offering of Primary Shares;
(c) the Company shall be entitled once in any six-month period
to postpone for a reasonable period of time (but not exceeding 90 days) the
filing of any registration statement required to be prepared and filed by it if
the Board of Directors of the Company determines, in its reasonable judgment,
that such registration and offering would have a material adverse effect on the
Company;
(d) with respect to any registration pursuant to this Section 2,
the Company may include in such registration any other Shares of the Company or
a stockholder of the Company; provided, however, that if the managing
-------- -------
underwriter advises the Company in writing that the inclusion of all such Shares
would interfere with the successful marketing (including pricing acceptable to
the Holders) of all such securities, then the number of Shares proposed to be
included in such registration shall be included in the following order:
(i) first, the Kim Shares held by the Holders, pro rata
----- --------
based upon the total number of Kim Shares owned by each Holder at the time
of such registration;
(ii) second, the Shares offered by the Company; and
------
(iii) third, the Shares of other stockholders of the Company;
-----
(e) Notwithstanding anything in this Section 2 to the contrary, the
Company shall not be required to take any action pursuant to Section 2,
including, without limitation, using its best efforts to effect the registration
under the Securities Act of Kim Shares, unless
(i) with respect to a Registration Demand for an
underwritten offering, the offering includes at least 1,000,000 Kim Shares
(without taking into account adjustments made to Shares after the date
hereof); or
(ii) with respect to a Registration Demand for a shelf
registration, the offering includes at least 400,000 Kim Shares (without
taking into account adjustments made to Shares after the date hereof);
(f) a Registration Demand under this Section 2 may be rescinded by
written notice to the Company by the Holder(s) initiating such request;
provided, however, that such rescinded registration shall not count as a
- -------- -------
registration statement
-4-
<PAGE>
initiated pursuant to this Section 2 for purposes of paragraph (b) above if the
Holder(s) initiating such request reimburse the Company for all reasonable out-
of-pocket expenses incurred in complying with such request; and
(g) with respect to any Registration Demand for an underwritten
offering, the Company shall have the right to designate an underwriter or
underwriters; provided that the designation of such underwriter(s) shall be
subject to the approval of the Holder(s) holding a majority of the Kim Shares to
be registered in the Registration Demand, which consent shall not be withheld
unreasonably.
Section 3. Registration and Qualification Procedures.
-----------------------------------------
(a) Procedures. Whenever the Company is required by the provisions
----------
of Section 1 or Section 2 to use its best efforts to effect the registration of
any securities held by a Holder under the Securities Act the Company will, as
expeditiously as is possible:
(i) prepare and file with the Commission a registration
statement with respect to such securities in connection with which the Company
will give such Holders and its counsel the opportunity to review and make
comments on such registration statement, each prospectus included therein or
filed with the Commission, and each amendment thereof or supplement thereto, and
will give each of them such access to its books and records and such
opportunities to discuss the business of the Company with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such Holder's counsel, to conduct a
reasonable investigation within the meaning of the Securities Act;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
the prospectus current for the Registration Demand Period and to comply with the
provisions of the Securities Act with respect to the sale of all securities
covered by such registration statement;
(iii) furnish to such Holder such numbers of copies of
preliminary prospectuses and prospectuses and each supplement or amendment
thereto and such other documents as such Holder may reasonably request in order
to facilitate the sale or other disposition of the securities owned by such
Holder in conformity with the requirements of the Securities Act;
-5-
<PAGE>
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under the securities or blue
sky laws of such jurisdictions within the United States as such Holder shall
reasonably request, and do such other reasonable acts and things as may be
required of it to enable such Holder to consummate the sale or other disposition
in such jurisdictions of the securities owned by such Holder; provided, however,
--------
that the Company shall not be required to (i) qualify as a foreign corporation
or consent to a general and unlimited service of process in any such
jurisdiction, or (ii) qualify as a dealer in securities;
(v) furnish, at the request of such Holder on the date such
securities are delivered to the Underwriter for sale pursuant to such
registration or, if such securities are not being sold through underwriters, on
the date the registration statement with respect to such securities becomes
effective, (i) an opinion, dated such date, of counsel representing the Company
for the purposes of such registration, addressed to the Underwriter, if any, and
to such Holder, covering such legal matters with respect to the registration in
respect of which such opinion is being given as such Holder may reasonably
request and are customarily included in such opinions and (ii) letters, dated,
respectively, (1) the effective date of the registration statement and (2) the
date such securities are delivered to the Underwriter, if any, for sale pursuant
to such registration, from a firm of independent certified public accountants of
recognized national standing selected by the Company, addressed to the
Underwriter, if any, and to such Holder, covering such financial, statistical
and accounting matters with respect to the registration in respect of which such
letters are being given as such Holder may reasonably request and are
customarily included in such letters;
(vi) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders as soon as reasonably practicable, but not later than sixteen
(16) months after the effective date of the registration statement, an earning
statement covering a period of at least twelve (12) months beginning after the
effective date of the registration statement, which earning statement shall
satisfy the provisions of Section 1 1 (a) of the Securities Act;
(vii) notify each seller at any time when a prospectus
relating to the registration is required to be delivered under the Securities
Act, upon discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made,
at the request of any such seller promptly prepare and furnish to such seller a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such
-6-
<PAGE>
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which they
were made;
(viii) use its best efforts (A) to cause all such securities to
be listed on a national securities exchange and on each other securities
exchange on which similar securities issued by the Company are then listed, if
the listing of such securities is then permitted under the rules of such
exchange; or (B) to secure the designation of all such securities as a NASDAQ
"national market system security" within the meaning of Rule 11Aa2-1 of the
Commission or, failing that, to secure NASDAQ authorization for such securities
and, without limiting the generality of the foregoing, to arrange for at least
two market makers to register as such with respect to such securities with the
National Association of Securities Dealers;
(ix) provide and cause to be maintained a transfer agent and
registrar for all such securities from and after a date not later than the
effective date of such registration; and
(x) keep each seller advised as to the initiation and
progress of any registration under Section 1 or Section 2.
(b) Underwriting Agreement. In the case of any registration under
----------------------
Section 2 pursuant to an underwritten offering, or in the case of a registration
under Section 1 if the Company has determined to enter into an underwriting
agreement in connection therewith, all securities to be included in such
registration shall be subject to an underwriting agreement and no Holder may
participate in such registration unless such Holder agrees to sell such Holder's
securities on the basis provided therein and completes and executes all
reasonable questionnaires and other documents (including custody agreements and
powers of attorney) which must be executed in connection therewith, and provides
such other information to the Company or the underwriter as may be necessary to
register such Holder's securities. In connection with any underwriting
agreement respecting an Offering, no Holder shall be required to make any
representations or warranties regarding the Company, or to make any
representations or warranties to or agreements with the Company or any
Underwriter, other than customary representations, warranties or agreements and
any other representations required by law.
(c) Limitation on Sale or Distribution of Other Securities. Each
------------------------------------------------------
Holder agrees not to effect any public sale or distribution of any Kim Shares
during the 10-day period prior to, and during the 90-day period (or, if
requested by the managing underwriter in connection with the initial public
offering, the 180-day period) beginning on the later of, (i) the effective date
of the registration statement in connection with a
-7-
<PAGE>
registration requested pursuant to Section 2 hereof or (ii) if applicable, the
commencement of an underwritten offering in connection with a registration
requested pursuant to Section 1 hereof, in each case, if requested by the
underwriter(s) of such underwritten offering, or for such shorter period as the
underwriter(s) shall request.
(d) Information by Holders. Each Holder selling Kim Shares in a
----------------------
proposed registration shall furnish to the Company such written information
regarding such Holder and the distribution proposed by such Holder as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Agreement.
Section 4. Allocation of Expenses. If the Company is required by the
----------------------
provisions of Section 1 or Section 2 to use its best efforts to effect the
registration or qualification under the Securities Act or any state securities
or blue sky laws of any Kim Shares, the Company shall pay all expenses in
connection therewith, including, without limitation, (a) all expenses incident
to filing with the National Association of Securities Dealers, Inc., (b)
registration fees, (c) printing expenses, (d) accounting and legal fees and
expenses (including legal fees and expenses for not more than one counsel
representing the Holder(s), not to exceed $10,000 in connection with any such
registration or qualification), (e) expenses of any special audits incident to
or required by any such registration or qualification and (f) expenses of
complying with the securities or blue sky laws of any jurisdictions in
connection with such registration or qualification; provided, however, the
-------- -------
Company shall not be liable for (1) any discounts or commissions to any
underwriter attributable to Kim Shares being sold; or (2) any stock transfer
taxes incurred in respect of the Kim Shares being sold.
Section 5. Indemnification.
---------------
(a) Obligations, In connection with any registration or
-----------
qualification of securities under Section 1 or Section 2, the Company agrees to
indemnify each Holder and each Underwriter, if any, of any Offering in
connection with such registration, including each person, if any, who controls
each Holder or Underwriter within the meaning of Section 15 of the Securities
Act, against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation) caused by any untrue, or alleged untrue,
statement of a material fact contained in any registration statement,
preliminary prospectus, prospectus or notification or offering circular (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or caused by any omission, or alleged omission, to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading,
-8-
<PAGE>
except insofar as such losses, claims, damages, liabilities or expenses are
caused by any untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished in writing to the Company by
any Holder or any Underwriter expressly for use therein. The Company and each
officer, director, employee and controlling person of the Company shall be
indemnified by each Holder for all such losses, claims, damages, liabilities and
expenses (including the costs of reasonable investigation) caused by any such
untrue, or alleged untrue, statement or any such omission or alleged omission,
based upon information furnished in writing to the Company by such Holder
expressly for use therein; provided that, the indemnification liability of any
--------
Holder shall not exceed the amount by which the total price at which any Kim
Shares sold by such Holder were offered to the public (less any applicable
underwriting discounts and commissions) exceeds the amount of any damages which
such Holder has otherwise been required to pay by reason of such untrue or
allegedly untrue statement or omission or alleged omission.
(b) Procedures. Promptly upon receipt by a party indemnified under
----------
this Section 5 of notice of the commencement of any action against such
indemnified party in respect of which indemnity or reimbursement may be sought
against any indemnifying party under this Section 5, such indemnified party
shall notify the indemnifying party in writing of the commencement of such
action, but the failure so to notify the indemnifying party shall not relieve it
of any liability which it may have to any indemnified party otherwise than under
this Section 5 unless such failure shall materially adversely affect the defense
of such action. In case notice of commencement of any such action shall be given
to the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel (other than reasonable costs of investigation)
shall be paid by the indemnified party unless (a) the indemnifying party agrees
to pay the same, (b) the indemnifying party fails to assume the defense of such
action with counsel satisfactory to the indemnified party or (c) the named
parties to any such action (including any impleaded parties) have been advised
by such counsel that representation of such indemnified party and the
indemnifying party by the same counsel would be inappropriate under applicable
standards of professional conduct (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of such
indemnified party). No indemnifying party shall be liable for any settlement
effected without its written consent. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified
-9-
<PAGE>
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
Section 6. Miscellaneous.
-------------
(a) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended or waived only by a writing signed by all the parties hereto. This
Agreement and the Employment Agreement constitute the full and entire
understanding and agreement among the parties with regard to the subjects hereof
and thereof
(b) Governing Law. This Agreement is made and shall be governed by
-------------
and construed in all respects in accordance with the laws of the State of
Delaware, without regard to the principles of conflicts of laws thereof which
might refer such interpretation to the laws of a different state or
jurisdiction.
(c) Assignment. The provisions hereof shall inure to the benefit
----------
of, and be binding upon (i) any successor of the Company and (ii) all Holders.
(d) Notices. All notices required or permitted hereunder shall be
-------
in writing and shall be delivered by facsimile, courier or registered mail,
addressed as follows:
If to the Company:
Yurie Systems, Inc.
4601 Presidents Drive
Suite 210
Lanham, MD 20706
If to the Executive:
Jeong H. Kim
1627 Nordic Hill Circle
Silver Spring, MD 20906
If personally delivered, such communication shall be deemed delivered upon
actual receipt; if sent by telecopier or facsimile transmission, such
communication shall be deemed delivered the day of transmission (and sender
shall bear the burden of proof of delivery); if sent by overnight courier
pursuant to this Section, such communication shall
-10-
<PAGE>
be deemed delivered upon receipt; and if sent by registered mail pursuant to
this Section 5, such communication shall be deemed delivered as of the date of
delivery indicated on the receipt issued by the relevant postal service, or, if
the addressee fails or refuses to accept delivery, as of the date of such
failure or refusal. No objection may be made to the manner of delivery of any
notice actually received in writing by an authorized agent of a party.
(e) Nominees for Beneficial Owners. In the event that Kim Shares
------------------------------
are held by a nominee for the beneficial owner thereof, the beneficial owner
thereof may, at its option and by written notice to the Company, be treated as
the Holder of such Kim Shares for purposes of any request or other action
pursuant to this Agreement.
(f) Specific Performance. The parties hereto recognize and agree
--------------------
that money damages may be insufficient to compensate any Holder for breaches by
the Company or Shareholder of the terms hereof and, consequently, that the
equitable remedy of specific performance of the terms hereof will be available
in the event of any such breach.
(g) Rule 144. If the Company shall have filed a registration
--------
statement pursuant to Section 12 of the Exchange Act or a registration statement
pursuant to the Securities Act, the Company will file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the Commission thereunder and will take such further
action as any Holder may reasonably request, all to the extent required from
time to time to enable such holder to sell Kim Shares without registration under
the Securities Act within the limitation of the exemptions provided by (i) Rule
144 under the Securities Act, as such Rule may be amended from time to time, or
(ii) any similar rule or regulation hereafter adopted by the Commission. Upon
the request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
(h) Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this agreement shall not in any way be affected or
impaired thereby.
(i) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
JEONG H. KIM
---------------------------------------------
YURIE SYSTEMS, INC.
By:------------------------------------------
Name:
Title:
-12-
<PAGE>
Exhibit 10.6
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into
as of _________, 1996, by and between Kwok Li, an individual residing in the
State of Maryland ("Executive"), and Yurie Systems, Inc., a Delaware corporation
(the "Company").
WHEREAS, as a condition of that certain Employment Agreement dated as
of the date hereof (the "Employment Agreement") by and among the Executive and
the Company, and as partial consideration for the covenants of the Executive
contained therein, the Company has agreed to grant registration rights to the
Executive with respect to 4,000,000 shares currently owned by the Executive (the
"Li Shares"), of common stock, $.01 par value, of the Company (the "Shares") on
the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the mutual promises contained
herein, and for other good and valuable consideration, receipt of which is
hereby acknowledged, the parties agree as follows:
Section 1. Piggy-Back Registration and Qualification.
-----------------------------------------
(a) Registration and Qualification. If the Company or any
------------------------------
security holder of the Company proposes to register any securities of the
Company under the Securities Act of 1933, as amended (such Act, together with
any successor federal statute, and the rules and regulations of the Securities
and Exchange Commission (the "Commission") promulgated thereunder, all as in
effect from time to time, being the "Securities Act"), on any registration form
(otherwise than for the registration of securities to be offered and sold by the
Company pursuant to (i) an employee benefit plan, (ii) a dividend or interest
reinvestment plan, (iii) other similar plans, (iv) reclassifications of
securities, mergers, consolidations and acquisitions of assets or (v) an initial
public offering of the Shares in which no other stockholder is offering to sell
Shares), not less than forty-five (45) days prior to each such registration the
Company shall give to each Holder (as defined below) written notice of such
proposal which shall describe in detail the proposed registration and
distribution (including those jurisdictions where registration or qualification
under the securities or blue sky laws is intended) and, upon the written request
of any Holder furnished within fifteen (15) days after the date of any such
notice,
<PAGE>
which request shall specify the maximum number of Li Shares intended to be sold
by such Holder, proceed to include in such registration such Li Shares ("Piggy-
Back Shares") as have been requested by such Holder to be included in such
registration. The term "Holder" means (i) the Executive, (ii) each Exempt
Assignee (defined below) and (iii) each Permitted Assignee (defined below). The
Company will upon receipt of each such written request use its best efforts in
each instance to cause all such Piggy-Back Shares to be registered under the
Securities Act and qualified under the securities or blue sky laws of any
jurisdiction requested by a Holder. "Exempt Assignee" means any affiliate of the
Executive or the Executive's spouse, direct lineal ancestors and descendants,
legal dependents, beneficiaries under a will or the laws of intestacy or a trust
exclusively for the benefit of some or all of the foregoing. "Permitted
Assignee" means any person to whom the Executive transfers a minimum of 400,000
Li Shares.
(b) Inclusion in Offerings. If the proposed registration giving rise
----------------------
to registration rights under this Section 1 is in connection with an
underwritten public offering (an "Offering') of Shares or securities exercisable
or convertible into Shares, the Company shall use its best efforts to ensure
that any Piggy-Back Shares registered pursuant to this Section 1 shall be
included in such Offering, if so requested, by the Holder who requested
registration of such Piggy-Back Shares. If the underwriter or underwriters of
such Offering (the "Underwriter") advises the Company in writing that, in its
opinion, the inclusion of the Piggy-Back Shares with securities being registered
by the Company would materially adversely affect the distribution of securities
to be sold by the Company ("Primary Shares") in such Offering, then the Piggy-
Back Shares (or such part thereof as is necessary to avoid such adverse effect)
may be excluded from such proposed registration. If any Shares other than
Primary Shares are registered in connection with any such Offering, then the
number of Piggy-Back Shares which must be registered in connection with such
Offering pursuant to this Section 1 shall be not less than either (A) if the
proposed registration was initiated by the Company, one-third of the number of
Shares other than Primary Shares registered in connection with such Offering or
(B) if the registration was initiated by a stockholder other than a Holder, one-
half of the number of Shares other than Primary Shares registered in connection
with such Offering. In the event fewer than all of the Piggy-Back Shares
requested to be registered by all Holders in connection with an Offering are
registered in connection with such Offering, the number of each Holder's Piggy-
Back Shares which are to be registered shall be determined on a pro rata basis,
according to the number of Piggy-Back Shares which such Holder has requested to
be registered.
(c) Underwriter. Each Holder who pursuant to subsection l(b) requests
-----------
Piggy-Back Shares to be included in an Offering initiated by the Company agrees
to the selection by the Company of the Underwriter.
-2-
<PAGE>
(d) No Requirement to Proceed with Registration. Nothing in this
-------------------------------------------
Section 1 shall be deemed to require the Company to proceed with any
registration of its securities after giving notice as provided herein; provided,
--------
however, that the Company shall pay all expenses incurred pursuant to such
- -------
notice in accordance with Section 4.
Section 2. Demand Registration. At any time and from time to time
-------------------
commencing one year after the Company has had a registration statement become
effective and has become a reporting company under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), any one or more of the Holders,
subject to the limitations set forth below, may request the Company to effect
the registration under the Securities Act of some or all of their Li Shares in
accordance with this Section (a "Registration Demand"); provided that,
--------
notwithstanding the foregoing, the Executive may request the Company to effect a
registration in accordance with this Section at any time commencing six months
after the Company has had a registration statement become effective and has
become a reporting company under the Exchange Act. The Registration Demand
shall specify whether the Holder(s) desires an underwritten offering or a shelf
registration. The Company will promptly, but in any event within 20 days, give
written notice of such requested registration and the intended method of
distribution thereof to all Holders and thereupon the Company will use its best
efforts to effect such registration under the Securities Act of (i) the Li
Shares which the Company has been requested to register and (ii) all other Li
Shares which the Company has been requested to register by Holders thereof by
written request given to the Company within 30 days after the giving of such
written notice by the Company. Thereafter, the Company will use its best
efforts to keep the registration statement current and effective for a period
(the "Registration Demand Period") of not less than six (6) months with respect
to a Registration Demand in connection with an underwritten public offering and
nine (9) months with respect to a Registration Demand in connection with a shelf
registration; provided, however, that the Company shall not be obligated to
-------- -------
effect any registration under the Securities Act under this Section 2 except in
accordance with the following provisions:
(a) the Company shall not be obligated to file more than five
registration statements initiated pursuant to this Section 2 (not more than
three of which may be in connection with an underwritten public offering) which
become effective or are rescinded by the Holders without reimbursement referred
to in the Section 2(f);
(b) the Company may delay the filing or effectiveness of any
registration statement for a period not to exceed 90 days after the date of a
request for registration pursuant to this Section 2 if at the time of such
request the Company is engaged, or has fixed plans to engage within 45 days of
the time of such request, in a firm commitment underwritten public offering of
Primary Shares;
-3-
<PAGE>
(c) the Company shall be entitled once in any six-month period to
postpone for a reasonable period of time (but not exceeding 90 days) the filing
of any registration statement required to be prepared and filed by it if the
Board of Directors of the Company determines, in its reasonable judgment, that
such registration and offering would have a material adverse effect on the
Company;
(d) with respect to any registration pursuant to this Section 2, the
Company may include in such registration any other Shares of the Company or a
stockholder of the Company; provided, however, that if the managing underwriter
-------- -------
advises the Company in writing that the inclusion of all such Shares would
interfere with the successful marketing (including pricing acceptable to the
Holders) of all such securities, then the number of Shares proposed to be
included in such registration shall be included in the following order:
(i) first, the Li Shares held by the Holders, pro rata based
-----
upon the total number of Li Shares owned by each Holder at the time of such
registration;
(ii) second, the Shares offered by the Company; and
------
(iii) third, the Shares of other stockholders of the Company;
-----
(e) Notwithstanding anything in this Section 2 to the contrary, the
Company shall not be required to take any action pursuant to Section 2,
including, without limitation, using its best efforts to effect the registration
under the Securities Act of Li Shares, unless
(i) with respect to a Registration Demand for an underwritten
offering, the offering includes at least 400,000 Li Shares (without taking
into account adjustments made to Shares after the date hereof); or
(ii) with respect to a Registration Demand for a shelf
registration, the offering includes at least 200,000 Li Shares (without
taking into account adjustments made to Shares after the date hereof);
(f) a Registration Demand under this Section 2 may be rescinded by
written notice to the Company by the Holder(s) initiating such request;
provided, however, that such rescinded registration shall not count as a
- -------- -------
registration statement initiated pursuant to this Section 2 for purposes of
paragraph (b) above if the Holder(s)
-4-
<PAGE>
initiating such request reimburse the Company for all reasonable out-of-pocket
expenses incurred in complying with such request; and
(g) with respect to any Registration Demand for an underwritten
offering, the Company shall have the right to designate an underwriter or
underwriters; provided that the designation of such underwriter(s) shall be
subject to the approval of the Holder(s) holding a majority of the Li Shares to
be registered in the Registration Demand, which consent shall not be withheld
unreasonably.
Section 3. Registration and Qualification Procedures.
-----------------------------------------
(a) Procedures. Whenever the Company is required by the provisions of
----------
Section 1 or Section 2 to use its best efforts to effect the registration of any
securities held by a Holder under the Securities Act the Company will, as
expeditiously as is possible:
(i) prepare and file with the Commission a registration
statement with respect to such securities in connection with which the Company
will give such Holders and its counsel the opportunity to review and make
comments on such registration statement, each prospectus included therein or
filed with the Commission, and each amendment thereof or supplement thereto, and
will give each of them such access to its books and records and such
opportunities to discuss the business of the Company with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such Holder's counsel, to conduct a
reasonable investigation within the meaning of the Securities Act;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
the prospectus current for the Registration Demand Period and to comply with the
provisions of the Securities Act with respect to the sale of all securities
covered by such registration statement;
(iii) furnish to such Holder such numbers of copies of
preliminary prospectuses and prospectuses and each supplement or amendment
thereto and such other documents as such Holder may reasonably request in order
to facilitate the sale or other disposition of the securities owned by such
Holder in conformity with the requirements of the Securities Act;
(iv) use its best efforts to register or qualify the securities
covered by such registration statement under the securities or blue sky laws of
such jurisdictions
-5-
<PAGE>
within the United States as such Holder shall reasonably request, and do such
other reasonable acts and things as may be required of it to enable such Holder
to consummate the sale or other disposition in such jurisdictions of the
securities owned by such Holder; provided, however, that the Company shall not
--------
be required to (i) qualify as a foreign corporation or consent to a general and
unlimited service of process in any such jurisdiction, or (ii) qualify as a
dealer in securities;
(v) furnish, at the request of such Holder on the date such
securities are delivered to the Underwriter for sale pursuant to such
registration or, if such securities are not being sold through underwriters, on
the date the registration statement with respect to such securities becomes
effective, (i) an opinion, dated such date, of counsel representing the Company
for the purposes of such registration, addressed to the Underwriter, if any, and
to such Holder, covering such legal matters with respect to the registration in
respect of which such opinion is being given as such Holder may reasonably
request and are customarily included in such opinions and (ii) letters, dated,
respectively, (1) the effective date of the registration statement and (2) the
date such securities are delivered to the Underwriter, if any, for sale pursuant
to such registration, from a firm of independent certified public accountants of
recognized national standing selected by the Company, addressed to the
Underwriter, if any, and to such Holder, covering such financial, statistical
and accounting matters with respect to the registration in respect of which such
letters are being given as such Holder may reasonably request and are
customarily included in such letters;
(vi) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders as soon as reasonably practicable, but not later than sixteen (16)
months after the effective date of the registration statement, an earning
statement covering a period of at least twelve (12) months beginning after the
effective date of the registration statement, which earning statement shall
satisfy the provisions of Section 1 1 (a) of the Securities Act;
(vii) notify each seller at any time when a prospectus relating to
the registration is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of which, the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a
-6-
<PAGE>
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made;
(viii) use its best efforts (A) to cause all such securities to be
listed on a national securities exchange and on each other securities exchange
on which similar securities issued by the Company are then listed, if the
listing of such securities is then permitted under the rules of such exchange;
or (B) to secure the designation of all such securities as a NASDAQ "national
market system security" within the meaning of Rule 11Aa2-1 of the Commission or,
failing that, to secure NASDAQ authorization for such securities and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register as such with respect to such securities with the National
Association of Securities Dealers;
(ix) provide and cause to be maintained a transfer agent and
registrar for all such securities from and after a date not later than the
effective date of such registration; and
(x) keep each seller advised as to the initiation and progress of
any registration under Section 1 or Section 2.
(b) Underwriting Agreement. In the case of any registration under
----------------------
Section 2 pursuant to an underwritten offering, or in the case of a registration
under Section 1 if the Company has determined to enter into an underwriting
agreement in connection therewith, all securities to be included in such
registration shall be subject to an underwriting agreement and no Holder may
participate in such registration unless such Holder agrees to sell such Holder's
securities on the basis provided therein and completes and executes all
reasonable questionnaires and other documents (including custody agreements and
powers of attorney) which must be executed in connection therewith, and provides
such other information to the Company or the underwriter as may be necessary to
register such Holder's securities. In connection with any underwriting
agreement respecting an Offering, no Holder shall be required to make any
representations or warranties regarding the Company, or to make any
representations or warranties to or agreements with the Company or any
Underwriter, other than customary representations, warranties or agreements and
any other representations required by law.
(c) Limitation on Sale or Distribution of Other Securities. Each
------------------------------------------------------
Holder agrees not to effect any public sale or distribution of any Li Shares
during the 10-day period prior to, and during the 90-day period (or, if
requested by the managing underwriter in connection with the initial public
offering, the 180-day period) beginning on the later of, (i) the effective date
of the registration statement in connection with a registration requested
pursuant to Section 2 hereof or (ii) if applicable, the
-7-
<PAGE>
commencement of an underwritten offering in connection with a registration
requested pursuant to Section 1 hereof, in each case, if requested by the
underwriter(s) of such underwritten offering, or for such shorter period as the
underwriter(s) shall request.
(d) Information by Holders. Each Holder selling Li Shares in a
----------------------
proposed registration shall furnish to the Company such written information
regarding such Holder and the distribution proposed by such Holder as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Agreement.
Section 4. Allocation of Expenses. If the Company is required by the
----------------------
provisions of Section 1 or Section 2 to use its best efforts to effect the
registration or qualification under the Securities Act or any state securities
or blue sky laws of any Li Shares, the Company shall pay all expenses in
connection therewith, including, without limitation, (a) all expenses incident
to filing with the National Association of Securities Dealers, Inc., (b)
registration fees, (c) printing expenses, (d) accounting and legal fees and
expenses (including legal fees and expenses for not more than one counsel
representing the Holder(s), not to exceed $10,000 in connection with any such
registration or qualification), (e) expenses of any special audits incident to
or required by any such registration or qualification and (f) expenses of
complying with the securities or blue sky laws of any jurisdictions in
connection with such registration or qualification; provided, however, the
-------- -------
Company shall not be liable for (1) any discounts or commissions to any
underwriter attributable to Li Shares being sold; or (2) any stock transfer
taxes incurred in respect of the Li Shares being sold.
Section 5. Indemnification.
---------------
(a) Obligations, In connection with any registration or qualification
-----------
of securities under Section 1 or Section 2, the Company agrees to indemnify each
Holder and each Underwriter, if any, of any Offering in connection with such
registration, including each person, if any, who controls each Holder or
Underwriter within the meaning of Section 15 of the Securities Act, against all
losses, claims, damages, liabilities and expenses (including reasonable costs of
investigation) caused by any untrue, or alleged untrue, statement of a material
fact contained in any registration statement, preliminary prospectus, prospectus
or notification or offering circular (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) or caused by any
omission, or alleged omission, to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses are
caused by any
-8-
<PAGE>
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished in writing to the Company by any Holder or any
Underwriter expressly for use therein. The Company and each officer, director,
employee and controlling person of the Company shall be indemnified by each
Holder for all such losses, claims, damages, liabilities and expenses (including
the costs of reasonable investigation) caused by any such untrue, or alleged
untrue, statement or any such omission or alleged omission, based upon
information furnished in writing to the Company by such Holder expressly for use
therein; provided that, the indemnification liability of any Holder shall not
--------
exceed the amount by which the total price at which any Li Shares sold by such
Holder were offered to the public (less any applicable underwriting discounts
and commissions) exceeds the amount of any damages which such Holder has
otherwise been required to pay by reason of such untrue or allegedly untrue
statement or omission or alleged omission.
(b) Procedures. Promptly upon receipt by a party indemnified under
----------
this Section 5 of notice of the commencement of any action against such
indemnified party in respect of which indemnity or reimbursement may be sought
against any indemnifying party under this Section 5, such indemnified party
shall notify the indemnifying party in writing of the commencement of such
action, but the failure so to notify the indemnifying party shall not relieve it
of any liability which it may have to any indemnified party otherwise than under
this Section 5 unless such failure shall materially adversely affect the defense
of such action. In case notice of commencement of any such action shall be
given to the indemnifying party as above provided, the indemnifying party shall
be entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel (other than reasonable costs of
investigation) shall be paid by the indemnified party unless (a) the
indemnifying party agrees to pay the same, (b) the indemnifying party fails to
assume the defense of such action with counsel satisfactory to the indemnified
party or (c) the named parties to any such action (including any impleaded
parties) have been advised by such counsel that representation of such
indemnified party and the indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct (in which case
the indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party). No indemnifying party shall be
liable for any settlement effected without its written consent. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified
-9-
<PAGE>
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
Section 6. Miscellaneous.
-------------
(a) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended or waived only by a writing signed by all the parties hereto. This
Agreement and the Employment Agreement constitute the full and entire
understanding and agreement among the parties with regard to the subjects hereof
and thereof
(b) Governing Law. This Agreement is made and shall be governed by
-------------
and construed in all respects in accordance with the laws of the State of
Delaware, without regard to the principles of conflicts of laws thereof which
might refer such interpretation to the laws of a different state or
jurisdiction.
(c) Assignment. The provisions hereof shall inure to the benefit of,
----------
and be binding upon (i) any successor of the Company and (ii) all Holders.
(d) Notices. All notices required or permitted hereunder shall be in
-------
writing and shall be delivered by facsimile, courier or registered mail,
addressed as follows:
If to the Company:
Yurie Systems, Inc.
4601 Presidents Drive
Suite 210
Lanham, MD 20706
If to the Executive:
Kwok Li
12400 Ellen Court
Silver Spring, MD 20904
If personally delivered, such communication shall be deemed delivered upon
actual receipt; if sent by telecopier or facsimile transmission, such
communication shall be deemed delivered the day of transmission (and sender
shall bear the burden of proof of delivery); if sent by overnight courier
pursuant to this Section, such communication shall
-10-
<PAGE>
be deemed delivered upon receipt; and if sent by registered mail pursuant to
this Section 5, such communication shall be deemed delivered as of the date of
delivery indicated on the receipt issued by the relevant postal service, or, if
the addressee fails or refuses to accept delivery, as of the date of such
failure or refusal. No objection may be made to the manner of delivery of any
notice actually received in writing by an authorized agent of a party.
(e) Nominees for Beneficial Owners. In the event that Li Shares are
------------------------------
held by a nominee for the beneficial owner thereof, the beneficial owner thereof
may, at its option and by written notice to the Company, be treated as the
Holder of such Li Shares for purposes of any request or other action pursuant to
this Agreement.
(f) Specific Performance. The parties hereto recognize and agree that
--------------------
money damages may be insufficient to compensate any Holder for breaches by the
Company or Shareholder of the terms hereof and, consequently, that the equitable
remedy of specific performance of the terms hereof will be available in the
event of any such breach.
(g) Rule 144. If the Company shall have filed a registration
--------
statement pursuant to Section 12 of the Exchange Act or a registration statement
pursuant to the Securities Act, the Company will file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the Commission thereunder and will take such further
action as any Holder may reasonably request, all to the extent required from
time to time to enable such holder to sell Li Shares without registration under
the Securities Act within the limitation of the exemptions provided by (i) Rule
144 under the Securities Act, as such Rule may be amended from time to time, or
(ii) any similar rule or regulation hereafter adopted by the Commission. Upon
the request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
(h) Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this agreement shall not in any way be affected or
impaired thereby.
(i) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
KWOK LI
By:
------------------------------
Kwok Li
YURIE SYSTEMS, INC.
By:
------------------------------
Name:
Title:
-12-
<PAGE>
Exhibit 10.7
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into
as of July 1, 1996, by and between Kenneth D. Brody, an individual residing in
the District of Columbia ("Director"), and Yurie Systems, Inc., a Maryland
corporation (the "Company").
WHEREAS, pursuant to that certain Equity Incentive Agreement dated as
of the date hereof (the "Equity Incentive Agreement," terms defined therein and
not otherwise defined herein being used herein as therein defined) by and among
Jeong H. Kim ("Shareholder"), Director and the Company, Director has purchased
from Shareholder an option (the "Option") to purchase 1,000,000 shares of the
Company's common stock, $0.01 par value per share (the "Shares");
WHEREAS, pursuant to the Equity Incentive Agreement, the Company and
Shareholder have agreed to enter into this Agreement and to grant to Director
certain registration rights with respect to Shares purchasable upon exercise of
the Option or purchased upon such exercise (such Shares, including Shares and/or
other securities that become subject to the Option pursuant to the Equity
Incentive Agreement, being the "Option Shares"), on the terms and conditions set
forth herein; and
WHEREAS, the Company and Director have agreed that Director will have
the right to transfer the registration rights granted in this Agreement to
permitted transferees and assignees of the Option pursuant to the Equity
Incentive Agreement.
NOW THEREFORE, in consideration of the mutual promises contained
herein, and for other good and valuable consideration, receipt of which is
hereby acknowledged, the parties agree as follows:
Section 1. Piggy-Back Registration and Qualification.
-----------------------------------------
(a) Registration and Qualification. If the Company or any
------------------------------
security holder of the Company proposes to register any securities of the
Company under the Securities Act of 1933, as amended (such Act, together with
any successor federal statute, and the rules and regulations of the Securities
and Exchange Commission (the "Commission") promulgated thereunder, all as in
effect from time to time, being the "Securities Act"), on any registration form
(otherwise than for the registration of securities to be offered and sold by the
Company pursuant to (i) an employee benefit plan,
<PAGE>
(ii) a dividend or interest reinvestment plan, (iii) other similar plans, (iv)
reclassifications of securities, mergers, consolidations and acquisitions of
assets or (v) an initial public offering of the Shares in which no other
stockholder is offering to sell Shares), not less than forty-five (45) days
prior to each such registration the Company shall give to each Holder (as
defined below) written notice of such proposal which shall describe in detail
the proposed registration and distribution (including those jurisdictions where
registration or qualification under the .securities or blue sky laws is
intended) and, upon the written request of any Holder furnished within fifteen
(15) days after the date of any such notice, which request shall specify the
maximum number of Option Shares intended to be sold by such Holder, proceed to
include in such registration such Option Shares ("Piggy-Back Shares") as have
been requested by such Holder to be included in such registration. The term
"Holder" means (i) Director, (ii) each Permitted Assignee (as defined in the
Equity Incentive Agreement) of the Option and (iii) each holder of Shares
purchased pursuant to the Option (or portion thereof) who was a Permitted
Assignee or acquired at least 200,000 Shares (without taking into account
adjustments made to Shares after the date hereof) from Director and/or Permitted
Assignees. The Company will upon receipt of each such written request use its
best efforts in each instance to cause all such Piggy-Back Shares to be
registered under the Securities Act and qualified under the securities or blue
sky laws of any jurisdiction requested by a such Holder.
(b) Inclusion in Offerings. If the proposed registration giving rise
----------------------
to registration rights under this Section 1 is 'm connection with an
underwritten public offering (an "Offering') of Shares or securities exercisable
or convertible into Shares, the Company shall use its best efforts to ensure
that any Piggy-Back Shares registered pursuant to this Section 1 shall be
included in such Offering, if so requested, by the Holder who requested
registration of such Piggy-Back Shares. If the underwriter or underwriters of
such Offering (the "Underwriter") advises the Company in writing that, in its
opinion, the inclusion of the Piggy-Back Shares with securities being registered
by the Company would materially adversely affect the distribution of securities
to be sold by the Company ("Primary Shares") in such Offering, then the Piggy-
Back Shares (or such part thereof as is necessary to avoid such adverse effect)
may be excluded from such proposed registration. If any Shares other than
Primary Shares are registered in connection with any such Offering, then the
number of Piggy-Back Shares which must be registered in connection with such
Offering pursuant to this Section 1 shall be not less than either (A) if the
proposed registration was initiated by the Company, one-third of the number of
Shares other than Primary Shares registered in connection with such Offering or
(B) if the registration was initiated by a stockholder other than a Holder, one-
half of the number of Shares other than Primary Shares registered in connection
with such Offering. In the event fewer than all of the Piggy-Back Shares
requested to be registered by all Holders in connection with an Offering are
registered in connection with such Offering, the number of each Holder's Piggy-
Back Shares which are to be registered shall
-2-
<PAGE>
be determined on a pro rata basis, according to the number of Piggy-Back Shares
which such Holder has requested to be registered.
(c) Underwriter. Each Holder who pursuant to subsection l(b) requests
-----------
Piggy-Back Shares to be included in an Offering initiated by the Company agrees
to the selection by the Company of the Underwriter.
(d) No Requirement to Proceed with Registration. Nothing in this
-------------------------------------------
Section 1 shall be deemed to require the Company to proceed with any
registration of its securities after giving notice as provided herein; provided,
--------
however, that the Company shall pay all expenses incurred pursuant to such
- -------
notice in accordance with Section 4.
Section 2. Demand Registration. At any time and from time to time
-------------------
commencing one year after the Company has had a registration statement become
effective and has become a reporting company under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), any one or more of the Holders,
subject to the limitations set forth below, may request the Company to effect
the registration under the Securities Act of some or all of their Option Shares
in accordance with this Section (a "Registration Demand"); provided that,
--------
notwithstanding the foregoing, Director may request the Company to effect a
registration in accordance with this Section at any time commencing six months
after the Company has had a registration statement become effective and has
become a reporting company under the Exchange Act. The Registration Demand
shall specify whether the Holder(s) desires an underwritten offering or a shelf
registration. The Company will promptly, but in any event within 20 days, give
written notice of such requested registration and the intended method of
distribution thereof to all Holders and thereupon the Company will use its best
efforts to effect such registration under the Securities Act of (i) the Option
Shares which the Company has been requested to register and (ii) all other
Option Shares which the Company has been requested to register by Holders
thereof by written request given to the Company within 30 days after the giving
of such written notice by the Company. Thereafter, the Company will use its
best efforts to keep the registration statement current and effective for a
period (the "Registration Demand Period") of not less than six (6) months with
respect to a Registration Demand in connection with an underwritten public
offering and nine (9) months with respect to a Registration Demand in connection
with a shelf registration; provided, however, that the Company shall not be
-------- -------
obligated to effect any registration under the Securities Act under this Section
2 except in accordance with the following provisions:
(a) the Company shall not be obligated to file more than three
registration statements initiated pursuant to this Section 2 (not more than one
of which
-3-
<PAGE>
may be in connection with an underwritten public offering) which become
effective or are rescinded by the Holders without reimbursement referred to in
the Section 2(f);
(b) the Company may delay the filing or effectiveness of any
registration statement for a period not to exceed 90 days after the date of a
request for registration pursuant to this Section 2 if at the time of such
request the Company is engaged, or has fixed plans to engage within 45 days of
the time of such request, in a firm commitment underwritten public offering of
Primary Shares;
(c) the Company shall be entitled once in any six-month period to
postpone for a reasonable period of time (but not exceeding 90 days) the filing
of any registration statement required to be prepared and filed by it if the
Board of Directors of the Company determines, in its reasonable judgment, that
such registration and offering would have a material adverse effect on the
Company;
(d) with respect to any registration pursuant to this Section 2, the
Company may include in such registration any other Shares of the Company or a
stockholder of the Company; provided, however, that if the managing underwriter
-------- -------
advises the Company in writing that the inclusion of all such Shares would
interfere with the successful marketing (including pricing acceptable to the
Holders) of all such securities, then the number of Shares proposed to be
included in such registration shall be included in the following order:
(i) first, the Option Shares held by the Holders, pro rata based
----- --------
upon the total number of Option Shares owned by each Holder at the time of
such registration;
(ii) second, the Shares offered by the Company; and
------
(iii) third, the Shares of other stockholders of the Company;
-----
(e) Notwithstanding anything in this Section 2 to the contrary, the
Company shall not be required to take any action pursuant to Section 2,
including, without limitation, using its best efforts to effect the registration
under the Securities Act of Option Shares, unless
(i) with respect to a Registration Demand for an underwritten
offering, the offering includes at least 400,000 Option Shares (without
taking into account adjustments made to Shares after the date hereof); or
-4-
<PAGE>
(ii) with respect to a Registration Demand for a shelf
registration, the offering includes at least 200,000 Option Shares (without
taking into account adjustments made to Shares after the date hereof);
(f) a Registration Demand under this Section 2 may be rescinded by
written notice to the Company by the Holder(s) initiating such request;
provided, however, that such rescinded registration shall not count as a
- -------- -------
registration statement initiated pursuant to this Section 2 for purposes of
paragraph (b) above if the Holder(s) initiating such request reimburse the
Company for all reasonable out-of-pocket expenses incurred in complying with
such request; and
(g) with respect to any Registration Demand for an underwritten
offering, the Company shall have the right to designate an underwriter or
underwriters; 12rovided that the designation of such underwriter(s) shall be
subject to the approval of the Holder(s) holding a majority of the Option Shares
to be registered in the Registration Demand, which consent shall not be withheld
unreasonably.
Section 3. Registration and Qualification Procedures.
-----------------------------------------
(a) Procedures. Whenever the Company is required by the provisions of
----------
Section 1 or Section 2 to use its best efforts to effect the registration of any
securities held by a Holder under the Securities Act the Company will, as
expeditiously as is possible:
(i) prepare and file with the Commission a registration statement
with respect to such securities in connection with which the Company will give
such Holders and its counsel the opportunity to review and make comments on such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such opportunities to discuss
the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of such Holder's counsel, to conduct a reasonable investigation
within the meaning of the Securities Act;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
the prospectus current for the Registration Demand Period and to comply with the
provisions of the Securities Act with respect to the sale of all securities
covered by such registration statement;
-5-
<PAGE>
(iii) furnish to such Holder such numbers of copies of
preliminary prospectuses and prospectuses and each supplement or amendment
thereto and such other documents as such Holder may reasonably request in order
to facilitate the sale or other disposition of the securities owned by such
Holder in conformity with the requirements of the Securities Act;
(iv) use its best efforts to register or qualify the securities
covered by such registration statement under the securities or blue sky laws of
such jurisdictions within the United States as such Holder shall reasonably
request, and do such other reasonable acts and things as may be required of it
to enable such Holder to consummate the sale or other disposition in such
jurisdictions of the securities owned by such Holder; provided, however, that
--------
the Company shall not be required to (i) qualify as a foreign corporation or
consent to a general and unlimited service of process in any such jurisdiction,
or (ii) qualify as a dealer in securities;
(v) furnish, at the request of such Holder on the date such
securities are delivered to the Underwriter for sale pursuant to such
registration or, if such securities are not being sold through underwriters, on
the date the registration statement with respect to such securities becomes
effective, (i) an opinion, dated such date, of counsel representing the Company
for the purposes of such registration, addressed to the Underwriter, if any, and
to such Holder, covering such legal matters with respect to the registration in
respect of which such opinion is being given as such Holder may reasonably
request and are customarily included in such opinions and (ii) letters, dated,
respectively, (1) the effective date of the registration statement and (2) the
date such securities are delivered to the Underwriter, if any, for sale pursuant
to such registration, from a firm of independent certified public accountants of
recognized national standing selected by the Company, addressed to the
Underwriter, if any, and to such Holder, covering such financial, statistical
and accounting matters with respect to the registration in respect of which such
letters are being given as such Holder may reasonably request and are
customarily included in such letters;
(vi) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders as soon as reasonably practicable, but not later than sixteen (16)
months after the effective date of the registration statement, an earning
statement covering a period of at least twelve (12) months beginning after the
effective date of the registration statement, which earning statement shall
satisfy the provisions of Section 1 1 (a) of the Securities Act;
(vii) notify each seller at any time when a prospectus relating to
the registration is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of which, the
prospectus included in such
-6-
<PAGE>
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances under which they were made, at the request of any such seller
promptly prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances under which they were made;
(viii) use its best efforts (A) to cause all such securities to be
listed on a national securities exchange and on each other securities exchange
on which similar securities issued by the Company are then listed, if the
listing of such securities is then permitted under the rules of such exchange;
or (B) to secure the designation of all such securities as a NASDAQ "national
market system security" within the meaning of Rule llAa2-1 of the Commission or,
failing that, to secure NASDAQ authorization for such securities and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register as such with respect to such securities with the National
Association of Securities Dealers;
(ix) provide and cause to be maintained a transfer agent and
registrar for all such securities from and after a date not later than the
effective date of such registration; and
(x) keep each seller advised as to the initiation and progress of
any registration under Section 1 or Section 2.
(b) Underwriting Agreement. In the case of any registration under
----------------------
Section 2 pursuant to an underwritten offering, or in the case of a registration
under Section 1 if the Company has determined to enter into an underwriting
agreement in connection therewith, all securities to be included in such
registration shall be subject to an underwriting agreement and no Holder may
participate in such registration unless such Holder agrees to sell such Holder's
securities on the basis provided therein and completes and executes all
reasonable questionnaires and other documents (including custody agreements and
powers of attorney) which must be executed in connection therewith, and provides
such other information to the Company or the underwriter as may be necessary to
register such Holder's securities. In connection with any underwriting
agreement respecting an Offering, no Holder shall be required to make any
representations or warranties regarding the Company, or to make any
representations or warranties to or agreements with the Company or any
Underwriter, other than customary representations, warranties or agreements and
any other representations required by law.
-7-
<PAGE>
(c) Limitation on Sale or Distribution of Other Securities. Each
------------------------------------------------------
Holder agrees not to effect any public sale or distribution of any Option Shares
during the 10-day period prior to, and during the 90-day period (or, if
requested by the managing underwriter in connection with the initial public
offering, the 180-day period) beginning on the later of, (i) the effective date
of the registration statement in connection with a registration requested
pursuant to Section 2 hereof or (ii) if applicable, the commencement of an
underwritten offering in connection with a registration requested pursuant to
Section 1 hereof, in each case, if requested by the underwriter(s) of such
underwritten offering, or for such shorter period as the underwriter(s) shall
request.
(d) Information by Holders. Each Holder selling Option Shares in a
----------------------
proposed registration shall furnish to the Company such written information
regarding such Holder and the distribution proposed by such Holder as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Agreement.
Section 4. Allocation of Expenses. If the Company is required by the
----------------------
provisions of Section 1 or Section 2 to use its best efforts to effect the
registration or qualification under the Securities Act or any state securities
or blue sky laws of any Option Shares, the Company shall pay all expenses in
connection therewith, including, without limitation, (a) all expenses incident
to filing with the National Association of Securities Dealers, Inc., (b)
registration fees, (c) printing expenses, (d) accounting and legal fees and
expenses (including legal fees and expenses for not more than one counsel
representing the Holder(s), not to exceed $10,000 in connection with any such
registration or qualification), (e) expenses of any special audits incident to
or required by any such registration or qualification and (f) expenses of
complying with the securities or blue sky laws of any jurisdictions in
connection with such registration or qualification; provided, however, however.
-------- -------
the Company shall not be liable for (1) any discounts or commissions to any
underwriter attributable to Option Shares being sold; or (2) any stock transfer
taxes incurred in respect of the Option Shares being sold.
Section 5. Indemnification.
---------------
(a) Obligations. In connection with any registration or qualification
-----------
of securities under Section 1 or Section 2, the Company agrees to indemnify each
Holder and each Underwriter, if any, of any Offering in connection with such
registration, including each person, if any, who controls each Holder or
Underwriter within the meaning of Section 15 of the Securities Act, against all
losses, claims, damages, liabilities
-8-
<PAGE>
and expenses (including reasonable costs of investigation) caused by any untrue,
or alleged untrue, statement of a material fact contained in any registration
statement, preliminary prospectus, prospectus or notification or offering
circular (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or caused by any omission, or alleged
omission, to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses are caused by any untrue
statement or alleged untrue statement or omission or alleged omission based upon
information furnished in writing to the Company by any Holder or any Underwriter
expressly for use therein. The Company and each officer, director and
controlling person of the Company shall be indemnified by each Holder for all
such losses, claims, damages, liabilities and expenses (including the costs of
reasonable investigation) caused by any such untrue, or alleged untrue,
statement or any such omission or alleged omission, based upon information
furnished in writing to the Company by such Holder expressly for use therein;
provided that, the indemnification liability of any Holder shall not exceed the
- --------
amount by which the total price at which any Option Shares sold by such Holder
were offered to the public (less any applicable underwriting discounts and
commissions) exceeds the amount of any damages which such Holder has otherwise
been required to pay by reason of such untrue or allegedly untrue statement or
omission or alleged omission.
(b) Procedures. Promptly upon receipt by a party indemnified under
----------
this Section 5 of notice of the commencement of any action against such
indemnified party in respect of which indemnity or reimbursement may be sought
against any indemnifying party under this Section 5, such indemnified party
shall notify the indemnifying party in writing of the commencement of such
action, but the failure so to notify the indemnifying party shall not relieve it
of any liability which it may have to any indemnified party otherwise than under
this Section 5 unless such failure shall materially adversely affect the defense
of such action. In case notice of commencement of any such action shall be
given to the indemnifying party as above provided, the indemnifying party shall
be entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel (other than reasonable costs of
investigation) shall be paid by the indemnified party unless (a) the
indemnifying party agrees to pay the same, (b) the indemnifying party fails to
assume the defense of such action with counsel satisfactory to the indemnified
party or (c) the named parties to any such action (including any impleaded
parties) have been advised by such counsel that representation of such
indemnified party and the indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct
-9-
<PAGE>
(in which case the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party). No indemnifying
party shall be liable for any settlement effected without its written consent.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
Section 6. Miscellaneous.
-------------
(a) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended or waived only by a writing signed by all the parties hereto. This
Agreement and the Equity Incentive Agreement constitute the full and entire
understanding and agreement among the parties with regard to the subjects hereof
and thereof
(b) Governing Law. This Agreement is made and shall be governed by
-------------
and construed in all respects in accordance with the laws of the State of New
York, without regard to the principles of conflicts of laws thereof which might
refer such interpretation to the laws of a different state or jurisdiction.
(c) Assignment. The provisions hereof shall inure to the benefit
----------
of, and be binding upon (i) any successor of the Company and (ii) all Holders.
(d) Notices. AU notices required or permitted hereunder shall be
-------
in writing and shall be delivered by facsimile, courier or registered mail,
addressed as follows:
If to the Company:
Yurie Systems, Inc.
4601 Presidents Drive
Suite 210
Lanham, MD 20706
-10-
<PAGE>
If to Director:
Kenneth D. Brody
Suite 500 West
555 Thirteenth St., N.W.
Washington, D.C. 20004
If personally delivered, such communication shall be deemed delivered upon
actual receipt; if sent by telecopier or facsimile transmission, such
communication shall be deemed delivered the day of transmission (and sender
shall bear the burden of proof of delivery); if sent by overnight courier
pursuant to this Section, such communication shall be deemed delivered upon
receipt; and if sent by registered mail pursuant to this Section 5, such
communication shall be deemed delivered as of the date of delivery indicated on
the receipt issued by the relevant postal service, or, if the addressee fails or
refuses to accept delivery, as of the date of such failure or refusal. No
objection may be made to the manner of delivery of any notice actually received
in writing by an authorized agent of a party.
(e) Nominees for Beneficial Owners. In the event that Option Shares
------------------------------
are held by a nominee for the beneficial owner thereof, the beneficial owner
thereof may, at its option and by written notice to the Company, be treated as
the Holder of such Option Shares for purposes of any request or other action
pursuant to this Agreement.
(f) Specific Performance. The parties hereto recognize and agree that
--------------------
money damages may be insufficient to compensate any Holder for breaches by the
Company or Shareholder of the terms hereof and, consequently, that the equitable
remedy of specific performance of the terms hereof will be available in the
event of any such breach.
(g) Rule 144. If the Company shall have filed a registration
--------
statement pursuant to Section 12 of the Exchange Act or a registration statement
pursuant to the Securities Act, the Company will file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the Commission thereunder and will take such further
action as any Holder may reasonably request, all to the extent required from
time to time to enable such holder to sell Option Shares without registration
under the Securities Act within the limitation of the exemptions provided by (i)
Rule 144 under the Securities Act, as such Rule may be amended from time to
time, or (ii) any similar rule or regulation hereafter adopted by the
Commission. Upon the request of any Holder, the Company will deliver to such
Holder a written statement as to whether it has complied with such requirements.
-11-
<PAGE>
(h) Sever. In case any provision of this Agreement shall be invalid,
-----
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions of this agreement shall not in any way be affected or
impaired thereby.
(i) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
(j) Termination. This Agreement shall terminate three months after
-----------
expiration of the Option in accordance with the terms thereof Notwithstanding
the foregoing, if prior to the termination of this Agreement any Holder has
requested that Shares held by them be included in any registration under Section
1 or Section 2 of this Agreement, then this Agreement will not terminate until
such time as the Shares requested to be included in any such registration have
been so registered and sold.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date firs written above.
KENNETH D. BRODY
------------------------------------------------
YURIE SYSTEMS, INC., a Maryland
corporation
By:----------------------------------------------
Name:
Title:
-12-
<PAGE>
Exhibit 10.8
EQUITY INCENTIVE AGREEMENT
This Equity Incentive Agreement (this "Agreement") is entered into as
of July 1, 1996 (the "Effective Date"), by and among Jeong H. Kim, an individual
residing in Maryland ("Shareholder"), Kenneth D. Brody, an individual residing
in the District of Columbia ("Director"), and Yurie Systems, Inc., a Maryland
corporation (the "Company").
R E C I T A L S
---------------
WHEREAS, Shareholder holds approximately 16,000,000 shares of the
Company's common stock, $0.01 par value per share (the "Shares"), representing
approximately 80% of the outstanding Shares of the Company;
WHEREAS, Director is serving as a member of the Board of Directors of
the Company (the "Board"), and Director intends to so serve for an indefinite
period;
WHEREAS, Shareholder desires to sell, and Director desires to purchase,
an option (the "Option") to purchase 1,000,000 Shares (together with any Shares
that become subject to the Option pursuant to Article III hereof, the "Option
Shares") in connection with Director's commitment to serve as a member of the
Board;
WHEREAS, the Company and Shareholder believe that the sale by
Shareholder to Director of such Option, and the granting to Director of certain
rights in accordance with the terms of this Agreement, will be beneficial to the
Company's shareholders because such sale will enhance Director's efforts to
further the growth, profitability and other prospects of the Company and
therefore enhance the value of the shareholders' investment in the Company and
<PAGE>
WHEREAS, it is a condition of Shareholder's willingness to sell the
Option to Director, and of Director's willingness to purchase the Option, that
the Company enter into this Agreement providing certain rights (including
registration rights) on the terms and conditions set forth in this Agreement.
A G R E E M E N T
-----------------
NOW THEREFORE, in consideration of the mutual promises contained
herein, and for other good and valuable consideration, receipt of which is
hereby acknowledged, the parties agree as follows:
ARTICLE 1.
ISSUANCE AND EXERCISE OF OPTION
-------------------------------
1. Purchase, Sale and Exercise of Option.
-------------------------------------
(a) In connection with Director's services to the Company, Shareholder
hereby sells to Director, and Director hereby purchases from Shareholder, the
Option for an option purchase price (the "Purchase Price") of $500,000 in cash.
(b) In consideration for the Option Purchase Price, Director is hereby
entitled to purchase from Shareholder, subject to the terms and conditions
hereinafter set forth, the Option Shares for an exercise price for each Share
purchasable hereunder of $4.00 per Share (as such exercise price may be adjusted
pursuant to Article 111, the "Share Exercise Price").
-2-
<PAGE>
(c) Director may exercise the Option at any time or from time to time,
in whole or in part, by delivery by Director to Shareholder of (i) written
notice, which shall state the election to exercise the Option and the number of
Option Shares in respect of which the Option is being exercised, and (ii)
payment of consideration in the amount of the Share Exercise Price for the
Option Shares for which the Option is being exercised. The consideration to be
paid for such Option Shares may, at the discretion of Director, include cash or
Option Shares received upon a simultaneous exercise of the Option (i.e., Option
Shares deemed received pursuant to a "cashless exercise" of the Option);
provided, however that Shares may be tendered as consideration only if such
- -----------------
Shares constitute valid consideration for the Option Shares under applicable
law, are surrendered in good form for transfer and are listed and traded on a
national securities exchange or qualified for trading or otherwise traded in the
over-the-counter market. The per Share value of Shares tendered as
consideration shall be deemed to be the average of the daily closing prices (or
the highest bid and asked prices, in the case of Shares traded on the over-the-
counter market) for the 20 consecutive trading days prior to the date of such
written notice.
(d) Upon any exercise of the Option, the Company shall: (i) cancel
the certificate or certificates representing the Option Shares owned by
Shareholder immediately prior to such exercise; (ii) issue and deliver to
Director a certificate representing the number of Option Shares with respect to
which the Option was exercised and (iii) in the case of an exercise with respect
to fewer than all of the Option Shares owned by Shareholder immediately prior to
such exercise, issue to Shareholder a certificate representing the number of
Option Shares with respect to which the Option at that time has not been
exercised, which certificate shall be held in escrow by the Company as escrow
agent in accordance with Article 11 and not delivered to Shareholder.
-3-
<PAGE>
(e) If the Option is exercised in part, the Option and this Agreement
shall remain in force and applicable to all Option Shares not purchased by
Director pursuant to such or any prior exercise.
(f) This Option shall vest in four equal installments on September 3,
1996, December 3, 1996, March 3, 1997 and June 3, 1997 (each, a "Vesting Date");
provided, however, that vesting shall occur on a Vesting Date only if on such
- -----------------
Vesting Date Director is serving as a member of the Board of Directors or, in
the absence of his election to the Board of Directors of the Company, has
tendered written notice of his willingness to serve as a member thereof;
provided, further that this Option shall vest in its entirety immediately prior
- -----------------
to any Change of Control Event (as defined below). A "Change of Control Event"
shall mean any event the result of which is that Shareholder ceases to own
beneficially, for purposes of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, 40 % of the voting power of the Company's then outstanding
voting securities.
(g) The term of the Option shall be 20 years from the Effective Date,
or until exercised in full or cancelled with the consent of Director.
(h) The Share Exercise Price and the number of Option Shares
purchasable upon exercise of the Option are subject to adjustment as provided in
Article III.
-4-
<PAGE>
ARTICLE II.
PLEDGE OF OPTION SHARES: ESCROW:
--------------------------------
LEGENDS
-------
1. Pledge of Security. In order to secure Shareholder's obligations
------------------
to deliver Option Shares upon exercise of the Option and payment of the
applicable Share Exercise Price, Shareholder hereby pledges and assigns to
Shareholder, and hereby grants to Shareholder a security interest in, all of
Shareholder's right, title and interest in and to the following (the "Pledged
Collateral"):
(a) the Option Shares and the certificates representing the Option
Shares and any interest of Shareholder in the entries on the books of any
financial intermediary pertaining to the Option Shares, and all dividends, cash,
warrants, rights, instruments and other property or proceeds from time to time
received, receivable or otherwise distributed in respect of or in exchange for
any or all of the Option Shares;
(b) all additional Shares or other of the Company's equity securities,
and all securities convertible into and warrants, options and other rights to
purchase or otherwise acquire Shares or other of the Company's equity
securities, that are issued in respect of the Option Shares (which Shares or
other securities shall be deemed to be part of the Option Shares), the
certificates or other instruments representing such additional Shares,
securities, warrants, options or other rights and any interest of Shareholder in
the entries on the books of any financial intermediary pertaining to such
additional shares, and all dividends, cash, warrants, rights, instruments and
other property or proceeds from time to time received, receivable or otherwise
distributed in
-5-
<PAGE>
respect of or in exchange for any or all of such additional Shares, securities,
warrants, options or other rights and
(c) to the extent not covered by clauses (a) and (b) above, all
proceeds of any or all of the foregoing Pledged Collateral. For purposes of
this Agreement, the term "proceeds" includes whatever is receivable or received
when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise
disposed of, whether such disposition is voluntary or involuntary.
2. Escrow. As promptly as possible after the effective date of this
------
Agreement, Shareholder shall deliver all certificates or instruments
representing or evidencing the Option Shares to the Company as escrow agent and
collateral agent for Director. Shareholder and Director each hereby appoint the
Company as escrow agent, and Director hereby appoints the Company as collateral
agent, to hold the Option Shares, and the Company hereby accepts such
appointments and agrees to hold the Option Shares, and all other Pledged
Collateral, in accordance with the terms of this Agreement. The Company shall
release Pledged Collateral only as follows:
(a) Upon its receipt of a written certificate by Director that
Director has exercised the Option and tendered to Shareholder the Share Exercise
Price in accordance with the terms of the Director's exercise notice pursuant to
Article I hereof, the Company shall deliver to Director the applicable number of
Option Shares, together with any other Pledged Collateral held by the Company in
respect of such Option Shares.
-6-
<PAGE>
(b) Upon expiration of the Option in accordance with Section l(g) of
Article 1, the Company shall release to Shareholder all Pledged Collateral then
held by the Company as escrow agent and collateral agent.
3. Legends. Option Shares shall bear certain legends as follows:
-------
(a) Each certificate representing Option Shares not yet purchased by
Director shall, until expiration of the Option in accordance with Section I (g)
of Article I, bear on the face thereof the following legend:
"Any transfer of the shares represented by this certificate is subject
to the conditions specified in the Equity Incentive Agreement dated as
of July 1, 1996, by and among Jeong H. Kim, Kenneth D. Brody and Yurie
Systems, Inc. (the "Company"). A copy of this Equity Incentive
Agreement is on file with the Secretary of the Company at Yurie
Systems, Inc., 4601 Presidents Drive, Suite 210, Lanham, MD 20706, and
will be furnished without charge by the Company to the holder of this
certificate upon written request to the Secretary of the Company at
such address."
(b Each Share issued upon the Director's exercise of the Option under
Article I hereof shall bear on the face of the certificate representing such
Share the following legend:
"The common stock evidenced by this certificate has not been
registered under the Securities Act of 1933, as amended, or applicable
state securities laws and, accordingly, the common stock may not be
transferred, sold, pledged, hypothecated or otherwise disposed of in
the absence of registration under such Act and such laws or pursuant
to an exemption therefrom."
-7-
<PAGE>
ARTICLE Ill.
ADJUSTMENT PROVISIONS
---------------------
1. Adjustment of Shares. Subject to the provisions of Section 2 of
-------------
this Article III, if the outstanding Shares of the Company are increased or
exchanged for a different number or kind of shares or other securities, or if
additional Shares of new or different securities are distributed in respect of
such Shares or other securities, through merger, consolidation, sale of all or
substantially all of the property of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other distribution in respect of such Shares or other securities, an
appropriate or proportionate adjustment shall be made in (i) the maximum number
of Option Shares issuable hereunder and (ii) the price for each Option Share
subject to this Agreement, but without changing the aggregate purchase price as
to which the Option remains exercisable. For purposes of any such increase,
exchange or distribution, any Option Shares transferred by Shareholder to the
Company pursuant to Section 2 of Article II shall be treated in a manner
identical to the manner in which any Shares subject to such increase, exchange
or distribution are treated.
2. Adjustment for Successor Entity. Upon the dissolution or liquidation
-------------------------------
of the Company or upon a reorganization, merger or consolidation of the Company
with one or more corporations as a result of which the Company is not the
surviving corporation, or upon the sale of all or substantially all of the
property of the Company, this Agreement shall continue and all obligations of
the Company under the Agreement shall be assumed by the successor to the Company
and provision shall be made in connection therewith for the substitution for
Option Shares of shares of capital stock of the successor to the Company, or a
parent or subsidiary thereof, or, if different, the same type of consideration
received by holders of Shares, taking into
-8-
<PAGE>
account any pro-rated adjustments as to number and kind of shares and prices as
are effected for holders of Shares.
ARTICLE IV.
REPRESENTATIONS. WARRANTIES AND COVENANTS
------------------------------------------
1. Representations and Warranties of the Company. To induce
---------------------------------------------
Shareholder and Director to enter into this Agreement and to sell and purchase
the Option and the Option Shares hereunder, the Company represents and warrants
to each of Shareholder and Director, as follows:
(a) Organization and Standing: Certificate of Incorporation and
-----------------------------------------------------------
Bylaws. The Company is a corporation duly organized and validly existing under,
and by virtue of, the laws of the State of Maryland and is in good standing
under such laws. The Company has the corporate power to own and operate its
properties and assets and to carry on its business as currently conducted and
the business proposed to be conducted by it.
(b) Corporate Power: Enforceability. The Company has all requisite
-------------------------------
legal and corporate power to enter into this Agreement and to carry out and
perform its obligations hereunder. This Agreement constitutes the valid and
binding obligation of the Company enforceable against it in accordance with its
terms.
(c) No Conflict. The execution and delivery of this Agreement by the
-----------
Company and the performance of its obligations hereunder will not: (a) conflict
with or violate the certificate of incorporation or bylaws of the Company; (b)
conflict with, violate or constitute
-9-
<PAGE>
a breach or default under any agreement to which the Company is a party; (c)
conflict with or violate any order, statute, rule or regulation applicable to
the Company or (d) result in the imposition of any lien, security interest,
charge, encumbrance or claim whatsoever against the Company or any asset or
property of the Company. No consent or filing of any person (other than consents
or filings which have been or will be obtained or made) with any governmental
authority on the part of the Company is required in connection with the
execution and delivery of this Agreement or the performance by the Company of
its obligations hereunder.
2. Representations and Warranties of Shareholder. To induce Director
---------------------------------------------
and the Company to enter into this Agreement and to purchase the Option
hereunder, Shareholder represents and warrants to each of Director and the
Company, as follows:
(a) Ownership of Shares. Shareholder is the sole record and
-------------------
beneficial owner of 16,000,000 Shares, free and clear of all pledges, liens,
encumbrances or claims of any kind whatsoever, and no other person has any
beneficial interest in or to such Shares. All such Shares have been duly issued
by the Company and are fully paid and nonassessable. Upon exercise of the
Option with respect to any Option Shares and delivery of the exercise price
therefor, Director will own such Shares free and clear of all pledges, liens,
encumbrances or claims of any kind whatsoever, and such Shares shall be fully
paid and nonassessable.
(b) Legal Power: Enforceability. Shareholder has all requisite legal
---------------------------
power to enter into this Agreement and to carry out and perform his obligations
hereunder. This Agreement constitutes the valid and binding obligation of
Shareholder enforceable against him in accordance with its terms.
-10-
<PAGE>
(c) No Conflict. The execution and delivery of the Agreement by
-----------
Shareholder and the performance of its obligations hereunder will not: (a)
conflict with, violate or constitute a breach or default under any agreement to
which Shareholder is a party; (b) conflict with or violate any order, statute,
rule or regulation applicable to Shareholder or (c) result in the imposition of
any lien, security interest, charge, encumbrance or claim whatsoever against
Shareholder or any asset or property of Shareholder. No consent or filing of
any person (other than consents or filings which have been or will be obtained
or made) with any governmental authority on the part of Shareholder is required
in connection with the execution and delivery of the Agreement or the
performance by Shareholder of its obligations hereunder.
3. Representations and Warranties of Director. To induce Shareholder
------------------------------------------
and the Company to enter into this Agreement and to induce Shareholder to sell
the Option hereunder and the Company to issue the Option Shares hereunder,
Director represents and warrants to each of Shareholder and the Company as
follows:
(a) Legal Power: Enforceability. Director has all requisite legal
---------------------------
power to enter into this Agreement and to carry out and perform his obligations
hereunder. This Agreement constitutes the valid and binding obligation of
Director enforceable against him in accordance with its terms.
(b) No Conflict. The execution and delivery of this Agreement by
-----------
Director and the performance of his obligations hereunder will not: (a)
conflict with, violate or constitute a breach or default under any agreement to
which Director is a party; (b) conflict with or violate any order, statute, rule
or regulation applicable to Director or (c) result in the imposition of any
lien, security interest, charge, encumbrance or claim whatsoever against
Director or any asset or
-11-
<PAGE>
property of Director. No consent or filing of any person (other than consents or
filings which have been or will be obtained or made) with any governmental
authority on the part of Director is required in connection with the execution
and delivery of each of the Option Agreements or the performance by Director of
its obligations thereunder.
(c) Investment. Director is purchasing the Option and the Option
----------
Shares for his own account for investment purposes with no intention of
distributing or reselling the Option or the Option Shares or any part thereof,
or interest therein, in any transaction which would be in violation, or cause
Shareholder or the Company to be in violation, of the securities laws of the
United States or any state thereof, without prejudice, however, to Director's
right at all times to sell or otherwise dispose of all or any part of the Option
and the Option Shares under an effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), or under an exemption
from such registration requirements available under the Securities Act and any
applicable state securities laws in accordance with the legend set forth in
Section 3(b) hereof, and subject, nevertheless, to the disposition of Director's
property being at all times within Director's control.
(d) No Public Market. Director understands that neither the Option
----------------
nor the Option Shares have been registered under the Securities Act by reason of
their issuance in a transaction exempt from the registration and prospectus
delivery requirements of the Securities Act, and that Director will have to hold
the Option and the Option Shares, and bear the economic risk of such investment,
indefinitely unless a subsequent disposition thereof is registered under the
Securities Act or is exempt from registration.
-12-
<PAGE>
(e) No Review By State or Federal Agencies. Director understands that
--------------------------------------
no federal or state agency has passed upon the Option or the Option Shares, or
made any finding or determination as to the fairness of the investment or any
recommendation or endorsement of the Option or the Option Shares.
(f) Accredited Investor. Director is an "accredited investor," as
-------------------
such term is defined in Rule 501 promulgated under the Securities Act and has
such knowledge and experience in financial and business matters so as to be
capable of evaluating the merits and risks of his investment in the Option and
the Option Shares, and he is capable of bearing the economic risks of such
investment and is able to bear a complete loss of his investment in the Option
and the Option Shares.
4. Covenants.
---------
(a) Extraordinary Corporate Events. In case the Company after the
------------------------------
date hereof shall propose to: (i) pay any dividend payable in stock to the
holders of Shares or to make any other distribution to the holders of Shares;
(ii) offer to the holders of Shares rights to subscribe for or purchase any
additional shares of any class of stock or any other rights or options or (iii)
effect any reclassification of the Shares (other than a reclassification
involving merely the subdivision or combination of outstanding Shares) or any
capital reorganization or any consolidation or merger (other than a merger in
which no distribution of securities or other property is to be made to holders
of Shares), or any sale, transfer or other disposition of its property, assets
and business as an entirety or substantially as an entirety, or the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to Director notice of such proposed action, which shall specify the
date on which the stock transfer
-13-
<PAGE>
books of the Company shall close, or a record shall be taken, for determining
-----------
the holders of Shares entitled to receive such stock dividends or other
distribution or such rights or options, or the date on which such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, dissolution or winding up shall take place or
commence, as the case may be, and the date as of which it is expected that
holders of Shares of record shall be entitled to receive securities or other
property deliverable upon such action, if any such date is to be fixed. Notice
shall be given in the case of any action covered by clause (i) or (ii) above at
least ten (10) days prior to the record date for determining holders of Shares
for purposes of receiving such payment or offer, or in the case of any action
covered by clause (iii) above at least thirty (30) days prior to any record date
to determine holders of Shares entitled to receive such securities or other
property; provided, however, that if Director is attending the meeting at which
-----------------
any such action is approved or taken, the notice prescribed by the preceding
sentence shall have been deemed to have been made and no further notice shall be
required hereunder. Failure to file any certificate or notice or to give any
notice, or any defect in any certificate or notice pursuant to this Section l(a)
shall not affect the legality or validity of the adjustment of the Share
Exercise Price or the number of Shares purchasable upon exercise of the Option,
or any transaction giving rise thereto.
(b) Shareholder will not, from the Effective Date to and until the
expiration of the Option in accordance with Section l(g) of Article 1, sell,
transfer or otherwise encumber any Option Shares other than pursuant to the
Option, except by operation of law or with the consent of Director.
-14-
<PAGE>
ARTICLE V.
REGISTRATION AND COME-ALONG RIGHTS
----------------------------------
1. Registration Rights. The Company and Shareholder hereby agree to
-------------------
enter into a registration rights agreement (the "Registration Rights Agreement")
in the form attached hereto as Exhibit A.
2. Come-Along Rights. If any proposed transfer or series of related
-----------------
transfers of Shares by Shareholder for value received would, upon consummation
of such proposed transfer or transfers, result in a reduction of Shareholder's
ownership of Shares to less than 50% of the issued and outstanding Shares, then
Shareholder shall make no such sale or transfer, and shall make no subsequent
sale or transfer, unless Shareholder shall (i) give Director notice of such
transfer or transfers not less than 30 days prior to the consummation of such
transfer or of the first in such series of transfers and (ii) permit Director
to, or cause Director to be permitted to, sell to the proposed transferee or
transferees of Shareholder's Shares (the "Transferee"), on terms and conditions
at least as favorable to Director as the terms and conditions of such sale by
Shareholder, the same proportionate part of the aggregate of the Option Shares
as Shareholder shall sell of the aggregate of Shareholder's Shares (excluding
Option Shares). Shareholder will reduce the number of Shares Shareholder will
transfer to the extent necessary to accommodate such participation of Director
hereunder; Transferee to purchase a greater number of Shares than initially
proposed to be purchased that nothing in this Section shall require the
Transferee to purchase a greater number of Shares than initially proposed to be
purchased.
-15-
<PAGE>
ARTICLE VI.
MISCELLANEOUS PROVISIONS
------------------------
1. The provisions of this Agreement may be amended or waived only by
a writing signed by all the parties hereto. This Agreement and the Registration
Rights Agreement constitute the full and entire understanding and agreement
among the parties with regard to the subjects hereof and thereof.
2. This Agreement is made and shall be governed by and construed in
all respects in accordance with the laws of the State of Maryland, without
regard to the principles of conflicts of laws thereof which might refer such
interpretation to the laws of a different state or jurisdiction.
3. The representations, warranties and covenants made herein shall
survive the closing of the transactions contemplated hereby.
4. The provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, transferees, heirs, executors and
administrators of the parties hereto including, without limitation, any assignee
or transferee of the Option. With respect to any assignment or transfer of the
Option, in whole or in part, by Director or any assignee or transferee of
Director, (x) if the assignee or transferee of such assignment or transfer is
not an Exempt Assignee (as defined below), such assignee or transferee shall,
upon such assignment or transfer, have all of the rights of Director hereunder
and under the Registration Rights Agreement, other than (a) those related to
serving as a member of the Board (or expressing a willingness to do so) and (b)
those relating to assignments and transfers to Exempt Assignees, so
-16-
<PAGE>
long as such assignee or transferee is assigned or transferred a portion of the
Option covering at least 200,000 Shares (without taking into account any
adjustments made to Shares after the date hereof), and (y) if the assignee or
transferee of such assignment or transfer is an Exempt Assignee, such assignee
or transferee shall, upon such assignment or transfer, have all of the rights of
Director hereunder and under the Registration Rights Agreement, other than (a)
those related to serving as a member of the Board (or expressing a willingness
to do so), and (b) those relating to assignments and transfers to Exempt
Assignees. "Exempt Assignee" means any affiliate of Director or Director's
spouse, direct lineal ancestors and descendants, legal dependents, beneficiaries
under a will or the laws of intestacy or a trust exclusively for the benefit of
some or all of the foregoing. Any assignee or transferee of this Option (or any
part thereof) who is entitled under this Section 4 to the rights of Director
hereunder is a "Permitted Assignee".
5. All notices required or permitted hereunder shall be in writing
and shall be delivered in person or by facsimile, courier or registered mail,
addressed as follows:
If to the Company: Yurie Systems, Inc.
4601 Presidents Drive
Suite 210
Lanham, MD 20706
If to Shareholder: Mr. Jeong H. Kim
c/o Yurie Systems, Inc.
4601 Presidents Drive
Suite 210
Lanham, MD 20706
-17-
<PAGE>
If to Director: Kenneth D. Brody
Suite 500 West
555 Thirteenth St., N.W.
Washington, D.C. 20004
If personally delivered, such communication shall be deemed delivered
upon actual receipt; if sent by telecopier or facsimile transmission, such
communication shall be deemed delivered the day of transmission (and sender
shall bear the burden of proof of delivery); if sent by overnight courier
pursuant to this Section, such communication shall be deemed delivered upon
receipt; and if sent by registered mail pursuant to this Section 5, such
communication shall be deemed delivered as of the date of delivery indicated on
the receipt issued by the relevant postal service, or, if the addressee fails or
refuses to accept delivery, as of the date of such failure or refusal. No
objection may be made to the manner of delivery of any notice actually received
in writing by an authorized agent of a party.
6. In case any provision of this Agreement shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the remaining
provisions of this agreement shall not in any way be affected or impaired
thereby.
7. This Agreement shall terminate upon the expiration of the Option
under Section l(g) Article I.
8. This Agreement may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute one
instrument.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
JEONG H. KIM
______________________________
KENNETH D. BRODY
_______________________________
YURIE SYSTEMS, INC., a Maryland
corporation
By: ____________________________
Its: Executive Vice President
-19-
<PAGE>
Exhibit 10.9
FIRST AMENDMENT TO AGREEMENT OF LEASE
-------------------------------------
This First Amendment to Agreement of Lease (the "Amendment") is made
this 3rd day of July, 1996, by and between Jon Glanz ("Landlord") and Yurie
Systems, Inc. ("Tenant"), collectively referred to herein as the "parties".
WITNESSETH:
-----------
WHEREAS, the parties hereto entered into that certain Agreement of
Lease dated May 15, 1996 (the "Lease") with respect to the Demised Premises at
10000 Derekwood Lane, Lanham, Maryland 20706; and
WHEREAS, the Lease provides for the payment by Tenant to Landlord of
Basic Rent in the total amount of $734,922.62 payable monthly commencing August
1, 1996 and thereafter until August 1, 1999 with certain concessions; and
WHEREAS, Exhibit D to the Lease obligates the parties to develop a
mutually agreeable plan for improvements to be made to the Premises by Landlord
in an amount not to exceed $177,850.00 (the "Improvement Allowance"); and
WHEREAS, Section 3.2 and Exhibit D to the Lease obligate the Landlord
to place the Improvement Allowance in an escrow account mutually agreeable to
the parties and to draw from same as work progresses, with the improvements to
be made pursuant to the Improvement Allowance to be completed by February 28,
1997; and
WHEREAS, Exhibit D to the Lease includes certain provisions with
respect to Tenant's use of certain modular furniture in the Premises during the
term of the Lease; and
WHEREAS, the parties have determined to amend the provisions of the
said Section 3.2 and Exhibits A and D as provided herein, in accordance with
Section 14.13 thereof.
<PAGE>
-2-
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants herein contained, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. The second full paragraph of Exhibit D to the said Lease is hereby
deleted in its entirety and the following substituted therefore:
Tenant may, at Tenant's option, leave any modular furniture which Tenant is
currently using upon termination of the Lease.
2. Landlord and Tenant have developed a mutually agreeable plan for
improvements to be made to the Premises by Landlord in the amount of
$177,850.00. The improvements shall be completed, by a general contractor which
has been selected by Tenant, on or before August 31, 1996. The parties hereto
acknowledge that, prior to the execution hereof, Tenant has occupied the Demised
Premises within the meaning of Stein 3.1 of the Lease. Accordingly, the Lease
term shall commence on August 1, 1996 and expire on August 31, 1999, and Tenant
is completing, executing and delivering to Landlord herewith its Certificate of
Acceptance in the form attached to the Lease as Exhibit E.
3. The second full sentence of the first full paragraph of Exhibit D,
commencing "Landlord shall place the Improvement Allowance in an escrow account
. . ." and ". . . as work progresses", shall be deleted in its entirety. Tenant
acknowledges that improvements to the Demised Premises having a cost of
$55,091.00 have previously been provided and paid for by Landlord. Remaining
improvements shall be completed, and the costs thereof paid, by Tenant, and
Landlord is hereby discharged from all other and further liability for the
preparation of the Demised Premises and the payment therefor. As consideration
for the completion of the remaining improvements, and payment therefor, by
Tenant, installments of rent owing under the Lease for the months of January,
February, March, April, May and July 1997 shall be abated, and Tenant shall have
no
<PAGE>
-3-
obligations therefor. Tenant's next payment of rent owing under the Lease
shall be due and payable on August 1, 1997. The Rent Schedule in the subsection
captioned "Basic Rent" on the first page of Exhibit A of the Lease is hereby
amended to conform with the rent concession provided herein. Upon the
completion of the improvements, Tenant shall execute such certificates of
completion, satisfaction, and payment as Landlord, in his sole discretion, shall
reasonably request.
4. Section 14.19 of the Lease captioned "contingency" is hereby deleted
in its entirety and the following substituted therefor:
This Lease, and any amendment thereof, is expressly contingent upon
receiving all necessary bank or court approvals. If necessary
approvals are not obtained by August 1, 1996 (or such later date as
the parties may hereafter agree to), this Lease shall be terminated,
any monies deposited with Landlord shall be returned to Tenant, and
the parties shall be relieved of any further liabilities or
obligations hereunder.
5. Capitalized terms used in this Amendment shall have the meanings
ascribed to them in the Lease.
<PAGE>
-4-
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
Agreement of Lease to be executed at College Park, Maryland the day and year
first above written.
Witness: LANDLORD
/s/ Jon L. Glanz
- ---------------------------- ----------------------- [SEAL]
Jon L. Glanz
TENANT:
Witness/Attest: YURIES SYSTEMS, INC.
By: /s/ Jeong H. Kim
- ---------------------------- --------------------- [SEAL]
Jeong H. Kim,
Chief Executive Officer
<PAGE>
AGREEMENT OF LEASE
THIS AGREEMENT OF LEASE (the "Lease") is made this ____ day of May,
1996, by and between JON GLANZ ("Landlord"), and YURIE SYSTEMS, INC. ("Tenant"),
(collectively sometimes referred to hereafter as the "parties").
ARTICLE I. GENERAL
-------
Section 1.1 Consideration. Landlord enters into this Lease in
-------------
consideration of the payment by Tenant of the rents herein reserved and the
keeping, observance and performance by Tenant of the covenants and agreements of
Tenant herein contained.
Section 1.2 Exhibits and Site Plans Attached to Lease. The Exhibits
-----------------------------------------
and Site Plans listed below shall be attached to this Lease and be deemed
incorporated in this Lease by this reference. In the event of any inconsistency
between such Exhibits and Site Plans and the terms and provisions of this Lease,
the terms and provisions of the Exhibits and Site Plans shall control. The
Exhibits and Site Plans attached to this Lease are:
Exhibit A -- Description of Demised Premises and Terms of Rental
Site Plan A-1 -- The Building, Building Lot and Demised Premises
Exhibit B -- INTENTIONALLY DELETED
Exhibit C -- Tenant's Estimated Share of Operating Expenses
Exhibit D -- Preparation of Demised Premises
Exhibit E -- Certificate of Acceptance
Exhibit F -- Rules and Regulations
Section 1.3 Certain Definitions. As used herein the following terms
-------------------
shall have the following meanings:
1.3.1 Building. "Building" shall mean the Building constructed on
--------
the Building Lot, as shown on Site Plan A-1 attached hereto, containing the
approximate number of square feet of interior space set forth on Exhibit A
attached thereto. The address of the Building is 10000 Derekwood Lane, Lanham,
Maryland 20706.
1.3.2 Building Lot. "Building Lot" shall mean that land of
------------
approximately 3.1762 acres as shown on Site Plan A-1, being described as part of
parcel "Q", in the "Hanson
<PAGE>
-2-
Palmer Business Park Resubdivision" as per plat thereof recorded among the
Prince George's County Land Records.
1.3.3 Common Facilities. "Common Facilities" shall mean all of the
-----------------
Property except the Demised Premises and those other premises in the Building
leased or held for lease to other tenants.
1.3.4 Palmer 50. "Palmer 50" shall mean the Land, the Property and
---------
all other buildings, fixtures and other improvements on the Land other than
fixtures and personal property of Tenant or of other users of space on the Land.
Any and all references to or use of the term "Palmer 50" in any Exhibit or Site
Plan attached hereto shall be construed to mean "Palmer 50".
1.3.5 Demised Premises. "Demised Premises" shall mean the space
----------------
within the Building to be occupied by Tenant as described on Exhibit A attached
hereto and as outlined in red on Site Plan A-1 attached hereto. The Demised
Premises contain the approximate number of square feet of interior space set
forth on Exhibit A attached hereto.
1.3.6 Land. "Land" shall mean that certain parcel of real property
----
of approximately 3.1762 acres shown on Site Plan A-1 attached hereto.
1.3.7 Property. "Property" shall mean the Building of approximately
--------
45,100 square feet set on approximately 3.1762 acres and all fixtures,
landscaping and other improvements now or hereafter existing therein and
thereon, other than fixtures and personal property of Tenant or of other users
of space in the Building.
ARTICLE II. DEMISE OF PREMISES
------------------
Section 2.1 Demise. Subject to the provisions, covenants and
------
agreements herein contained, Landlord hereby leases and demises to Tenant, and
Tenant hereby leases from Landlord, the Demised Premises subject to existing
covenants, conditions, restrictions, easements and encumbrances affecting the
same. Tenant's right to enjoyment of the Demised Premises shall be subject to
such rules and restrictions as may be established by Landlord.
Section 2.2 Use. Tenant will use and occupy the Demised Premises
---
solely for general office purposes and uses incident thereto in accordance with
the certificate of occupancy and the use permitted under applicable zoning
regulations, and for no other purpose, except any permitted use which may be set
forth in Exhibit A. Tenant will not use or occupy the Demised premises for any
unlawful, disorderly, or extra hazardous purpose, and will not prepare or
dispense any food or beverage therein, except for Tenant's personal use in the
Demised Premises. Tenant will comply with all present and future laws,
regulations and governmental requirements of any governmental or public
authority having jurisdiction over the Demised Premises.
Section 2.3 Covenant of Quiet Enjoyment. Landlord covenants and
---------------------------
agrees that, provided Tenant is not in default and keeps, observes and performs
the covenants and agreements
<PAGE>
-3-
of Tenant contained in this Lease, Tenant shall have quiet and peaceable
possession of the Demised Premises, and such possession shall not be disturbed
or interfered with by Landlord or by any person claiming superior title, through
Landlord, except as expressly permitted in this Lease; it being understood and
agreed that the Landlord's liability hereunder shall obtain only so long as it
remains the owner of the Demised Premises
Subject to Tenant's approval, which approval shall not be unreasonably
withheld, Landlord hereby reserves to itself and its successors and assigns the
following rights: (i) to change the street address and/or name of the Building
and/or the arrangement and/or location of entrances, passageways, doors,
doorways, corridors, stairs, or other public parts of the Building, (ii) to
erect, use and maintain pipes and conduits in and through the Premises and
(iii) to grant to anyone the exclusive right to conduct any particular business
or undertaking in the Building. Landlord may exercise any or all of the
foregoing rights without being deemed to be guilty of an eviction, actual or
constructive, or a disturbance or interruption of the business of Tenant or
Tenant's use or occupancy of the Demised Premises.
Section 2.4 Condition of Demised Premises. Landlord is delivering
-----------------------------
the Premises free of any zoning and building code violations. Upon delivery of
the Premises, all mechanical, plumbing, electrical and fire protection systems
and equipment, as well as building exterior components will be in working
condition. Tenant covenants and agrees that, upon taking possession of the
Demised Premises, Tenant shall be deemed to have accepted the Demised Premises
"as is" and Tenant shall be deemed to have waived any warranty of condition or
habitability, suitability for occupancy, use or habitation, fitness for a
particular purpose or merchantability, express or implied relating to the
Demised Premises.
ARTICLE III. TERM OF LEASE
-------------
Section 3.1 Lease Term. The term of this Lease shall commence on the
----------
commencement date and expire on the expiration date as are specified on Exhibit
A (the "Lease Term"), provided, however, that if the Demised Premises are not
Ready for Occupancy, as hereinafter defined, as of said commencement date, the
Lease Term shall commence on the earlier of the date on which Tenant first
occupies the Demised Premises or on the fifteenth day after deliver of notice to
Tenant by Landlord that the Demised Premises are Ready for Occupancy. The
Demised Premises shall be considered "Ready for Occupancy" on the first day as
of which a temporary use and occupancy permit for the Demised Premises is issued
by the appropriate agencies of Prince George's County, Maryland.
Section 3.2 Improvements. Landlord agrees to make the improvements
------------
to the Demised Premises as set forth on Exhibit D attached hereto.
Landlord shall use its best efforts to cause the Demised Premises to
be Ready for Occupancy on the commencement date as specified on Exhibit A
attached hereto; provided, however, Landlord shall not be responsible to Tenant
for any claims, damages or liabilities by reason of any failure by Landlord to
meet such date. At any time after delivery of notice by
<PAGE>
-4-
Landlord to Tenant that the Demised Premises are Ready for Occupancy, but within
fifteen (15) days of such date, the Tenant shall have the right to inspect the
Demised Premises in the presence of Landlord or its agent and to submit to
Landlord or its agent a punch list of items which remain to be done by Landlord
in accordance with Exhibit D. Notwithstanding the submission of any such punch
list, Tenant shall occupy the Demised Premises within fifteen (15) days after
delivery of the aforesaid notice that the Demised Premises are Ready for
Occupancy, and such occupancy shall be deemed to be acceptance by Tenant of the
Demised Premises as then existing. Landlord agrees to complete the items on the
punch list, so long as said items are required to be completed in accordance
with Exhibit D, within a reasonable period of time after receipt of any such
punch list.
In the event Landlord agrees to make, on behalf of Tenant,
improvements to the Demised Premises in addition to those set forth on Exhibit
D, Landlord and Tenant shall initial plans and specifications therefor and
identify the same as being for additional improvements. Tenant covenants and
agrees to reimburse Landlord for all Landlord's costs and expenses in making
said additional improvements by paying such amounts to Landlord as additional
rent.
Section 3.3 Tenant's Acceptance. At the commencement of the Lease
-------------------
Term, Tenant shall execute and deliver to Landlord a certificate in the form of
Exhibit E attached hereto. After commencement of the Lease Term, Tenant shall
have no right to assert any remedy based on a claim that Landlord failed to
deliver possession of the Demised Premises, or failed to furnish any other
facilities, in accordance with the terms hereof.
ARTICLE IV. RENT AND OTHER AMOUNTS PAYABLE
------------------------------
Section 4.1 Security Deposit. Tenant shall deposit with Landlord
----------------
upon execution of this Lease, the sum set forth on Exhibit A ("Security
Deposit") as a security deposit for the faithful performance of Tenant's
obligations under this Lease, and Landlord may apply all or any part of said
Security Deposit to cure any failure by Tenant to faithfully perform Tenant's
obligations under this Lease. The Security Deposit shall not be considered an
advance payment of rent or a measure of Landlord's damages in the event of
default by Tenant.
Section 4.2 Basic Rent. Tenant covenants and agrees to pay to
----------
Landlord, without offset, deduction or abatement, basic rent for the full Lease
Term in the amount specified as basic rent on Exhibit A ("Basic Rent").
Section 4.3 Monthly Rent. Basic Rent shall be payable monthly in
------------
advance, without notice, in equal installments on the first day of each calendar
month in the amount of monthly rent specified on Exhibit A ("Monthly Rent").
The first Five (5) installments shall be payable on the date that this Lease is
executed by Tenant. Rent for any fractional calendar month, at the beginning or
end of the term, shall be that proportion of the monthly installment which the
number of days during such month bears to the total days in the month.
<PAGE>
-5-
Section 4.4 Place of Payments. Basic Rent and all other sums payable
-----------------
by Tenant to Landlord under this Lease shall be paid to Landlord at the place
for payments specified on Exhibit A, or such other place as Landlord may, from
time to time, designate in writing.
Section 4.5 Lease a Net Lease and Rent Absolute. It is the intent of
-----------------------------------
the parties that the Basic Rent provided in this Lease shall be a net payment to
Landlord, that the Lease shall continue for the full Lease Term notwithstanding
any occurrence preventing or restricting use and occupancy of the Demised
Premises and notwithstanding any action by governmental authority relating to or
affecting the Demised Premises, except as otherwise specifically provided in
this Lease; that the Basic Rent shall be absolutely payable without offset,
reduction or abatement for any cause except as otherwise specifically provided
in this Lease; that Landlord shall not bear any costs or expenses relating to
the Demised Premises or provide any services or do any act in connection with
the Demised Premises except as otherwise specifically provided in this Lease;
and that Tenant shall pay in addition to Basic Rent, Additional Rent as
hereinafter provided to cover costs and expenses relating to the Demised
Premises and the Common Facilities.
Section 4.6 Additional Rent. Subject to the provisions of Exhibit A,
---------------
Tenant covenants and agrees to pay, in addition to the Basic Rent, the Tenant's
Prorata Share of Building Operating Expenses. Building Operating Expenses shall
be all expenses relating to the Building including, but not limited to, real
estate taxes, sales, franchise, business corporation, or any other taxes (except
income taxes) based on rents, Landlord's insurance (as defined in paragraph 6.1
and 6.2 below), utilities not separately metered to individual tenants,
maintenance, repairs, operating supplies, property management, building
services, snow removal, landscaping, equipment, materials, labor for management
and maintenance, resurfacing, repainting and restriping of parking areas, car
stops, signage, security lighting and security. Building Operating Expenses
will not include monies spend for expenditures of a capital nature (except to
the extent that such expenses otherwise cause a reduction of the Building
Operating Expenses without a reduction of services; in such cases, that part of
the capital expense attributable to the calendar year under good accounting
practices shall be included in the Building Operating Expenses).
Tenant shall pay monthly, as Additional Rent, in addition to the Basic
Rent, Tenant's Estimated Share of Building Operating Expenses which shall
represent Landlord's best estimate of such costs. Exhibit C attached hereto
sets forth Landlord's estimate of the Building Operating Expenses for the
calendar year in which this Lease commences, but shall in no way limit Tenant's
obligation to pay Additional Rent as described above. Annually, or from time to
time, after assessing past and estimated operating cost data, the Landlord may
adjust the monthly operating cost payment provided for herein upward or downward
to reflect more accurately anticipated monthly costs. All payments due at least
twenty (20) days after the revision shall be made at the new rate.
As of the close of each calendar year, Landlord shall compute the
actual costs of operating the Building for the previous twelve-month period (if
the Building has been operating for less than twelve months, the cost of
operating the Building for year shall be determined by dividing the actual
operating costs by the number of days of actual operating and multiplying by
<PAGE>
-6-
365). Landlord shall deliver to Tenant notice of such cost and the amount due,
if any, from Tenant no later than May 15 of the year immediately subsequent to
the year to which such costs relate. Tenant shall reimburse Landlord, as
Additional Rent, within thirty (30) days after notice of any deficiency between
estimated operating costs paid and actual costs incurred. In the event of
overpayment by Tenant, the Landlord shall apply the excess to the next
successive installment of Basic Rent due hereunder unless there are no further
Basic Rent payments due from Tenant, in which case Landlord shall pay such
excess to Tenant within thirty (30) days of notice.
Landlord shall, upon Tenant's request, deliver to Tenant a written
accounting showing how Building Operating Costs were calculated.
Section 4.7 Tenant's Pro Rata Share. "Tenant's Pro Rata Share" shall
-----------------------
mean a fraction, the numerator of which shall be the approximate square footage
of the Demised Premises as set forth on Exhibit A attached hereto, and the
denominator of which shall be the approximate square footage of the Building as
set forth on Exhibit A.
Section 4.8 Adjustments to Rent. During the Lease Term, the Basic
-------------------
Rent shall be adjusted as provided in Exhibit A to this Lease.
ARTICLE V. TAXES AND ASSESSMENTS
---------------------
Section 5.1 Covenant to Pay Taxes and Assessments. Tenant covenants
-------------------------------------
and agrees to pay, as Additional Rent, Tenant's Pro Rata Share of Taxes and
Assessments which are billed during any calendar year falling partly or wholly
within the Lease Term. "Taxes and Assessments" shall mean all taxes,
assessments or other impositions, general or special, ordinary or extraordinary,
of every kind or nature, which may be levied, assessed or imposed upon or with
respect to the Property or any part thereof, or upon any building, improvements
at any time situated thereon. In no event shall Tenant be responsible for
payment of Personal Property Taxes.
Section 5.2 Proration at Commencement and Expiration of Term. Taxes
------------------------------------------------
and Assessments shall be prorated between Landlord and Tenant for the year in
which the Lease Term commences and for the year in which the Lease Term expires
as of, respectively, the date of commencement of the Lease Term and the date of
the expiration of the Lease Term, except as hereinafter provided. All
prorations hereunder shall be calculated on the basis of a year comprised to
twelve thirty-day months. Tenant shall be liable without proration for the full
amount of Taxes and Assessments relating to improvements, fixtures, equipment or
personal property installed by or on behalf of Tenant which are levied,
assessed, or attributable to the Lease Term. Proration of Taxes and Assessments
shall be made on the basis of actual Taxes and Assessments billed during the
calendar years of the Lease Term. Tenant's Pro Rata Shares of Taxes and
Assessments for the years in which the Lease Term commences and expires shall be
paid and deposited with the Landlord monthly as hereinabove provided, but, in
the event actual Taxes and Assessments for either year are greater or less than
as estimated for purposes of monthly payments, appropriate adjustment and
payment shall be made between the parties at the
<PAGE>
-7-
time the actual Taxes and Assessments are known, as may be necessary to
accomplish proration, as herein provided.
Section 5.3 Special Assessments. In the event any Taxes or
-------------------
Assessments are payable in installments over the period of years, Tenant shall
be responsible only for installments billed during the calendar years within the
Lease Term with proration, as above provided, of any installment payable prior
to or after expiration of the Lease Term.
Section 5.4 New or Additional Taxes. Tenant's obligation to pay
-----------------------
Tenant's Pro Rata Share of Taxes and Assessments shall include any Taxes and
Assessments of a nature not presently in effect but which may hereafter be
levied, assessed or imposed upon Landlord or upon the Property if such tax shall
be based upon or arise out of the ownership, use or operation of, or the rents
received from the Property, other than income taxes of Landlord. The liability
of all tenants in the Property for any such new type of tax shall be that
portion of the total tax that is attributable to the ownership, use or operation
of the Property or the rents received thereon, as the case may be.
Section 5.5 Landlord's Sole Right to Contest Taxes. Landlord shall
--------------------------------------
have the sole right to contest any Taxes or Assessments. Landlord shall pay to
or credit Tenant with Tenant's Pro Rata Share of any abatement, reduction or
recovery of any Taxes and Assessments attributable to the Lease Term less
Tenant's Pro Rata Share of all costs and expenses incurred by Landlord,
including attorney's fees, in connection with such abatement, reduction or
recovery.
ARTICLE VI. INSURANCE
---------
Section 6.1 Casualty Insurance. Landlord covenants and agrees to
------------------
obtain and keep in full force and effect during the Lease Term, Casualty
Insurance as hereinafter defined, the cost of which shall be a Building
Operating Expense. "Casualty Insurance" shall mean fire and extended coverage
insurance with respect to the Building, in an amount equal to the full
replacement cost thereof, with coinsurance clauses of no less than 80%, and with
coverage, at Landlord's option, by endorsement or otherwise, for all risks,
vandalism and malicious mischief, sprinkler leakage, boilers and rental loss and
with a deductible in an amount for each occurrence as Landlord, in its sole
discretion, may determine from time to time. Casualty Insurance obtained by
Landlord need not name Tenant as an insured party and may, at Landlord's option,
name any mortgagee or holder of a deed of trust as an insured party as its
interest may appear. Landlord may charge Tenant with any extra cost of the
insurance described in this Section due to the particular use of the Demised
Premises by Tenant. Tenant shall be responsible for obtaining, at Tenant's
option, cost and expense, insurance coverage for property of Tenant and for the
interruption of Tenant's business.
Section 6.2 Liability Insurance. Tenant covenants and agrees to
-------------------
obtain and keep in full force and effect during the Lease Term, and to pay the
premiums and costs of, Liability Insurance as hereinafter defined. "Liability
Insurance" shall mean comprehensive general liability insurance covering public
liability with respect to the ownership, use and operation of
<PAGE>
-8-
the Demised Premises, with limits of not less than $1,000,000 combined single
limit of liability, with endorsements for assumed contractual liability with
respect to the liabilities assumed by Tenant under Section 8.25 of this Lease,
and with no deductible, retention or self-insurance provision contained therein,
unless otherwise approved in writing by Landlord. Landlord covenants and agrees
to obtain and keep infull force and effect during the Lease Term liability
insurance covering public liability with respect to the ownership, use and
operation of the Common Facilities with limits of not less than $1,000,000
single limit of liability.
Section 6.3 General Provisions Respecting Insurance. Except as
---------------------------------------
otherwise approved in writing by Landlord, all insurance obtained by Tenant
shall be on forms and with insurers approved by Landlord, which approval shall
not be unreasonably withheld; shall name Landlord and the holder of any first
mortgage or deed of trust encumbering the Property as insured parties, as their
interests may appear; shall contain a waiver of rights of subrogation as among
Tenant, Landlord and the holder of any such first mortgage or deed of trust; and
shall provide, by certificate of insurance or otherwise, that the insurance
coverage shall not be cancelled or altered except upon thirty (30) days prior
written notice to Landlord and the holder of any such first mortgage or deed of
trust. Certificates of insurance obtained by Tenant shall be delivered to
Landlord who may deposit the same with the holder of any such first mortgage or
deed of trust.
Section 6.4 Cooperation in the Event of Loss. Landlord and Tenant
--------------------------------
shall cooperate with each other in the collection of any insurance proceeds
which may be payable in the event of any loss, including the execution and
delivery of any proof of loss or other actions required to effect recovery.
ARTICLE VII. UTILITY, OPERATING, MAINTENANCE AND REPAIR EXPENSES
---------------------------------------------------
Section 7.1 Utility Charges. Subject to the provisions of Exhibit A
----------------
hereto, Tenant covenants and agrees to pay all charges for electricity, light,
heat, power, telephone and other utilities, except for water, sewer and other
commonly metered charges for which provision is made below, used, rendered or
supplied to or for the Demised Premises and to contract for the same in Tenant's
own name and to make payments for same directly to the supplier. In the event
that, in Landlord's sole opinion, Tenant's usage of water warrants separate
metering, Landlord may install, at Tenant's expense, a separate meter for the
Demised Premises. Landlord shall have no responsibility for utilities used in
the Demised Premises other than to arrange to bring such utilities to Tenant at
a single point of entry to the Demised Premises.
Section 7.2 Tenant's Maintenance and Operating Expenses. Tenant
-------------------------------------------
covenants and agrees to operate, maintain, repair, replace and keep the Demised
Premises and all improvements, fixtures and personal property therein in good,
safe and sanitary condition, order and repair and in accordance with all
applicable laws, ordinances, orders, rules and regulations of governmental
authorities having jurisdiction. Tenant further covenants and agrees to pay all
costs and expenses of operations and maintenance on or relating to the Demised
Premises, including costs and expenses for utilities, janitorial and cleaning
services, interior plant services, security systems, painting, replacement of
damaged or broken glass and other breakable
<PAGE>
-9-
materials in or serving the Demised Premises and replacement of lights and light
fixtures in or serving the Demised Premises and to contract for the same in
Tenant's own name. Tenant further covenants and agrees to enter into a contract
or contracts satisfactory in form and substance to Landlord for professional
maintenance and service of the heating, ventilating and air condition systems in
the Demised Premises. Such contracts shall be submitted to Landlord at least
thirty (30) days prior to Tenant's occupancy of the Demised Premises. Landlord
may disapprove any such contract within fifteen (15) days of Landlord's receipt
thereof. In the event of such disapproval, Tenant shall obtain a contract
satisfactory to Landlord prior to Tenant's occupancy of the Demised Premises.
Section 7.3 Landlord's Maintenance and Repair. Landlord shall be
---------------------------------
responsible for and shall bear the costs and expenses of replacement of, or
extraordinary maintenance and repairs to the roof, exterior walls, emergency
generator, fuel tanks and structural elements of the Building, unless such is
caused by the act or neglect of Tenant. All such repairs or replacements shall
be performed within a reasonable time.
ARTICLE VIII. OTHER COVENANTS OF TENANT
-------------------------
Section 8.1 Limitation on Use by Tenant. Tenant covenants and agrees
---------------------------
to use the Demised Premises only for the use or uses set forth as Permitted Uses
by Tenant on Exhibit A attached hereto and for no other purposes, except with
the prior written consent of Landlord.
Section 8.2 Compliance with Laws. Tenant covenants and agrees that
--------------------
nothing shall be done or kept on the Demised Premises or Palmer 50 in violation
of any law, ordinance, order, rule or regulation of any governmental authority
having jurisdiction and that the Demised Premises and the Common Facilities
shall be used, kept and maintained in compliance with any such law, ordinance,
order, rule or regulation and with the certificate of occupancy issued for the
Building and the Demised Premises.
Section 8.3 Compliance with Insurance Requirements. Tenant covenants
--------------------------------------
and agrees that nothing shall be done or kept on the Demised Premises or Palmer
50 which might impair or increase the cost of insurance maintained with respect
to all or any part thereof, which might increase the insured risks or which
might result in cancellation of any such insurance.
Section 8.4 Compliance with Rules and Regulations. Tenant, and
-------------------------------------
anyone acting by, through or under Tenant, shall at all times abide by and
observe the rules and regulations attached hereto as Exhibit F. In addition,
Tenant, and anyone acting by, through or under Tenant, shall abide by and
observe such other rules or regulations as may be promulgated from time to time
by Landlord, with a copy sent to Tenant, for the operation and maintenance of
the Building; provided, however, that the same are in conformity with common
operation and maintenance in similar buildings and are not inconsistent with the
provisions of this Lease. Nothing contained in this Lease shall be construed to
impose upon Landlord any duty or obligation to enforce such rules and
regulations, or the terms, conditions, or covenants contained in any other
lease, as against any other tenant, and Landlord shall not be liable to Tenant
for
<PAGE>
-10-
violation of the same by any other tenant, or anyone acting by, through or
under such other tenant. If there is any inconsistency between this Lease and
the rules and regulations as set forth in Exhibit F, this Lease shall govern.
Section 8.5 No Waste or Impairment of Value. Tenant covenants and
-------------------------------
agrees that nothing shall be done or kept on the Demised Premises or Palmer 50
which might impair the value of all or any part thereof, or which would
constitute waste.
Section 8.6 No Hazardous Use. Tenant covenants and agrees that
----------------
nothing shall be done or kept on the Demised Premises or Palmer 50 and that no
improvements, changes, alterations, additions, maintenance or repairs shall be
made to the Demised Premises which might be unsafe or hazardous to any person or
property.
Section 8.7 No Structural or Electrical Overloading. Tenant
---------------------------------------
covenants and agrees that nothing shall be done or kept on, and that no
improvements changes, alterations, additions, maintenance or repairs shall be
made to the Demised Premises or Palmer 50 which might impair the structural
soundness of the Building, which might result in an overload of electrical lines
serving the Building or which might interfere with electric or electronic
equipment in the Building. In the event of violations hereof, Tenant covenants
and agrees to immediately remedy the violation at Tenant's expense and in
compliance with all requirements of governmental authorities, utility companies
and insurance underwriters.
Section 8.8 No Nuisance, Noxious or Offensive Activity. Tenant
------------------------------------------
covenants and agrees that no noxious or offensive activity shall be carried on
the Demised Premises or Palmer 50, nor shall anything be done or kept on the
Demised Premises or Palmer 50 which may be or become a public or private
nuisance or which may cause embarrassment, disturbance, or annoyance to Landlord
or other tenants in the Building.
Section 8.9 No Annoying Lights, Sound or Odors. Tenant covenants and
----------------------------------
agrees that no light shall be emitted from the Demised Premises which is
unreasonably bright or causes unreasonable glare; no sound shall be emitted from
the Demised Premises which is unreasonably loud or annoying; and no odor shall
be emitted from the Demised Premises which is or might be noxious or offensive
to others in Palmer 50 or on adjacent or nearby property.
Section 8.10 No Unsightliness. Tenant covenants and agrees that no
----------------
unsightliness shall be permitted on the Demised Premises. Without limiting the
generality of the foregoing, all unsightly conditions, equipment, objects and
conditions shall be kept enclosed within the Demised Premises; no refuse, scrap,
debris, garbage, trash, bulk materials or waste shall be kept, stored or allowed
to accumulate in Palmer 50 except as may be enclosed within the Demised
Premises; all pipes, wires, poles, antennae and other facilities for utilities
or the transmission or reception of audio or visual signals or electricity shall
be kept and maintained underground or enclosed within the Demised Premises, and
no temporary structure shall be placed or permitted on the Demised Premise or
Palmer 50 without the prior written consent of Landlord.
<PAGE>
-11-
Section 8.11 No Animals. Tenant covenants and agrees that no animals
----------
shall be permitted or kept on the Demised Premises or Palmer 50.
Section 8.12 Restriction on Signs and Exterior Lighting. Tenant
------------------------------------------
covenants and agrees that no signs or advertising devices of any nature shall be
erected or maintained by Tenant on the Demised Premises or Palmer 50 and no
exterior lighting shall be permitted on the Demised Premises or Palmer 50 except
as approved in writing by Landlord, which approval shall not be unreasonably
withheld.
Section 8.13 No Violation of Covenants. Tenant covenants and agrees
-------------------------
not to commit, suffer or permit any violation of any covenants, conditions or
restrictions affecting the Demised Premises or Palmer 50.
Section 8.14 Restriction on Changes and Alterations. Tenant
--------------------------------------
covenants and agrees not to improve, change, alter, add to, remove or demolish
any improvements on the Demised Premises ("Changes") without the prior written
consent of Landlord, which consent shall not be unreasonably withheld, and
unless Tenant complies with all conditions which may be imposed by Landlord, in
its sole discretion, in connection with such consent; and unless Tenant pays to
Landlord the reasonable costs and expenses of Landlord for architectural,
engineering or other consultants which may be reasonably incurred by Landlord in
determining whether to approve any such changes. If such consent is given, no
such Changes shall be permitted unless: Tenant shall have procured and paid for
all necessary permits and authorizations from any governmental authorities
having jurisdiction; such Changes will not reduce the value of the Demised
Premises or Palmer 50, and will not affect or impair existing insurance on the
Demised Premises or Palmer 50; and Tenant, at Tenant's sole cost and expense,
shall maintain or cause to be maintained workmen's compensation insurance
covering all persons employed in connection with the work and obtain liability
insurance covering any loss or damage to persons or property arising in
connection with any such Changes and such other insurance or bonds as Landlord
may reasonably require. Tenant covenants and agrees that any such Changes
approved by Landlord shall be completed with due diligence and in good and
workmanlike fashion and in compliance with all conditions imposed by Landlord
and all applicable permits, authorizations, laws, ordinances, orders, rules and
regulations of governmental authorities having jurisdiction and that the costs
and expenses with respect to such Changes shall be paid promptly when due and
that the Changes shall be accomplished free of liens of mechanics and
materialmen. Tenant covenants and agrees that all such Changes shall become the
property of the Landlord at the expiration of the Lease Term, or, if Landlord so
requests, Tenant shall, at or prior to expiration of the Lease Term, and at its
sole cost and expense, remove such Changes and restore the Demised Premises to
their condition prior to such Changes.
Section 8.15 No Mechanics Liens. Tenant covenants and agrees not to
------------------
permit or suffer, and to cause to be removed and released, any mechanics,
materialmen or other lien on account of supplies, machinery, tools, equipment,
labor or material furnished or used in connection with the construction,
alteration, improvement, addition to or repair of the Demised Premises, by,
through or under Tenant. Tenant shall have the right to contest, in good faith
and with reasonable diligence, the validity of any such lien or claimed lien,
provided that Tenant shall give to
<PAGE>
-12-
Landlord such security as may be reasonably requested by Landlord to insure the
payment of any amounts claimed, including interests and costs, and to prevent
any sale, foreclosure or forfeiture of any interest in Palmer 50 on account of
any such lien and provided that, on final determination of the lien or claim for
lien, Tenant shall immediately pay any judgment rendered, with interests and
costs, and will cause the lien to be released and any judgment satisfied.
Section 8.16 No Other Encumbrances. Tenant covenants and agrees not
---------------------
to obtain any financing secured by Tenant's interest in the Demised Premises and
not to encumber the Demised Premises or Landlord or Tenant's interest therein,
without the prior written consent of Landlord and to keep the Demised Premises
free from all liens and encumbrances except liens and encumbrances existing upon
the date of commencement of the Lease Term or liens and encumbrances created by
Landlord.
Section 8.17 Subordination to Landlord Mortgages. Tenant covenants
-----------------------------------
and agrees that, at Landlord's option, this Lease and Tenant's interest in the
Demised Premises shall be junior and subordinate to any mortgage or deed of
trust now or hereafter encumbering the Property or Palmer 50 provided that, as
to any mortgage or deed of trust given hereafter, the mortgage or beneficiary
under such mortgage or deed of trust agrees in writing, or adequate provision is
made in the mortgage or deed of trust, that, in the event of foreclosure of any
such mortgage or deed of trust, Tenant shall not be disturbed in its possession
of the Demised Premises provided only that Tenant shall attorn to the party
acquiring title to the Property or Palmer 50 as the result of such foreclosure.
No act or further agreement by Tenant shall be necessary to establish the
subordination of this Lease to any such mortgage or deed of trust but Tenant
covenants and agrees, upon request of Landlord, to execute such documents as may
be necessary or appropriate to confirm and establish this Lease as subordinate
to any such mortgage or deed of trust in accordance with the foregoing
provisions. Alternatively, Tenant covenants and agrees that, at Landlord's
option, Tenant shall execute documents as may be necessary to establish this
Lease and Tenant's interest in the Demised Premises as superior to any such
mortgage or deed of trust. If Tenant fails to execute any documents required to
be executed by Tenant under the provisions hereof, Tenant hereby makes,
constitutes and irrevocably appoints Landlord as Tenant's attorney in fact and
in Tenant's name, place and stead to execute any such documents.
Section 8.18 Assignment or Subletting. Tenant shall have the right
------------------------
to make or permit an assignment of this Lease, a sublease of all or any part of
the Demised Premises or any assignment, sublease, transfer, mortgage, pledge or
encumbrance of all or any part of Tenant's interest under this Lease or in the
Demised Premises, by operation of law or otherwise, or the use or occupancy of
all or any part of the Demised Premises by anyone other than Tenant (any of the
foregoing events are herein after referred to as "Transfer by Tenant"), provided
Tenant obtains Landlord's prior written consent, which consent shall not be
unreasonably withheld. Any such Transfer by Tenant without Landlord's prior
written consent shall be void and shall constitute a default under this Lease.
In the event Landlord consents to any Transfer by Tenant, Tenant shall not be
relieved of its obligations under this Lease and Tenant shall remain liable,
jointly and severally and as a principal, and not as a guarantor or surety,
under this Lease, to the same extent as though no Transfer by Tenant had been
made, unless specifically provided to the contrary in Landlord's prior written
consent. The acceptance of rent by Landlord from any person other than
<PAGE>
-13-
Tenant shall not be deemed to be a waiver by Landlord of the provisions of this
Section or of any other provision of this Lease and any consent by Landlord to
Transfer by Tenant shall not be deemed a consent to any subsequent Transfer by
Tenant. In the event that rents paid pursuant to a Transfer by Tenant exceed
Tenant's rental obligations hereunder, Landlord and Tenant shall share equally
the excess amount. It is understood and agreed that in the event Tenant has
vendors or contractors occupying portions of the Premises pursuant to contracts
or on-going business of the Tenant, for purposes of this provision it will not
be considered an assignment or sublease.
Notwithstanding the foregoing, Landlord shall, at Landlord's option,
have the right in lieu of consenting to a Transfer by Tenant, to terminate this
Lease as to the portion of the Demised Premises as is subject to the proposed
Transfer by Tenant and to enter into a new lease with the proposed transferee
and receive directly with the proposed transferee the consideration agreed to be
given by such transferee to Tenant for the Transfer by Tenant.
In the event Landlord consents to a Transfer by Tenant, any option to
renew this Lease or right to extend the Lease Term shall automatically terminate
unless otherwise agreed in writing by Landlord.
Section 8.19 Annual Financial Statements. If requested by Landlord,
---------------------------
Tenant covenants and agrees to furnish to Landlord annually, within one hundred
twenty (120) days after the end of each fiscal year of Tenant, copies of
financial statements of Tenant audited, if requested by Landlord, by a certified
public accountant, and agrees that Landlord may deliver any such financial
statements to any existing or prospective mortgagee or purchaser of Palmer 50.
The financial statements shall include a balance sheet as of the end of, and a
statement of profit and loss for, the preceding fiscal year of Tenant and, if
regularly prepared by Tenant, a statement of sources and use of funds for the
preceding fiscal year of Tenant.
Section 8.20 Payment of Income and Other Taxes. Tenant covenants and
---------------------------------
agrees to pay promptly when due all personal property taxes on personal property
of Tenant on the Demised Premises and all federal, state and local income taxes,
sales taxes, use taxes, Social Security taxes, unemployment taxes and taxes
withheld from wages or salaries paid to Tenant's employees, the nonpayment of
which might give rise to a lien on the Demised Premises or Tenant's interest
therein, and to furnish, if requested by Landlord, evidence of such payments.
Section 8.21 Estoppel Certificates. Tenant covenants and agrees to
---------------------
execute, acknowledge and deliver to Landlord, upon Landlord's written request, a
written statement certifying that this Lease is unmodified (or, if modified,
stating the modifications) and in full force and effect; stating the dates to
which Basic Rent and Additional Rent has been paid; stating the amount of the
Security Deposit held by Landlord; and stating whether or not Landlord is in
default under this Lease (and, if so, specifying the nature of the default).
Tenant agrees that such statement may be delivered to and relied upon by any
existing or prospective mortgagee or purchaser of Palmer 50. Tenant agrees that
a failure to deliver such a statement within ten (10) days after written request
from Landlord shall be conclusive upon Tenant that this Lease is in full force
and effect without modification except as may be represented by Landlord; that
there are no
<PAGE>
-14-
uncured defaults by Landlord under this Lease; and that any representation by
Landlord with respect to Basic Rent, the Additional Rent and the Security
Deposit are true.
Section 8.22 Landlord's Right to Inspect and Show Premises and to
----------------------------------------------------
Install For Sale Signs. Tenant covenants and agrees that Landlord and the
- ----------------------
authorized representatives of Landlord shall have the right to enter the Demised
Premises at any reasonable time during ordinary business hours for the purposes
of inspecting, repairing or maintaining the same or performing any obligations
of Tenant which Tenant has failed to perform hereunder or for the purpose of
showing the Demised Premises to any existing or prospective mortgagee, purchaser
or lessee of Palmer 50 or the Demised Premises. Tenant covenants and agrees
that Landlord may at any time and from time to time place on Palmer 50, the
Common Facilities or the Demised Premises a sign advertising all or any part of
Palmer 50 for sale or for lease.
Section 8.23 Landlord's Title to Fixtures, Improvements and
----------------------------------------------
Equipment. Tenant covenants and agrees that all fixtures and improvements on
the Demised Premises and all equipment and personal property relating to the use
and operation of the Demised Premises (as distinguished from operations incident
to the business of Tenant), including all plumbing, heating, lighting,
electrical and air conditioning fixtures and equipment, whether or not attached
to or affixed to the Demised Premises, and whether now or hereafter located upon
the Demised Premises, shall be and remain the property of the Landlord upon
expiration of the Lease Term.
Section 8.24 Removal of Tenant's Equipment. Subject to the
-----------------------------
provisions of Exhibit D hereto, Tenant covenants and agrees to remove, at or
prior to the expiration of the Lease Term, all of Tenant's equipment, apparatus,
machinery, signs, furniture, furnishings and personal property used in the
operation of the business of Tenant ("Tenant's Equipment"), as distinguished
from the use and operation of the Demised Premises. If such removal shall
injure or damage the Demised Premises or the Common Facilities, Tenant covenants
and agrees, at its sole cost and expense, at or prior to the expiration of the
Lease Term, to repair such injury and damage in good and workmanlike fashion and
to place the Demised Premises and Common Facilities in the same condition as the
same would have been if such Tenant's Equipment had not been installed. If
Tenant fails to remove any Tenant's Equipment by the expiration of the Lease
Term, Landlord may, at its option, keep and retain any such Tenant's Equipment
or dispose of the same and retain any proceeds thereof and Landlord shall be
entitled to recover from Tenant any costs or expenses of Landlord in removing
the same and in restoring the Demised Premises in excess of the actual proceeds,
if any, received by Landlord from disposition thereof.
Section 8.25 Tenant Indemnification of Landlord. Tenant covenants
----------------------------------
and agrees to protect, indemnify and save Landlord harmless from and against all
liability, obligations, claims, damages, penalties, causes of action, costs and
expenses, including reasonable attorneys' fees, imposed upon, incurred by or
asserted against Landlord by reason of (a) any accident, injury to or death of
any person or loss of or damage to any property occurring on or about the
Demised Premises; (b) any act or omission of Tenant or Tenant's officers,
employees, agents, guests or invitees or of anyone claiming by, through or under
Tenant; (c) any use which may be made of, or condition existing upon, the
Demised Premises; (d) any improvements, fixtures or equipment upon the Demised
Premises; (e) any failure on the part of Tenant to perform or comply with any
<PAGE>
-15-
of the provisions, covenants or agreements of Tenant contained in this Lease;
(f) any violation of any law, ordinance, order, rule or regulation of
governmental authorities having jurisdiction by Tenant or Tenant's officers,
employees, agents, guests or invitees or by anyone claiming by, through or under
Tenant and (g) any repairs, maintenance or Changes to the Demised Premises by,
through or under Tenant. Tenant further covenants and agrees that, in case any
action, suit or proceeding is brought against Landlord by reason of any of the
foregoing, Tenant will, if so directed by Landlord, at Tenant's sole cost and
expense, defend Landlord in any such action, suit or proceeding.
Section 8.26 Waiver by Tenant. Tenant waives and releases any claims
----------------
Tenant may have against Landlord or Landlord's officers, partners, agents or
employees for loss, damage or injury to person or property sustained by Tenant
or Tenant's officers, partners, agents, employees, guests, invitees or anyone
claiming by, through or under Tenant resulting from any cause whatsoever.
Tenant hereby assumes all risks of injury, illness or harm which any of its
employees, agents, representatives or guests may incur while on the premises of
Palmer 50.
Section 8.27 Release Upon Transfer by Landlord. In the event of a
---------------------------------
transfer by Landlord of the Property or of Landlord's interest as Landlord under
this Lease, Landlord's successor or assign shall take subject to and be bound by
this Lease and, in such event, Tenant covenants and agrees that Landlord shall
be released from all obligations of Landlord under this Lease, except
obligations which arose and matured prior to such transfer by Landlord; that
Tenant shall thereafter look solely to Landlord's successor or assign for
satisfaction of the obligations of Landlord under this Lease; and that, upon
demand by Landlord or Landlord's successor assign, Tenant shall attorn to such
successor or assign.
ARTICLE IX. DAMAGE OR DESTRUCTION
---------------------
Section 9.1 Tenant's Notice of Damage. If any portion of the Demised
-------------------------
Premises shall be damaged or destroyed by fire or other casualty, Tenant shall
give prompt written notice thereof to Landlord ("Tenant's Notice of Damage").
Section 9.2 Options to Terminate if Damage Substantial. Upon receipt
------------------------------------------
of Tenant's Notice of Damage, Landlord shall promptly proceed to determine the
nature and extent of the damage or destruction and to estimate the time
necessary to repair or restore the Demised Premises. As soon as reasonably
possible, Landlord shall give written notice to Tenant stating Landlord's
estimate of the time necessary to repair or restore the Demised Premises
("Landlord's Notice of Repair Time"). If Landlord reasonably estimates that
repair or restoration of the Demised Premises cannot be completed within one
hundred eighty (180) days from the time of Tenant's Notice of Damage, Landlord
and Tenant shall each have the option to
<PAGE>
-16-
terminate this Lease. Any option granted hereunder shall be exercised by
written notice to the other party given within ten (10) days after Landlord's
Notice of Repair Time. In the event either Landlord or Tenant exercises its
option to terminate this Lease, the Lease Term shall expire ten (10) days after
the notice by either Landlord or Tenant exercising such party's option to
terminate this Lease. In the event of termination of this Lease under the
provisions hereof, Landlord shall refund to Tenant such amounts of Basic Rent
and Additional Rent theretofor paid by Tenant as may be applicable to the period
subsequent to the time of Tenant's Notice of Damage, less the reasonable value
of any use or occupation of the Demised Premises by Tenant subsequent to the
time of Tenant's Notice of Damage.
Section 9.3 Obligations to Repair and Restore. In the event repair
---------------------------------
and restoration of the Demised Premises can be completed within the period
specified in Section 9.2, in Landlord's reasonable estimation, this Lease shall
continue in full force and effect and Landlord shall proceed forthwith to cause
the Demised Premises to be repaired and restored with reasonable diligence, and
there shall be abatement of Basic Rent and Additional in Rent in that proportion
to which the extent of the space and period of time that Tenant is unable to use
and enjoy the Demised Premises bears to the total space leased by Tenant and to
the Lease Term. Landlord may, at its option, require Tenant to arrange for and
handle the repair and restoration of the Demised Premises, in which case
Landlord shall furnish Tenant with sufficient funds for such repair and
restoration, at the time or times such funds are needed, utilizing any proceeds
from insurance and any additional funds necessary to cover the costs of repair
or restoration.
Section 9.4 Application of Insurance Proceeds. The proceeds of any
---------------------------------
Casualty Insurance maintained on the Demised Premises, other than casualty
insurance maintained by Tenant on fixtures and personal property of Tenant,
shall be paid to and become the property of Landlord, subject to any obligation
of Landlord to cause the Demised Premises to be repaired and restored.
ARTICLE X. CONDEMNATION
------------
Section 10.1 Taking: Substantial Taking and Institutional Taking. A
----------------------------------------------------
"Taking" shall mean the taking of all or any portion of the Property as a result
of the exercise of the power of eminent domain or condemnation for public or
quasi-public use or the sale of all or part of the Property under the threat of
condemnation. A "Substantial Taking" shall mean a Taking of so much of the
Property that the Demised Premises cannot thereafter be reasonably used by
Tenant for carrying on, at substantially the same level or scope, the business
theretofor conducted by Tenant on the Demised Premises. An "Insubstantial
Taking" shall mean a Taking such at the Demised Premises can thereafter continue
to be used by Tenant for carrying on, at substantially the same level or scope,
the business theretofore conducted by Tenant on the Demised Premises.
Section 10.2 Termination on Substantial Taking. If there is a
---------------------------------
Substantial Taking, the Lease Term shall expire on the date of vesting of title
pursuant to such Taking. In the event of termination of this Lease under the
provisions hereof, Landlord shall refund to Tenant such
<PAGE>
-17-
amounts of Basic Rent and Additional Rent theretofore paid by Tenant as may be
applicable to the period subsequent to the time of termination of this Lease.
Section 10.3 Restoration on Insubstantial Taking. In the event of an
-----------------------------------
Insubstantial Taking, this Lease shall continue in full force and effect,
Landlord shall proceed forthwith to cause the Property to be restored as near as
may be to the original condition thereof and there shall be abatement of Basic
Rent and Additional Rent in proportion to the extent the space within the
Demised Premises so taken bears to the total space leased by Tenant. Landlord
may, at its option, require Tenant to arrange for and complete the restoration
of the Demised Premises, in which case Landlord shall furnish Tenant with
sufficient funds for such restoration, at the time or times such funds are
needed, utilizing the proceeds of any awards or consideration received as a
result of the Taking and any additional funds necessary to cover the costs of
restoration.
Section 10.4 Right to Award. The total award, compensation, damages
--------------
or consideration received or receivable as a result of a Taking ("Award") shall
be paid to and be the property of Landlord, whether the Award shall be made as
compensation for diminution of the value of the leasehold or the fee of the
property or otherwise and Tenant hereby assigns to Landlord all of Tenant's
right, title and interest in and to any such Award. Tenant covenants and agrees
to execute, immediately upon demand by Landlord, such documents as may be
necessary to facilitate collection by Landlord of any such Award.
ARTICLE XI. DEFAULTS BY TENANT
------------------
Section 11.1 Defaults Generally. Each of the events described in the
------------------
following sections of this Article XI shall constitute a "Default by Tenant"
under this Lease.
Section 11.2 Failure to Pay Rent or Other Amounts. A Default by
------------------------------------
Tenant shall exist if Tenant fails to pay when due, Basic Rent, Additional Rent,
or any other amounts payable by Tenant under the terms of this Lease, and such
failure shall continue for five (5) days after written notice from Landlord to
Tenant of such failure, provided, however, that Tenant shall not be entitled to
more than two notices of such failure during any lease year and if, after two
such notices are given in any lease year, Tenant fails, during such lease year,
to pay any such amounts when due, such failure shall constitute a Default by
Tenant without further notice by Landlord.
Section 11.3 Violation of Lease Terms. A Default by Tenant shall
------------------------
exist if Tenant breaches or fails to comply with any agreement, term, covenant
or condition in this Lease applicable to Tenant, and such breach or failure to
comply continues for a period of twenty (20) days after notice thereof by
Landlord to Tenant, or, if such breach or failure to comply cannot be reasonably
cured within such twenty day period, if Tenant shall not in good faith commence
to cure such breach or failure to comply within such twenty day period or shall
not diligently proceed therewith to completion.
Section 11.4 Nonoccupancy of Demised Premises. A Default by Tenant
--------------------------------
shall exist if Tenant shall fail to occupy and use the Demised Premises within
fifteen (15) days after
<PAGE>
-18-
commencement of the Lease Term or shall leave the Demised Premises unoccupied
for fifteen (15) consecutive days or shall vacate and abandon the Demised
Premises.
Section 11.5 Transfer of Interest Without Consent. A Default by
------------------------------------
Tenant shall exist if Tenant's interest under this Lease or in the Demised
Premises shall be transferred to or pass to or devolve upon any other party
without Landlord's prior written consent.
Section 11.6 Execution and Attachment Against Tenant. A Default by
---------------------------------------
Tenant shall exist if Tenant's interest under this Lease or in the Demised
Premises shall be taken upon execution or by other process of law directed
against Tenant, or shall be subject to any attachment at the instance of any
creditor or claimant against Tenant and said attachment shall not be discharged
or disposed of within fifteen (15) days after the levy thereof.
Section 11.7 Bankruptcy or Related Proceedings. A Default by Tenant
---------------------------------
shall exist if Tenant shall file a petition in bankruptcy or insolvency or for
reorganization or arrangement under the bankruptcy laws of the United States or
under any similar act of any state, or shall voluntarily take advantage of any
such law or act by answer or otherwise, or shall be dissolved or shall make an
assignment for the benefit of creditors or if an involuntary proceeding under
any such bankruptcy or insolvency law or for the dissolution of Tenant shall be
instituted against Tenant or a receiver or trustee shall be appointed for
Tenant, for Tenant's leasehold interest in the Demised Premises or for all or
substantially all of the property of the Tenant, and such proceedings shall not
be dismissed or such receivership or trusteeship vacated within sixty (60) days
after such institution or appointment.
ARTICLE XII. LANDLORD'S REMEDIES
-------------------
Section 12.1 Remedies Generally. Upon the occurrence of any Default
------------------
by Tenant, Landlord shall have the right, at Landlord's election, then or at any
time thereafter, to exercise any one or more of the remedies provided in the
following sections of this Article XII.
Section 12.2 Cure by Landlord. In the event of a Default by Tenant,
----------------
Landlord may, at Landlord's option, but without obligation to do so, and without
releasing Tenant from any obligations under this Lease, make any payment or take
any actions as Landlord may deem necessary or desirable to cure any such Default
by Tenant in such manner and to such extent as Landlord may deem necessary or
desirable. Landlord may do so without demand on, or written notice to, Tenant
and without giving Tenant an opportunity to cure such Default by Tenant. Tenant
covenants and agrees to pay to Landlord, within ten (10) days after demand, all
advances, costs and expenses of Landlord in connection with the making of any
such payment or the taking of any such action, including reasonable attorney's
fees, together with interest as hereinafter provided, from the date of payment
of any such advances, costs and expenses by Landlord. Action taken by Landlord
may include commencing, appearing in, defending or otherwise participating in
any action or proceeding and paying, purchasing, contesting or compromising any
claim, right, encumbrance, charge or lien with respect to the Demised Premises
which
<PAGE>
-19-
Landlord, in its discretion may deem necessary or desirable to protect its
interest in the Demised Premises and Landlord's interests under this Lease.
Section 12.3 Termination of Lease and Damages. In the event of a
--------------------------------
Default by Tenant, Landlord may terminate this Lease, effective at such time as
may be specified by written notice to Tenant, and immediately recover possession
of the Demised Premises from Tenant. Tenant shall remain liable to Landlord for
damages in an amount equal to the Basic Rent, Additional Rent and other sums
which would have been owing by Tenant hereunder for the balance of the term, had
this Lease not been terminated, less the net proceeds, if any, of any reletting
of the Demised Premises by Landlord subsequent to such termination after
deducting all Landlord's expenses in connection with such recovery of possession
or reletting. Landlord shall be entitled to collect and receive such damages
from Tenant on the days on which the Basic Rent, Additional Rent and other
amounts would have been payable if this Lease had not been terminated.
Alternatively, at the option of Landlord, Landlord shall be entitled to recover
forthwith from Tenant, as damages for loss of the bargain and not as a penalty,
an aggregate sum which, at the time of such termination of the Lease, represents
the excess, if any, of (a) the aggregate of the Basic Rent, Additional Rent and
all other sums payable by Tenant hereunder that would have accrued for the
balance of the Lease Term, over (b) the aggregate rental value of the Demised
Premises for the balance of the Lease Term, both discounted to present worth at
the rate of 100% per annum.
Section 12.4 Repossession and Reletting. In the event of Default by
--------------------------
Tenant, Landlord may reenter and take possession of the Demised Premises or any
part thereof, without demand or notice, and repossess the same and expel Tenant
and any party claiming by, under or through Tenant and remove the effects of
both using such force for such purposes as may be necessary, without being
liable for prosecution on account thereof and without prejudice to any remedies
for arrears of rent or right to bring any proceeding for breach of covenants or
conditions. No such reentry or taking possession of the Demised Premises by
Landlord shall be construed as an election by Landlord to terminate this Lease
unless a written notice of such intention is given to Tenant. No notice from
Landlord hereunder or under a forcible entry and detainer statute or similar law
shall constitute an election by Landlord to terminate this Lease unless such
notice specifically so states. Landlord reserves the right, following any
reentry or reletting, to exercise its right to terminate this Lease by giving
Tenant such written notice, in which event the Lease will terminate as specified
in said notice. After recovering possession of the Demised Premises, Landlord
may, from time to time, but shall not be obligated to, relet the Demised
Premises, or any part thereof, for the account of Tenant, for such term or terms
and on such conditions and upon such other terms as Landlord, in its
uncontrolled discretion, may determine. Landlord may make such repairs,
alterations or improvements as Landlord may consider appropriate to accomplish
such reletting, and Tenant shall reimburse Landlord upon demand for all costs
and expenses, including attorneys' fees, which Landlord may incur in connection
with such reletting. Landlord may collect and receive the rents for such
reletting but Landlord shall in no way be responsible or liable for any failure
to collect any rent due upon such reletting. Notwithstanding Landlord's
recovery of possession of the Demised Premises, Tenant shall continue to pay on
the dates herein specified, the Basic Rent, Additional Rent and other amounts
which would be payable hereunder if such repossession had not occurred. Upon
the expiration or earlier
<PAGE>
-20-
termination of this Lease, Landlord shall refund to Tenant any amount, without
interest, by which the amounts paid by Tenant, when added to the net amount, if
any, recovered by Landlord through any reletting of the Demised Premises,
exceeds the amounts payable by Tenant under this Lease. If, in connection with
any reletting, the new lease term extends beyond the existing term, or the
premises covered thereby include other premises not part of the Demised
Premises, a fair apportionment of the rent received from such reletting and the
expenses incurred in connection therewith will be made in determining the net
amount recovered from such reletting.
Section 12.5 Landlord's Lien and Enforcement. Tenant hereby grants
-------------------------------
to Landlord a security interest in all personal property of Tenant now or
hereafter located on the Demised Premises as security for the performance of
Tenant's obligations under this Lease. Tenant covenants and agrees, upon
request by Landlord from time to time, to execute and deliver such financing
statements as may be necessary or desirable to perfect the security interest
hereby granted. In the event of a Default by Tenant, Landlord may foreclose the
security interest hereby granted in any manner permitted by law.
Section 12.6 Suits by Landlord. Actions or suits for the recovery of
-----------------
amounts and damages payable under this Lease may be brought by Landlord, from
time to time, at Landlord's election, and Landlord shall not be required to
await the date upon which the Lease Term would have expired to bring any such
action or suit.
Section 12.7 Recovery of Landlord Enforcement Costs. All costs and
--------------------------------------
expenses incurred by Landlord in connection with collecting any amounts and
damages owing by Tenant pursuant to the provisions of this Lease or to enforce
any provision of this Lease, including reasonable attorneys' fees, shall be paid
by Tenant to Landlord upon demand if the Landlord prevails.
Section 12.8 Interest on Past Due Payments and Advances. Tenant
------------------------------------------
covenants and agrees to pay to Landlord interest on demand at the rate of 2%
above the "Prime Rate", as hereinafter defined, on the amount of any Basic Rent
or Additional Rent not paid when due, from the date due and payable, and on the
amount of any payment made by Landlord required to have been made by Tenant
under this Lease and on the amount of any costs and expenses, including
reasonable attorneys' fees, paid by Landlord in connection with the taking of
any action to cure any Default by Tenant, from the date of making any such
payment or the advancement of such costs and expenses by Landlord. "Prime Rate"
shall mean the rate of interest set by the Wall Street Journal, a national
banking association (the "Bank"), or another bank as hereinafter provided, at
the time said Monthly Rent or Monthly Deposit was due and payable or at the time
of making any such payment or the advancement of such costs and expenses by
Landlord as aforesaid, on ninety (90) day loans to commercial borrowers of
nationally recognized and unquestioned credit as announced by the Bank from time
to time, but not in excess of the maximum amount of finance charge permissible
under applicable law. In the event that the Bank discontinues the use of a
Prime Rate, the Prime Rate being charged by any other national banking
association, as selected by Landlord in its sole discretion, shall be used for
computing the interest rate under this Section.
<PAGE>
-21-
Section 12.9 Landlord's Bankruptcy Remedies. Nothing contained in
------------------------------
this Lease shall limit or prejudice the right of Landlord to prove and obtain as
liquidated damages in any bankruptcy, insolvency, receivership, reorganization
or dissolution proceeding, an amount equal to the maximum allowable by any
statute or rule of law governing such proceeding in effect at the time when such
damages are to be proved, whether or not such amount be greater, equal or less
than the amounts recoverable, either as damages or rent, under this Lease.
Section 12.10 Remedies Cumulative. Exercise of any of the remedies
-------------------
of Landlord under this Lease shall not prevent the concurrent or subsequent
exercise of any other remedy provided for in this Lease or otherwise available
to Landlord at law or in equity.
ARTICLE XIII. SURRENDER AND HOLDING OVER
--------------------------
Section 13.1 Surrender Upon Lease Expiration. Upon the expiration or
-------------------------------
earlier termination of this Lease, or on the date specified in any demand for
possession by Landlord after any Default by Tenant, Tenant covenants and agrees
to surrender possession of the Demised Premises to Landlord, in the same
condition as when Tenant first occupied the Demised Premises, ordinary wear and
tear excepted.
Section 13.2 Holding Over. If Tenant shall hold over after the
------------
expiration of the Lease Term, without written agreement providing otherwise,
Tenant shall be deemed to be a tenant from month to month, at a monthly rental,
payable in advance, equal to 200% of the Monthly Rent, and Tenant shall be bound
by all of the other terms, covenants and agreements of this Lease. Nothing
contained herein shall be construed to give Tenant the right to hold over at any
time, and Landlord may exercise any and all remedies at law or in equity to
recover possession of the Demised Premises, as well as any damages incurred by
Landlord due to Tenant's failure to vacate the Demised Premises and deliver
possession to Landlord as herein provided.
ARTICLE XIV. MISCELLANEOUS
-------------
Section 14.1 No Implied Waiver. No failure by Landlord to insist
-----------------
upon the strict performance of any term, covenant or agreement contained in this
Lease, no failure by Landlord to exercise any right or remedy under this Lease,
and no acceptance of full or partial payment during the continuance of any
Default by Tenant, shall constitute a waiver of any such term, covenant or
agreement or a waiver of any such right or remedy or a waiver of any such
Default by Tenant.
Section 14.2 Survival of Provisions. Notwithstanding any termination
----------------------
of this Lease, the same shall continue in force and effect as to any provisions
hereof which require observance or performance by Landlord or Tenant subsequent
to termination.
Section 14.3 Covenants Independent. This Lease shall be construed as
---------------------
if the covenants herein between Landlord and Tenant are independent, and not
dependent, and Tenant shall not be
<PAGE>
-22-
entitled to any offset against Landlord if Landlord fails to perform its
obligations under this Lease.
Section 14.4 Covenants as Conditions. Each provision of this Lease
-----------------------
performable by Tenant shall be deemed both a covenant and a condition.
Section 14.5 Tenant's Remedies. Tenant may bring a separate action
-----------------
against Landlord for any claim Tenant may have against Landlord under this
Lease, provided Tenant shall first give written notice thereof to Landlord and
shall afford Landlord a reasonable opportunity to cure any such default. In
addition, Tenant shall send notice of such default by certified or registered
mail, postage prepaid, to the holder of any mortgage or deed of trust covering
the Demised Premises, the Property or any portion thereof of whose address
Tenant has been notified in writing, and shall afford such holder a reasonable
opportunity to cure any default on Landlord's behalf. In no event will Landlord
be responsible for any damages incurred by Tenant, including, but not limited
to, loss of profits or interruption of business as a result of any default by
Landlord hereunder.
Section 14.6 Binding Effect. This Lease shall extend to and be
--------------
binding upon the heirs, executors, legal representatives, successors and assigns
of the respective parties hereto. The terms, covenants, agreements and
conditions in this Lease shall be construed as covenants running with the Land.
Section 14.7 Notices and Demands. All notices, demands or billings
-------------------
under this Lease shall be in writing, signed by the party giving the same,
delivered in person or sent by registered or certified United States Mail,
postage prepaid, and properly addressed, as follows:
If to Landlord:
John Glanz
c/o Capitol Carousel
520 Hampton Boulevard
Capitol Heights, Maryland 20743
and if to Tenant, at the address of the Demised Premises as provided on Exhibit
A attached hereto or such other addresses as may hereinafter be designated by
either party by written notice. Such notices, demands and billings shall be
deemed properly given and received when actually given and received or on the
third business day after mailing.
Section 14.8 Time of the Essence. Time is of the essence under this
-------------------
Lease, and all provisions herein relating thereto shall be strictly construed.
Section 14.9 Captions for Convenience. The headings and captions
------------------------
hereof are for convenience only and shall not be considered in interpreting the
provisions hereof.
<PAGE>
-23-
Section 14.10 Severability. If any provision of this Lease shall be held
------------
invalid or unenforceable, the remainder of this Lease shall not be affected
thereby, and there shall be deemed substituted for the affected provision a
valid and enforceable provision as similar as possible to the affected
provision.
Section 14.11 Governing Law. This Lease shall be interpreted and enforced
-------------
according to the laws of the State of Maryland.
Section 14.12 Entire Agreement. This Lease and any exhibits and addenda
----------------
referred to herein, constitute the final and complete expression of the parties'
agreements with respect to the Demised Premises and Tenant's occupancy thereof.
Each party agrees that it has not relied upon or regarded as binding any prior
agreements, negotiations, representations or understandings, whether oral or
written, except as expressly set forth herein.
Section 14.13 No Oral Amendment or Modifications. No amendment or
----------------------------------
modification of this Lease and no approvals, consents or waivers by Landlord
under this Lease, shall be valid or binding unless in writing and executed by
the party to be bound.
Section 14.14 Real Estate Brokers. Landlord recognizes the firms of The
-------------------
Michael Companies, Inc. and Victor M. Williams (herein referred to as the
"Brokers") as the procuring cause of the Tenant and this Lease. In
consideration of Brokers' services in procuring the Tenant, Landlord agrees to
pay Brokers, their successors and assigns a leasing commission pursuant to the
provisions of Exhibit A hereto. Tenant covenants to pay, and to hold harmless
and indemnify the Landlord from and against, any and all cost, expense or
liability for any compensation, commissions, charges or claims by any broker or
other agent with respect to this Lease or the negotiation thereof other than any
other broker or brokers listed on Exhibit A attached hereto.
Section 14.15 Relationship of Landlord and Tenant. Nothing contained
-----------------------------------
herein shall be deemed or construed as creating the relationship of principal
and agent or of partnership, or of joint venture by the parties hereto, it being
understood and agreed that no provision contained in this Lease nor any acts of
the parties hereto shall be deemed to create any relationship other than the
relationship of Landlord and Tenant.
Section 14.16 Force Majeure. Landlord shall not be liable for any failure
-------------
or delay in performing its obligations hereunder due to causes or conditions
beyond Landlord's control, nor shall there be any abatement or reduction of rent
or other charges payable by Tenant as a result of any inconvenience,
interruption or loss of business or other loss caused thereby. Causes or
conditions beyond Landlord's control shall include, without limitation, acts of
God, the elements, weather conditions, earthquakes, settlements, fines, acts of
governmental authorities, wars, riots, shortages of labor or materials, acts of
third parties for which Landlord is not responsible, strikes, picketing, work
slowdowns or stoppages and labor disputes.
Section 14.17 Limitation on Personal Liability of Landlord.
--------------------------------------------
Notwithstanding anything to the contrary contained in this Lease, it is
understood and agreed that there shall be no personal liability on the part of
the Landlord or any of its beneficiaries, successors or assigns, with respect
<PAGE>
-24-
to any of the terms, covenants and conditions of this Lease, and Tenant shall
look solely to the equity of Landlord in the Demised Premises in the event of
any default or liability of Landlord under this Lease, such exculpation of
liability to be absolute and without any exception whatsoever.
Section 14.18 Authority of Tenant. Each individual executing this Lease
-------------------
on behalf of Tenant represents and warrants that he is duly authorized to
deliver this Lease on behalf of Tenant and that this Lease is binding upon
Tenant in accordance with its terms.
Section 14.19 Contingency. This Lease is expressly contingent upon
-----------
receiving all necessary bank or court approvals prior to May 31, 1996. If
necessary approvals are not obtained by such date, this Lease shall be
terminated, any monies deposited with Landlord shall be returned to Tenant, and
the parties shall be relieved of any further liability or obligations hereunder.
Section 14.20 Consent/Approval. Wherever in this Lease it is stated that
----------------
Tenant may not undertake or fail to undertake an action without the written
consent/approval of the Landlord, Landlord shall not be obligated to give such
consent/approval and may refuse to do so in Landlord's sole and absolute
discretion unless otherwise specifically stated herein.
Section 14.21 Supersedes/Replaces. Upon final execution of this Lease by
-------------------
all parties, this Lease shall supersede the prior Agreement of Lease dated May
14, 1996.
<PAGE>
-25-
IN WITNESS WHEREOF the parties hereto have caused this Lease to be executed
the day and year first above written.
WITNESS: LANDLORD
/s/ Jon Glanz DATE
- -------------------------- -------------------------- ----------------
Jon Glanz
WITNESS/ATTEST: TENANT:
YURIE SYSTEMS, INC.
By /s/ Jeong H. Kim DATE
- -------------------------- ------------------------ ----------------
Jeong H. Kim, Chief
Executive Officer
With Authority to Bind
the Corporation
<PAGE>
<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 1,513,000 1,513,000 1,513,000 1,513,000 1,513,000
----------- ----------- ----------- ----------- -----------
Average number of shares and
equivalent shares outstanding
during the period 17,513,000 17,513,000 21,681,000 21,667,000 21,721,000
----------- ----------- ----------- ----------- -----------
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 the Registration Statement of Yurie Systems, Inc.
on Form S-1 of our report dated March 8, 1996 (April 2, 1996, April 3, 1996,
July 17, 1996 and November 7, 1996 as to Note 13) 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.
November 7, 1996
