<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1997
REGISTRATION NO. 333-15759
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
YURIE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3669 52-1778987
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
10000 DEREKWOOD LANE
LANHAM, MD 20706
(301) 352-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
DR. JEONG H. KIM
CHIEF EXECUTIVE OFFICER
YURIE SYSTEMS, INC.
10000 DEREKWOOD LANE
LANHAM, MD 20706
(301) 352-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
RICHARD A. STEINWURTZEL, ESQUIRE RICHARD C. TILGHMAN, JR., ESQUIRE
FRIED, FRANK, HARRIS, SHRIVER & PIPER & MARBURY L.L.P.
JACOBSON CHARLES CENTER SOUTH
1001 PENNSYLVANIA AVENUE, N.W. 36 SOUTH CHARLES STREET
SUITE 800 BALTIMORE, MD 21201
WASHINGTON, DC 20004-2505 (410) 539-2530
(202) 639-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<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
FEBRUARY 4, 1997
[LOGO OF YURIE SYSTEMS, INC.
APPEARS HERE]
4,000,000 Shares
YURIE SYSTEMS, INC.
Common Stock
--------
All of the 4,000,000 shares of Common Stock offered hereby are being sold by
Yurie Systems, Inc. Prior to this offering, there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $10.00 and $11.00 per share. See
"Underwriting" for the factors to be considered in determining the initial
public offering price. Management will beneficially own approximately 78.6% of
the Company's outstanding voting stock upon completion of this offering. The
Common Stock has been approved for quotation on the Nasdaq Stock Market
(National Market) upon completion of this offering under the trading symbol
"YURI."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 HEREOF.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS TO
PUBLIC AND COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- --------------------------------------------------------------------------------
Total(2)..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company estimated at $600,000.
(2) Certain stockholders of the Company have granted to the Underwriters a 30-
day option to purchase up to 600,000 additional shares of Common Stock on
the same terms and conditions as the securities offered hereby, solely to
cover over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares to the public at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and proceeds to the certain
stockholders of Company will be $ , $ and $ , respectively. See
"Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
Alex. Brown & Sons Wessels, Arnold & Henderson
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[GRAPHIC]
[LDR200 PICTURE WITH DESCRIPTION]
----------------
Yurie Systems(TM), Yurie(TM), LDR(TM), LANET(TM) and AQueMan(TM) are
trademarks of the Company. All other trade names and trademarks referred to in
this prospectus are the property of their respective owners.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements, including
the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise
indicated, information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
Yurie Systems, Inc. ("Yurie" or the "Company") designs, manufactures, markets
and services asynchronous transfer mode ("ATM") access products for
telecommunications service providers, corporate end users and government end
users. ATM is a standard for packaging and switching digital information that
facilitates high speed information transmission with a high degree of
efficiency. End users of telecommunications services have traditionally
maintained separate wide area networks ("WANs") for transmitting voice, data,
video and other electronic information among geographically dispersed
locations. ATM technology is conducive to consolidating these networks. The
network consolidation brought about by employing ATM access products can
provide savings in WAN communication costs and simplify network management.
Yurie is a leading supplier of ATM access products. The Company's LDR100,
introduced in February 1995, was one of the first commercially available ATM
access products. The LDR200, Yurie's second generation ATM access product, was
released in September 1996. The Company designed its ATM access products to be
flexible and scaleable, so that customers can realize the benefits of ATM while
preserving their investments in existing equipment. The LDR products adhere to
industry-wide technical standards, allowing users to integrate the products
into current networks operating with other standards-compliant products.
Yurie's proprietary adaptive queue management algorithm ("AQueMan") allows the
LDR products to reduce network congestion while maintaining quality of service.
The Company's Limitless ATM Network Protocol ("LANET") is capable of
transporting ATM traffic over circuits of varying speed and quality, including
poor quality circuits. The Company's ATM access products incorporate a variety
of value-added features, including compact size, scaleability, reliability,
encryption capabilities and a broad variety of access interfaces.
The Company's strategy centers on maintaining its technological leadership,
developing both the telecommunications service provider and corporate end user
markets while continuing to pursue government end user markets, developing
international markets and building strategic relationships. Since 1994, Yurie
has had a significant strategic relationship with AT&T. In August 1995,
pursuant to this relationship, AT&T and Yurie entered into an agreement (the
"AT&T Agreement") to facilitate the joint technical evaluation and marketing of
the Company's LDR products. Under the AT&T Agreement, as amended, AT&T has a
three-year exclusive right to market and sell the LDR100 and the LDR200 in U.S.
federal, state and local government markets, as well as certain foreign
government markets, and has committed to purchase at least $6.5 million, $10.0
million and $10.0 million of the LDR200 in 1996, 1997 and 1998, respectively.
The Company was founded in February 1992 by Dr. Jeong H. Kim, the Company's
Chief Executive Officer and Chairman of the Board of Directors. The Company
began developing ATM products in 1994 and began product shipments in February
1995. Prior to 1994, the Company's business operations consisted primarily of
telecommunications consulting and related service activities.
The Company was incorporated in Maryland in February 1992 as Integrated
Systems Technology, Inc. In April 1996, it changed its name to Yurie Systems,
Inc. and reincorporated in Delaware in August 1996. Yurie's executive offices
are located at 10000 Derekwood Lane, Lanham, Maryland 20706, its telephone
number is (301) 352-4600, its e-mail address is [email protected] and its World
Wide Web site address is http://www.yurie.com.
3
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 4,000,000 shares
Common Stock outstanding after the offering........ 24,608,400 shares(1)
Use of proceeds.................................... General corporate purposes,
including working capital.
Nasdaq National Market symbol...................... YURI
</TABLE>
- --------
(1) Excludes 3,386,722 shares of Common Stock issuable upon the exercise of
stock options outstanding as of January 30, 1997 at a weighted average
exercise price of approximately $2.17 per share, substantially all of which
are not exercisable as of the date of this Prospectus. Also excludes
1,613,278 shares of Common Stock reserved for future issuance under the
Company's 1996 Non Statutory Stock Option Plan (the "Stock Option Plan"),
200,000 shares of Common Stock reserved for future issuance under the
Company's Employee Stock Purchase Plan (the "Stock Purchase Plan") and
200,000 shares of Common Stock reserved for future issuance under the
Company's 401(k) Savings Plan (the "401(k) Plan"). See "Management--Stock
Option Plan," "--Stock Purchase Plan" and "--401(k) Plan."
The following table presents summary audited and unaudited financial data
which has been derived from and should be read in conjunction with the
Company's Audited and Unaudited Balance Sheets and Statements of Operations and
related notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................... $ 194 $ 1,144 $ 5,971 $ 3,960 $ 15,038
Gross profit..................... 52 420 3,460 2,044 9,407
Income (loss) from operations.... (17) 161 1,444 673 4,503
Net income (loss)................ (23) 121 897 416 2,739
Net income per common share...... $ 0.04 $ 0.13
Weighted average common and
common equivalent shares
outstanding..................... 21,660 21,701
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 6,202 $11,002 $51,322
Working capital............................ 2,598 7,398 47,718
Total assets............................... 11,031 15,831 56,151
Total stockholders' equity................. 3,842 8,642 48,962
</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 $11.00 per share) and the application of the estimated net
proceeds therefrom as set forth in "Use of Proceeds."
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the shares of Common Stock offered
hereby.
Certain statements included in this Prospectus are forward-looking, such as
statements regarding the anticipated growth in demand for ATM access products,
the anticipated growth in the Company's revenues from the development,
manufacture and sale of ATM access products, the expectation that such revenue
growth will result largely from sales of ATM access products to
telecommunications service providers and corporate end users and the
anticipated expansion of the Company's international activities. Such forward-
looking statements, in addition to information contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Prospectus, are based on the Company's current expectations
and are subject to a number of risks and uncertainties that could cause actual
results in the future to differ significantly from results expressed or
implied in any forward-looking statements made by, or on behalf of, the
Company. These and other risks are detailed below.
Limited Operating History and Operating Results. The Company was founded in
1992, began developing ATM access products in 1994 and commenced shipping ATM
access products in February 1995. Accordingly, there is only a limited
operating history upon which to base an evaluation of the Company and its
prospects. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, develop its technologies, commercialize products
incorporating these technologies, and attract, retain and motivate qualified
employees. There can be no assurance that the Company will be successful in
addressing these risks. The Company expects that its operating expenses will
increase in the future, and there can be no assurance that its revenues will
increase sufficiently to allow it to maintain profitability, either on an
annual or quarterly basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on ATM; Product Concentration. Although ATM is an industry
standard, the ATM access market is still emerging and only a limited number of
telecommunications service providers have installed ATM networks. All of the
Company's product revenue to date has been derived from the sale of ATM access
products, and the Company expects that the sale of ATM access products and
related services will continue to account for substantially all of its
revenues for the foreseeable future. Virtually all of the Company's sales of
ATM access products have been to government agencies or third parties
deploying the Company's ATM access products on behalf of government agencies,
and there can be no assurance that the Company's ATM access products will
achieve acceptance in the corporate end user market to the same degree as in
the government end user market. The Company's success will depend on the
market acceptance of ATM technology as a preferred networking solution
relative to other existing or newly developed solutions. The failure of ATM-
based networking products to achieve widespread market acceptance would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Industry Background."
Sales of the Company's LDR access products have accounted for substantially
all of its revenue to date, and these products and related enhancements are
expected to continue to account for a majority of the Company's revenue at
least through 1997. The Company's success depends in large part on continued
sales of the LDR product line. A decline in either demand for or the average
sales prices of the Company's LDR products, whether as a result of new product
introductions by competitors, price competition, technological change,
inability to provide enhancements on a timely basis or otherwise, could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--The LDR Product Family and Supporting
Services."
5
<PAGE>
Dependence on Government Business. Sales of products and services to the
U.S. government or government contractors represented 100.0% of the Company's
revenue for the years ended December 31, 1994, December 31, 1995 and for the
nine months ended September 30, 1996. Such government customers are often
subject to budgetary pressures and may from time to time reduce their
expenditures and/or cancel orders. A reduction in sales to these government
customers would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Customers and
End Users."
Dependence on Strategic Relationships, Particularly the AT&T Relationship. A
major component of the Company's strategy involves the establishment of
strategic relationships with telecommunications equipment providers and
telecommunications service providers to leverage these entities' distribution
networks. The failure of the Company to establish these relationships would
have a material adverse effect on the Company's growth prospects. The Company
has had a significant strategic relationship with AT&T since 1994, pursuant to
which AT&T and the Company entered into the AT&T Agreement in August 1995. The
AT&T Agreement provides, among other things, for the joint technical
evaluation and marketing of LDR products by Yurie and AT&T. The AT&T
Agreement, as amended, grants AT&T a three-year exclusive right to market and
sell the LDR100 and the LDR200 products solely in U.S. federal, state and
local government markets as well as certain foreign government markets. Under
the AT&T Agreement, AT&T has guaranteed minimum annual purchase orders for the
LDR200 of $6.5 million, $10.0 million and $10.0 million for calendar years
1996, 1997 and 1998, respectively. Sales pursuant to the AT&T Agreement have
generated a majority of the Company's revenue to date. In 1994, 1995 and the
first nine months of 1996, sales to AT&T represented 52.4%, 71.8% and 91.4%,
respectively, of the Company's revenue. If the Company fails to fulfill any of
its material obligations under the AT&T Agreement, AT&T could terminate the
agreement. Any such termination would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--AT&T Relationship."
Fluctuations in Quarterly Operating Results. The Company may experience
significant fluctuations in future quarterly operating results. Fluctuations
may be caused by many factors, including the timing of new product
introductions or technological advances by the Company or its competitors;
market acceptance of enhanced or new versions of the Company's products,
including the LDR200 product line; the size and timing of individual orders of
the Company's products; price reductions by the Company or its competitors;
changes in the distribution channels through which the Company's products are
sold; the addition or loss of significant customers; the mix of the products
sold by the Company; the ability of the Company to obtain sufficient supplies
of sole or limited source components for the Company's products; and general
economic conditions. Quarterly fluctuations in purchase orders by AT&T, or
inventory buildups by AT&T and its customers, also will cause fluctuations in
the Company's operating results. In addition, changes in the mix of the
products sold by the Company or the distribution channels through which the
Company's products are sold may cause fluctuations in the Company's gross and
operating margins. Also, the Company's anticipated operating expense levels
are based, in part, on its expectations as to future revenue and, as a result,
net income may be disproportionately affected by a reduction in revenue.
The Company has recently experienced a period of revenue growth and a
substantial increase in orders, customers and employees. This growth, however,
is not necessarily indicative of future results. In addition, in view of the
significant growth of the Company's operations in the past two years, the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance. The Company
has not experienced seasonal trends to date, but the Company's business,
operating results and financial condition may be affected by such trends in
the future. Fluctuations in operating results may result in volatility in the
price of the Company's Common Stock. See "--No Prior Trading Market; Potential
Volatility of Stock Price" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
6
<PAGE>
New Management Team and Strategies; Management of Growth. Since January
1996, the Company has recruited and hired Barton Y. Shigemura as its Senior
Vice President of Sales and Marketing, Charles S. Marantz as its Chief
Financial Officer and most other key members of management, particularly in
the areas of sales, marketing, operations and administration. As a result, the
key members of the Company's management team have worked together for only a
short time. The new management team has recently initiated a series of
strategies designed to accelerate the Company's growth. There can be no
assurance that these strategies will be successful. In addition, the Company
expects to hire additional employees and there can be no assurance that it
will be successful in hiring, integrating or retaining these employees. See
"Business--Strategy" and "Management."
The Company's growth has placed, and will continue to place, strains on its
management, operations and systems. To manage its growth, the Company must
continuously evaluate the adequacy of its existing systems and procedures,
including its financial and internal control systems and management structure.
There can be no assurance that the Company's management will adequately
anticipate all of the changing demands that growth will impose on the
Company's systems, procedures and structure. Any failure by the Company's
management to anticipate effectively, implement and manage the changes
required to sustain the Company's growth would have a material adverse effect
on the Company.
Dependence on Proprietary Technology. The Company's ability to compete
successfully will depend, in part, on its ability to protect the proprietary
technology contained in its products. The Company currently relies upon a
combination of trade secret, copyright, patent and trademark laws, as well as
contractual restrictions, to establish and protect its proprietary rights. The
Company also seeks to enter into non-competition, proprietary information and
assignment of invention agreements with its employees and non-disclosure
agreements with certain of its suppliers, distributors and customers that are
designed to limit access to and disclosure of its proprietary information.
There can be no assurance that these statutory and contractual arrangements
can effectively deter misappropriation of the Company's technology or
independent third-party development of competing technologies.
The Company has one issued patent for its LANET protocol. The Company
intends to make the technology covered by the LANET patent available in
unmodified form, at no cost to the public, in the belief that this release
will create demand for and facilitate widespread use of LANET and increase
name recognition for Yurie as the developer of LANET. Two additional patent
applications have been filed for (i) the AQueMan algorithm developed by the
Company to regulate and prioritize the flow of traffic in ATM access products
and (ii) error-tolerant addressing to enhance the ability to transport ATM
cells over noisy links (e.g., wireless circuits). The Company intends to file
another patent application within the next six months for a method to simplify
authentication and key exchange in the establishment of secure data links.
There can be no assurance that the applications will result in issued patents
or that the Company's existing patent or future patents will be upheld as
valid or prevent the development of competing products. The failure of the
Company to obtain a patent for AQueMan, or to be granted patents for any of
its other Company-developed technologies, could have a material adverse effect
on the Company's business. Defense of patents can be very costly and
unsuccessful patent litigation could have a material adverse effect on the
Company's competitive position. In addition, there can be no assurance that
third parties will not accuse the Company of patent infringement with respect
to current or future products. Any such claims could require the Company to
spend significant sums in litigation, pay damages, develop non-infringing
technology or acquire technology licenses. Also, effective copyright and trade
secret protection may not be available in every foreign country in which the
Company's products are or may be deployed. See "Business--Intellectual
Property, Proprietary Information and Technical Know How."
Rapid Technological Development; New Products; Product Errors. The market
for the Company's products is generally characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions
that can render existing products obsolete or unmarketable. The Company's
success will depend to a substantial degree upon its ability to develop and
introduce in a timely fashion, enhancements to its existing products and new
products that meet changing customer
7
<PAGE>
requirements and emerging industry standards. The failure of the Company to
introduce new products and respond to industry changes on a timely basis could
have a material adverse affect on the Company's business, results of
operations and financial condition.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. Furthermore, the introduction
and marketing of new or enhanced products require the Company to manage the
transition from existing products in order to minimize disruption in customer
purchasing patterns. There can be no assurance that the Company will be
successful in developing and marketing, on a timely basis, new products or
product enhancements, that its new products will adequately address the
changing needs of the marketplace, or that it will successfully manage the
transition from existing products. Nor can there be any assurance that the
Company will be able to identify, develop, manufacture or support new products
successfully, that such new products will gain market acceptance or that the
Company will be able to respond effectively to technological changes, emerging
industry standards or product announcements by competitors. In addition, the
Company has on occasion experienced delays in the introduction of product
enhancements and new products. There can be no assurance that in the future
the Company will be able to introduce product enhancements or new products on
a timely basis. Products as complex as those offered by the Company may
contain undetected errors or failures when first introduced or as new versions
are released, and such errors have occurred in the Company's products in the
past. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products
after commencement of commercial shipments. The occurrence of such errors
could result in the loss or delay in market acceptance of the Company's
products, diversion of development resources, damage to the Company's
reputation or increased service or warranty costs, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business--The LDR Product Family and Supporting
Services" and "--Research and Development."
Furthermore, from time to time, the Company may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycle of the Company's existing product offerings. There can be no
assurance that announcements of product enhancements or new product offerings
will not cause customers to defer purchasing existing Company products or
cause resellers to return products to the Company. Failure to introduce new
products or product enhancements effectively and on a timely basis, customer
delays in purchasing products in anticipation of new product introductions and
any inability of the Company to respond effectively to technological changes,
emerging industry standards or product announcements by competitors, could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--The LDR Product Family and Supporting
Services" and "--Research and Development."
Highly Competitive and Consolidating Market. Although the market for ATM
access products is still evolving, the Company anticipates that it will become
intensely competitive. The Company's direct competitors include ADC Kentrox
and OnStream Networks, which was recently 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, which recently entered into an agreement to be acquired by Cascade
Communications, is reportedly developing an ATM access product that will be
directly competitive with the Company's products. Other companies, including
Cisco Systems/StrataCom, 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. Among the companies that have announced or completed
acquisitions are Cisco Systems, Bay Networks, Cabletron Systems, Cascade
Communications 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 78.6% of the outstanding Common Stock
(approximately 76.2% if the Underwriters' over-allotment option is exercised
in full). As a result, these stockholders will be able to elect a majority of
the Company's Board of Directors and approve all matters requiring stockholder
approval, and will have significant control over the Company and the conduct
of its business. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company.
No Prior Trading Market; Potential Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock, and there can
be no assurance that an active trading market for the Common Stock will
develop upon consummation of this offering or, if one does develop, that it
will be maintained. Consequently, the offering price of the Common Stock will
be determined by negotiations between the Company and the representatives of
the Underwriters. In addition, the market price of the Common Stock may be
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or
its competitors, developments with respect to patents or proprietary rights,
and general market conditions may have a significant effect on the market
price of the Common Stock. Further, the stock market has experienced
volatility that has particularly affected the market prices of equity
securities of many high technology companies and that often has been unrelated
or disproportionate to the operating performance of such companies. See
"Underwriting" for a description of the factors to be considered in
determining the initial public offering price.
Discretion as to Use Proceeds. The Company expects to use the net proceeds
of this offering primarily for general corporate purposes, including working
capital. A portion of the net proceeds also may be used for the acquisition of
complementary businesses, products or technologies, although the Company
currently has no agreements in place, no specified acquisition targets and is
not involved in
11
<PAGE>
any negotiation with respect to any such acquisitions. The Company also
expects that this offering will create a public market for the Common Stock,
facilitate future access for the Company to public equity markets and enhance
the Company's ability to use its Common Stock as consideration for potential
acquisitions and as a means of attracting and retaining key employees. In
addition, the Company believes that the offering will provide increased
visibility for the Company in a marketplace where many of its potential
competitors are publicly held.
The Company has no specific plans for a significant portion of the proceeds
of this offering and, as a consequence, management will have discretion over
the use of a significant portion of the proceeds. The failure of management to
apply such funds effectively could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Use of
Proceeds."
Benefits of the Offering to Existing Stockholders. After this offering, it
is expected that a public market will exist for the Common Stock. At an
assumed initial offering price of $11.00 per share, there will be a
substantial increase in the market value of the shares of Common Stock held by
management and existing shareholders over their original purchase price. As of
January 30, 1997, the directors, officers, key employees and 5% stockholders
of the Company hold an aggregate of 19.4 million shares of Common Stock having
an aggregate original purchase price of $156,000 and a market value, based on
an assumed initial public offering price of $11.00, of $213.4 million. See
"Management" and "Principal Stockholders."
Shares Eligible for Future Sale. Sales of substantial amounts of the Common
Stock of the Company in the public market, or the prospect of such sales,
could have a material adverse affect on the market price of the Common Stock.
Immediately following this offering, the Company will have outstanding
24,608,400 shares of Common Stock. The 4,000,000 shares of Common Stock
offered hereby (4,600,000 if the Underwriters' over-allotment option is
exercised in full) will be eligible for public sale without restriction under
the Securities Act by persons other than Affiliates (as that term is defined
in Rule 144 under the Securities Act) of the Company. Sales of shares by
Affiliates of the Company will be subject to public resale in accordance with
Rule 144. Approximately 14,500,000 shares of Common Stock have been owned by
existing stockholders for more than two years and will be available for public
sale pursuant to Rule 144, subject to the volume and other limitations set
forth therein. See "Underwriting." In addition certain of the Company's
existing stockholders have registration rights that permit them to demand
registration under the Securities Act of their shares beginning 180 days after
the consummation of this offering. These registration rights, if exercised,
would permit such stockholders to sell, in the aggregate, up to 22,250,000
shares into the public market without being subject to the restrictions of
Rule 144.
The Company and its executive officers, directors and certain stockholders,
who will beneficially own an aggregate of 20,935,300 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 January
30, 1997, following the expiration or waiver of the foregoing restrictions on
dispositions and any applicable holding periods under Rule 144, 20,608,400
shares of Common Stock owned by existing stockholders will be available for
sale into the public market pursuant to Rule 144 (including the volume and
other limitations set forth therein) and could impair the Company's future
ability to raise capital through an offering of its equity securities.
The Company intends to register on Form S-8 under the Securities Act as soon
as practicable after the effective date of this offering, 5,000,000 shares of
Common Stock issued or reserved for issuance under the Stock Option Plan,
200,000 shares of Common Stock reserved for issuance under the Stock Purchase
Plan and 200,000 shares of Common Stock reserved for issuance under the 401(k)
Plan. These registrations will be effective upon filing. As of January 30,
1997, there were 3,386,722 outstanding options for the purchase of shares
under the Stock Option Plan. See "Management--Stock Option Plan." Shares
registered and issued pursuant to such registration statement will be freely
tradable except to the extent that the holders thereof are deemed to be
Affiliates of the Company, in which case the
12
<PAGE>
transferability of such shares will be subject to the volume limitations set
forth in Rule 144 under the Securities Act. See "Description of Capital Stock"
and "Shares Eligible for Future Sale."
Absence of Dividends. The Company has never paid a cash dividend on its
Common Stock. The payment of cash dividends on the Common Stock is unlikely
for the foreseeable future. See "Dividend Policy."
Dilution. The purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution in the net tangible book value
per share of their Common Stock. At the assumed initial public offering price
of $11.00 per share, investors in this offering will incur dilution of $9.02
per share. See "Dilution."
Antitakeover Effects of Certain Charter, Bylaws and Other
Provisions. Certain provisions of the Company's Certificate of Incorporation
("Certificate") and Bylaws and Delaware law could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party
from attempting to acquire, control of the Company. Such provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock. Certain of such provisions allow the
Company to issue preferred stock with rights senior to those of the Common
Stock and impose various procedural and other requirements which could make it
more difficult for stockholders to effect certain corporate actions. In
addition, the Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law ("DGCL"). See "Description of Capital Stock."
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 4,000,000 shares of Common Stock
offered by the Company hereby (at an assumed public offering price of $11.00
per share), after deduction of underwriting discounts and commissions and
estimated expenses payable by the Company will be approximately $40.3 million.
The Company intends to use the net proceeds for general corporate purposes,
including working capital, and expects that this offering will facilitate
future access for the Company to public equity markets. A portion of the net
proceeds also may be used for the acquisition of complementary businesses,
products or technologies, although the Company currently has no agreements in
place, no specified acquisition targets and is not involved in any negotiation
with respect to any such acquisitions. Pending their application, the net
proceeds of this offering will be invested in short-term U.S. government
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. The declaration and payment by the Company of any future dividends and
the amounts thereof will depend upon the Company's results of operations,
financial condition, cash requirements, future prospects, limitations imposed
by credit agreements or senior securities and other factors deemed relevant by
the Board of Directors.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 (i) on an actual basis, (ii) on a pro forma basis after
giving effect to the Amerindo Transaction and (iii) on an as adjusted basis to
reflect the sale by the Company of 4,000,000 shares of Common Stock offered
hereby (assuming an initial public offering price of $11.00 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 45,196
Retained earnings.............................. 3,520 3,520 3,520
------ ------ -------
Total stockholders' equity..................... 3,842 8,642 48,962
------ ------ -------
Total capitalization....................... $3,842 $8,642 $48,962
====== ====== =======
</TABLE>
- --------
(1) The pro forma data give effect to the Amerindo Transaction.
(2) Excludes 3,386,722 shares of Common Stock issuable upon exercise of
outstanding stock options as of January 30, 1997 at a weighted average
exercise price of approximately $2.17 per share, substantially all of
which are not exercisable as of the date of this Prospectus. Also excludes
1,613,278 shares of Common Stock reserved for future issuance under the
Stock Option Plan, 200,000 shares of Common Stock reserved for future
issuance under the Stock Purchase Plan and 200,000 shares of Common Stock
reserved for future issuance under the 401(k) Plan. See "Management--Stock
Option Plan," "--Stock Purchase Plan" and "--401(k) Plan."
15
<PAGE>
DILUTION
As of September 30, 1996, after giving pro forma effect to the Amerindo
Transaction, the pro forma net tangible book value of the Company was
approximately $8.5 million, or $0.41 per share of Common Stock. Pro forma net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the offering
made hereby and the pro forma net tangible book value per share of Common
Stock immediately after completion of the offering. Net tangible book value is
defined as total assets less deferred offering and other intangible costs less
total liabilities. After giving effect to the sale by the Company of 4,000,000
shares of Common Stock offered hereby (after deducting underwriting discounts
and commissions and estimated offering expenses) at an assumed initial public
offering price of $11.00 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
$48.8 million or $1.98 per share, representing an immediate increase in the
pro forma net tangible book value of $1.57 per share to existing stockholders
and an immediate dilution of $9.02 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........... $11.00
Pro forma net tangible book value per share before this
offering ................................................ $0.41
Increase per share attributable to new investors........ 1.57
-----
Adjusted pro forma net tangible book value per share after
this offering............................................ 1.98
------
Dilution per share to new investors....................... $ 9.02
======
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by existing
stockholders and by new investors (assuming the sale by the Company of
4,000,000 shares offered hereby), before deduction of underwriting discounts
and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
------------------ ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 20,608,400 83.7% $ 4,962,000 10.1% $ 0.24
New investors.............. 4,000,000 16.3 44,000,000 89.9 $11.00
---------- ----- ----------- -----
Total.................... 24,608,400 100.0% $48,962,000 100.0%
========== ===== =========== =====
</TABLE>
The above computations assume no exercise of any outstanding options. At
January 30, 1997, there were outstanding options to purchase 3,386,722 shares
of Common Stock at a weighted average exercise price of $2.17. To the extent
these options are exercised, there will be further dilution to the new
investors in this offering.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements of the Company and the notes
thereto included elsewhere in this Prospectus. The statements of operations
data for the years ended December 31, 1993, 1994 and 1995 and for the nine
months ended September 30, 1996, and the balance sheet data as of December 31,
1993, 1994 and 1995 and as of September 30, 1996, have been derived from the
financial statements of the Company which have been audited by Deloitte &
Touche LLP, independent auditors. The statement of operations data for the
nine months ended September 30, 1995 and the balance sheet data as of
September 30, 1995 have been derived from the Company's unaudited financial
statements which, in the opinion of management, include all significant,
normal and recurring adjustments necessary for a fair presentation of the
financial position and results of operations for such unaudited period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue................ $ -- $ -- $ 2,870 $2,666 $13,023
Service revenue................ 194 1,144 1,993 1,044 1,623
Other revenue.................. -- -- 1,108 250 392
------- ------- ------- ------ -------
Total revenue................. 194 1,144 5,971 3,960 15,038
Cost of revenue:
Cost of product revenue........ -- -- 1,327 1,220 4,536
Cost of service revenue........ 143 723 1,184 696 1,095
------- ------- ------- ------ -------
Total cost of revenue......... 143 723 2,511 1,916 5,631
------- ------- ------- ------ -------
Gross profit.................... 52 420 3,460 2,044 9,407
Operating expenses:
Research and development....... 8 40 428 86 2,380
Sales and marketing............ -- -- -- -- 790
General and administrative..... 61 219 1,588 1,285 1,733
------- ------- ------- ------ -------
Total operating expenses...... 68 259 2,016 1,371 4,903
------- ------- ------- ------ -------
Income (loss) from operations... (17) 161 1,444 673 4,503
Other income (expense).......... (6) 2 13 4 62
------- ------- ------- ------ -------
Income (loss) before income
taxes.......................... (23) 162 1,458 677 4,565
Income taxes.................... -- 42 561 260 1,826
------- ------- ------- ------ -------
Net income (loss)............... $ (23) $ 121 $ 897 $ 416 $ 2,739
======= ======= ======= ====== =======
Net income per common share..... $ (0.00) $ 0.01 $ 0.04 $ 0.02 $ 0.13
======= ======= ======= ====== =======
Weighted average common and
common equivalent shares
outstanding(1)................. 17,493 17,493 21,660 21,647 21,701
======= ======= ======= ====== =======
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents....... $ 5 $ 230 $ 3,780 $ 546 $ 6,202
Working capital................. (82) (130) 552 95 2,598
Total assets.................... 97 627 6,192 1,819 11,031
Stockholders' equity
(deficit)...................... (77) 44 1,103 461 3,842
</TABLE>
- --------
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Yurie, founded in 1992, designs, manufactures, markets and services ATM
access products for telecommunications service providers, corporate end users
and government end users. The Company began developing ATM access products in
1994 and began product shipments in February 1995. Prior to 1995, the
Company's revenue was derived primarily from telecommunications consulting and
related services.
Today, the Company generates revenue primarily from the sale of the LDR200,
an ATM access product released in September 1996. The Company's first
generation ATM access product, the LDR100, was first shipped in February 1995.
Yurie continues to generate revenue from providing telecommunications and
networking applications consulting services, though these services generate an
increasingly smaller portion of total revenue. Since the release of the LDR100
in 1995, revenue generated from the sale of the LDR products continues to
represent an increasingly larger portion of the Company's total revenue, and
the Company expects this trend to continue.
Since 1994, Yurie has had a strategic relationship with AT&T. In August
1995, pursuant to this relationship, AT&T and Yurie entered into the AT&T
Agreement to facilitate the joint technical evaluation and marketing of the
Company's LDR products. Under the AT&T Agreement, as amended, AT&T has the
exclusive right to market and sell the LDR100 and the LDR200 in U.S. federal,
state and local government markets and certain foreign government markets, and
has committed to purchase at least $6.5 million, $10.0 million and $10.0
million of the LDR200 in 1996, 1997 and 1998, respectively. Sales of the LDR
product line to AT&T represented 52.4%, 71.8% and 91.4% of total revenue in
1994, 1995 and the nine months ended September 30, 1996, respectively. During
the quarter ended December 31, 1996, the Company shipped $4.8 million of
LDR200s to AT&T. For the year ended December 31, 1996, the Company shipped a
total of $8.3 million of LDR200s to AT&T, $1.8 million in excess of AT&T's
1996 purchase order guarantee for this product of $6.5 million. The Company
plans to make additional shipments of $1.1 million to AT&T in early 1997
pursuant to additional 1996 purchase orders.
In 1995 and for the nine months ended September 30, 1996, the Company also
generated non-recurring other revenue from one-time fees earned under the
technology evaluation portion of the AT&T Agreement, which called for a total
of $1.5 million to be earned over six months beginning in August 1995. All
product revenue arising from sales to AT&T is presented net of the applicable
discount. See "Business--AT&T Relationship."
Prior to the Company's granting AT&T the exclusive right to market and sell
Yurie's products in government markets, the Company made direct sales to
certain government agencies. Since the Company granted this right to AT&T,
AT&T has marketed and sold the Company's products to the government agencies
to which the Company initially made direct sales, and the Company expects that
AT&T will continue to market and sell Yurie's products to a substantial
majority of these agencies as well as additional government agencies. The
Company has now developed a direct sales force in order to pursue the
telecommunications service provider and corporate end user markets. See
"Business--Customers and End Users."
Revenue from the sale of Yurie's LDR product line is recognized at shipment.
Revenue from the provision of telecommunications and networking applications
consulting services is recognized as the services are performed. Payments
received in advance of product delivery or the performance of services are
recorded as unearned revenue and recognized upon shipment of product or
performance of services by the Company. The LDR200 purchase price includes a
standard warranty on parts and service, which provides that the product will
be free from defects for a period of one year from the date of shipment.
18
<PAGE>
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.
On November 7, 1996, the Company sold 400,000 shares of Common Stock to
Amerindo for $4.8 million. In connection with the Amerindo Transaction, Dr.
Kim and Mr. Li sold 500,000 and 100,000 shares of Common Stock, respectively,
to Amerindo for $6.0 million and $1.2 million, respectively. Prior to November
7, 1996, Amerindo did not own any shares of the Company's capital stock.
Amerindo now owns a total of 4.9% of the Company's outstanding Common Stock,
and will own 4.1% after the completion of this offering. Amerindo received
registration rights with respect to the Common Stock sold to it in these
transactions. See "Shares Eligible for Future Sale."
In view of the Company's rapid revenue growth, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance. In addition, the Company's results of operations may fluctuate
from period to period in the future.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of total revenue, except other data, which is expressed as a
percentage of the applicable revenue type.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPT.
DECEMBER 31, 30,
-------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue......................... 0.0 % 0.0% 48.1% 67.3% 86.6%
Service revenue......................... 100.0 100.0 33.4 26.4 10.8
Other revenue........................... 0.0 0.0 18.5 6.3 2.6
----- ----- ----- ----- -----
Total revenue......................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of product revenue................. 0.0 0.0 22.2 30.8 30.2
Cost of service revenue................. 73.5 63.3 19.8 17.6 7.3
----- ----- ----- ----- -----
Total cost of revenue................. 73.5 63.3 42.1 48.4 37.4
----- ----- ----- ----- -----
Gross profit.............................. 26.5 36.7 57.9 51.6 62.6
Operating expenses:
Research and development................ 3.9 3.5 7.2 2.2 15.8
Sales and marketing..................... 0.0 0.0 0.0 0.0 5.3
General and administrative.............. 31.3 19.2 26.6 32.4 11.5
----- ----- ----- ----- -----
Total operating expenses.............. 35.2 22.7 33.8 34.6 32.6
----- ----- ----- ----- -----
Income (loss) from operations............. (8.7) 14.1 24.2 17.0 29.9
Other income (expense).................... (3.2) 0.1 0.2 0.1 0.4
----- ----- ----- ----- -----
Income (loss) before income taxes......... (11.9) 14.2 24.4 17.1 30.4
Income taxes.............................. 0.0 3.6 9.4 6.6 12.1
----- ----- ----- ----- -----
Net income (loss)......................... (11.9)% 10.6% 15.0% 10.5% 18.2%
===== ===== ===== ===== =====
OTHER DATA:
Gross margin
Product................................. 0.0% 0.0% 53.8% 54.2% 65.2%
Service................................. 26.5 36.7 40.6 33.3 32.5
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue. For the first nine months of 1996, total revenue was $15.0 million,
compared with $4.0 million for the first nine months of 1995. This increase
resulted primarily from an increase in sales of the Company's LDR products.
Product revenue was $13.0 million for the first nine months of 1996 compared
with $2.7 million for the comparable 1995 period. The Company also experienced
a 55.4% increase in service revenue and a 56.7% increase in other revenue for
the first nine months of 1996, each relative to the comparable period in 1995.
The increase in service revenue was attributable to growth in both the number
and size of contracts with U.S. government customers and government
contractors. The increase in other revenue was due to a higher percentage of
fees earned under the AT&T Agreement, which called for a total of $1.5 million
to be earned over the six months beginning in August 1995.
During the first nine months of both 1996 and 1995, product sales to and
service contracts with U.S. government customers and government contractors
comprised 100.0% of total revenue. Sales to or through AT&T represented $12.6
million, or 96.9% of product revenue for the first nine months of 1996
compared with $1.6 million, or 59.2% of product revenue for the first nine
months of 1995. Sales to or through AT&T represented 91.4% and 69.7% of total
revenue for the first nine months of 1996 and 1995, respectively.
20
<PAGE>
Gross Profit. Gross profit increased to $9.4 million in the first nine
months of 1996 from $2.0 million in the comparable 1995 period. Gross margins
were 62.6% and 51.6% for the 1996 and 1995 periods, respectively. The
improvement in gross margins was due primarily to the more rapid growth in
product revenue, which has a higher gross margin than the Company's service
revenue. In the first nine months of 1996, product gross margin was 65.2%
compared with service gross margin of 32.5%. In the first nine months of 1995,
product gross margin was 54.2% compared with service gross margin of 33.3%.
Research and Development. Research and development expenses were $2.4
million, or 15.8% of total revenue, for the first nine months of 1996,
compared with $86,000, or 2.2% of total revenue, for the comparable 1995
period. This increase was due primarily to the hiring of additional
engineering personnel and increased prototyping expenses related to the
development of the Company's LDR products.
Sales and Marketing. Sales and marketing expenses were $790,000, or 5.3% of
total revenue, during the first nine months of 1996. The Company incurred no
sales and marketing expenses for the comparable 1995 period. The expenses
incurred during the first nine months of 1996 resulted from the hiring of
sales and marketing personnel in anticipation of the release of the Company's
LDR200 product, and the Company's expected entry into the telecommunications
service provider and corporate end user markets.
General and Administrative. General and administrative expenses increased to
$1.7 million in the first nine months of 1996 from $1.3 million in the
comparable 1995 period. This increase was due primarily to higher personnel
expenses, related to increased staffing in finance, information technology and
administration undertaken in support of the Company's growth. Also, on June 1,
1996, the Company began a phased relocation of its operations to a larger,
leased facility, resulting in higher occupancy costs. As a percentage of total
revenue, general and administrative expenses were 11.5% and 32.4% during the
first nine months of 1996 and 1995, respectively. The decrease as a percent of
total revenue between the comparable nine month periods was due to the
Company's significant increase in total revenue.
Provision for Income Taxes. The provision for income taxes in the first nine
months of 1996 was $1.8 million, resulting in an effective tax rate of 40.0%.
For the comparable 1995 period, the provision was $260,000, resulting in an
effective tax rate of 38.5%.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenue. Total revenue in 1995 was $6.0 million, compared with $1.1 million
in 1994. This increase was due primarily to three factors. The Company had
$2.9 million in revenue from product sales in 1995 compared with none in 1994.
Service revenue increased to $2.0 million in 1995 from $1.1 million in 1994 as
a result of growth in both the number and size of contracts with U.S.
government customers and government contractors. Also, the Company had $1.1
million of other revenue in 1995 from fees earned under the AT&T Agreement
compared with none in 1994.
During both 1995 and 1994, U.S. government customers and government
contractors comprised 100.0% of total revenue. Sales to or through AT&T
represented 57.3% of product revenue in 1995 and 71.8% and 52.4 % of total
1995 and 1994 revenues, respectively.
Gross Profit. Gross profit increased to $3.5 million in 1995 from $420,000
in 1994. Gross margins were 57.9% and 36.7% for 1995 and 1994, respectively.
The improvement in 1995 was due primarily to the commencement of product
sales, which have higher gross margins than the Company's service revenue. In
1995, product gross margin was 53.8% compared with service gross margin of
40.6%. In 1994, service gross margin was 36.7%.
Research and Development. Research and development expenses were $428,000,
or 7.2% of total revenue in 1995, compared with $40,000, or 3.5% of total
revenue, in 1994. The increase was due primarily to the hiring of additional
engineering personnel related to development of the Company's LDR product
line.
21
<PAGE>
Sales and Marketing. The Company incurred no sales and marketing expenses
for either 1995 or 1994.
General and Administrative. General and administrative expenses were $1.6
million, or 26.6% of total revenue in 1995, compared with $219,000, or 19.2%
of total revenue, in 1994. Both the dollar amount and percent of total revenue
increases were due primarily to 1995 bonus payments totaling $1.1 million.
These bonuses were paid primarily to senior executives of the Company. The
Company also increased its personnel-related and general operating expenses in
support of its sales growth.
Provision for Income Taxes. The provision for income taxes in 1995 was
$561,000, resulting in an effective tax rate of 38.5%. In 1994, the provision
was $42,000, resulting in an effective tax rate of 25.6%. The lower effective
tax rate in 1994 was due primarily to the Company being in a lower tax bracket
and a net operating loss carryforward.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Revenue. Total revenue in 1994 was $1.1 million compared with $194,000 in
1993. This increase was due to growth in both the number and size of contracts
with U.S. government customers and government contractors. Revenue recognized
under contracts with AT&T totaled $600,000, or 52.4% of total revenue, in
1994. The Company did not generate any revenue associated with AT&T in 1993.
Gross Profit. Gross profit increased to $420,000 in 1994 from $52,000 in
1993. Gross margins were 36.7% and 26.5% for 1994 and 1993, respectively. The
increase in gross margin was attributable to improved absorption by the
Company of fixed, direct costs, primarily labor, due to its larger revenue
base.
Research and Development. Research and development expenses were $40,000, or
3.5% of total revenue, in 1994, compared with $8,000, or 3.9% of total
revenue, in 1993. This increase was due primarily to the hiring of engineering
personnel related to the development of the Company's LDR product line. The
decrease in research and development expenses as a percentage of revenue
resulted from the increase in 1994 total revenue over 1993 total revenue.
Sales and Marketing. The Company incurred no sales and marketing expenses
for either 1994 or 1993.
General and Administrative. General and administrative expenses were
$219,000, or 19.2% of total revenue, in 1994, compared with $61,000, or 31.3%
of total revenue, in 1993. This dollar increase was primarily due to increased
personnel-related and general operating expenses in support of the Company's
sales growth. The decrease in general and administrative expenses as a percent
of total revenue resulted from the increase in 1994 total revenue over 1993
total revenue.
Provision for Income Taxes. The provision for income taxes in 1994 was
$42,000, resulting in an effective tax rate of 25.6%. The effective tax rate
in 1994 was due primarily to the Company being in a lower tax bracket and its
utilization of a net operating loss carryforward. In 1993, there was no income
tax provision because of the loss incurred in that year.
QUARTERLY INFORMATION--UNAUDITED
The following table presents unaudited statement of operations data for each
of the seven quarters in the period ended September 30, 1996. This information
has been prepared by the Company on a basis consistent with the Company's
audited financial statements and includes all adjustments (consisting only of
normal recurring adjustments) that management considers necessary for a fair
presentation of the data. These quarterly results are not necessarily
indicative of future results of operations and may fluctuate, depending on the
timing of new product introductions, market acceptance of enhanced or new
versions of Yurie's products, the size and timing of individual orders of the
Company's products, price reductions
22
<PAGE>
by the Company, changes in the Company's distribution channels, the addition
or loss of significant customers, the Company's ability to obtain components
for its products and general economic conditions. This information should be
read in conjunction with the Company's Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue....... $695 $ 830 $1,140 $ 204 $2,804 $4,588 $5,632
Service revenue....... 156 354 534 949 591 430 601
Other revenue......... -- -- 250 858 392 -- --
---- ------ ------ ------ ------ ------ ------
Total revenue....... 851 1,184 1,924 2,011 3,787 5,018 6,233
Cost of revenue:
Cost of product
revenue.............. 318 375 526 107 735 1,623 2,179
Cost of service
revenue.............. 86 235 375 488 413 316 366
---- ------ ------ ------ ------ ------ ------
Total cost of
revenue............ 404 610 901 595 1,148 1,939 2,545
---- ------ ------ ------ ------ ------ ------
Gross profit............ 447 574 1,023 1,416 2,639 3,079 3,688
Operating expenses:
Research and
development.......... 20 30 36 342 402 944 1,034
Sales and marketing... -- -- -- -- 49 237 504
General and
administrative....... 374 192 719 303 471 365 897
---- ------ ------ ------ ------ ------ ------
Total operating
expenses........... 394 222 755 645 922 1,546 2,435
---- ------ ------ ------ ------ ------ ------
Income from operations.. 53 352 268 771 1,717 1,533 1,253
Other income............ -- -- 3 10 39 15 8
---- ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 53 352 271 781 1,756 1,548 1,261
Income taxes............ 20 135 104 300 702 619 504
---- ------ ------ ------ ------ ------ ------
Net income.............. $ 33 $ 217 $ 167 $ 481 $1,054 $ 929 $ 757
==== ====== ====== ====== ====== ====== ======
</TABLE>
23
<PAGE>
The following table sets forth certain financial data expressed as a
percentage of total revenue:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue........ 81.7% 70.1% 59.2% 10.1% 74.0% 91.4% 90.4%
Service revenue........ 18.3 29.9 27.8 47.2 15.6 8.6 9.6
Other revenue.......... 0.0 0.0 13.0 42.7 10.4 0.0 0.0
----- ----- ----- ----- ----- ----- -----
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of product reve-
nue................... 37.4 31.7 27.3 5.3 19.4 32.3 35.0
Cost of service reve-
nue................... 10.1 19.8 19.5 24.3 10.9 6.3 5.9
----- ----- ----- ----- ----- ----- -----
Total cost of revenue.. 47.5 51.5 46.8 29.6 30.3 38.6 40.8
----- ----- ----- ----- ----- ----- -----
Gross profit............ 52.5 48.5 53.2 70.4 69.7 61.4 59.2
Operating expenses:
Research and develop-
ment.................. 2.4 2.5 1.9 17.0 10.6 18.8 16.6
Sales and marketing.... 0.0 0.0 0.0 0.0 1.3 4.7 8.1
General and administra-
tive.................. 43.9 16.2 37.4 15.1 12.4 7.3 14.4
----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses................ 46.3 18.8 39.2 32.1 24.3 30.8 39.1
----- ----- ----- ----- ----- ----- -----
Income from operations.. 6.2 29.7 13.9 38.3 45.3 30.6 20.1
Other income............ 0.0 0.0 0.2 0.5 1.0 0.3 0.1
----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 6.2 29.7 14.1 38.8 46.4 30.8 20.2
Income taxes............ 2.4 11.4 5.4 14.9 18.5 12.3 8.1
----- ----- ----- ----- ----- ----- -----
Net income.............. 3.9% 18.3% 8.7% 23.9% 27.8% 18.5% 12.1%
===== ===== ===== ===== ===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital and capital expenditure
requirements primarily through cash generated from operations. At September
30, 1996, the Company had cash and cash equivalents of approximately $6.2
million and working capital of $2.6 million, as compared to cash and cash
equivalents of $3.8 million and working capital of $552,000 at December 31,
1995. The Company has available a $3.0 million revolving line of credit with
Commerce Bank, located in College Park, Maryland, under a facility which is
available through May 31, 1997 and bears interest at a floating rate ranging
from the prime rate to the prime rate plus one percent. At September 30, 1996,
the prime rate was 8.25%. Borrowings under this credit facility are secured by
accounts receivable and inventory and are subject to certain maximum advance
percentages against eligible accounts receivable, inventory and purchase
orders. The Company does not have any borrowings outstanding under the line of
credit, nor does it have any long-term debt.
The Company's operating activities provided cash of $3.4 million for the
first nine months of 1996 and $4.0 million and $428,000 for the years ended
December 31, 1995 and December 31, 1994, respectively. In the first nine
months of 1996, cash generated from operations increased significantly over
the comparable 1995 period. This increase was due to significantly higher net
income in the first nine months of 1996. The increase in cash generated from
operations in 1995 as compared to 1994 was due both to higher net income and
to cash received from payments made by AT&T in the fourth quarter of 1995,
prior to delivery of the associated product.
Cash used in investing activities was $860,000 for the first nine months of
1996 and $436,000 and $202,000 for the years ended December 31, 1995 and
December 31, 1994, respectively. In each period, cash was used for the
purchase of property and equipment, primarily computer hardware and software.
Financing activities used cash of $147,000 for the first nine months of
1996. In the first nine months of 1996, cash was used for certain expenses
related to the Company's anticipated initial public offering. There were no
financing activities in either 1994 or 1995.
24
<PAGE>
On November 7, 1996, the Company sold 400,000 shares of Common Stock for
$4.8 million to Amerindo in the Amerindo Transaction. Amerindo currently owns
a total of 4.9% of the Company's outstanding Common Stock, and will own 4.1%
after the completion of this offering. The Company plans to use the proceeds
received in the Amerindo Transaction for general corporate purposes, including
working capital.
The Company believes that the net proceeds of this offering, proceeds of the
Amerindo Transaction, existing sources of liquidity and internally generated
cash, will be sufficient to meet the Company's projected cash needs for at
least the next 12 months. In the longer term, the Company may require
additional sources of liquidity to fund future growth. Such sources of
liquidity may include additional equity offerings or debt financings.
To date, inflation has not had a material impact on the Company's financial
results.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation expense to be measured based on the fair market value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB No. 25, which recognizes compensation costs based on the intrinsic
value of the equity instrument awarded. The Company has adopted SFAS 123 for
disclosure purposes in 1996, but will continue to apply APB No. 25 with
respect to recognition and measurement of its stock-based compensation awards
to employees.
RECENT DEVELOPMENTS
On February 3, 1997, the Company reported its unaudited financial results
for the fourth quarter and the year ended December 31, 1996. For the quarter
ended December 31, 1996, net income was $413,000, or $0.02 per share, on
revenue of $6.6 million, compared with 1995 fourth quarter net income of
$481,000, or $0.02 per share, on revenue of $2.0 million. For the year ended
December 31, 1996, net income was $3.2 million, or $0.14 per share, on revenue
of $21.6 million, compared with net income of $897,000, or $0.04 per share, on
revenue of $6.0 million for the year ended December 31, 1995.
25
<PAGE>
BUSINESS
Yurie designs, manufactures, markets and services ATM access equipment for
telecommunications service providers, corporate end users and government end
users. ATM is a standard for packaging and switching digital information that
facilitates high speed information transmission with a high degree of
efficiency. End users of telecommunications services have traditionally
maintained separate WANs for transmitting voice, data, video and other
electronic information among geographically dispersed locations. ATM
technology is conducive to consolidating these networks. The network
consolidation brought about by employing ATM access platforms can provide
savings in WAN communications costs and simplify network management.
Yurie is a leading supplier of ATM access products. The Company's LDR100,
introduced in February 1995, was one of the first commercially available ATM
access products. The LDR200, Yurie's second generation ATM access product, was
released in September 1996. The Company designed its ATM access products to be
flexible and scaleable, so that customers can realize the benefits of ATM
while preserving their investments in existing equipment. The LDR products
adhere to industry-wide technical standards, allowing users to integrate the
products into current networks operating with other standards-compliant
products. Yurie's proprietary AQueMan algorithm allows the LDR products to
reduce network congestion while maintaining quality of service. The Company's
LANET framing protocol is capable of transporting ATM traffic over circuits of
varying speed and quality, including poor quality circuits. The Company's ATM
access products incorporate a variety of value-added features, including
compact size, scaleability, reliability, encryption capabilities and a broad
variety of access interfaces.
The Company's strategy centers on maintaining its technological leadership,
developing both the telecommunications service provider and corporate end user
markets while continuing to pursue government end users, developing
international markets and building strategic relationships. Since 1994, Yurie
has had a strategic relationship with AT&T. In August 1995, pursuant to this
relationship, the Company and AT&T entered into the AT&T Agreement to
facilitate the joint technical evaluation and marketing of the Company's LDR
products. Under the AT&T Agreement, as amended, AT&T has a three-year
exclusive right to market and sell the LDR100 and the LDR200 in U.S. federal,
state and local government markets, as well as certain foreign government
markets, and has committed to purchase at least $6.5 million, $10.0 million
and $10.0 million of the LDR200 in 1996, 1997 and 1998, respectively. To
enhance its distribution efforts and pursue the telecommunications service
provider and corporate end user markets, the Company has established a
nationwide direct sales force which currently consists of 13 sales personnel.
INDUSTRY BACKGROUND
Deregulation of the U.S. telecommunications industry, which began with the
breakup of AT&T in 1984, has triggered significant competition for the
provision of both long distance and local telecommunications services. The
recent adoption of the Telecommunications Act of 1996 is likely to create even
more competition over the next few years. The international market has also
experienced increased deregulation, liberalization, privatization and the
emergence of new wireline and wireless alternatives to traditional carrier
services. In this intensely competitive environment, telecommunications
service providers throughout the world are seeking to differentiate
themselves, in part, by offering enhanced services based on new and emerging
technologies.
Industry surveys show that both voice and data traffic are continuing to
expand. Businesses have increasingly deployed communications technology to
link remote sales offices, home offices, mobile offices and geographically
dispersed customers and suppliers. These businesses use increasingly powerful
computer technologies that enable new multimedia applications integrating
data, voice and video. The volume of network traffic has also grown
dramatically due to traffic on the Internet, a rapidly growing global web of
networks that permits users to communicate, share information and
26
<PAGE>
conduct business throughout the world. Businesses demand telecommunications
services that provide significantly higher transmission capacity or bandwidth,
the flexibility to choose among services with varying bandwidths and the
ability to access communications services from remote locations.
Driven by this combination of increased demand and competition, WAN
technology has made significant advances. Current WAN technology permits users
in geographically dispersed locations to communicate. However, most existing
networks have had difficulty keeping pace with the increase in WAN traffic,
resulting in network congestion and related performance inefficiencies.
Today's Networking Technologies
Time division multiplexing ("TDM") and frame relay are the networking
technologies currently most widely deployed in WANs. TDM, which was one of the
first technologies developed to send traffic through circuits across a WAN,
operates by dedicating a circuit--or fixed amount of bandwidth--to each end
device. TDM's use of dedicated circuits provides high quality service for all
network traffic, whether data, voice or video. Since information is not
continuously transmitted, however, the dedicated circuits are often idle. This
results in inefficient use of expensive bandwidth and high cost to TDM network
users.
Frame relay was introduced in 1990 as a method of connecting local area
networks ("LANs") over WANs by using flexible bandwidth allocation to lower
the cost of transmission. Frame relay uses "packets" or "frames" to transmit
traffic, thereby allowing the same bandwidth to be shared by many users, each
using the bandwidth only for the time required to transmit a packet. Designed
primarily for data transmission, frame relay cannot guarantee the high quality
transmission of voice and video. Currently, frame relay is widely used to
transmit data over WANs, including the Internet. Due to the substantial
increase in data traffic over WANs, however, today's frame relay networks are
being used to transmit more traffic than they were designed to support,
resulting in network congestion.
To increase a frame relay network's switching capacity to meet increased
data demands and alleviate congestion, sophisticated software is required. To
run this software, the network must be upgraded with powerful, intelligent
processors. The costs of these high-end processors required to switch frame
relay traffic at the speeds needed in today's data network backbones are very
high. Therefore, as data traffic increases, upgrading the frame relay network
becomes more costly and inefficient and ultimately impractical.
The Emergence of ATM as a Standard
Faced with the limitations of frame relay, telecommunications service
providers are installing ATM switches in the "backbones" of their existing
networks. ATM segments data, voice and video traffic into small, uniform-sized
"cells," rather than the larger, variable-size "packets" or "frames" used in
frame relay. The addition of ATM backbone switches upgrades a network's
performance by increasing switching capabilities at the network's core. ATM's
cell-based architecture increases bandwidth utilization and seeks to provide
consistent quality of service and predictability for all traffic types. ATM is
also an enabling technology, making possible new network applications such as
video distribution, medical imaging and collaborative computing, all of which
would be impractical with conventional network technologies.
ATM is the first standard protocol to permit reliable service for all
traffic types, allowing the consolidation of TDM and frame relay networks into
a single ATM network for data, voice and video. A single ATM network offers
the potential for economies of scale and streamlining of network operations.
ATM technology has been approved by both the ATM Forum, a group of equipment
manufacturers, telecommunications service providers and end users, and the ITU
as a standard in both the computer and telecommunications industries. The
standardization of ATM has allowed for compatibility of ATM equipment and
interoperability of ATM among a wide variety of interfaces and vendors, which
the Company believes will result in the widespread adoption of ATM.
27
<PAGE>
Current Status of ATM
The U.S. government was among the first to deploy ATM technology. Its
initial decision to use ATM was motivated by its desire to consolidate many
discrete networks onto a single network, thus significantly reducing cost. The
U.S. government was able to deploy ATM across geographic boundaries because
ATM was quickly accepted as an international standard, and the government soon
discovered the effectiveness and efficiency of ATM as a global networking
technology.
Several telecommunications service providers began offering trial ATM
services in the early 1990s. These services were available only for high speed
traffic and at high prices and, therefore, made ATM attractive only to
"bandwidth hungry" users and limited ATM deployment within the providers'
networks. Driven by increasing competition and the rapid growth of data
traffic on frame relay systems, a number of telecommunications service
providers began deploying ATM for use in their network backbones to manage
heavy loads of user traffic and thereby relieve network congestion. Until
recently, providers have continued to install ATM primarily in their network
backbones and typically have not offered ATM service directly to end users.
End users have generally continued to use a costly mix of frame relay and TDM,
along with leased communications lines, to meet their data, voice and video
transport needs.
In 1996, several telecommunications service providers announced plans to
begin offering ATM services directly to end users at prices competitive with
similar frame relay and TDM access services. To utilize these direct ATM
services, an end user needs ATM access products either located at the local
office of a telecommunications service provider (in close proximity to the end
user) or deployed by the end user in its private network. Access products
provide the end user with network access through multiple network interfaces,
traffic concentration and data protocol translation.
ATM access products are well suited to provide efficient connectivity to ATM
networks, facilitate transmission of a variety of traffic types at varying
speeds and accommodate a mix of end user applications on a single network. In
addition, ATM access products have the potential to lower the cost to end
users of transmitting data, voice and video communications. For these reasons,
the Company believes that ATM access products, over time, will supplant TDM
and frame relay access products in WANs. Vertical Systems, a leading industry
research firm, forecasts the aggregate ATM market, including the markets for
both ATM access and backbone equipment, to be $330.0 million in 1996 and
expects these markets to exceed $1.3 billion by 1999.
THE CHALLENGES OF WIDESPREAD ATM ACCESS
Before telecommunications service providers and end users can fully deploy
ATM, several problems relating to the ATM access layer must be solved.
Quality of Service and Network Congestion
The architects of early ATM products focused almost exclusively on data
applications and did not fully implement ATM's traffic management capabilities
for voice and video. However, today's mixed-services environment demands
sophisticated traffic management to provide the level of bandwidth utilization
that makes a single ATM network more cost effective than separate voice and
data networks. An ATM network must be capable of delivering high quality
service for all traffic types, notwithstanding high levels of utilization.
Support for Limited Circuit Types
ATM was originally conceived for use only on high quality fiber optic
circuits (e.g., T3/E3, OC-3c and STM-1). At the access layer, however,
circuits come in all varieties, including wireless, copper and satellite. On
these circuits, quality may be affected by atmospheric conditions, interfering
transmissions or defects in the circuits themselves. Transmission on lower
quality or "noisy" circuits frequently results in
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<PAGE>
uncorrectable errors and corruption in the network. The inability of early ATM
products to transmit reliably over lower-quality circuits has limited the use
of ATM to high quality circuits, thereby limiting widespread ATM access.
Need for Additional Product Features
Early ATM access products did not meet the requirements of
telecommunications service providers and end users because they lacked
important features:
Size and Scaleability. Telecommunications service providers, who often house
thousands of pieces of equipment in their central offices, and end users, who
incur costs for each square foot of office space, place a premium on space. To
be attractive to telecommunications service providers and end users, an ATM
access product must offer the required functionality in a compact package. At
the same time, an access product must be scaleable to permit
telecommunications service providers and end users to upgrade performance and
capacity through minimal additions to existing equipment. Early ATM access
products were physically large relative to their capacities.
Reliability. Service interruptions can be disastrous to telecommunications
service providers and end users, who need reliable products designed for
continuous utilization. Redundant features are essential to the reliability of
an access product. Early ATM access products provided little redundancy,
typically limited to power supply. Products deployed to deliver public
services or to carry mission-critical traffic across a private network must
offer multiple levels of redundancy for a broad variety of features, including
central processing unit, clock, backplane and interface cards.
Encryption. ATM uses virtual circuits that convey data from many end users.
As a result, particularly because WANs are being used for commercial
transactions, preserving data privacy is critical to many end users. Early ATM
access products did not address this problem.
Access Interfaces. Early ATM access products generally did not interface
with a wide range of standard communications equipment, such as private branch
exchanges, video decoders, LAN routers, hubs and switches and IBM SNA-based
equipment. This limited the utility of these products because users frequently
employ a variety of non-ATM equipment.
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<PAGE>
THE YURIE SOLUTION
Yurie has developed ATM access products that are designed to meet the
challenges of widespread ATM deployment. These products are capable of
furnishing telecommunications service providers, corporate end users and
government end users with flexible, cost-effective and reliable access to
present and future ATM-based services. The Company's product family includes
the LDR100, released in February 1995, and the LDR200, released in September
1996. The LDR100 and the LDR200 have been engineered with a set of Company-
developed technologies designed to solve the current problems of ATM access.
These technologies include AQueMan, a proprietary queuing algorithm designed
to maximize bandwidth utilization while preserving quality of service, and
LANET, a robust framing protocol that facilitates ATM deployment over low
quality circuits. In addition, the LDR products offer value-added features,
such as compact size, scaleability and reliability. The LDR200 also offers
encryption capabilities and is compatible with a wide range of interfaces.
Quality of Service and Reduced Network Congestion
Yurie developed AQueMan to reduce network congestion while preserving
quality of service. AQueMan is a queuing algorithm that establishes separate
queues for time-sensitive traffic (typically voice) and loss-sensitive traffic
(typically data) and prioritizes traffic within these separate queues. This
technique reduces cell loss for loss-sensitive traffic and cell delay for
time-sensitive traffic, thereby allowing higher quality of service and more
optimal use of bandwidth. Time-sensitive cells are transmitted ahead of loss-
sensitive cells, but have a higher probability of being selectively deleted
during network congestion than loss-sensitive cells. In addition, when
comparing cells of the same traffic type (e.g., voice-to-voice or data-to-
data), AQueMan is able to ensure that more important time-sensitive traffic
will experience less delay and more important loss-sensitive traffic will have
a lower probability of being selectively deleted. With AQueMan, the LDR
products can meet the ATM Forum's quality of service standards for constant
bit rate, variable bit rate and unspecified bit rate traffic management even
during periods of network congestion. Through the use of AQueMan, Yurie's LDR
products substantially reduce the expense of sending information over a WAN by
achieving higher levels of bandwidth utilization.
Support for Many Circuit Types
Yurie developed LANET, a robust framing protocol that enables the transport
of ATM cells on any transmission medium, including low-speed and/or low-
quality circuits. LANET is particularly beneficial in wireless environments
(e.g., satellite, cellular and microwave), which often suffer from high bit
error rates and blocks of errors due to interfering transmissions or adverse
conditions such as inclement weather. LANET provides a framing structure that
allows ATM cells to be "multiplexed" into serial bit streams for transmission
over a single channel. This framing structure, which is scaleable to conform
to the transmission speed of the circuit, provides an embedded network
synchronization capability required for serving isochronous applications such
as voice and real-time video. LANET's simple framing structure makes the
required communication link synchronization relatively easy even in a noisy
environment. The Company's LDR products include a combination of LANET, Reed
Solomon forward error correction and error-tolerant addressing, which enable
the products to significantly increase the reliability of transmission of ATM
cells over noisy circuits.
Other Value-Added Product Features
Yurie's products incorporate a wide variety of value-added features,
including the following:
Size and Scaleability. The LDR products are compact and can be easily
upgraded. A single LDR200 platform occupies significantly less space than
early ATM access products and can be upgraded with minimal additional space
and at minimal cost.
Reliability. Yurie's ATM access products satisfy telecommunications service
providers' need for reliability, offering uninterrupted service through
comprehensive redundancy options, including power, central processing unit,
clock, backplane and interface cards.
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<PAGE>
Encryption. The algorithms embedded in the LDR200 support encryption to meet
end users' network security requirements. Yurie's encryption scheme will allow
communication between secured and unsecured networks, easy generation and
distribution of passwords from a single personal computer or workstation and
adaptability to a variety of existing "block" encryption algorithms and modes
of operation.
Wide Variety of Access Interfaces. Yurie's ATM access products are built to
interface with a wide variety of standard communications equipment including
private branch exchanges, video decoders, LAN routers, hubs and switches and
IBM SNA-based equipment. In addition, the LDR product line is designed to
allow for the easy addition of new interfaces as they emerge.
STRATEGY
Yurie's objective is to become the leading provider of ATM access equipment
to both telecommunications service providers and end users. The key elements
of Yurie's strategy are as follows:
Maintain Technology Leadership. Yurie is a leader in developing new
technology for the ATM access market. The Company's LANET framing protocol was
among the first technologies to facilitate ATM access at low speeds and across
noisy circuits. Yurie's AQueMan queuing algorithm was one of the first to
establish separate queues for voice and data and prioritize traffic types
within each queue to improve quality and maximize bandwidth utilization. Yurie
intends to continue to develop additional product features and network
interfaces while reducing production costs. Yurie plans to continue to commit
substantial resources to its active research and development program so it can
remain in the forefront of ATM product development and maintain its position
as a technology leader in the emerging ATM access market.
Focus on ATM Access Solutions. Most ATM equipment suppliers have focused on
designing and marketing products that can be used as backbone switches at
major switching centers. Yurie, by contrast, has concentrated on developing
ATM access products which act as gateways for non-ATM equipment and
concentrators for lower speed ATM circuits. Yurie believes that by continuing
to focus on this market segment and developing cost effective products
designed specifically to provide ATM access, it can strengthen its current
market position.
Develop Both the Telecommunications Service Provider and Corporate End User
Markets. The Company has successfully marketed its ATM access products to
government end users and believes that the government's demand for these
products will increase. Yurie intends to continue to market its products to
the government through its strategic relationship with AT&T. The Company
believes, however, that the market for ATM access products among
telecommunications service providers and corporate end users has greater
potential than the government end user market. These customers should benefit
greatly from an ATM access platform that can combine voice, video and data on
a single ATM network. Yurie's LDR products are specifically designed to be
attractive to these customers because they can connect to a variety of
standard central office and customer premises equipment. Yurie has implemented
a sales and pricing strategy that targets both the telecommunications service
provider and corporate end user markets. In addition, the Company is expanding
its direct sales force, particularly in the geographic areas where the
telecommunications service provider and corporate end user markets are
concentrated. This direct sales force is comprised of sales personnel who have
all had prior experience in commercial sales of networking and/or
telecommunications products.
Pursue International Markets. Since ATM is an international standard, Yurie
believes that the potential market for its ATM access products is global in
scope. Yurie, therefore, intends to establish a sales and support organization
not only in North America, but also in Europe and Asia, and to develop the
product features and obtain the certifications required to pursue
international markets.
Build and Leverage Strategic Relationships. Yurie has established a
successful strategic relationship with AT&T to develop the U.S. government
markets. The Company is actively seeking to establish similar
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<PAGE>
relationships for other markets with other telecommunications industry
participants, including equipment suppliers and telecommunications service
providers. Once these relationships are established, Yurie intends to leverage
its position in the marketplace by using the marketing expertise, distribution
network, support capabilities and technologies of its strategic allies.
THE LDR PRODUCT FAMILY AND SUPPORTING SERVICES
Yurie's LDR family of ATM access products includes the LDR100, the LDR200
and the LDR5. All of Yurie's LDR products are based on an ATM "cell"
architecture that allows flexible transmission of all traffic types. The
following table provides an overview of the Company's LDR products:
<TABLE>
<CAPTION>
NUMBER OF BUS
PLATFORM USER SLOTS BANDWIDTH DIMENSIONS
-------- ---------- ---------- ------------------------
<S> <C> <C> <C>
LDR200 11 1.2 Gbps 7"H x 10.5"D x 19"W
LDR100S 10 64 Mbps 12.25"H x 15.25"D x 19"W
LDR100C 3 64 Mbps 8.75"H x 10"D x 19"W
LDR5 2 1.544 Mbps 3.5"H x 10"D x 19"W
</TABLE>
The LDR100
Yurie's first access product, the LDR100, was originally built as a
prototype to demonstrate the AQueMan queuing algorithm and the LANET framing
protocol. The LDR100 was designed to meet the needs of highly technical users.
Beginning in 1995, the LDR100 was delivered, through AT&T, to a variety of
U.S. government agencies and their support contractors for deployment in
mission-critical environments, including the U.S. military operations in Haiti
and Bosnia. In addition to ships, aircraft and ground vehicles, the LDR100 has
been deployed in centralized locations, such as telecommunications equipment
closets and desktops.
To further ensure quality over a wide variety of circuit types, the LDR100
employs Reed Solomon forward error correction, an industry standard method of
detecting and correcting transmission errors, and a simple error-tolerant
addressing scheme that ensures highly reliable communications over circuits of
varying speeds and quality.
The LDR100, with a bus bandwidth of 64 megabits per second, aggregates high
speed ATM LAN traffic and non-ATM voice and data traffic onto a low-speed ATM
WAN. Where bandwidth utilization is especially critical, the LDR100 compresses
voice prior to transmission over the WAN. The Company has shipped more than
150 LDR100 access concentrators since February 1995.
The following table describes the key features of the LDR100:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS PORT 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 (RS232, 4 75bps--1.544Mbps ATM/LANET, frame relay,
RS422, RS530, V.35) synchronous, asynchronous
Analog Compressed 2 8kbps, 16kbps
Voice 2 Wire POTS, Station, Office
TAXI 1 100/140 Mbps ATM
</TABLE>
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<PAGE>
The LDR200
Yurie's second generation product, the LDR200, was first shipped in
September 1996. The LDR200 is designed to be easily deployed by
telecommunications service providers, corporate end users and government end
users. The LDR200 incorporates AQueMan and LANET, along with Reed Solomon
forward error correction and error-tolerant addressing. In addition, the
LDR200 expands the capabilities of the LDR100 by offering higher throughput,
greater port density, a greater variety of interface types, encryption
capabilities, enhanced scaleability and higher speed.
The LDR200 has a bus bandwidth of 1.2 gigabits per second and is scaleable
up to 11 interface module slots. It also provides enhanced reliability,
offering redundancy for the power, central processing unit, clock, backplane
and interface cards. The LDR200 conforms to carrier equipment installation
requirements, such as Bellcore's Network Equipment Building Standards (NEBS).
Additionally, the LDR200 complies with the ATM Forum's User Network Interface
standard and the IISP 1.0 network/network interface standards, providing
connectivity and interoperability with ATM backbone switches.
Currently, the LDR200 supports high-speed WAN connections via DS3 cards. It
uses DS1 cards to support structured and unstructured service in compliance
with the ATM Forum's circuit emulation specification as well as ATM cell-
bearing capabilities. The Company plans to offer other interface cards in the
future, including OC-3c, High Speed, 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 PORT SPEEDS PROTOCOLS SUPPORTED
--------------------- ----- ------------------ ----------------------------
<S> <C> <C> <C>
DS3 2 45 Mbps ATM
Channelized T1 (DS1) 6 1.544 Mbps ATM, TDM, Frame Relay,*
Voice Compression*
Serial Data* (RS232, 6 300 bps-2.048 Mbps ATM/LANET, Frame Relay,
RS422, RS530, V.35) Synchronous, Asynchronous,
HDLC
High Speed Interface* 1 up to 30 Mbps ATM/LANET
(RS422 Serial and
Parallel)
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 64 Kbps 2 Wire POTS, Station, Office
E1* 6 2.048Mbps ATM, TDM, Frame Relay,
Voice Compression
E3* 2 34Mbps ATM
TAXI 1 100/140Mbps ATM
Ethernet* 6** 10Mbps** ATM (RFC 1483)
</TABLE>
- --------
* In development.
** One port can be run at 100Mbps.
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<PAGE>
The LDR5
To augment its product family, Yurie has recently entered into an agreement
with DataLabs, Inc., under which Yurie has a non-exclusive license to market
DataLabs' Virtual Access 1000 product on a private label basis as the LDR5.
The LDR5 is an ATM access device that features full "CSU/DSU" capabilities,
thereby allowing frame relay and TDM equipment to interface with an ATM
network. The LDR5 offers low-cost ATM access for standard customer premises
equipment. It is designed for use in branch offices and other settings that do
not require the more sophisticated LDR100 or LDR200 access products. The LDR5
enables the Company to offer a full range of ATM access products, but Yurie
does not expect sales of the LDR5 to be significant.
The following table describes the key features of the LDR5:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS PORT SPEEDS PROTOCOLS SUPPORTED
---------------------- ----- ---------------- ------------------------
NETWORK:
<S> <C> <C> <C>
T1 (DS1) 1 1.544 Mbps ATM
<CAPTION>
USER:
<S> <C> <C> <C>
Channelized T1 (DS1) 1 1.544Mbps Frame relay, TDM
Serial Data 1 56kbps-1.544Mbps Frame relay, synchronous
(RS422, RS530, V.35)
</TABLE>
Product Management Protocol; Pricing
Each of the Company's three LDR products can be managed using any software
package supported by the Simple Network Management Protocol ("SNMP"), such as
HP OpenView and SunNet Manager. The LDR200 can also be managed using a simple
"dumb" terminal interface.
The LDR100 and LDR200 products sell for prices ranging from $20,000 to
$90,000, and the LDR5's price ranges from $5,000 to $10,000. Actual price
depends on the configuration of the product selected.
Product Support
The Company offers comprehensive customer support for its LDR product line.
The Company's service organization offers installation, preventative
maintenance, multi-vendor services, repair, training and a variety of other
advanced services designed to enhance the reliability of a customer's
telecommunications network. The LDR200 is sold with a standard one-year
warranty. The Company's customer support representatives are located in
Lanham, Maryland and currently are available from 8:00 a.m. to 8:00 p.m.
Eastern time, Monday through Friday. At other times, the Company's customer
support representatives can page an on-call technical support person to
respond to technical support requests. Beginning in 1997, extended service for
the Company's products will be provided by a third party. The third-party
service provider will be available 24 hours a day, seven days a week to
supplement the Company's service organization.
AT&T RELATIONSHIP
The Company has had a significant strategic relationship with AT&T since
1994. Pursuant to this relationship, Yurie and AT&T entered into the AT&T
Agreement in August 1995. The AT&T Agreement, as amended, provides for the
joint technical evaluation and marketing of the LDR products by Yurie and
AT&T, and grants AT&T a three-year exclusive right to market and sell the
LDR100 and the LDR200 solely in U.S. federal, state and local government
markets, as well as certain foreign government markets. Sales pursuant to the
AT&T Agreement have generated a majority of the Company's revenue to date.
Under the AT&T Agreement, AT&T has guaranteed minimum annual purchase orders
for the LDR200 of $6.5 million, $10.0 million and $10.0 million for calendar
years 1996, 1997 and 1998, respectively. In the event that the Company fails
to fulfill any of its material obligations under the AT&T Agreement, AT&T
could
34
<PAGE>
terminate the contract. Such termination would have a material adverse effect
on the Company's business, results of operations and financial condition.
CUSTOMERS AND END USERS
To date, the majority 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 25 government organizations and commercial customers that have
purchased or used the Company's products are:
Advanced Research Project Agency/Defense Mitre Corporation
Information Systems Agency Joint Booz-Allen &
Program Office Hamilton, Inc.
U.S. Army Communications Electronics Applied Innovation,
Command Inc.
Defense Aerospace Reconnaissance OneLine Management,
Organization Inc.
North Atlantic Treaty Organization Lunex Group, LLC
Naval Research Laboratory
Although there are more than 25 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 January
14, 1997, 51 Company employees were engaged in research and development
programs, including hardware and software development, test and engineering
support personnel. Approximately two-thirds of the Company's research and
development employees hold masters or higher degrees. The Company believes that
recruiting and retaining qualified engineering personnel will be essential to
its continuing success.
SALES, MARKETING AND DISTRIBUTION
In order to pursue customers in the telecommunications service provider and
corporate end user markets, the Company has expanded its direct sales force by
hiring sales personnel who have all had experience in commercial sales of
networking and/or telecommunications products. To allow its sales
35
<PAGE>
force to concentrate on commercial markets, the Company will continue to rely
on AT&T to market and sell the LDR products in U.S. federal, state and local
government markets, as well as in certain foreign government markets. As of
January 14, 1997, the Company had 13 sales personnel in its direct sales
organization. Currently, sales offices are located in New York, Phoenix, San
Francisco, Los Angeles, Hartford, Chicago, Dallas, Denver, 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 Seattle, Boston, Houston, Atlanta, Miami and Pittsburgh, all
of which are expected to be located in the homes of sales personnel.
International sales offices are also planned for 1997 in the U.K. and
Singapore.
Direct Sales
The Company continues to expand its direct sales force to market the
Company's products and to ensure direct contact with its customers. The
primary roles of the Company's sales force are (i) to provide support to AT&T
and seek additional strategic partners, (ii) to support end users by
addressing complex ATM access problems and (iii) to differentiate the features
and capabilities of the Company's LDR products from competitive products. In
addition, the Company believes that its investment in a direct sales force
will help the Company to monitor changing customer requirements, competing
products and the development of industry standards.
Yurie's 13 person direct sales force includes both sales persons and sales
engineers. Sales engineers provide support and services for the Company's
sales persons and for existing customers. Most of the members of the direct
sales force have had significant prior experience in sales with industry-
leading networking companies. The average Yurie sales person has had over 10
years of sales experience, and many of the sales persons have had experience
selling and managing end user, telecommunications service provider and
strategic private label accounts.
Marketing
The Company has recently established a marketing program to support the sale
and distribution of its products. The objective of this program is to inform
potential strategic allies and end users about the capabilities and benefits
of the Company's products. The marketing program includes participation in
industry trade shows and technical conferences, technology seminars,
publication of customer newsletters and technical and educational articles for
the trade press and other industry journals. In addition, the Company
communicates frequently with its installed base of end users regarding
evolving applications for the Company's products.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of materials
planning and procurement, test and manufacturing engineering, module testing
and quality control. Yurie relies on one manufacturer, Sanmina Corporation, to
manufacture the majority of its common equipment circuit packs, backplanes,
chassis and printed circuit board assemblies used in the Company's products.
Sanmina Corporation manufactures most of these products and assembles them at
its New Hampshire facility. Yurie does not have a contract with Sanmina
Corporation or any other manufacturer, and all of the Company's products are
manufactured pursuant to individual purchase orders. The Company believes that
its orders did not represent a significant portion of Sanmina Corporation's
total business in 1996. In the past, Yurie has also used several other
manufacturers as supplemental sources for backplanes, chassis and printed
circuit boards, and may use these manufacturers in the future as necessary.
The Company's reliance on a limited number of manufacturers may reduce the
Company's flexibility and responsiveness to changes. The Company believes,
however, that by using a limited number of manufacturers, it is in a better
position to reduce product costs, acquire additional capacity and reduce its
capital investment.
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<PAGE>
Final testing of the Company's products is performed by the Company at its
Lanham, Maryland facility. All products are rigorously tested using automated
test equipment prior to shipment to customers. All circuit boards are tested
individually. As each customer's network requires different product features
to provide the desired functionality, the products are not assembled into
complete units prior to shipment. Each feature is packaged and shipped
separately to the customers, who use instructions provided by Yurie to
configure the products at their locations. Yurie warrants all of its products
to be free from defects for a period of one year from the date of shipment.
Generally, the Company uses industry standard components for its access
products. It uses field programmable gate arrays with erasable programmable
memory rather than custom integrated circuits in order to maximize its ability
to customize products quickly for telecommunications service providers and add
product features. Certain components used in the Company's products, including
microprocessors and communications chips manufactured by PMC-Sierra, Inc.,
Hewlett-Packard Company, Integrated Device Technology, Inc., Xilinx, Inc. and
Altera Corporation, are currently available from only one supplier. In the
past, there have been shortages of certain of these components because of
vendor production problems and the inability of suppliers to increase delivery
rates. In addition, the Company has experienced shortages of certain other key
components. These component shortages and delays have resulted in delays in
the shipment of the Company's products, and the component shortages have also
resulted in higher component costs. When these components are in short supply,
Yurie must compete for them with larger companies that often have longer
established relationships with these vendors. Certain components that
currently are readily available may become difficult to obtain in the future.
COMPETITION
While the market for ATM access products is still evolving, the networking
industry as a whole is intensely competitive. Among the companies who have
already produced ATM access products are ADC Kentrox and OnStream Networks,
which was recently acquired by 3Com. In addition, Sahara Networks is
reportedly developing an ATM access product. Other companies, including Cisco
Systems/StrataCom, Cascade Communications, General DataComm and Newbridge
Networks, have already developed networking equipment that may be competitive
with the Company's products. The Company expects that some of these companies
and other networking and computer systems companies may in the future announce
plans to develop ATM access products that are directly competitive with the
Company's products.
The Company does not intend to compete solely on the basis of price.
Instead, it intends to compete by offering superior features, performance,
reliability and flexibility at competitive prices. Yurie's management is
adopting this strategy because equipment price is only one component in
overall communications costs. WAN bandwidth and network operating expenses
generally exceed the total cost of the network equipment for a typical
customer.
As competition in the ATM access market increases, the Company believes that
the ATM access industry may be characterized by the intense price competition
similar to that present in the broader networking market. In response to this,
the Company has already implemented cost improvement measures and will
continue to seek ways to improve upon the LDR products' price-to-performance
ratio.
INTELLECTUAL PROPERTY, PROPRIETARY INFORMATION AND TECHNICAL KNOW HOW
The Company believes that its future success depends, in part, upon its
ability to develop and protect proprietary technology contained in its
products. The Company currently relies upon a combination of trade secret,
copyright, patent and trademark laws, as well as contractual restrictions, to
establish and protect proprietary rights in its products. The Company also has
entered into nondisclosure, noncompete and invention assignment agreements
with substantially all of its employees and nondisclosure agreements
37
<PAGE>
with certain of its suppliers, distributors and customers so as to limit
access to and disclosure of its proprietary information. There can be no
assurance that these statutory and contractual arrangements will prove
sufficient to deter misappropriation of the Company's technologies or
independent third-party development of similar technologies. The Company also
possesses and relies upon a valuable body of technical know how related to the
design and operation of its products.
The U.S. Patent and Trademark Office recently issued U.S. Patent No.
5,568,482 to the Company for its LANET protocol. LANET is a significant
technological invention that allows ATM to run over transmission media of any
speed or quality. The Company intends to provide the technology covered by the
LANET patent at no cost to the public because it believes that making the
LANET technology freely available to the public would have greater benefits
than licensing the technology to third parties or preserving the technology
solely for its own use. The Company, however, retains its patent rights in the
LANET technology, although third parties are free to use the technology in
unmodified form for their own purposes. The Company anticipates that making
LANET available at no cost to the public will create demand for and facilitate
widespread use of LANET and increase name recognition for Yurie as the
developer of LANET.
Two additional patent applications have been filed for (i) the AQueMan
algorithm developed by the Company to regulate and prioritize the flow of
traffic in ATM access products and (ii) error-tolerant addressing to enhance
the ability to transport ATM cells over noisy links (e.g., wireless circuits).
The Company intends to file another patent application within the next six
months for a method to simplify authentication and key exchange in the
establishment of secure links. The Company does not now intend to make any of
the technologies described in these patent applications available to the
public at no cost. There can be no assurance that the Company's patent
applications will result in issued patents or that the Company's existing
patent or future patents will be upheld as valid or prevent the development of
competitive products. The failure of the Company to obtain a patent for
AQueMan, or to be granted patents for any of its other Company-developed
technologies, could have a material adverse effect on the Company's business
and its growth prospects.
FACILITIES
The Company's principal offices are located in a 45,000 square foot facility
leased by the Company at 10000 Derekwood Lane, Lanham, MD (a suburb of
Washington, DC). Approximately 20.0% of the space in this facility is used or
reserved for manufacturing, product development and testing; the balance is
used or reserved for sales, marketing and other general and administrative
activities. In December 1996, the building in which the Company's principal
offices are located was sold. In connection with the sale, the Company and the
purchaser of the building agreed to an amendment to the Company's lease, which
changes the expiration date of the lease from August 31, 1999 to June 30,
1997. The amendment also gives the purchaser the right to terminate the lease
with 60 days notice on either March 1, 1997 or April 1, 1997, and gives Yurie
the right to terminate the lease upon 30 days notice on either April 1, 1997
or May 1, 1997. The Company will either renegotiate the lease or relocate to
another facility. The Company believes that relocation would not materially
disrupt its operations.
The Company also leases 10,000 square feet of space for its federal division
at 4601 Presidents Drive, Suite 210, Lanham, MD, and sales office space at
3420 East Shea Boulevard, Phoenix, Arizona. Yurie believes that its present
facilities are well maintained and in good operating condition although
additional facilities may be needed to meet anticipated levels of operations
in the foreseeable future.
EMPLOYEES
On January 14, 1997, Yurie employed 138 individuals on a full-time
equivalent basis. Of these, 51 were involved in engineering, 24 were working
in applications engineering in the federal division, 22 were employed in
sales, marketing and customer support, 21 were engaged in manufacturing, and
the remaining 20 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.
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<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............ 57 Vice President, Engineering
Anthony J. DeMambro..... 54 Vice President, Operations
William F. Flynn........ 40 Vice President, Federal Division
Joseph Miller........... 40 Vice President, Marketing
John J. McDonnell....... 50 Corporate Counsel and Secretary
Kenneth D. Brody(1)..... 53 Director
Herbert Rabin(1)........ 68 Director
R. James Woolsey(1)..... 55 Director
William J. Perry........ 69 Director
Henry W. Sterbenz(2).... 53 Vice President, Quality
Catherine A. Graham(2).. 36 Vice President, Finance
</TABLE>
- --------
(1) Member of the Audit Committee and Compensation Committee.
(2) Key employee.
Dr. Kim is the founder of Yurie and has served as Chief Executive Officer and
a Director of the Company since its inception in February 1992, as well as
President from its inception until March 1996. From 1990 to 1993, Dr. Kim
served as Senior Project Engineer with AlliedSignal Technical Services
Corporation, a subsidiary of AlliedSignal Inc. Previously, he served as an
Engineering Consultant with SFA, Inc., a U.S. Department of Defense contractor
and as a Nuclear Submarine Officer in the U.S. Navy. Dr. Kim holds a Ph.D. in
Reliability Engineering from the University of Maryland, and an M.S. in
Technical Management and a B.E.S. in Electrical Engineering and Computer
Science from The Johns Hopkins University.
Mr. Li has served as President and Chief Operating Officer of the Company
since March 1996, a Director since 1995, and Executive Vice President and Chief
Technical Officer from August 1994 through March 1996. Mr. Li was employed by
Yurie on a part-time basis from its inception in 1992 through August 1994. From
1991 to 1994, Mr. Li was Director of Strategic Planning at WilTel, Inc., an
interexchange carrier, and from 1988 to 1991, he was Manager of Fiber Access
Systems Development for Bell Northern Research, Inc., a subsidiary conducting
technological research and development for Northern Telecom Limited. Mr. Li
holds a B.E.S. in Electrical Engineering from The Johns Hopkins University.
Mr. Shigemura has served as Senior Vice President, Sales and Marketing and a
Director of the Company since May 1996. From 1993 to 1996, Mr. Shigemura was
Vice President, Marketing and Services and an executive officer for Premisys
Communications, Inc., a manufacturer of integrated access products for
telecommunications service providers, and from 1990 to 1993, he was Director,
Product Line Management for Northern Telecom Limited, a telecommunications
equipment manufacturer. Prior to that, he served as an Area Vice President,
Sales for General DataComm Industries, Inc., a provider of wide area network
and telecommunication products. Mr. Shigemura holds a B.S. in Marketing and
Finance from the University of Southern California.
39
<PAGE>
Mr. Marantz has served as Vice President, Finance and Administration, Chief
Financial Officer and Treasurer since August 1996. From 1993 to 1996, he was
Director, Mergers and Acquisitions, of Global One, the joint venture among
Sprint Corporation, a telecommunications service provider, France Telecom, the
French telephone company, and Deutsche Telekom AG, the German telephone
company. From 1992 to 1993, he was an independent financial advisor. From 1991
to 1992, he was with LiTel Communications, Inc., an interexchange carrier,
first as a division CFO and then as Vice President of Corporate Development.
Prior to 1991, Mr. Marantz held Vice President positions with several
investment banking firms and was Chief Financial Officer of Omninet
Corporation, a satellite communications company. Mr. Marantz holds S.B. and
M.S. degrees in aeronautics and astronautics from the Massachusetts Institute
of Technology and Stanford University, respectively, and an M.B.A. from the
Harvard Business School.
Mr. Chow has served as Vice President, Engineering of the Company since June
1996. Prior to joining the Company, he spent 30 years with Bell Northern
Research, Inc. a subsidiary conducting technological research and development
for Northern Telecom Limited, where his last position was Director, Broadband
Systems Development. Mr. Chow holds an M.S. and a B.S. in Electrical
Engineering from the University of New Brunswick and the University of British
Columbia, respectively.
Mr. DeMambro has served as Vice President, Operations of the Company since
October 1996. From 1993 until to joining the Company, he was Vice President of
Operations for Steinbrecher Corporation, now Tellabs Wireless, Inc. From 1991
to 1993, he was Director of Operations for Aviv Corporation, a manufacturer of
data storage products. From 1989 to 1991 he was Vice President of
Manufacturing for EMC/2/ Corporation, also a manufacturer of data storage
products.
Mr. Flynn has served as Vice President, Federal Division of the Company
since July 1996, and was Director of Government Programs from May 1994 through
June 1996. From 1990 to 1994, he was a Senior Manager, Program Development and
Technical Liaison for McDonnell Douglas Aerospace, a manufacturer of aerospace
systems. Previously, Mr. Flynn was Marketing Manager, Exploitation Systems for
Unisys Defense Systems and a Naval Flight Officer in the U.S. Navy. Mr. Flynn
holds an M.B.A. from Averett College and a B.A. in Journalism from the
University of South Carolina.
Mr. Miller has served as Vice President, Marketing since May 1996. From 1993
to 1996, he was Director of Marketing for Premisys Communications, Inc., a
manufacturer of integrated access products for telecommunications service
providers. From 1986 to 1993, he held various management positions at Network
Equipment Technologies, a network equipment company. Mr. Miller holds a B.S.
in Business from Golden Gate University.
Mr. McDonnell has served as Corporate Counsel and Secretary of the Company
since June 1996 and is presently employed on a part time basis. He founded
Coagulation Diagnostics, Inc., a medical diagnostics device company, in 1995,
and serves as its Chief Executive Officer. From 1990 to 1995, he was Counsel
with Reed Smith Shaw & McClay, a law firm. He previously served as Executive
Vice President and General Counsel for Fairchild Space and Defense
Corporation, Senior Vice President and General Counsel for Fairchild
Industries, Inc. and Principal Deputy General Counsel of the Department of the
Navy. Mr. McDonnell serves on the Boards of Directors of Geraghty and Miller,
Inc., an environmental engineering firm and Sequoia National Bank. Mr.
McDonnell holds an A.B. from Boston College and a J.D. from Fordham Law
School.
Mr. Brody has served as a Director of the Company since June 1996. Mr. Brody
is the founding partner of Winslow Partners LLC, a private equity investment
firm in Washington, D.C. From 1993 to early 1996, Mr. Brody served as
President and Chairman of the Export-Import Bank of the United States. Prior
thereto, he was a Partner at Goldman, Sachs & Co., where he served as a member
of the firm's Management Committee and founded and headed the high technology
investment banking group. Mr. Brody is a director of Alex. Brown Incorporated.
Alex. Brown & Sons Incorporated, one of the representatives of the
underwriters for this offering, is a wholly-owned subsidiary of Alex. Brown
Incorporated. Mr. Brody holds an M.B.A. from the Harvard Business School and a
B.S. in Electrical Engineering from the University of Maryland.
40
<PAGE>
Dr. Rabin has served as a Director of the Company since 1995. Dr. Rabin is
Director of the Engineering Research Center and Associate Dean of the College
of Engineering at the University of Maryland, where he has been Professor of
Electrical Engineering since 1983. He was Deputy Assistant Secretary of the
Navy (Research, Applied and Space Technology) from 1979 through 1983 and
Associate Director of Research at the Naval Research Laboratory from 1971
through 1979. He currently serves as a Director of General Research
Corporation International and the National Technological University. Mr. Rabin
holds a Ph.D., an M.S. and a B.S. in Physics from the University of Maryland,
the University of Illinois and the University of Wisconsin, respectively.
Mr. Woolsey has served as a Director of the Company since April 1996. Mr.
Woolsey served the United States as the Director of Central Intelligence from
1993 to 1995, after which he returned to the law firm of Shea & Gardner, in
Washington, DC, where he became a partner in 1979. Mr. Woolsey is a Director
of United States Fidelity & Guaranty Company and Sun Healthcare Group, Inc.
Mr. Woolsey holds an L.L.B. from Yale Law School, an M.A. from Oxford
University and a B.A. from Stanford University.
Dr. Perry has served as a Director of the Company since January 1997. He
served as the Secretary of Defense from 1994 to 1997, and served as Deputy
Secretary of Defense from 1993 to 1994. From 1989 to 1993, Dr. Perry was a
professor in the School of Engineering at Stanford University, and also served
as the Chairman of Technology Strategies Alliances and as a Co-Director of
Stanford's Center for International Security and Arms Control. Dr. Perry holds
a Ph.D. in Mathematics from Penn State University and an M.S. and B.S. in
Mathematics 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 and Dr. Perry 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 Dr. Rabin and Messrs. Brody 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 Dr. Rabin (Chairman) and Messrs. Brody and Woolsey.
41
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth information concerning
compensation for services rendered in all capacities to the Company by the
Chief Executive Officer and the three most highly compensated executive
officers of the Company other than the Chief Executive Officer for the fiscal
year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION(1)
--------------------------------- ---------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED ALL OTHER
POSITIONS(2) SALARY BONUS COMPENSATION(3) STOCK AWARDS COMPENSATION
- ------------------ -------- -------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Jeong H. Kim(4)......... $206,112 $656,865 $41,346 -- --
Chief Executive Officer
Kwok L. Li(4)........... 140,851 250,077 25,962 $154,000(5) $15,940(6)
President and Chief
Operating Officer
Henry W. Sterbenz(7).... 29,784 15,000 577 -- --
Vice President, Quality
William F. Flynn(8)..... 107,164 10,000 11,482 -- --
Vice President, Federal
Division
</TABLE>
- --------
(1) There were no stock options granted to the named executive officers in
1995.
(2) Messrs. Shigemura, Chow and Marantz, who joined the Company on May 6,
1996, July 8, 1996 and August 12, 1996, respectively, along with Dr. Kim
and Mr. Li, are expected to be included in the Fiscal 1996 Summary
Compensation Table.
(3) Includes payments for unused vacation and sick leave and, for Dr. Kim and
Messrs. Li and Flynn, the Company's contribution to their pension plans.
(4) The Company has entered into employment agreements with Dr. Kim and Mr.
Li. See "--Employment Agreements."
(5) Represents 4,000,000 shares of Common Stock granted to Mr. Li in March
1995. See "--Stock Grants."
(6) Represents reimbursed relocation expenses and applicable associated taxes.
(7) Mr. Sterbenz joined the Company in September 1995.
(8) Mr. Flynn was named Vice President, Federal Division and an Executive
Officer in July, 1996. Previously, he served as Director of Government
Programs for the Company.
42
<PAGE>
STOCK OPTION PLAN
Under the Company's Stock Option Plan, stock option awards may be made to
employees, consultants, directors and officers of the Company. The purpose of
the Stock Option Plan is to secure for the Company and its shareholders the
benefits arising from capital stock ownership by key individuals, who are
expected to contribute to the Company's future growth and services. Further,
the Stock Option Plan will enable to the Company to attract and retain
competent personnel.
The Stock Option Plan was adopted by the Company's Board of Directors on
January 31, 1996 and amended on April 2, 1996, July 18, 1996, September 6,
1996 and December 20, 1996. A total of 5.0 million shares have been reserved
for issuance under the Stock Option Plan. The Stock Option Plan will remain
effective until all shares available for issuance under the Plan have been
issued, unless sooner terminated by action of the Board of Directors. The
number and kind of shares subject to the Stock Option Plan may be adjusted by
the Board to prevent dilution or enlargement of rights in the event of a
merger, consolidation, sale of all or substantially all of the assets of the
Company, reorganization, reclassification, stock dividend, stock split,
reverse stock split or other similar distribution with respect to the
outstanding shares of Common Stock. No individual may be granted options to
purchase more than 1,500,000 shares of Common Stock in any year under the
Stock Option Plan.
The Stock Option Plan is administered by the Board of Directors, although
the Board is in some cases authorized (and in some cases required) 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) when the option becomes exercisable; (iii)
the duration of the option and (iv) any other appropriate term of the option
agreement. The Board (or the committee) also may accelerate or extend the time
at which any option may be exercised. The Stock Option Plan requires that the
exercise price of each option be set at the fair market value of the Common
Stock on the effective date of the grant.
The Stock Option Plan, as amended, provides for automatic annual grants to
independent directors of 5,000 stock options on June 30 of each year beginning
on June 30, 1997. In addition, the Board (or the committee) may grant options
to incoming directors upon their agreement to serve on the Board. The Stock
Option Plan also provides that in the event of a transaction that constitutes
a Change of Control (as defined in the Plan) of the Company, each outstanding
option will automatically become exercisable as to all of the option shares
immediately prior to the effective date of such transaction, subject to
certain exceptions.
As of January 30, 1997, options to acquire an aggregate of 3,386,722 shares
of Common Stock were outstanding pursuant to the Stock Option Plan. In
general, these options vest over a four-year period from their grant date and
expire after a specified period not to exceed ten years. Neither Dr. Kim or
Mr. Li hold any options to purchase shares of Common Stock under the Stock
Option Plan. Other executive officers, directors and key employees have been
granted options to purchase shares under the Stock Option Plan as of January
30, 1997 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; Herbert Rabin--121,000 shares;
R. James Woolsey--100,000 shares; Kenneth D. Brody--75,000 shares; William J.
Perry--75,000 shares; Henry W. Sterbenz--50,000 shares; and Catherine A.
Graham--50,000 shares. These options have exercise prices ranging from $.52 to
$9.00 per share and a weighted average exercise price of $1.22. All of these
options vest periodically through January 2001.
On January 14, 1997, the Company granted options to acquire 50,000 shares of
Common Stock at an exercise price of $9.00 per share to In Y. Chung, a
consultant to the Company. See "Certain Transactions."
The options granted under the Stock Option Plan are not incentive stock
options within the meaning of Section 422 of the Internal Revenue Code.
43
<PAGE>
STOCK PURCHASE PLAN
In December 1996, the Board of Directors and the stockholders of the Company
approved the adoption of the Yurie Systems, Inc. Employee Stock Purchase Plan
(the "Stock Purchase Plan"). A total of 200,000 shares of Common Stock have
been reserved for issuance under the Stock Purchase Plan. Employees of the
Company will be eligible to participate in the Stock Purchase Plan if they
have been employed by the Company for at least 90 consecutive days. Employees
who own 5% or more of the outstanding capital stock of the Company will not be
eligible to participate. The Stock Purchase Plan will permit eligible
employees to purchase Common Stock through payroll deductions, at a price
equal to 85% of the fair market value of the Common Stock at the time of
purchase.
The Stock Purchase Plan will be administered by the Board of Directors or by
a committee appointed by the Board of Directors, which shall establish such
rules and procedures as are necessary or advisable to administer the Stock
Purchase Plan. The Stock Purchase Plan will become effective on the date on
which a registration statement on Form S-8 filed by the Company with respect
thereto becomes effective. The Stock Purchase Plan will remain effective until
all the shares available for issuance under the Plan have been issued, unless
sooner terminated by action of the Board of Directors.
401(K) PLAN
Effective January 1, 1996, the Company adopted a 401(k) Plan (the "401(k)
Plan"). Pursuant to the 401(k) Plan, participants may contribute up to 10%
(12% as of April 1997) of their compensation, not to exceed a statutorily
prescibed annual maximum, to the 401(k) Plan. The 401(k) Plan provides for the
Company to make dollar-for-dollar matching contributions to the Plan on behalf
of each participant up to a maximum of 5% of the participant's base salary and
discretionary profit-sharing contributions. An employee must have completed
one year of service (as defined in the 401(k) Plan) in order to participate in
the 401(k) Plan.
Under the 401(k) Plan, each participant vests immediately in his or her
salary contributions and vests in the Company's contributions at the rate of
20% per year of service beginning with two years of service. Distributions may
be made from a participant's account in the form of a lump-sum, installments
or direct rollover upon termination of employment, retirement, disability,
death or attainment of the age 59 1/2, or in the form of a lump-sum
distribution in the event of financial hardship. The 401(k) Plan is intended
to qualify under Section 401 of the Code so that contributions by employees or
by the Company to the 401(k) Plan, and income earned on plan contributions,
are not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made.
The 401(k) Plan has been amended to provide that the Company's matching
contributions will take the form of Common Stock and to provide that employees
may become participants in the 401(k) Plan for the purpose of making salary
contributions as of the first day of the quarter following their date of hire.
The Board has reserved a total of 200,000 shares of Common Stock for issuance
in connection with the 401(k) Plan.
STOCK GRANTS
The Company has granted shares of stock as compensation to certain of its
officers and employees. On May 22, 1995, the Company issued (i) 4,000,000
shares of Common Stock to Kwok L. Li, (ii) 200 shares of Common Stock to each
of Joseph Aviles, Jr., David Brooks, Kawaldeep Chadha, John Randy Crout,
William F. Flynn, Lawrence Foster, Erin Holiday, Yvonne Julien, Cynthia Kim,
William Marshall, Arthur Mobley and Patrick O'Connor and (iii) 200,000 shares
of Common Stock to Yung-Lung Ho. On June 14, 1995, the Company issued 4,000
shares of Common Stock to Arthur Mobley and 2,000 shares of Common Stock to
David Brooks. See "--Summary Compensation Table."
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Dr. Kim, its Chief
Executive Officer, and Mr. Li, its President, on July 31, 1996. Pursuant to
the Company's employment agreement with Dr. Kim (the "Kim Employment
Agreement"), Dr. Kim will receive an annual salary of $200,000 and bonus of
$40,000 or such other amount as the Board of Directors may determine. Dr.
Kim's employment is for a one-year term that renews automatically unless
terminated by either party. If the Kim Employment Agreement is terminated by
the Company for any reason other than "disability" or "cause" or by Dr. Kim
44
<PAGE>
for any reason other than "good reason" (as those terms are defined in the Kim
Employment Agreement), the Company must make a cash lump sum severance payment
equal to Dr. Kim's base salary (as defined in the Kim Employment Agreement)
and a "bonus amount" for the then-current year, and continue his benefits for
up to one year. Throughout his employment, Dr. Kim is bound by a covenant not
to compete, which prevents him from engaging in any business in the United
States in which the Company is then involved. Dr. Kim will continue to be
bound by this covenant not to compete for one year after his termination. The
Kim Employment Agreement also provides for certain registration rights with
respect to Dr. Kim's shares of Common Stock pursuant to a registration rights
agreement (the "Kim Registration Rights Agreement"). See "Shares Eligible for
Future Sale."
Pursuant to the Company's employment agreement with Mr. Li (the "Li
Employment Agreement"), Mr. Li will receive an annual salary of $150,000 and
bonus of $30,000 or such other amount as the Board of Directors may determine.
Mr. Li's employment is for a one-year term that renews automatically unless
terminated by either party. If the Li Employment Agreement is terminated by
the Company for any reason other than "disability" or "cause" or by Mr. Li for
any reason other than "good reason" (as those terms are defined in the
Li Employment Agreement), the Company must make a cash lump sum severance
payment equal to Mr. Li's base salary for the then-current year and a "bonus
amount" (as defined in the Li Employment Agreement), and continue his benefits
for up to one year. Throughout his employment, Mr. Li is bound by a covenant
not to compete, which prevents him from engaging in any business in the United
States in which the Company is then involved. Mr. Li will continue to be bound
by this covenant not to compete for one year after his termination. The Li
Employment Agreement also provides for certain registration rights with
respect to Mr. Li's shares of Common Stock pursuant to a registration rights
agreement (the "Li Registration Rights Agreement"). See "Shares Eligible for
Future Sale."
COMPENSATION OF DIRECTORS
During 1995 and 1996, each of the Company's independent directors received
$5,000 per year for serving as members of the Board of Directors, and the same
amount is expected to be paid for service in 1997. During 1996, Dr. Rabin and
Messrs. Woolsey and Brody received options to purchase 121,000, 100,000 and
75,000 shares of Common Stock, respectively. During January 1997, Dr. Perry
received options to purchase 75,000 shares of Common Stock. These options have
a weighted average exercise price of $2.23 and vest periodically over 4 years.
In addition, Mr. Brody purchased an option for 1,000,000 additional shares of
Common Stock from Dr. Kim. See "Certain Transactions" and "Shares Eligible For
Future Sale." The Company has amended its Stock Option Plan to provide for
annual automatic option grants of 5,000 options to its independent directors.
The Stock Option Plan also allows the Board (or a committee thereof) to grant
options to incoming directors upon their agreement to serve on the Board.
Directors also are reimbursed for travel and other expenses of attendance at
meetings of the Board of Directors or committees thereof.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The DGCL authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The Company's
Certificate limits the liability of directors of the Company to the Company or
its stockholders to the fullest extent permitted by Delaware law. See
"Description of Capital Stock--Certain Provisions of the Company's Certificate
of Incorporation and Bylaws."
The Certificate provides mandatory indemnification rights to any officer or
director of the Company who, by reason of the fact that he or she is an
officer or director of the Company, is involved in a legal proceeding of any
nature. Such indemnification rights include reimbursement for expenses
incurred by such officer in advance of the final disposition of such
proceeding in accordance with the applicable provisions of the DGCL.
45
<PAGE>
CERTAIN TRANSACTIONS
CERTAIN STOCK TRANSACTIONS
On July 1, 1996, Dr. Jeong H. Kim and Kenneth D. Brody entered into an
option purchase agreement (the "Option Purchase Agreement"), pursuant to which
Mr. Brody purchased for $500,000 an option (the "Brody Option") to buy
1,000,000 shares of the Common Stock from Dr. Kim at an exercise price of
$4.00 per share. The Brody Option vests in four equal installments, provided
that Mr. Brody is still serving or is willing to serve as a director of the
Company, on September 3, 1996, December 3, 1996, March 3, 1997 and June 3,
1997, subject to early vesting immediately prior to any "Change of Control
Event." A Change of Control Event is defined as any event the result of which
is that Dr. Kim ceases to beneficially own 40% of the voting power of the
Company's then outstanding voting securities. To secure Dr. Kim's obligations
to deliver shares of Common Stock to Mr. Brody upon exercise of the Brody
Option, Dr. Kim granted Mr. Brody a security interest in all of the shares of
Common Stock subject to the Brody Option. Mr. Brody may assign the Brody
Option, in whole or in part, subject to the limitation that each assignee
(with the exception of Affiliates and family members) must be assigned a
portion of the Brody Option covering at least 200,000 shares of Common Stock.
The Brody Option is exercisable for a term of 20 years.
On May 22, 1995, the Company issued 4,000,000 shares of Common Stock to Kwok
Li as compensation for his services to the Company in connection with the
development of the LDR100. The Company also issued 200 Shares of Common Stock
to William F. Flynn as compensation for his services to the Company. Mr. Flynn
was not an officer of the Company at the time this stock was issued.
Certain executive officers and directors of the Company have been granted
options to purchase shares of the Common Stock of the Company as follows:
Barton Y. Shigemura--1,000,000 shares; Charles S. Marantz--100,000 shares;
Quon S. Chow--100,000 shares; Anthony J. DeMambro--75,000 shares; William F.
Flynn--100,000 shares; Joseph Miller--110,000 shares; John J. McDonnell--
30,000; Herbert Rabin--121,000 shares; R. James Woolsey--100,000 shares,
Kenneth D. Brody--75,000 shares and William J. Perry--75,000 shares. These
options have exercise prices ranging from $.52 to $9.00 per share.
On January 14, 1997, the Company entered into a consulting agreement with In
Y. Chung, under which Mr. Chung will perform consulting and business
development activities for the Company in the Pacific Rim area. Pursuant to
this consulting agreement, the Company granted options to purchase 50,000
shares of Common Stock at an exercise price of $9.00 per share to Mr. Chung.
These options vested upon their grant. Mr. Chung is the father-in-law of Dr.
Jeong H. Kim.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must be
approved by a majority of the members of the Company's board of directors and
by a majority of the disinterested members of the Company's board of directors
and be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
CERTAIN RELATIONSHIPS
R. James Woolsey, a director of the Company, is a partner in the law firm of
Shea & Gardner, which is one of several firms that performs legal work for the
Company. Kenneth D. Brody, also a director of the Company, is a director of
Alex. Brown Incorporated. Alex. Brown & Sons Incorporated, one of the
representatives of the underwriters for this offering, is a wholly-owned
subsidiary of Alex. Brown Incorporated.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of Common Stock as of January 30, 1997, 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)................... 14,750,000 71.6% 14,750,000 59.9%
Kwok L. Li(3)(4)..................... 3,750,000 18.2 3,750,000 15.2
Kenneth D. Brody(5).................. 750,000 3.6 750,000 3.0
Barton Y. Shigemura.................. 250,000 1.2 250,000 1.0
Quon S. Chow......................... 50,000 * 50,000 *
Joseph Miller........................ 50,000 * 50,000 *
R. James Woolsey(6).................. 50,000 * 50,000 *
William F. Flynn..................... 41,800 * 41,800 *
Anthony J. DeMambro.................. 22,500 * 22,500 *
Herbert Rabin........................ 11,000 * 11,000 *
Henry W. Sterbenz.................... 10,000 * 10,000 *
Catherine A. Graham.................. -- -- -- --
Charles S. Marantz................... -- -- -- --
John J. McDonnell.................... -- -- -- --
William J. Perry..................... -- -- -- --
All executive officers, directors and
key employees as a group (15
persons)............................ 19,735,300 93.5% 19,735,300 78.6%
</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 250,000 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 14,250,000
shares (57.9%) and 3,650,000 shares (14.8%), respectively.
(4) In May 1995, the Company granted 4,000,000 shares of Common Stock to Mr.
Li. In October 1996, he sold 150,000 shares to various employees and a
director of the Company. In November 1996, he sold 100,000 shares of
Common Stock to Amerindo. Includes 1,000,000 shares owned by Mr. Li's
spouse, as to which he disclaims beneficial ownership.
(5) Does not include 250,000 shares subject to the Brody Option that will vest
in June 1997. See "Certain Transactions."
(6) Mr. Woolsey's shares are held jointly with his spouse.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Certificate provides that the authorized capital of the Company consists
of 50,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000
shares of undesignated Preferred Stock, par value $.01 per share. As of
January 30, 1997, there were 20,608,400 shares of Common Stock outstanding,
held by 20 persons, and no shares of Preferred Stock outstanding. In addition,
there were outstanding options to acquire 3,386,722 shares of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive, conversion or other subscription rights. There are no redemption
or sinking fund provisions available to the Common Stock. All outstanding
shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the undesignated Preferred
Stock in one or more series and to determine the powers, preferences and
rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated Preferred Stock and to
fix the number of shares constituting any series and the designation of such
series, without any further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company and may adversely affect the voting and other
rights of the holders of Common Stock. The Company has no present plans to
issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate of Incorporation provides that the liability of directors of
the Company is eliminated to the fullest extent permitted under Section
102(b)(7) of the Delaware General Corporation Law. As a result, no director of
the Company will be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for any willful or
negligent payment of an unlawful dividend, stock purchase or redemption or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Certificate divides the Board of Directors of the Company into three
classes, each class to be as nearly equal in number of directors as possible.
Messrs. Shigemura and Brody and Dr. Perry are Class I directors with their
terms of office expiring in 1999, Messrs. Li and Woolsey are Class II
directors whose terms will expire in 1998, and Drs. Kim and Rabin are Class
III directors whose terms will expire in 1997. At each annual meeting of
stockholders, directors in each class will be elected for terms of three years
to succeed the directors of that class whose terms are expiring. In accordance
with the DGCL, directors serving on classified boards of directors may only be
removed from office for cause. The Certificate provides that stockholders may
take action by the written consent of 66 2/3% of the stockholders, and that a
special meeting of stockholders may be called only by the Board of Directors.
The Bylaws of the Company provide that stockholders must follow an advance
notification procedure for certain stockholder nominations of candidates for
the Board of Directors and for certain other stockholder business to be
conducted at an annual meeting. These provisions could, under certain
circumstances, operate to delay, defer or prevent a change in control of the
Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be American Stock
Transfer & Trust Company.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following this offering, the Company will have outstanding
24,608,400 shares of Common Stock. The 4,000,000 shares of Common Stock
offered hereby (4,600,000 if the Underwriters' over-allotment option is
exercised in full) will be eligible for public sale without restriction under
the Securities Act by persons other than Affiliates of the Company. Sales of
shares by affiliates of the Company will be subject to public resale in
accordance with Rule 144 under the Securities Act. Approximately 14,500,000
shares of Common Stock have been owned by existing stockholders for more than
two years and will be available for public sale pursuant to Rule 144, subject
to the volume and other limitations set forth therein. See "Underwriting." The
Company and its executive officers, directors and certain stockholders who
will beneficially own 20,935,300 outstanding shares immediately following this
offering, have agreed with the Underwriters not to offer, sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated.
In general, under Rule 144 as presently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least two years has elapsed
since the later of the date shares of Common Stock that are "restricted
securities" (as that term is defined in Rule 144) were acquired from the
Company or the date they were acquired from an Affiliate of the Company, as
applicable, the holder of such restricted shares (including an Affiliate) is
entitled to sell a number of shares within any three-month period that does
not exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 246,084 shares immediately after the consummation of this
offering) or the average weekly trading volume of the Common Stock on the
Nasdaq National Market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements pertaining to
the manner of such sales, notices of such sales and the availability of
current public information concerning the Company. Affiliates may sell shares
not constituting restricted securities in accordance with the foregoing volume
limitations and other requirements but without regard to the two-year holding
period requirement.
Under Rule 144(k), if a period of at least three years has elapsed since the
later of the date restricted shares were acquired from the Company or the date
they were acquired from an Affiliate of the Company, as applicable, restricted
shares held by a person who is not an Affiliate of the Company at the time of
the sale and who has not been an affiliate for at least three months prior to
the sale would be entitled to sell the shares immediately without regard to
the volume limitations and other conditions described above.
The Company and Mr. Brody entered into a registration rights agreement (the
"Brody Registration Rights Agreement") with respect to 1,000,000 shares of
Common Stock issuable upon exercise of the Brody Option (the "Brody Shares").
Under the Brody Registration Rights Agreement, Mr. Brody and his assignees
(the "Holders") may, beginning 180 days after this Offering (360 days with
respect to assignees) and subject to certain limitations, require the Company
to file up to three registration statements under the Securities Act
("registration demands") covering the public sale of all or any portion of the
Brody Shares, one of which may be for the sale of Brody Shares in an
underwritten offering, and two of which must be shelf registration statements.
In addition, the Holders have been granted piggyback registration rights with
respect to certain registration statements filed by the Company. In any
registration, the Company must pay the registration expenses of the Holders,
including legal fees of up to $10,000, other than underwriting commissions or
discounts. The Company has agreed to indemnify the Holders against certain
liabilities, including liabilities under the Securities Act, in connection
with the registration of the Brody Shares.
Pursuant to the Kim Registration Rights Agreement and the Li Registration
Rights Agreement (collectively, the "Registration Rights Agreements"), Dr. Kim
and Mr. Li were granted registration rights for 15,000,000 shares of Common
Stock (the "Kim Shares") and 4,000,000 shares of Common Stock (the "Li
Shares"), respectively. The Registration Rights Agreements provide that Dr.
Kim and his assignees or Mr. Li and his assignees, as the case may be, may,
beginning 180 days after this offering (360 days with
49
<PAGE>
respect to assignees) and subject to certain limitations, make up to five
registration demands with respect to the sale of all or any portion of the Kim
Shares or the Li Shares, respectively, three of which may be shelf
registration statements. Dr. Kim and Mr. Li and their assignees have also been
granted piggyback registration rights with respect to certain registration
statements filed by the Company. In any registration, the Company must pay the
registration expenses of Dr. Kim and Mr. Li and their assignees, including
legal fees of up to $10,000, other than underwriting commissions or discounts.
The Company has agreed to indemnify Dr. Kim and Mr. Li against certain
liabilities, including liabilities under the Securities Act, in connection
with the registration of the Kim Shares and the Li Shares.
Pursuant to a Stock Purchase Agreement between the Company and Amerindo, the
Company granted registration rights to Amerindo with respect to 1,000,000
shares of Common Stock (the "Amerindo Shares"). Amerindo acquired the shares
on November 7, 1996 from the Company (400,000 shares), Dr. Kim (500,000
shares) and Mr. Li (100,000 shares). The Stock Purchase Agreement provides
that Amerindo may, beginning one year after the date of this offering and
subject to certain limitations, make one registration demand for a shelf
registration for all, but not less than all, of the Amerindo Shares. Amerindo
has also been granted piggyback registration rights with respect to certain
registration statements filed by the Company. In any registration, the Company
must pay the registration expenses of Amerindo, excluding Amerindo's legal
fees, underwriting commissions and discounts. The Company has agreed to
indemnify Amerindo against certain liabilities, including liabilities under
the Securities Act, in connection with the registration of the Amerindo
Shares.
The Company intends to register on Form S-8 under the Securities Act as soon
as practicable after this offering, 5,000,000 shares of Common Stock issued or
reserved for issuance under the Stock Option Plan, 200,000 shares of Common
Stock reserved for issuance under the Stock Purchase Plan and 200,000 shares
of Common Stock reserved for issuance under the 401(k) Plan. See "Management--
Stock Option Plan," "--Stock Purchase Plan" and "--401(k) Plan" Shares
registered and issued pursuant to such registration statement will be freely
tradable unless held by Affiliates of the Company, for whom resale of the
shares will be subject to the volume limitations of Rule 144.
Prior to this offering, there has been no market for the Common Stock of the
Company, and the Company can make no prediction as to the effect, if any, that
sales of shares or the availability of shares for sale will have on market
prices prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock of the Company in the public market, or the
prospect of such sales, could adversely affect the market price of the Common
Stock.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Wessels, Arnold & Henderson, L.L.C.
(collectively, the "Representatives"), have severally agreed to purchase from
the Company the following respective number of shares of Common Stock at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated...................................
Wessels, Arnold & Henderson, L.L.C................................
---------
Total........................................................... 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such
shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the initial
public offering, the offering price and other selling terms may be changed by
the Representatives.
Certain stockholders of the Company have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 600,000 additional shares of Common Stock at the initial
public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by it in the above table
bears to the total number of shares offered hereby, and the certain
stockholders of Company will be obligated, pursuant to the option, to sell
such shares to the Underwriters. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the Common
Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 4,000,000 shares are
being offered hereby.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company regarding certain liabilities,
including liabilities under the Securities Act.
The Company has agreed that until 180 days after the date of this
Prospectus, it will not, without the prior written consent of Alex. Brown &
Sons Incorporated, sell, offer to sell, issue, or otherwise distribute any
shares of Common Stock or any options, rights or warrants with respect to any
Common Stock, except for shares issued pursuant to the exercise of options
granted under the Company's stock option plan. Further, the executive
officers, directors, and certain stockholders of the Company have agreed not
to directly or indirectly sell or offer for sale or otherwise dispose of any
Common Stock of the Company for a period of 180 days after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated. See "Shares Eligible for Future Sale."
51
<PAGE>
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
has been determined by negotiations between the Company and the
Representatives. Among the factors considered in such negotiations were
prevailing market conditions, the results of operations of the Company in
recent periods, the market capitalizations and stages of development of other
companies which the Company and the Representatives believed to be comparable
to the Company, estimates of the business potential of the Company, the
present state of the Company's development and other factors deemed relevant
by the Company and the Representatives.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fried, Frank, Harris, Shriver & Jacobson, Washington,
DC. Certain legal matters related to this offering will be passed upon for the
Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The financial statements of the Company as of December 31, 1993, 1994 and
1995 and September 30, 1996, and for each of the years ended December 31,
1993, 1994 and 1995 and for the nine months ended September 30, 1996, included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus, which is part of the
Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the Registration Statement. For further information
pertaining to the Company and the Common Stock, reference is made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents or provisions of any documents
referred to herein are not necessarily complete, and in each instance,
reference is made to the copy of the document filed as an exhibit to the
Registration Statement. The Registration Statement may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the Registration Statement may be obtained from the
Commission at prescribed rates from the Public Reference Section of the
Commission at such address, and at the Commission's regional offices located
at 7 World Trade Center, 13th Floor, New York, New York 10048, and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements certified by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
interim unaudited financial information.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996.... F-3
Statements of Operations for Years Ended December 31, 1993, 1994 and 1995
and the Nine Months Ended September 30, 1995 (Unaudited) and 1996........ F-4
Statements of Stockholders' Equity (Deficit) for Years Ended December 31,
1993, 1994 and 1995, and the Nine Months Ended September 30, 1996........ F-5
Statements of Cash Flows for Years Ended December 31, 1993, 1994 and 1995
and for the Nine Months Ended September 30, 1995 (Unaudited) and 1996.... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Yurie Systems, Inc.:
We have audited the accompanying balance sheets of Yurie Systems, Inc. as of
December 31, 1994 and 1995 and as of September 30, 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1995 and for the nine
months ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Yurie Systems, Inc. as of
December 31, 1994 and 1995 and as of September 30, 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995 and for the nine months ended September 30, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996, the Company
adopted the requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation."
/s/ Deloitte & Touche LLP
Washington, DC November 7, 1996
F-2
<PAGE>
YURIE SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
--------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 230,188 $3,779,800 $ 6,201,539
Accounts receivable--trade.............. 166,776 1,172,394 1,657,033
Accounts receivable--other.............. 8,130 2,828 4,855
Inventory............................... -- 654,447 1,276,337
Deferred offering costs................. -- -- 146,815
Deferred income taxes................... -- -- 225,608
Prepaid expenses........................ 11,015 5,164 198,847
--------- ---------- -----------
Total current assets.................. 416,109 5,614,633 9,711,034
--------- ---------- -----------
PROPERTY AND EQUIPMENT:
Furniture and equipment................. 47,706 90,250 120,403
Software................................ 4,087 50,622 204,395
Computer and office equipment........... 157,331 504,481 1,180,495
--------- ---------- -----------
Total property and equipment.......... 209,124 645,353 1,505,293
Less accumulated depreciation and amor-
tization............................... (13,008) (89,257) (237,679)
--------- ---------- -----------
Net property and equipment............ 196,116 556,096 1,267,614
--------- ---------- -----------
OTHER ASSETS.............................. 15,220 20,938 52,722
--------- ---------- -----------
$ 627,445 $6,191,667 $11,031,370
========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 50,056 $ 295,591 $ 2,235,197
Accrued salaries and employee benefits.. 189,564 269,386 1,239,795
Other accrued expenses.................. 7,555 893 599,124
Due to stockholder...................... 583 -- --
Unearned revenue........................ 275,437 4,000,000 2,846,235
Deferred income taxes................... 3,547 64,995 --
Income taxes payable.................... 19,220 432,059 193,139
--------- ---------- -----------
Total current liabilities............. 545,962 5,062,924 7,113,490
ACCRUED RENT.............................. 18,511 25,661 17,614
DEFERRED INCOME TAXES..................... 18,768 -- 57,957
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, autho-
rized 10,000,000 shares, none issued... -- -- --
Common Stock, par value $.01 per share;
authorized, 30,000,000 shares in 1994
and 1995 and 50,000,000 in 1996; issued
and outstanding, 16,000,000 and
20,208,400 shares at December 31, 1994
and 1995 and 20,208,400 shares at Sep-
tember 30, 1996........................ 160,000 202,084 202,084
Additional paid-in capital.............. -- 119,939 119,939
Retained earnings (deficit)............. (115,796) 781,059 3,520,286
--------- ---------- -----------
Total stockholders' equity............ 44,204 1,103,082 3,842,309
--------- ---------- -----------
$ 627,445 $6,191,667 $11,031,370
========= ========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Product revenue....... $ -- $ -- $2,869,937 $2,665,537 $13,023,251
Service revenue....... 194,489 1,143,520 1,992,669 1,044,206 1,622,614
Other revenue......... -- -- 1,108,333 250,000 391,667
---------- ---------- ---------- ---------- -----------
Total revenue....... 194,489 1,143,520 5,970,939 3,959,743 15,037,532
COSTS OF REVENUE:
Cost of product reve-
nue.................. -- -- 1,326,702 1,219,657 4,536,284
Cost of service reve-
nue.................. 142,988 723,481 1,184,093 696,292 1,094,741
---------- ---------- ---------- ---------- -----------
Total cost of reve-
nue................ 142,988 723,481 2,510,795 1,915,949 5,631,025
---------- ---------- ---------- ---------- -----------
GROSS PROFIT............ 51,501 420,039 3,460,144 2,043,794 9,406,507
---------- ---------- ---------- ---------- -----------
OPERATING EXPENSES:
Research and develop-
ment................. 7,524 39,875 427,815 85,990 2,379,923
Sales and marketing... -- -- -- -- 790,256
General and adminis-
trative.............. 60,948 219,344 1,588,154 1,284,817 1,733,013
---------- ---------- ---------- ---------- -----------
Total operating ex-
penses............. 68,472 259,219 2,015,969 1,370,807 4,903,192
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) FROM
OPERATIONS............. (16,971) 160,820 1,444,175 672,987 4,503,315
---------- ---------- ---------- ---------- -----------
OTHER INCOME (EX-
PENSES)................ (6,134) 1,583 13,341 3,576 62,064
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE IN-
COME TAXES............. (23,105) 162,403 1,457,516 676,563 4,565,379
PROVISION FOR INCOME
TAXES.................. -- 41,535 560,661 260,253 1,826,152
---------- ---------- ---------- ---------- -----------
NET INCOME (LOSS)....... $ (23,105) $ 120,868 $ 896,855 $ 416,310 $ 2,739,227
========== ========== ========== ========== ===========
NET INCOME (LOSS) PER
COMMON SHARE........... $ (0.00) $ 0.01 $ 0.04 $ 0.02 $ 0.13
========== ========== ========== ========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 17,492,751 17,492,751 21,660,407 21,646,676 21,701,151
========== ========== ========== ========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1993................... 16,000,000 $160,000 $ -- $ (213,559) $ (53,559)
Net loss.............. -- -- -- (23,105) (23,105)
---------- -------- -------- ---------- ----------
BALANCE, DECEMBER 31,
1993................... 16,000,000 160,000 -- (236,664) (76,664)
Net income............ -- -- -- 120,868 120,868
---------- -------- -------- ---------- ----------
BALANCE, DECEMBER 31,
1994................... 16,000,000 160,000 -- (115,796) 44,204
Common stock issu-
ance................. 4,208,400 42,084 119,939 -- 162,023
Net income............ -- -- -- 896,855 896,855
---------- -------- -------- ---------- ----------
BALANCE, DECEMBER 31,
1995................... 20,208,400 202,084 119,939 781,059 1,103,082
Net income............ -- -- -- 2,739,227 2,739,227
---------- -------- -------- ---------- ----------
BALANCE, SEPTEMBER 30,
1996................... 20,208,400 $202,084 $119,939 $3,520,286 $3,842,309
========== ======== ======== ========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- ----------------------
1993 1994 1995 1995 1996
-------- --------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income (loss)...... $(23,105) $ 120,868 $ 896,855 $ 416,310 $2,739,227
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation.......... 2,575 11,220 76,249 57,186 148,422
Loss on property and
equipment............ 3,385 -- -- -- --
Compensation due to
stock issuance....... -- -- 162,023 -- --
Deferred income tax-
es................... -- 22,315 42,680 -- (232,646)
Changes in assets and
liabilities:
Accounts receivable... (36,963) (137,943) (1,000,316) (508,904) (486,666)
Inventory............. -- -- (654,447) (167,396) (621,890)
Prepaid expenses...... -- (10,665) 5,851 (8,619) (193,683)
Other assets.......... 100 (15,220) (5,718) (5,294) (31,784)
Accounts payable and
accrued expenses..... -- 57,611 238,873 123,177 2,537,837
Accrued salaries and
employee benefits.... 123,807 15,757 79,822 685,376 970,409
Income taxes payable.. -- 19,220 412,839 242,750 (238,920)
Due to/from stockhold-
er................... (74,441) 50,601 (583) -- --
Unearned revenue...... -- 275,437 3,724,563 (275,437) (1,153,765)
Accrued rent.......... -- 18,511 7,150 -- (8,047)
-------- --------- ----------- --------- ----------
Net cash provided by
(used in) operating
activities.......... (4,642) 427,712 3,985,841 559,149 3,428,494
-------- --------- ----------- --------- ----------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchase of property
and equipment......... (4,309) (202,250) (436,229) (243,612) (859,940)
-------- --------- ----------- --------- ----------
Net cash used in in-
vesting activities.. (4,309) (202,250) (436,229) (243,612) (859,940)
-------- --------- ----------- --------- ----------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Deferred offering
costs................. -- -- -- -- (146,815)
-------- --------- ----------- --------- ----------
Net cash used in fi-
nancing activities.. -- -- -- -- (146,815)
-------- --------- ----------- --------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (8,951) 225,462 3,549,612 315,537 2,421,739
CASH AND CASH EQUIVA-
LENTS, BEGINNING OF PE-
RIOD................... 13,677 4,726 230,188 230,188 3,779,800
-------- --------- ----------- --------- ----------
CASH AND CASH EQUIVA-
LENTS, END OF PERIOD... $ 4,726 $ 230,188 $ 3,779,800 $ 545,725 $6,201,539
======== ========= =========== ========= ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for income
taxes................. $ -- $ -- $ 105,142 $ 91,432 $2,296,000
======== ========= =========== ========= ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During 1995, the Company issued 4,208,400 shares of Common Stock that was
recorded as compensation expense in the amount of $162,023.
See notes to financial statements.
F-6
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Yurie Systems, Inc. (formerly Integrated Systems Technology, Inc.) is a
Delaware corporation that was incorporated in February 1992. The Company
designs, manufactures, markets and services asynchronous transfer mode ("ATM")
access products for telecommunications service providers, corporate end users
and government end users. ATM is a standard for packaging and switching
digital information that facilitates high speed information transmission with
a high degree of efficiency.
Revenue Recognition--For financial reporting purposes, the Company records
revenue from product sales on the ship and bill method. Contract service
revenue is primarily generated from cost-reimbursable contracts, including
cost-plus-fixed-fee contracts, and is recorded on the basis of reimbursable
costs plus a pro rata portion of the fee. A portion of the Company's service
revenue is derived from various fixed-price contracts and is accounted for
using the percentage-of-completion method. Losses on contracts, if any, are
recorded when they become known. Contract costs for services supplied to the
U.S. government, including indirect expenses, are subject to audit by the
government's representatives. All revenue is recorded in amounts that are
expected to be realized upon final settlement.
Cash and Cash Equivalents--The Company considers all highly liquid temporary
investments including those with an original maturity of three months or less
to be cash equivalents. Cash and cash equivalents consist primarily of
interest bearing accounts.
Unbilled Receivables--Unbilled receivables include certain costs and a
portion of the fee and expected profit which is billable upon completion of
the contracts or the completion of certain tasks under terms of the contracts.
Inventories--Inventory is stated at the lower of cost or market using the
first-in, first-out method.
Depreciation and Amortization--Property and equipment is recorded at cost.
The cost of furniture and computer and office equipment is depreciated from
the date of installation using the straight-line method over the estimated
useful lives of the various classes of property, which range from three to
seven years. The costs of software are amortized using the straight-line
method over three years.
Software Development Costs--Software development costs incurred for products
to be sold are capitalized after technological feasibility has been
established, which is consistent with the guidance under SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." As of September 30, 1996, all costs related to software
development have been expensed as incurred.
Deferred Offering Costs--Legal and other incremental costs associated with
raising capital through an initial public offering are capitalized on the
balance sheet. Such costs are subsequently netted against the proceeds of the
stock offering to which they relate. In the event that the offering is not
successful, such costs would be written off to operations in the period in
which the related offering is abandoned. There are no deferred costs included
in the balance sheets at December 31, 1994 and 1995.
Income Taxes--The provision for income taxes includes Federal and state
income taxes currently payable plus the net change during the year in the
deferred tax liability or asset. The current or deferred tax consequences of
all events that have been recognized in the financial statements are measured
based on provisions of enacted tax law to determine the amount of taxes
payable or refundable in future periods.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported
F-7
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amounts of assets, liabilities, revenues and expenses in the financial
statements and in the disclosures of contingent assets and liabilities. Actual
results could differ from those estimates.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk principally consist of trade
accounts receivable. The Company's largest commercial customer accounted for
approximately 57%, 66% and 61% of gross accounts receivable as of December 31,
1994 and 1995 and September 30, 1996, respectively. In addition, other
customers with balances in excess of 10% accounted for approximately 32%, 23%
and 28% of gross accounts receivable as of December 31, 1994 and 1995 and
September 30, 1996, respectively. The Company performs ongoing credit
evaluations of its customers, but generally does not require collateral to
support customer receivables. Losses on uncollectible accounts have
consistently been within management's expectations and have historically been
minimal.
Net Income (Loss) Per Share--Net income per common and common share
equivalents at the effective date of the Registration Statement will be
computed based upon the weighted average number of common and common share
equivalents, outstanding during the period. Common share equivalents consist
of stock options calculated using the treasury stock method. Retroactive
restatement has been made for the forty-to-one stock split on January 3, 1995
and the two-to-one stock split on April 3, 1996. Primary and fully diluted
earnings (loss) per share are the same. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and options to
purchase common stock issued within one year prior to the initial filing of
the Registration Statement at prices below the assumed initial public offering
price will be included as outstanding for all periods presented, using the
treasury stock method.
Interim Financial Information--The interim financial data for the nine
months ended September 30, 1995 is unaudited. The information reflects all
adjustments, consisting only of normal, recurring adjustments that, in the
opinion of management, are necessary to present fairly the results of
operations of the Company for the period indicated. Results of operations for
the interim period are not necessarily indicative of the results of operations
for the full year.
New Accounting Pronouncements--As of January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets to be Disposed Of. The adoption had no effect
on the financial position or the results of operations of the Company. SFAS
No. 123, Accounting for Stock-Based Compensation, has been adopted by the
Company as of September 30, 1996. However, the Company has not adopted the
recognition and measurement provisions of SFAS No. 123 and therefore, will
provide only the applicable disclosures. (see Note 11).
2. LINE OF CREDIT
From January 1, 1995 to June 28, 1996, the Company had a credit agreement
with Commerce Bank, which provided for maximum borrowings of $100,000. At
December 31, 1995, there were no borrowings under this agreement.
On June 28, 1996, the Company entered into a revolving loan agreement with
Commerce Bank, which provides for maximum borrowings of $3,000,000, based upon
certain percentages of accounts receivable and inventory as borrowing bases.
The interest varies from prime to prime plus 1% depending upon the amounts
borrowed. At September 30, 1996, the prime rate was 8.25%. The agreement
expires on May 31, 1997. At September 30, 1996, there were no borrowings under
this agreement.
F-8
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE--TRADE
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- ---------- -------------
<S> <C> <C> <C>
Billed..................................... $ 70,136 $ 748,372 $1,325,461
Unbilled................................... 96,640 424,022 331,572
-------- ---------- ----------
Total...................................... $166,776 $1,172,394 $1,657,033
======== ========== ==========
</TABLE>
4. INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
---- -------- -------------
<S> <C> <C> <C>
Raw materials.................................... $-- $246,291 $ 849,187
Work-in-process.................................. -- 325,101 187,713
Finished goods................................... -- 83,055 239,437
---- -------- ----------
Total............................................ $-- $654,447 $1,276,337
==== ======== ==========
</TABLE>
5. DUE FROM STOCKHOLDER
During 1993, the Company advanced funds to the sole stockholder and also
borrowed funds from the stockholder. The net amount advanced at December 31,
1993 was $50,018. This amount was repaid in full during 1994.
6. UNEARNED REVENUE
Unearned revenue at December 31, 1995 and September 30, 1996 represents
prepayment from AT&T for purchases of products which had not been delivered as
of the end of the reporting period.
7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ----------------------
1993 1994 1995 1995 1996
-------------- --------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current..................... $ -- $ 19,220 $ 519,700 $229,532 $2,069,899
Deferred.................... -- 22,315 40,961 30,721 (243,747)
----- -------- --------- -------- ----------
Total....................... $ -- $ 41,535 $ 560,661 $260,253 $1,826,152
===== ======== ========= ======== ==========
</TABLE>
F-9
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1993 1994 1995 1995 1996
------- -------- -------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected statutory
amount................. 0.0% 34.0% 34.0% 34.0% 34.0%
Utilization of NOL
carryforward........... -- (6.3) -- -- --
Benefit of lower tax
bracket................ -- (6.3) -- -- --
State income taxes, net
of federal benefit..... -- 4.6 4.6 4.6 4.6
Other................... -- -- (0.1) (0.1) 1.4
------- -------- -------- -------- --------
Effective Rate.......... 0.0% 26.0% 38.5% 38.5% 40.0%
======= ======== ======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued salaries and employee bene-
fits.................................. $ 28,621 $ -- $245,873
Warranty reserve....................... -- -- 100,986
Deferred rent.......................... 7,149 9,987 6,802
-------- -------- --------
Total deferred tax assets............ 35,770 9,987 353,661
-------- -------- --------
Deferred tax liabilities:
Depreciation........................... 18,768 25,685 57,957
Unbilled receivables................... 39,317 49,297 128,053
-------- -------- --------
Total gross deferred tax liabili-
ties................................ 58,085 74,982 186,010
-------- -------- --------
Net deferred tax assets (liabili-
ties)............................... $(22,315) $(64,995) $167,651
======== ======== ========
</TABLE>
As a result of operating losses in 1993 and the fact that the Company had a
limited operating history, a valuation allowance equal to the deferred tax
asset was recorded at December 31, 1993 which resulted in no tax benefit being
realized for the period. The Company was profitable for the first time in 1994
which allowed it to release the previously recorded deferred tax asset
valuation allowance.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents--The carrying amounts reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable--The carrying amounts reported
in the balance sheets for accounts receivable and accounts payable
approximate fair value.
F-10
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS
Lease Obligations--The Company currently leases two facilities in Lanham,
Maryland, which leases expire in 1998 and 1999. The Company is accounting for
the costs of these leases by recognizing rent expense on a straight-line basis
over the lease term. Each lease contains an escalation clause, one related to
increases in the Consumer Price Index and one providing a fixed 3% annual
increase. Both provide options for extension and one provides an option for
expansion. The following is a composite schedule, by year, of minimum rental
payments as of September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1996......................................................... $ 71,858
1997......................................................... 398,941
1998......................................................... 271,212
1999......................................................... 167,463
--------
Total minimum lease payments.................................. $909,474
========
</TABLE>
Rental expense for the years ended December 31, 1993, 1994 and 1995 was
$4,200, $38,500, and $112,615, respectively. Rental expense for the nine
months ended September 30, 1995 and 1996 was $78,296 (unaudited) and $180,547,
respectively.
Employment Agreements--The Company has employment agreements with two of its
executive officers. The agreements provide for a minimum salary level as well
as for bonuses which are determined by the Board of Directors. Each of the
employment agreements is for a one-year term that renews automatically unless
terminated by either party.
10. PENSION PLAN
Until December 31, 1995, the Company had an employee pension plan, which was
administered as a self-employment plan under Internal Revenue Service
regulations. It was Company policy to contribute annually an amount equal to
15% of qualified employees' salaries. Pension expense for the years ended
December 31, 1993, 1994, and 1995 was $22,767, $38,119 and $93,557,
respectively. There was no expense for the nine months ended September 30,
1995 (unaudited) as no contributions had been approved by the Company. The
investment options were employee directed. All employees are fully vested at
the end of one year of consecutive service.
Effective January 1, 1996, the plan is administered as a 401(k) profit
sharing plan that covers substantially all full time employees. Employees are
eligible to participate upon completion of one year of service and may
contribute up to 10% of their annual compensation not to exceed certain
statutory limitations. Eligible employees vest in employer contributions and
investment earnings thereon in 20% increments over a five year period. Pension
expense for the nine months ended September 30, 1996 totaled $33,293.
11. STOCKHOLDERS' EQUITY
On January 3, 1995, the Board of Directors approved a stock split in the
ratio of forty-to-one that increased the number of shares, all held at that
time by the President of the Company, from 200,000 to 8,000,000.
F-11
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On May 22, 1995, the Company issued 4,000,000 shares of Common Stock to Kwok
Li as compensation for his services in connection with the development of the
LDR100. Also on May 22, 1995, the Company issued 200,000 shares of Common
Stock to Yung Lung Ho as compensation for his services as Director of Advanced
Technology and 200 shares of Common Stock to each of the following persons as
compensation for their services to the Company: Joseph Aviles, Jr., David
Brooks, Kawaldeep Chadha, John Randy Crout, William Flynn, Lawrence Foster,
Erin Holiday, Yvonne Julien, Cynthia Kim, William Marshall, Arthur Mobley and
Patrick O'Connor. On June 14, 1995, the Company issued 4,000 shares of Common
Stock to Arthur Mobley and 2,000 shares of Common Stock to David Brooks as
compensation for their services to the Company. The Company recorded these
grants at $.077 per share, the then-current fair value of the Common Stock
based on an independent appraisal conducted as of May 22, 1995 by Willamette
Management Associates.
On April 3, 1996, the Board of Directors recommended, and the shareholders
approved, a two-for-one stock split on outstanding shares of common stock as
well as options outstanding. At the same time, the option price per share was
reduced by 50%.
The Company's Board of Directors approved a nonstatutory stock option plan
effective January 31, 1996, for which 395,800 shares of stock were approved to
be issued. On April 2, 1996, the Board of Directors recommended the stock
option plan be amended to increase the number of shares available under the
Plan to 1,250,000. This increase and the two-for-one stock split approved by
the shareholders on April 3, 1996, increased the number of shares available
under the plan to 2,500,000. Subsequently, on July 17, 1996, the Board of
Directors recommended and the shareholders approved another increase of
700,000 shares, bringing the total number of shares available under the plan
to 3,200,000. The exercise price per share was determined based upon estimated
fair value on the date of grant. Options are generally exercisable over a four
year period and expire ten years after the date of the grant.
A summary of stock option activity, described above, under the stock option
plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Outstanding, January 1, 1996....................................... --
Granted:
At exercise price of $.52 per share.............................. 2,103,642
At exercise price of $2.70 per share............................. 722,600
---------
Total Granted...................................................... 2,826,242
Exercised.......................................................... --
---------
Outstanding, September 30, 1996.................................... 2,826,242
=========
Exercisable options at September 30, 1996.......................... 271,000
=========
</TABLE>
The Company accounts for its stock-based compensation plans under APB No.
25. No compensation expense has been recognized in connection with the
options, as all options have been granted with an exercise price equal to the
fair value of the Company's common stock on the date of grant. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123
purposes, the fair value of each option grant has been estimated as of the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 6.17%, expected life
of three years, dividend rate of zero percent, and expected volatility of
66.0%. Using these assumptions, the fair value of the stock options granted in
1996 is $1,544,908, which would be amortized as compensation expense over the
vesting period of the options. The options generally vest equally over four
years. Had
F-12
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
compensation expense been determined consistent with SFAS No. 123, utilizing
the assumptions detailed above, the Company's net income and earnings per
share for the nine months ending September 30, 1996 would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Net Income:
As Reported..................................................... $2,739,227
Pro forma....................................................... $2,605,330
Net income per common share:
As Reported..................................................... $0.13
Pro forma....................................................... $0.12
</TABLE>
The resulting pro forma compensation cost may not be representative of that
expected in future years.
On November 7, 1996, the Amerindo Technology Growth Fund Inc. (Amerindo)
acquired 400,000 shares of common stock of the Company for a purchase price of
$12.00 per share. In addition, Amerindo acquired 600,000 shares from officers
of the Company for $12.00 per share. Pursuant to the stock purchase agreement,
the Company granted Amerindo certain registration rights that begin one year
after the date of the effective date of a registration statement relating to
an initial public offering effected by the Company.
12. SIGNIFICANT CUSTOMER
For the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996, approximately 53%, 72% and 91%, respectively, of total
revenues were generated from sales through or to one customer, AT&T. Included
in Other Revenue in the Statement of Operations for the year ended December
31, 1995 and the nine months ended September 30, 1996 are fees of $1,108,333
and $391,667, respectively, earned under an agreement entered into in August
1995 that granted AT&T certain rights to market and sell products of the
Company.
Under an amendment to this agreement, AT&T committed to purchase at least
$6,500,000, $10,000,000 and $10,000,000 of product in 1996, 1997 and 1998,
respectively.
F-13
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 4
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 26
Management............................................................... 39
Certain Transactions..................................................... 46
Principal Stockholders................................................... 47
Description of Capital Stock............................................. 48
Shares Eligible For Future Sale.......................................... 49
Underwriting............................................................. 51
Legal Matters............................................................ 52
Experts.................................................................. 52
Additional Information................................................... 52
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 Shares
[LOGO OF YURIE SYSTEMS, INC. APPEARS HERE]
YURIE SYSTEMS, INC.
Common Stock
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
Wessels, Arnold & Henderson
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable by the Company in connection with the sale of the Common Stock offered
hereby are as follows:
<TABLE>
<S> <C>
Registration fee.................................................... $15,333.33
NASD filing fee..................................................... 5,100.00
Nasdaq National Market listing fee..................................
Printing and engraving expenses.....................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Blue Sky fees and expenses (including legal fees)...................
Transfer agent and registrar fees and expenses......................
Miscellaneous.......................................................
----------
Total............................................................. $ *
==========
</TABLE>
- --------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate provides that the Company shall indemnify to the
fullest extent authorized by the DGCL, each person who is involved in any
litigation or other proceeding because such person is or was a director or
officer of the Company or is or was serving as an officer or director of
another entity at the request of the Company, against all expense, loss or
liability reasonably incurred or suffered in connection therewith. The
Certificate provides that the right to indemnification includes the right to
be paid expenses incurred in defending any proceeding in advance of its final
disposition; provided, however, that such advance payment will only be made
upon delivery to the Company of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If the
Company does not pay a proper claim for indemnification in full within 60 days
after a written claim for such indemnification is received by the Company, the
Certificate of Incorporation and Bylaws authorize the claimant to bring an
action against the Company and prescribe what constitutes a defense to such
action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding brought by reason
of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (i.e.,
one brought by or on behalf of the corporation), indemnification may be made
only for expenses, actually and reasonably incurred by any director or officer
in connection with the defense or settlement of such an action or suit, if
such person acted in good faith and in a manner that he reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought shall determine that the defendant is
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, Article EIGHT of the Company's
Certificate eliminates the liability of a director to the corporation or its
stockholders for monetary damages for such breach of
II-1
<PAGE>
fiduciary duty as a director, except for liabilities arising (i) from any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) from acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, or (iv) from any transaction from which the director derived an
improper personal benefit.
The Company has obtained primary and excess insurance policies insuring the
directors and officers of the Company against certain liabilities that they
may incur in their capacity as directors and officers. Under such policies,
the insurers, on behalf of the Company, may also pay amounts for which the
Company has granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement
and persons who control the Company, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued shares of Common Stock in the following transactions, each
of which was intended to be exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereunder. The
shares in each of the following transactions are presented as adjusted for a
2:1 stock split which the Company effected on April 3, 1996.
On May 22, 1995, the Company issued 4,000,000 shares of Common Stock to Kwok
Li as compensation.
On May 22, 1995, the Company issued 200 shares of Common Stock to each of
the following persons as compensation: Joseph Aviles, Jr., David Brooks,
Kawaldeep Chadha, John Randy Crout, William Flynn, Lawrence Foster, Erin
Holiday, Yvonne Julien, Cynthia Kim, William Marshall, Arthur Mobley and
Patrick O'Connor.
On May 22, 1995, the Company issued 200,000 shares of Common Stock to Yung
Lung Ho as compensation.
On June 14, 1995, the Company issued 4,000 shares of Common Stock to Arthur
Mobley as compensation.
On June 14, 1995, the Company issued 2,000 shares of Common Stock to David
Brooks as compensation.
On November 7, 1996, the Company issued 400,000 shares of Common Stock to
Amerindo for $4.8 million.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 Specimen Certificate representing the Common Stock.
Yurie Systems, Inc. 1996 Non Statutory Stock Option Plan, as amended
10.1 December 20, 1996
10.12 Yurie Systems, Inc. Employee Stock Purchase Plan
10.13 Yurie Systems, Inc. 401(k) Savings Plan
23.1 Consent of Deloitte & Touche LLP
</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.
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 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-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILINGS ON FORM S-1 AND HAS DULY CAUSED THIS AMENDMENT NO. 5
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN LANHAM, MARYLAND ON FEBRUARY 3, 1997.
Yurie Systems, Inc.
By: /s/ Jeong H. Kim
-----------------------------------
JEONG H. KIM
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
The undersigned directors and officers of Yurie Systems, Inc. hereby
constitute and appoint Jeong H. Kim as our true and lawful attorney-in-fact
with full power to execute in our name and behalf in the capacities indicated
below this Registration Statement on Form S-1 and any and all amendments
thereto and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and hereby
ratify and conform all that such attorneys-in-fact, or any of them, or their
substitutes shall lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jeong H. Kim Chairman of the
- ------------------------------------- Board and Chief February 3,
JEONG H. KIM Executive Officer 1997
/s/ Kwok Li President, Chief
- ------------------------------------- Operating Officer, February 3,
KWOK LI and a Director 1997
/s/ Barton Y. Shigemura Senior Vice
- ------------------------------------- President, Sales February 3,
BARTON Y. SHIGEMURA and Marketing and a 1997
Director
/s/ Charles S. Marantz Vice President,
- ------------------------------------- Finance and February 3,
CHARLES S. MARANTZ Administration, 1997
Chief Financial
Officer and
Treasurer (also
serves as Chief
Accounting Officer)
II-4
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ R. James Woolsey Director
- ------------------------------------- February 3,
R. JAMES WOOLSEY 1997
/s/ Herbert Rabin Director
- ------------------------------------- February 3,
HERBERT RABIN 1997
/s/ Kenneth D. Brody Director
- ------------------------------------- February 3,
KENNETH D. BRODY 1997
/s/ William J. Perry Director
- ------------------------------------- February 3,
WILLIAM J. PERRY 1997
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 Specimen Certificate representing the Common Stock
Yurie Systems, Inc. 1996 Non Statutory Stock Option Plan, as amended
10.1 December 20, 1996
10.12 Yurie Systems, Inc. Employee Stock Purchase Plan
10.13 Yurie Systems, Inc. 401(k) Savings Plan
23.1 Consent of Deloitte & Touche LLP
</TABLE>
<PAGE>
Exhibit 4.1
[LOGO] [LOGO] [LOGO]
YS SHARES
COMMON STOCK YURIE SYSTEMS, INC. COMMON STOCK
PAR VALUE $.01 INCORPORATED UNDER THE LAWS OF THE SEE REVERSE FOR
STATE OF DELAWARE CERTAIN DEFINITIONS
- --------------------------------------------------------------------------------
THIS CERTIFIES that CUSIP 98871Q 10 2
is the registered holder of
- --------------------------------------------------------------------------------
FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE OF $.01
EACH OF
============================= YURIE SYSTEMS, INC. ==============================
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate
to be signed by its duly authorized officers.
Dated
SECRETARY YURIE SYSTEMS, INC. CHIEF EXECUTIVE OFFICER
CORPORATE
SEAL
DELAWARE
*
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
YURIE SYSTEMS, INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof of the Corporation, and the qualifications, limitations, or restrictions
of such preferences and/or rights. Such request may be made to the Corporation
or the transfer agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-_____Custodian_____
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform
JT TEN - as joint tenants with right of Gifts to Minors
survivorship and not as tenants Act
in common ---------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING
POSTAL ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated
-------------------------
SIGNATURE(S) GUARANTEED
BY
---------------------- -------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings
and Loan Associations and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15
NOTICE: THE SIGNATURE TO 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 and restated, effective January 1, 1997
YURIE SYSTEMS, INC.
1996 NON STATUTORY STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this Plan is to secure for Yurie Systems, Inc. and its
shareholders the benefits arising from capital stock ownership by employees,
consultants, officers and members of the Board of Directors who are expected to
contribute to the future growth and success of the Company.
2. Definitions.
-----------
(1) "Beneficial Ownership" means beneficial ownership within the meaning
of Rule 13d-3 under the Exchange Act.
(2) "Board of Directors" means the Board of Directors of Yurie Systems,
Inc.
(3) "Change in Control" means the occurrence during the term of the
Plan and an Option Agreement of any one of the following events:
(a) An acquisition (other than directly from Yurie) of any Voting
Securities by any Person, immediately after which such Person has
Beneficial Ownership of 30 percent or more of the combined voting
power of Yurie's then outstanding Voting Securities; provided
however, that in determining whether a Change in Control has
occurred, Voting Securities which are acquired in a Non-Control
Acquisition shall not constitute an acquisition which would cause
a Change in Control.
(b) The individuals who, as of January 1, 1997, are members of the
Incumbent Board, cease for any reason to constitute at least two-
thirds of the members of the Board of Directors; provided,
however, that if the election, or nomination for election by
Yurie's common stockholders, of any new director was approved by a
vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Plan, be considered as a
member of the Incumbent Board; provided further, however, that no
individual shall be considered a member of the Incumbent Board if
such individual initially assumed office as a result of either an
actual or
<PAGE>
-2-
threatened Election Contest (as described in Rule 14a-11 under the
Exchange Act) or other actual or threatened Proxy Contest (that
is, solicitation of proxies or consents by or on behalf of a
Person other than the Board of Directors) including by reason of
any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(c) Approval by stockholders of Yurie of:
(i) A merger, consolidation or reorganization involving Yurie,
unless such merger, consolidation or reorganization is a
Non-Control Transaction;
(ii) A complete liquidation or dissolution of Yurie; or
(iii) An agreement for the sale or other disposition of all or
substantially all of the assets of Yurie to any Person
(other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person acquired Beneficial Ownership of
more than the permitted amount of the then outstanding Voting
Securities as a result of the acquisition of Voting Securities by the
Company which, by reducing the number of Voting Securities then
outstanding, increases the proportional number of shares Beneficially
Owned by such persons, provided that if a Change in Control would
occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such share
acquisition by the Company, such Person becomes the Beneficial Owner
of any additional Voting Securities which increases the percentage of
the then outstanding Voting Securities Beneficially Owned by such
Person, then a Change in Control shall occur.
(4) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(5) "Common Stock" means the common stock of Yurie Systems, Inc. having
a par value of $0.01.
(6) "Company" means Yurie and any entities that are Subsidiaries of Yurie
or of which it is a Subsidiary.
(7) "Covered Employee" means that term as defined in Section 162(m)(3) of
the Code.
<PAGE>
-3-
(8) "Director" means a member of the Board of Directors of the Company.
(9) "Director's Automatic Grant Agreement" means an Option Agreement
referred to in Section 4(d) hereof.
(10) "Effective Date" means the date as of which an Option granted
pursuant to the Plan is effective.
(11) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(12) "Fair Market Value of the Common Stock" on a given date means the
last reported sales price of the Common Stock on the NASDAQ
(National) System, as reported in a national newspaper, on such date
or on the nearest prior day on which trading of the Common Stock
occurred on the NASDAQ (National) System or, if the stock is listed
on a national stock exchange, the last reported sales price of the
Common Stock on such exchange, as reported in a national newspaper,
on such date or the nearest prior day on which trading of the Common
Stock occurred on such exchange; provided that if the Common Stock is
not registered with the Securities and Exchange Commission or there
has been no trading of the Common Stock on or reasonably near and
prior to the given date, it shall be the fair market value of the
Common Stock on the given date as determined on such basis as the
Board of Directors shall establish for this purpose.
(13) "Incumbent Board" means the Board of Directors as constituted on
January 1, 1997.
(14) "Independent Director" means a member of the Board of Directors who
is not an employee of the Company.
(15) "Merger Price" means, in the event of a merger described in Section
15(a) hereof, any cash payment that holders of Common Stock receive
for each share of Common Stock surrendered in the merger.
(16) "Non-Control Acquisition" means an acquisition by: (i) an employee
benefit plan (or a trust forming a part thereof) maintained by the
Company or any Subsidiary; (ii) the Company or its Subsidiaries;
(iii) a Person who as of January 1, 1997 has Beneficial Ownership of
30 percent or more of the combined voting power of Yurie's then
outstanding Voting Securities; or (iv) any Person in connection with
a Non-Control Transaction.
<PAGE>
-4-
(17) "Non-Control Transaction" means a merger, consolidation or
reorganization of Yurie where:
(a) the stockholders of Yurie, immediately before such merger,
consolidation or reorganization, own directly or indirectly
immediately following such merger, consolidation or
reorganization, at least 70 percent of the combined voting power
of the outstanding voting securities of the surviving corporation
in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger, consolidation
or reorganization;
(b) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
surviving corporation, or a corporation beneficially directly or
indirectly owning a majority of the voting securities of the
surviving corporation; and
(c) no Person other than (i) Yurie, (ii) any Subsidiary, (iii) any
employee benefit plan (or any trust forming a part thereof)
maintained by Yurie, the surviving corporation, or any
Subsidiary, or (iv) any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial Ownership
of 30 percent or more of the then outstanding Voting Securities,
has Beneficial Ownership of 30 percent or more of the combined
voting power of the surviving corporation's then outstanding
voting securities.
(18) "Non-Employee Director" means that term as defined in Rule 16b-3.
(19) "Officer" means a person who is an officer of the Company for
purposes of Rule 16b-3.
(20) "Option" means a stock option granted pursuant to this Plan.
(21) "Option Agreement" means an agreement entered into pursuant to
Section 7 hereof.
(22) "Option Shares" means shares of Common Stock that may be purchased by
an optionee, pursuant to this Plan and the optionee's Option
Agreement.
<PAGE>
-5-
(23) "Option Term" means the period during which an Option is outstanding.
(24) "Outside Director" means that term as defined in Treas. Reg. (S)
1.162-27(e)(3).
(25) "Person" means a person for purposes of Section 13(d) or 14(d) of the
Exchange Act.
(26) "Plan" means the Yurie Systems, Inc. 1996 Nonstatutory Option Plan,
as amended from time to time.
(27) "Pooling Transaction" means a business combination that qualifies for
use of the pooling of interests accounting method under generally
accepted accounting principles.
(28) "Rule 16b-3" means Rule 16b-3 under the Exchange Act of 1934, or any
successor rule.
(29) "Subsidiary" means, as to any entity, a corporation or other Person
of which a majority of its voting power or its voting equity
securities or equity interest is owned, directly or indirectly, by
the entity.
(30) "Triggering Event" means an event referred to in Section 11(b)(1)-(3)
hereof.
(31) "Voting Securities" means any voting securities of Yurie.
(32) "Yurie" means Yurie Systems, Inc.
3. Type of Options and Administration.
----------------------------------
a. Type of Options. The options granted pursuant to the Plan shall
---------------
be non-statutory options which are not intended to meet the requirements of
Section 422 of the Code.
b. Administration. The Plan will be administered by the Board of
--------------
Directors. The Board shall have authority, subject to the express provisions of
the Plan, to construe the Option Agreements and the Plan, to prescribe, amend
and rescind rules
<PAGE>
-6-
and regulations relating to the Plan, to determine the terms and provisions of
the Option Agreements, which need not be identical, and to make any other
determination which, in the judgment of the Board of Directors, is necessary or
desirable for the administration of the Plan. The Board of Directors'
construction and interpretation of the terms and provisions of the Plan and any
determinations made by the Board pursuant thereto shall be final and conclusive.
c. Delegation. Except as provided in Section 4(c), the Board of
----------
Directors may, to the full extent permitted by or consistent with applicable
laws or regulations and the governing documents of Yurie, delegate any or all of
its powers under the Plan to a committee appointed by the Board of Directors.
If a committee is so appointed all references to the Board of Directors in the
Plan shall mean and relate to such committee. To the extent required by Rule
16b-3, however, such committee shall consist solely of Non-Employee Directors
when exercising any powers relating to options granted to Directors.
d. Applicable Law. The provisions of this Plan and the Option Agreement
--------------
shall be interpreted in a manner consistent with all applicable law, including
but not limited to the Exchange Act and the rules and regulations thereunder.
Any authority or discretion exercised under the Plan by the Board of Directors
or any other person or entity shall be exercised in a manner consistent with all
applicable law, including but not limited to the Exchange Act and the rules and
regulations thereunder.
<PAGE>
-7-
4. Eligibility for and Issuance of Grants.
--------------------------------------
a. Eligibility. Options may be granted only to persons who are, at the
-----------
time of the grant: (i) Directors, officers or employees of the Company or (ii)
consultants or advisors to the Company.
b. Grant of Options Generally. Subject to the express provisions of the
--------------------------
Plan, the Board of Directors may in its sole discretion grant Options to
purchase shares of the Common Stock and issue shares upon exercise of such
Options.
c. Grant of Options to Officers. Any grant, or modification of any
----------------------------
grant, to an Officer shall be made by the full Board of Directors, provided,
however that to the extent required by Section 162(m)(4)(C) of the Code (after
expiration of the reliance period for existing plans in Treas. Reg. (S) 1.162-
27(f)(1)-(3)), any grant or modification of options to an Officer who is a
Covered Employee shall be made by a committee composed of at least two Outside
Directors and approved by the full Board of Directors.
d. Automatic Grants to Directors. Each Independent Director who has
-----------------------------
executed a Director's Automatic Grant Agreement shall receive a grant of Options
of 5,000 shares of Common Stock effective on the 30th day of June of each year
beginning on June 30, 1997. A Director's Automatic Grant Agreement shall be
approved by the Board of Directors prior to execution by the Independent
Director and shall set forth the Option term, the time for exercising the
Option, the Option price, the Effective Date of the Option and all other terms
at which Common Stock may be purchased pursuant to the Options granted to the
Independent Director. For this purpose, the exercise price shall be the Fair
Market Value of the Common Stock, as defined in Section 2(12) hereof, but
without regard to the proviso clause, on the
<PAGE>
-8-
Effective Date of the Option. A Director's Automatic Grant Agreement shall not
be inconsistent with the terms of the Plan, and in the event of a conflict
between the terms of the Plan and the Director's Automatic Grant Agreement, the
terms of the Plan shall supersede the terms of such Agreement unless the terms
of the Plan are inconsistent with the requirements of Rule 16b-3. Each such
Agreement shall be appended to the Plan and is hereby incorporated by reference.
Options granted pursuant to this Section 4(d) shall be subject to the terms and
conditions set forth in this Plan to the extent not inconsistent with this
Section 4(d).
5. Stock Subject to Plan.
----------------------
a. Limitations on Number of Shares. Subject to adjustment as provided in
-------------------------------
Section 14 below, the maximum number of shares of Common Stock which may be
issued and sold under the Plan is 5,000,000 shares. The maximum number of shares
of Common Stock that can be offered to any optionee in any year shall be
1,500,000 shares. Such shares may be authorized and unused shares or may be
shares issued and thereafter acquired by Yurie. Until Yurie has a class of
common equity registered under the Exchange Act, the Board of Directors will
take steps to assure that sales of securities to optionees under the Plan
qualify under Rule 701 under the Securities Act of 1933, including the limit
imposed by Rule 701 on the amount of securities that can be offered and sold.
b. Unpurchased Shares. If an Option shall expire or terminate for any
------------------
reason without having been exercised in full, the unpurchased shares subject to
such Option shall again be available for subsequent Option grants under the
Plan.
<PAGE>
-9-
6. Term and Exercise.
------------------
a. Option Term. Unless otherwise provided in the Option Agreement, the
-----------
Option Term of an Option granted under the Plan shall be ten years from the
Effective Date of the Option.
b. Exercise. Options issued hereunder shall become exercisable as
--------
follows:
i. General. Unless otherwise provided in the Option Agreement, the
-------
initial grant of Options issued hereunder to an individual shall become
exercisable in installments, the optionee having the right to purchase the
following number of Option Shares, on or after the following dates, in
cumulative fashion: (i) on the first day of the month beginning on or after the
first anniversary of the Effective Date, up to one-fourth of the total number of
Option Shares; (ii) on the first day of each of the succeeding 35 months, up to
1/48th of the total number of Option Shares; (iii) on the first day of the 36th
succeeding month, any remaining Option Shares. If the division of a number of
shares pursuant to the preceding sentence results in a fractional number of
shares, such fractional number shall be rounded off to the nearest integer. The
optionee may purchase fewer than the total number of Option Shares with respect
to which the Option is exercisable, provided that no partial exercise of the
Option may be for any fractional shares.
Any subsequent grant of options to the same individual shall become
exerciseable as provided in the Option Agreement.
ii. Change in Control. Notwithstanding anything contained in any
-----------------
Option Agreement to the contrary, in the event of a Change in Control, all
outstanding Options shall become exercisable in full immediately prior to such
Change in Control.
<PAGE>
-10-
7. Forms of Option Agreements.
--------------------------
As a condition to the grant of an Option under the Plan, each recipient of
an Option shall execute an Option Agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Option Agreements may
differ among recipients, and each Option Agreement shall state the price, the
number of shares subject to the Option, and other terms at which the underlying
stock can be purchased pursuant to the Option. In the event of a conflict
between the terms of this Plan and an Option Agreement entered into pursuant to
this Plan, the terms of the Plan shall supersede the terms of the Option
Agreement.
8. Purchase Price.
--------------
a. General. The option price shall be the Fair Market Value of the
-------
Common Stock as of the Effective Date of the Option.
b. Payment of Purchase Price.
-------------------------
i. Cash or Stock Owned by Optionee. Options granted under the Plan
-------------------------------
may provide for the payment of the exercise price by delivery of cash or a check
to the order of Yurie in an amount equal to the exercise price of such Options
or by delivery to Yurie of shares of Common Stock then owned by the optionee
having a Fair Market Value equal in amount to the exercise price of such shares,
or by any combination of such methods of payment. Provided, however, that if an
Officer or Director elects to make payment by delivery to Yurie of shares of
Common Stock, such election must be approved in advance by the Board of
Directors.
<PAGE>
-11-
ii. Other Cashless Exercise Procedures. Options granted under the
----------------------------------
Plan also may be exercised through a registered broker-dealer or through such
other cashless exercise procedures (in addition to the use of stock already
owned by the optionee) that are, from time to time, established by the Board of
Directors.
c. Delivery of Shares. Yurie shall not be required to transfer or
------------------
deliver any certificate or certificates for shares purchased upon any exercise
of an Option until after (i) the stock has been paid for in accordance with the
terms of the Option Agreement, and (ii) compliance with all 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. Transferability and Termination of Options.
------------------------------------------
a. General. Unless otherwise provided in the Option Agreement, no Option
-------
granted under the Plan shall be assignable or transferable by the optionee to
whom it is granted, except pursuant to a domestic relations order (as defined in
Section 414(p) of the Code) or, in the event of the optionee's death, by will or
the laws of descent and distribution. During the lifetime of an optionee, an
Option shall be exercisable only by the optionee or, if the optionee becomes
incompetent, by a guardian or other person duly authorized by law to administer
the optionee's assets or by the party to whom the Option is transferred pursuant
to such a domestic relations order. If an Option is so transferred to, or
exercisable by, a person other than the optionee, the terms of the Option
granted to the optionee shall be final, binding and conclusive upon such other
person.
<PAGE>
-12-
b. Effect of Death and Termination of Employment.
---------------------------------------------
The Board of Directors shall determine the period of time during which an
an Option may be exercised 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.
10. Additional Provisions.
---------------------
a. Additional Option Provisions. The Board of Directors may, in its sole
----------------------------
discretion, include additional provisions in any Option granted under the Plan,
including, without limitation, provisions relating to restrictions on transfer,
repurchase rights, rights to the optionee's work product, noncompetition
restrictions, or commitments to (i) pay cash bonuses, (ii) make, arrange for or
guaranty loans, or (iii) transfer other property to optionees upon exercise of
Options, or such other provisions as shall be determined by the Board of
Directors; provided that such additional provisions shall not be inconsistent
with any other term or condition of the Plan.
b. Acceleration. The Board of Directors may, in its sole discretion:
------------
(i) accelerate the date or dates on which all or any particular Option or
Options granted under the Plan may be exercised; or (ii) extend the dates during
which all or any particular Option or Options granted under the Plan may be
exercised; provided, however, that no such acceleration or extension shall be
permitted if it would cause the Plan or the Option to fail to satisfy the
requirements of Rule 16b-3 or of Section 162(m)(4)(C) of the Code (relating to
performance-based compensation).
<PAGE>
-13-
c. 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 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 price which is higher or lower than the then-current Option price of such
outstanding Options. No cancellation or amendment of an Option will be made,
however, to the extent it would cause an Option to fail to satisfy the
requirements of Rule 16b-3 or of Section 162(m)(4)(C) of the Code (relating to
performance-based compensation).
11. Yurie's Right Prior to Registration of Stock to Repurchase Shares Acquired
--------------------------------------------------------------------------
By Exercise of Option.
- ---------------------
a. Yurie's Right Prior to Registration of Stock to Repurchase Upon
---------------------------------------------------------------
Voluntary Sale of Stock by the Optionee. In the event an optionee who has
- ---------------------------------------
exercised his or her Option and has become a shareholder in Yurie wishes to sell
his or her Common Stock acquired upon exercise of said Option (or in the event
of the optionee's death or disability his or her personal representative,
guardian, or heirs wish to sell such Common Stock) and has received a written
bona fide binding offer, the optionee shall give written notice to Yurie of the
optionee's wish to sell such Common Stock, and such notice shall set forth the
per share sales price for such Common Stock which has been
<PAGE>
-14-
offered by a third party and shall include a copy of the written bona fide
binding offer. Such notice shall be sent by certified mail, return receipt
requested, to the President of Yurie. Yurie shall have the right of first
refusal to purchase, within six months after the date it receives such notice,
such shares at the price set forth in the notice.
b. Yurie's Right to Initiate Repurchase of Optionee's Common Stock.
---------------------------------------------------------------
Yurie may, on its own initiative, repurchase all or any portion of such
optionee's Common Stock if any of the following Triggering Events occurs: (1)
the optionee's employment or service as a Director, consultant or otherwise with
the Company terminates for any reason, including death; (2) such optionee's
insolvency, bankruptcy or other making of an assignment for the benefit of
creditors; or (3) any purported or attempted sale or other assignment, gift, or
other transfer of stock to a third party in violation of the terms of the Plan.
In any such event, Yurie shall have the absolute right to repurchase the
shares of Common Stock owned by such optionee for a period of six months
immediately following the occurrence of the Triggering Event and the shares
shall not otherwise be transferable during such six month period.
c. Manner of Exercise. Following the date that Yurie receives written
------------------
notice of an optionee's desire to sell his or her Common Stock, or following the
date of the Triggering Event, Yurie shall notify such optionee in writing of the
number of shares, if any, that Yurie intends to repurchase and of the date upon
which Yurie shall purchase the shares. Unless otherwise agreed by the parties,
the aggregate repurchase price shall be paid in cash to the optionee or the
optionee's representative.
<PAGE>
-15-
d. Price at Which Yurie May Repurchase Shares. If Yurie elects to
------------------------------------------
exercise its option pursuant to Section 11(b) hereof and purchase the shares of
Common Stock available from the optionee, Yurie shall pay such optionee the Fair
Market Value of the Common Stock being sold.
If Yurie elects to exercise its option pursuant to Section 11(a)
hereof and purchase the shares of Common Stock that such optionee seeks to sell
to a third party, Yurie shall pay the optionee the price per share being offered
by such third party, as set forth in the notice delivered to Yurie pursuant to
Section 11(a).
e. Optionee's Right to Sell Shares. If Yurie does not elect to acquire
-------------------------------
such optionee's Common Stock pursuant to Section 11(a), the optionee may, within
the 120-day period following the expiration of the right granted to Yurie set
forth in Section 11(a), sell his or her Common Stock specified in the notice to
Yurie to the third party, provided that the sale shall not be on terms and
conditions less favorable to the optionee than those contained in the notice to
Yurie. If the optionee does not sell his or her Common Stock in such fashion,
such Common Stock shall remain subject to Yurie's rights set forth in this
Section 11.
f. Lapse of Repurchase Rights. Shares acquired pursuant to the exercise
--------------------------
of any Option granted hereunder shall remain subject to Yurie's right to
repurchase under Sections 11(a) and (b) until the earliest to occur of the
following:
i. The effective date of a Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 covering
securities of Yurie, whether or not such shares are covered;
<PAGE>
-16-
ii. The date on which a class of securities of Yurie is registered
under Section 12 of the Exchange Act; or
iii. The date on which Yurie's right to repurchase pursuant to a
Triggering Event expires with respect to such shares, in accordance with Section
11(b) hereof.
g. In the case of an optionee who is an Officer or Director, any election
by Yurie to acquire such optionee's Common Stock pursuant to this Section 11
shall be approved in advance by the Board of Directors.
h. This Section 11 shall apply to all Common Stock acquired upon the
exercise of Options granted pursuant to the Plan unless otherwise waived or
amended pursuant to an Option Agreement.
12. Sale or Other Disposition By Majority Interest Prior to Registration of
-----------------------------------------------------------------------
Stock.
- -----
An optionee shall irrevocably appoint Yurie and its chief executive
officer, or either of them, as such optionee's agents and attorneys-in-fact,
with full power of substitution in the optionee's name, to sell, exchange,
transfer or otherwise dispose of all or a portion of such optionee's Common
Stock or Options, or both, and to do any and all things and to execute any and
all documents and instruments (including, without limitation, any stock transfer
powers) in connection therewith, such power of attorney not to become operable
until such time as the holder or holders of a majority of the issued and
outstanding shares of Common Stock sell, exchange, transfer or otherwise dispose
of, or contract to sell, exchange, transfer or otherwise dispose of, all or
substantially all of their shares of Common Stock. Any sale, exchange, transfer
other
<PAGE>
-17-
disposition of all or a portion of an optionee's shares of Common Stock pursuant
to the foregoing powers of attorney shall be made upon substantially the same
terms and conditions (including sale price per share) applicable to a sale,
exchange, transfer or other dispositions of all or a portion of shares of Common
Stock owned by the holder or holders of a majority of the issued and outstanding
shares of Common Stock. For purposes of determining the sale price per share of
Common Stock under this Section 12, there shall be excluded the consideration
(if any) paid or payable to the holder or holders of a majority of the issued
and outstanding shares of Common Stock in connection with any employment,
consulting, noncompetition or similar agreements which such holder or holders
may enter into in connection with or subsequent to such sale, transfer, exchange
or other disposition. The foregoing powers of attorney shall be irrevocable and
coupled with an interest and shall not terminate by operation of law, whether by
the death, bankruptcy or adjudication of incompetency or insanity of the
optionee or the occurrence of any other event.
The provision in this Section 12 shall remain in effect until the earliest
to occur of the following:
a. The effective date of a Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 covering
securities of Yurie whether or not such shares are covered; or
b. The date on which a class of securities of Yurie is registered under
Section 12 of the Exchange Act.
<PAGE>
-18-
13. General Restrictions Prior to Registration of Stock.
---------------------------------------------------
a. Investment Representations. Yurie may require any person to whom an
--------------------------
option is granted, as a condition of exercising such Option, to give written
assurances in substance and form satisfactory to Yurie to the effect that such
person is acquiring the Common Stock subject to the Option for his or her own
account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as Yurie deems
necessary or appropriate in order to comply with federal and applicable state
securities law.
b. Compliance With Securities Laws. Each Option shall be subject to the
-------------------------------
requirement that if, at any time, counsel to Yurie shall determine that the
listing, registration or qualification of the shares subject to the Option upon
any securities exchange or under any state or federal law, or the consent or
approval of any governmental or regulatory body, or of any other condition is
necessary as a condition of, or in connection with, the issuance or purchase of
shares thereunder, the option may not be exercised, in whole or in part, unless
such listing, registrations, qualification, consent or approval, or satisfaction
of such condition shall have been effected or obtained on conditions acceptable
to the Board of Directors. Nothing herein shall be deemed to require Yurie to
apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
Notwithstanding any other provision of this Plan, no transfer for value of
any stock acquired upon exercise of an Option shall be valid unless (i) the
stock has been held for a minimum period of two (2) years in the event that the
stock of Yurie is not listed on a national exchange or qualified for trading on
the NASDAQ system; (ii) there
<PAGE>
-19-
is an effective registration statement under the Securities Act of 1933, as
amended; (iii) registration thereunder is not required; or (iv) the holder has
furnished a "no-action" letter from the staff of the Securities and Exchange
Commission satisfactory to Yurie that such registration is not required.
All stock issued pursuant to the terms of this Plan shall bear the
following legend:
The securities represented by this Stock certificate have not been
registered under the Securities Act of 1933 or the Securities and Exchange
Act of 1934 (the "Act") or applicable state securities laws (the "State
Acts"), and shall not be sold, pledged, hypothecated, donated, or otherwise
transferred (whether or not for consideration) by the holder unless (i)
they have first been registered under the federal and/or state securities
laws or (ii) a "no action letter" has been received from the Securities and
Exchange Commission and/or the applicable State Securities Commission, to
the effect that the registration of such shares under federal and/or state
securities laws, is not required in connection with such transfer, or (iii)
the Company has received a favorable opinion of its counsel and/or
submission to the Company of such other evidence as may be satisfactory to
counsel for the Company, to the effect that any such transfer shall not be
in violation of the Acts and the State Acts.
These securities are subject to certain rights of the Company, including a
right of first refusal and a right to repurchase, such rights being set
forth in full in the Yurie Systems, Inc. 1996 Non Statutory Stock Option
Plan (the "Plan") and the Yurie Systems, Inc. 1996 Non Statutory Stock
Option Grant Agreement (the "Grant Agreement"). The Company will furnish to
each stockholder who so requests a copy of the Plan and the Option
Agreement.
14. Recapitalizations and Related Transactions by Yurie.
---------------------------------------------------
a. General. If, through or as a result of any merger, consolidation, sale
-------
of all or substantially all of the assets of Yurie, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock-
split or other similar
<PAGE>
-20-
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 Yurie or (ii) additional shares or new or different shares or
other securities of Yurie or other non-cash assets are distributed with respect
to such shares of Common Stock or other securities, an appropriate and
proportionate adjustment may be made in (x) the 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.
b. Board Authority to Make Adjustments. Adjustments under this Section 14
-----------------------------------
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 the Plan on account of
any such adjustments.
15. Merger, Consolidation, Asset Sale, or Liquidation of Yurie.
----------------------------------------------------------
a. Acquisition of Yurie. Subject to the provisions of Section 6(b)(ii)
--------------------
regarding Change in Control transactions, in the event of a merger,
consolidation or reorganization of the stock, business or assets of Yurie or a
sale of all or substantially all of the stock, business or assets of Yurie in
which outstanding shares of Common Stock are exchanged for securities, cash or
other property of any other corporation or business entity, or in the event of a
liquidation of Yurie, the Board of Directors, or the
<PAGE>
-21-
board of directors of any corporation assuming the obligations of Yurie, may, in
its discretion, take any one or more of the following actions as to outstanding
Options: (i) provide that such Options shall be assumed, or equivalent options
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof), (ii) upon written notice to the optionees, provide that all
unexercised Options will terminate immediately prior to the consummation of such
transaction unless exercised by the optionee within a specified number of days
following the date of such notice, (iii) in the event of a merger under the
terms of which holders of the Common Stock will receive upon consummation
thereof a cash payment for each share surrendered in the merger, make or provide
for a cash payment to the optionees equal to the difference between (X) the
Merger Price times the number of shares of Common Stock subject to such
outstanding Options (to the extent exercisable at prices not in excess of the
Merger Price) and (Y) the aggregate exercise price of all such outstanding
Options in exchange for the termination of such options, and (iv) provide that
all or any outstanding Options shall become exercisable in full immediately
prior to such event. In any such case, the Board of Directors may, in its
discretion, advance the lapse of any waiting or installment periods and exercise
dates.
b. Acquisition by Yurie. The Board of Directors may grant options under
--------------------
the Plan in substitution for options held by employees of another corporation
who become employees of the Company, as the result of a merger or consolidation
of the employing corporation with the Company, or as a result of the acquisition
by the Company, of property or stock of the employing corporation. Substitute
options may be granted on
<PAGE>
-22-
such terms and conditions as the Board of Directors considers appropriate in the
circumstances.
16. Rights as a Shareholder.
-----------------------
The holder of an Option shall have no rights as a shareholder with respect
to any shares covered by the Option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares.
Except as Section 14 provides, no adjustment shall be made for dividends or
other rights for which the record date is prior to the date such stock
certificate is issued.
17. Public offering.
---------------
In the event that Yurie proposes to engage in a public offering of its
Common Stock, Yurie shall have the right, prior to said offering, to cancel any
or all stock options that were granted within the six month period prior to the
scheduled date of said public offering.
18. No Special Employment Rights.
----------------------------
Nothing contained in the Plan or in any Option Agreement shall confer upon
any optionee any right with respect to the continuation of his or her employment
or service as a Director, consultant or otherwise by the Company or interfere in
any way with the right of the Company at any time to terminate such employment
or service or to increase or decrease the compensation of the optionee.
<PAGE>
-23-
19. Other Employee Benefits.
-----------------------
Except as to plans which by their terms include such amounts as
compensation, or as specifically determined by the Board of Directors, neither
the amount of any compensation deemed to be received by an optionee 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 or fringe
benefits of such optionee are determined, including, without limitation,
benefits under any bonus, pension, profit-sharing, life insurance or salary
continuation plan.
20. Withholding.
-----------
a. The Company shall have the right to deduct from payments of any
kind otherwise due to the optionee (or secure payment from the optionee in lieu
of such deduction) any federal, state or local taxes of any kind required by law
to be withheld with respect to any shares issued upon exercise of Options under
the Plan. Subject to the prior approval of the Company, which may be withheld
by the Company in its sole discretion, the optionee may elect to satisfy such
obligations, in whole or in part, (i) by causing the Company to withhold shares
of Common Stock otherwise issuable pursuant to the exercise of an option or (ii)
by delivering to the Company shares of Common Stock already owned by the
optionee. The Common Stock so delivered or withheld shall have a Fair Market
Value equal to such withholding obligation.
b. Notwithstanding the foregoing, in the case of an Officer, 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.
<PAGE>
-24-
21. Pooling Transactions.
--------------------
In the event of a Change in Control which also is intended to constitute a
Pooling Transaction, the Board of Directors shall take such actions, if any, as
are specifically recommended by an independent accounting firm retained by Yurie
to the extent reasonably necessary in order to assure that the Pooling
Transaction will qualify as such, including but not limited to (i) deferring the
vesting, exercise, payment, settlement or lapsing of restrictions with respect
to any Option, (ii) providing that the payment or settlement in respect of any
Option be made in the form of cash, shares or securities of a successor or
acquirer of Yurie, or a combination of the foregoing, and (iii) providing for
the extension of the Option Term to the extent necessary to accommodate the
foregoing.
22. Amendment and Termination of the Plan.
-------------------------------------
a. Except as set forth herein, the Board of Directors may at any time,
and from time to time, terminate the Plan or modify or amend the Plan in any
respect. To the extent that approval of the shareholders is required as to such
modification or amendment under Section 162(m)(4)(C) of the Code, 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, adversely 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.
<PAGE>
-25-
c. Notwithstanding Section 22(a) or (b): (i) neither the Plan nor an
Option Agreement may be amended to the extent the amendment would cause the Plan
or the Option Agreement to fail to satisfy the requirements of Rule 16b-3 or
Section 162(m)(4)(C) of the Code (relating to performance-based compensation);
and (ii) the consent of an affected optionee will not be required for amendment
of an Option Agreement if the failure to amend would cause the Option Agreement
to fail to satisfy the requirements of Rule 16b-3 or Section 162(m)(4)(C) of the
Code (relating to performance-based compensation).
23. 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 requiring shareholder approval
shall become effective when adopted by the Board of Directors and approved by
the shareholders. Amendments to the Plan not requiring shareholder approval
shall become effective as of the date they are made effective by the Board of
Directors.
b. Duration. Unless sooner terminated in accordance with Section 22, the
--------
Plan shall terminate upon the date on which all shares available for issuance
under the
<PAGE>
-26-
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, July 18, 1996, September 6, 1996, and
December 20, 1996.
Approved by the Shareholders on April 3, 1996, July 31, 1996, and December
23, 1996.
<PAGE>
Exhibit 10.12
YURIE SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose.
-------
The purpose of this Plan is to secure for Yurie Systems, Inc. and its
shareholders the benefits arising from capital stock ownership by employees of
the Company.
2. Definitions.
-----------
(1) "Account" means the account established on the Company's books in the
name of each Participant for the purpose of accounting for the
Participant's payroll deductions pursuant to Section 7.
(2) "Board of Directors" means the Board of Directors of Yurie Systems,
Inc.
(3) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(4) "Common Stock" means the common stock of Yurie Systems, Inc. having a
par value of $0.01.
(5) "Company" means Yurie Systems, Inc. and any subsidiaries of Yurie
Systems, Inc., as defined in Section 424(f) of the Code.
(6) "Compensation" means the amount required to be reported in the Wages,
Tips and Other Compensation box on the Employee's Form W-2 for the
applicable period, including overtime pay but excluding bonuses,
commissions and other extraordinary compensation.
(7) "Employee" means any person who receives earnings from the Company
which are reported on a Form W-2. A person on an authorized leave of
absence from the Company whose period of leave does not exceed 90
days or whose right to reemployment is guaranteed either by statute
or by contract shall continue to be deemed an Employee while on such
leave. If a person whose right to reemployment is not guaranteed by
statute or by contract takes a leave of absence which exceeds 90
days, he or she shall cease to be deemed an Employee at the close of
business on the 90th day of such leave.
(8) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
<PAGE>
2
(9) "Fair Market Value of the Common Stock" on a given date means the
last reported sales price of the Common Stock on the NASDAQ
(National) System, as reported in a national newspaper, on such date
or on the nearest prior day on which trading of the Common Stock
occurred on the NASDAQ (National) System, or, if the stock is listed
on a national stock exchange, the last reported sales price of the
Common Stock on such exchange, as reported in a national newspaper,
on such date or on the nearest prior day on which trading of the
Common Stock occurred on such exchange; provided that if there has
been no trading of the Common Stock on or reasonably near and prior
to the given date, it shall be the fair market value of the Common
Stock on the given date as determined in a reasonable and uniform
manner by the Board of Directors.
(10) "Offering" means an offering of Common Stock, as described in Section
6, by Yurie Systems, Inc. to Participants.
(11) "Offering Commencement Date" means the date on which, pursuant to
Section 6, a particular Offering begins.
(12) "Offering Period" means the period between the Offering Commencement
Date of an Offering and the Offering Termination Date of the
Offering.
(13) "Offering Termination Date" means the date on which, pursuant to
Section 6, a particular Offering terminates.
(14) "Option" means a stock option granted pursuant to this Plan.
(15) "Participant" means an Employee who has an authorization for a
payroll deduction in effect pursuant to the Plan or who has an
outstanding balance in his or her Account.
(16) "Plan" means the Yurie Systems, Inc. Employee Stock Purchase Plan, as
amended from time to time.
(17) "Secretary" means the Secretary of Yurie or his or her designee.
(18) "Yurie" means Yurie Systems, Inc.
3. Type of Options and Administration.
----------------------------------
(a) Type of Plan. This Plan is intended to qualify as an employee stock
------------
purchase plan under Section 423 of the Code.
<PAGE>
3
(b) Administration. The Plan will be administered by the Board of
--------------
Directors. Subject to the express provisions of the Plan, the Board of Directors
shall have authority to construe the Plan, to prescribe, amend and rescind rules
and regulations relating to the Plan, and to make any other determination which,
in the judgment of the Board of Directors, is necessary or desirable for the
administration of the Plan. The Board of Directors' construction and
interpretation of the terms and provisions of the Plan and any determinations
made by the Board of Directors pursuant thereto shall be final and conclusive.
(c) Delegation. The Board of Directors may, to the full extent permitted
----------
by or consistent with applicable laws or regulations and the governing documents
of Yurie, delegate any or all of its powers under the Plan to a committee
appointed by the Board of Directors, and if a committee is so appointed all
references to the Board of Directors in the Plan shall mean and relate to such
committee.
(d) Applicable Law. The provisions of this Plan shall be interpreted in a
--------------
manner consistent with all applicable law, including but not limited to Sections
423 and 424 of the Code and the regulations thereunder. Any authority or
discretion exercised under the Plan by the Board of Directors or any other
person or entity shall be exercised in a manner consistent with all applicable
law, including but not limited to the requirement of Section 423(b)(5) of the
Code that all Participants have the same rights and privileges under the Plan.
<PAGE>
4
4. Eligibility.
-----------
(a) General. Options may be granted only to Employees who, at the time of
-------
the grant, have been employed by the Company for at least 90 consecutive days.
Except as provided in Section 4(b), all such Employees shall be eligible to
purchase Common Stock under the Plan.
(b) Ineligible Employees. An Employee shall not be granted an Option under
--------------------
the Plan if, immediately after the grant he or she would own stock, or hold
outstanding options to purchase stock, possessing 5 percent or more of the total
combined voting power or value of all classes of stock of the Company, within
the meaning of Section 424(b)(3) of the Code.
5. Commencement of Participation.
-----------------------------
An Employee who is eligible to participate in the Plan under Section 4 may
become a Participant by completing an authorization for a payroll deduction on
the form provided by Yurie, and by filing it with the Secretary within the
period set therefor by the Secretary. Payroll deductions for a Participant
shall be effective as of the first payday that occurs at least 10 days after the
date on which he or she submits the proper form to the Secretary (unless he or
she designates a later date as permitted by the Secretary), and shall end on the
earlier of: (1) the date on which he or she ceases to be an Employee; (2) the
date on which, pursuant to Section 4(b), he or she ceases to be eligible; or (3)
the date as of which he or she elects to terminate his or her payroll deductions
pursuant to Section 10.
<PAGE>
5
6. Offerings.
---------
The Plan will be implemented by quarterly Offerings of Common Stock. The
first Offering shall commence on February 1, 1997 and terminate on March 31,
1997, unless another period shall be designated by the Board of Directors for
the first Offering Period. Subsequent Offerings will commence on the first day
of each quarter of the calendar year, beginning with the quarter commencing
April 1, 1997, and will terminate on the last day of each such quarter.
7. Payroll Deductions.
------------------
(a) Amount of Deduction. At the time a Participant files an authorization
-------------------
for payroll deduction, he or she shall elect to have deductions from his or her
Compensation on each payday during the time he or she has elected to participate
in the Plan. The Participant shall choose an amount to be deducted, which shall
be equal to a whole percentage, not to exceed 10 percent, of his or her
Compensation in effect on each payday.
(b) Participant's Account. All payroll deductions made for a Participant
---------------------
shall be credited to his or her Account under the Plan. A Participant may not
make any separate cash payment with respect to such Account.
(c) Changes in Payroll Deductions. A Participant may elect to change the
-----------------------------
percentage amount of his or her payroll deduction by filing a written notice
with the Secretary. Such change will take effect on the first pay day after the
beginning of the Offering Period next following receipt of the notice by the
Secretary. A Participant may discontinue his or her participation in the Plan
during an Offering Period as provided in
<PAGE>
6
Section 10, but may not otherwise alter the amount of his or her payroll
deductions for that Offering.
(d) Leave of Absence. If a Participant goes on an authorized leave of
----------------
absence (but is still deemed an Employee), the Participant shall have the right
to elect to: (i) withdraw the balance in his or her Account and discontinue
payroll deductions under the Plan; (ii) discontinue payroll deductions under the
Plan without withdrawing the balance in his or her Account; or (iii) authorize
deductions to be made from Compensation paid to him or her by the Company during
the leave of absence without withdrawing the balance in his or her Account.
(e) Use of Funds. All payroll deductions received or held by Yurie under
------------
the Plan may be used by Yurie for any corporate purpose and Yurie shall not be
obligated to segregate such payroll deductions.
8. Number of Option Shares.
-----------------------
(a) General. On each Offering Commencement Date, each Participant shall be
-------
deemed to have been granted an option to purchase a number of shares of Common
Stock equal to: (i) that percentage of the Participant's Compensation which he
or she has elected to have deducted pursuant to Section 7(a) hereof; (ii)
multiplied by the Participant's Compensation during the Offering Period; (iii)
divided by 85 percent of the Fair Market Value of the Common Stock on the
Offering Termination Date.
(b) $25,000 Limitation. Notwithstanding Section 8(a) hereof or any other
------------------
provision of the Plan, an Employee shall not be granted an Option under the Plan
to the extent that, immediately after the grant, the aggregate Fair Market Value
of the
<PAGE>
7
Common Stock with respect to which the options he or she would hold under the
Plan or any other employee stock purchase plan (within the meaning of Section
423 of the Code) and that would be exercisable for the first time by him or her
in any calendar year would exceed $25,000. For purposes of this Section 8(b),
Fair Market Value of the Common Stock shall be determined as of the date the
options would be granted but for this Section 8(b).
9. Exercise of Option.
------------------
(a) Option Price. The option price of Common Stock purchased pursuant to
------------
the Plan shall be 85 percent of the Fair Market Value of the Common Stock on the
Offering Termination Date.
(b) Automatic Exercise. Except as provided elsewhere in the Plan, a
------------------
Participant's Option for the purchase of Common Stock with payroll deductions
made during an Offering will be deemed to have been exercised automatically on
the Offering Termination Date applicable to such Offering, for the purchase of
the number of full shares of stock which the accumulated payroll deductions in
his or her Account on such Offering Termination Date will purchase at the
applicable option price (but not in excess of the number of shares for which
Options have been granted to him or her pursuant to Section 8), and any excess
in the Participant's Account on such Offering Termination Date will remain in
that Account, unless the Participant withdraws from the Plan pursuant to Section
10(a).
(c) Fractional Shares. Fractional shares of Common Stock will not be
-----------------
issued under the Plan. Any accumulated payroll deductions which would have been
used to
<PAGE>
8
purchase fractional shares will remain in a Participant's Account and will be
used to purchase additional whole shares of Common Stock until the Participant
ceases his or her participation in the Plan pursuant to Sections 10, 11 or 12.
(d) Transferability. No Option granted under the Plan nor payroll
---------------
deductions credited to a Participant's Account shall be assignable or
transferable by the Participant, either voluntarily or by operation of law. All
Options granted under the Plan shall be exercisable only by the Participant.
(e) Delivery of Stock. As promptly as practicable after the Offering
-----------------
Termination Date of each Offering, Yurie will deliver to each Participant, as
appropriate, the Common Stock purchased upon exercise of his or her Option.
10. Withdrawal.
----------
(a) General. A Participant may elect to terminate his or her payroll
-------
deductions under the Plan by filing a written notice with the Secretary at the
time and in the manner provided by the Secretary. Such written notice will take
effect as of the next payday that occurs at least 10 days after the notice is
received by the Secretary or, if the Participant elects, as of a later Offering
Termination Date, and no further payroll deductions will be made from the
Participant's Compensation after such effective date, except as provided in
Section 10(b). A Participant who submits a written notice that is effective as
of a payday during an Offering Period shall be paid all of the payroll
deductions credited to his or her Account during such Offering Period or carried
over from a prior Offering Period pursuant to Section 9(c). Yurie may, at its
option, treat any
<PAGE>
9
attempt to borrow by a Participant on the security of his or her Account as an
election to terminate his or her payroll deductions under the Plan.
(b) Effect on Subsequent Participation. If a Participant withdraws from an
----------------------------------
Offering pursuant to Section 10(a), he or she may not elect to participate again
in the same Offering. Such Participant may, however, pursuant to Section 7,
elect to participate in a subsequent Offering as of a payday that occurs no less
than 120 days after the date as of which his or her withdrawal became effective.
11. Termination of Employment.
-------------------------
If a Participant should cease to be an Employee for any reason other than
death while in the employ of Yurie, the payroll deductions credited to his or
her Account as of the date of his or her termination of employment will be
returned to him or her.
12. Death of a Participant.
----------------------
Upon termination of a Participant's employment because of death, the
payroll deductions credited to his or her Account as of his or her date of death
shall be paid to the personal representative of his or her estate.
13. Interest.
--------
No interest will be credited or paid on any amounts credited to the Account
of a Participant.
14. Shares Issued.
-------------
Subject to adjustment as provided in Sections 16 and 17 below, the number
of shares of Common Stock which may be issued under the Plan shall be 200,000
shares.
<PAGE>
10
15. Rights as a Shareholder.
-----------------------
A Participant shall have no rights as a shareholder with respect to any
shares of Common Stock covered by an 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 Yurie, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar distribution with respect to the outstanding shares of
Common Stock or other securities, (i) the outstanding shares of Common Stock are
increased or decreased, or are exchanged for a different number or kind of
shares or other securities of Yurie or (ii) additional shares or new or
different shares or other securities of Yurie or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in (x) the 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.
<PAGE>
11
(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 thereof will be final, binding
and conclusive. No fractional shares of Common Stock will be issued under the
Plan on account of any such adjustments.
17. Merger, Consolidation, Asset Sale, Liquidation, etc.
---------------------------------------------------
In the event of a consolidation or merger of Yurie or a sale of all or
substantially all of the stock, business, or assets of Yurie, in which
outstanding shares of Common Stock are exchanged for securities, cash or other
property of any other corporation or business entity, or in the event of a
liquidation of Yurie, both this Plan and all Options then outstanding will
terminate. Each Participant will be paid the outstanding balance of payroll
deductions that are in his or her Account at the time of such transaction.
18. Public Offering.
---------------
In the event that Yurie proposes to engage in a public offering of its
Common Stock, Yurie shall have the right, prior to said offering, to cancel all
Options that are outstanding at the time. If Yurie exercises this right, each
Participant will be paid the outstanding balance off payroll deductions that are
in his or her Account at the time of the cancellation.
19. No Special Employment Rights.
----------------------------
Nothing contained in the Plan shall confer upon any Participant any right
with respect to the continuation of his or her employment by the Company or
interfere in any
<PAGE>
12
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, or as specifically determined by the Board of Directors, 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.
21. Withholding.
-----------
(a) General. The Company shall have the right to deduct from payments of
-------
any kind otherwise due to a Participant (or secure payment from the Participant
in lieu of such deduction) any federal, state or local taxes of any kind
required by law to be withheld with respect to any amount payable under the Plan
or with respect to any disqualifying disposition (as defined in Section 421(b)
of the Code) of shares acquired upon exercise of Options under the Plan.
Subject to prior approval of the Company, which may be withheld by the Company
in its sole discretion, a Participant may elect to satisfy such obligations, in
whole or in part: (i) by causing Yurie to withhold shares of Common Stock
otherwise issuable pursuant to the exercise of an Option or (ii) by delivering
to Yurie shares of Common Stock already owned by the Participant. The Fair
<PAGE>
13
Market Value of the Common Stock so delivered or withheld shall be equal to such
withholding obligation.
(b) Officers and Directors. Notwithstanding the foregoing, in the case of
----------------------
an officer or director (as defined for purposes of Rule 16b-3 under the Exchange
Act) no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with Rule 16b-3 under the Exchange Act.
22. Amendment of the Plan.
---------------------
The Board of Directors may at any time and from time to time terminate or
modify or amend the Plan in any respect, except that the Board may not, without
shareholder approval: (i) increase the maximum number of shares of Common Stock
which may be issued under the Plan (other than increases pursuant to Section
16); or (ii) make any change that would cause the Plan thereunder to fail to
qualify as an employee stock purchase plan within the meaning of Sections 423
and 424 of the Code. Provided, however, that without the consent of a
Participant no amendment shall be made that would restrict or in any way
adversely affect outstanding Options held by that Participant. Amendments to
the Plan not requiring shareholder approval shall become effective as of the
date adopted by the Board of Directors unless otherwise provided by the Board.
Amendments requiring shareholder approval shall become effective as of the date
of adoption by the Board unless otherwise provided by the Board, if approved by
the shareholders of Yurie within twelve months before or after such adoption
date.
<PAGE>
14
23. Effective Date and Duration of the Plan.
---------------------------------------
(a) Effective Date. The Plan shall become effective on February 1, 1997.
--------------
(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 __, 1997.
Approved by the Shareholders on December 23, 1996.
<PAGE>
Exhibit 10.13
YURIE SYSTEMS, INC. 401(k) SAVINGS PLAN
RESTATED AND AMENDED
EFFECTIVE JANUARY 1, 1997
<PAGE>
ARTICLE I
DEFINITIONS
As used in this Plan, the following words and phrases shall have the meanings
set forth herein unless a different meaning is clearly required by the context:
1.1 Act means the Employee Retirement Income Security Act of 1974 as it may be
---
amended from time to time.
1.2 Administrator means the persons or entity designated by the Employer
-------------
pursuant to Section 2.4 to administer the Plan on behalf of the Employer.
1.3 Affiliated Employer means the Employer and any corporation which is a
-------------------
member of a controlled group of corporations (as defined in Code Section 414(b)
which includes the Employer any trade or business (whether or not incorporated)
which is under common control (as defined in Code Section 414(c) with the
Employer, any organization (whether or not incorporated) which is a member of an
affiliated service group (as defined in Code Section 414(m) which includes the
Employer, and any other entity required to be aggregated with the Employer
pursuant to Regulations under Code Section 414(o).
1.4 Aggregate Account means with respect to each Participant, the value of all
-----------------
accounts maintained on behalf of a Participant, whether attributable to Employer
or Employee contributions, subject to the provisions of Section 2.2.
1.5 Allocation Participant means: (a) for purposes of allocation of Employer's
----------------------
Non-Elective Contributions made pursuant to Section 4.1(b) (i.e., matching
----
contributions), a Participant who is considered to be a Participant under
Section 3.1(d); and (b) for purposes of allocation of an Employer's Non-Elective
Contributions made pursuant to Section 4.1(c) (i.e., discretionary
----
contributions), a participant who is (I) considered to be a Participant under
Section 3.1(d); (II) credited with a Year of Service for the Plan Year with
respect to which the contribution is made, unless the Year of Service
requirement is reduced pursuant to Section 4.4(h); and (III) an Employee on the
last day of the Plan Year with respect to which the contribution is made.
Provided, however, that an Employee who terminates employment during a Plan Year
for reasons of death, Total and Permanent Disability, or retirement shall be
deemed to have met the requirements of Sections 1.5(b)(II) and (III) for such
Plan Year.
1.6 Anniversary Date means December 31st.
----------------
-1-
<PAGE>
1.7 Anniversary Starting Date means the first day on which all events have
-------------------------
occurred which entitles the Participant to a benefit.
1.8 Beneficiary means the person to whom a share of a deceased Participant's
-----------
interest in the Plan is payable, subject to the restrictions of Sections 6.2 and
6.6.
1.9 Code means the Internal Revenue Code of 1986, as amended or replaced from
----
time to time.
1.10 Common Stock means the common stock of Yurie Systems, Inc. having a par
------------
value of $0.01.
1.11 Common Stock Account means the portion of a Participant's Account
--------------------
maintained pursuant to Section 4.14 and attributable to matching contributions
made in Common Stock.
1.12 Compensation with respect to any Participant means 415 safe-harbor
------------
compensation for the Plan Year that is actually paid to the Participant. 415
safe-harbor compensation is defined as wages, salaries, and fees for
professional services and other amounts received (without regard to whether or
not an amount is paid in cash) for personal services actually rendered in the
course of employment with the Employer maintaining the Plan to the extent that
the amounts are includible in gross income (including, but not limited to,
commissions paid salesmen, compensation for services on the basis of a
percentage of profit, commissions on insurance premiums, tips, bonuses, fringe
benefits, and reimbursements, or other expense allowances under a non-
accountable plan (as described in Regulation 1.622(c)), and excluding the
following:
(1) Employer contributions to a plan of deferred compensation which
are not includible in the Employee's gross income for the
taxable year in which contributed, or employer contributions
under a simplified employee pension plan to the extent such
contributions are deductible by the Employee, or any
distributions from a plan of deferred compensation;
(2) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
Employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(3) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
-2-
<PAGE>
(4) Other amounts which received special tax benefit, or
contributions made by the Employer (whether or not under a
salary reduction agreement) towards the purchase of an annuity
contract described in Code Section 403(b) (whether or not the
contributions are actually excludable from the gross income of
the Employee).
Notwithstanding this definition of 415 safe-harbor compensation, however,
Compensation for all Plan purposes shall not include: (A) compensation which is
not currently includible in the Participant's gross income by reason of the
application of Code Sections 125, 402(e)(3), 402(h)(1)(B), or 403(b); (B)
overtime; (C) bonuses; (D) compensation for the period prior to the date the
Participant entered the Plan; or (E) reimbursements or other expense allowances,
fringe benefits (cash or noncash), moving expenses, deferred compensation or
welfare benefits.
Notwithstanding the above, the Compensation of each Employee taken into account
under the Plan shall not exceed the OBRA '93 annual compensation limit. The
OBRA '93 annual compensation limit is $150,000. as adjusted by the Commissioner
for increases in the cost of living in accordance with Code Section
401(a)(17)(B). The cost of-living adjustment in effect for a calendar year
applies to any period, not exceeding 12 months. over which Compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction. the numerator of which is
the number of months in the determination period, and the denominator of which
is 12.
Any reference in this Plan to the limitation under Code Section 401(a)(17) shall
mean the OBRA '93 annual compensation limit set forth in this Section.
In applying these limitations, the family group of a Highly Compensated
Participant who is subject to the Family Member aggregation rules of Code
Section 414(q)(6) because such Partici pant is either a "five percent owner" of
the Employer or one of the ten (10) Highly Compensated Employees paid the
greatest "415 Compensation" during the year, shall be treated as a single
Participant, except that for this purpose Family Members shall include only the
affected Participant's spouse and any lineal descendants who have not attained
age nineteen (19) before the close of the year. If, as a result of the
application of such rules, the adjusted limitation is exceeded, then (except for
purposes of determining the portion of Compensation up to the integration level
if this plan is integrated), the limitation shall be prorated among the affected
individuals in proportion to each such individual's Compensation as determined
under this Section prior to the application of this limitation.
-3-
<PAGE>
1.13 Deferred Compensation means that portion of a Participant's total
---------------------
Compensation that such Participant has elected to defer for a Plan Year pursuant
to Section 4.2.
1.14 Early Retirement Date means the date on which a Participant or Former
---------------------
Participant has attained his 55th birthday and completed at least five (5) Years
of Service (Early Retirement Age). A Participant shall become fully Vested upon
satisfying this requirement if still employed at his Early Retirement Age.
A Former Participant who terminates employment after satisfying the service
requirement for Early Retirement and who thereafter reaches the age requirement
contained herein shall be entitled to receive his benefits under this Plan.
1.15 Effective Date means January 1, 1996.
--------------
1.16 Elective Contribution means the Employer's contributions to the Plan that
---------------------
are made pursuant to the Participant's deferral election pursuant to Section
4.2. Elective Contributions shall be subject to the requirements of Sections
4.2(b) and 4.2(c) and shall further be required to satisfy the discrimination
requirements of Regulation 1.40 1(k)-1(b)(3), the provisions of which are
specifically incorporated herein by reference.
1.17 Employee means any person who is employed by the Employer, but excludes
--------
any person who is employed as an independent contractor. The term Employee
shall also include Leased Employees as provided in Code Section 414(n) or (o).
Employees of entities which are an Affiliated Employer will not be treated as
employed by a single employer.
1.18 Employer means Yurie Systems, Inc., any Participating Employer (as defined
--------
in Section 10.1) which shall adopt this Plan, any successor which shall maintain
this Plan and any predecessor which has maintained this Plan.
1.19 Excess Contributions means, with respect to a Plan Year, the excess of
--------------------
Elective Contributions and Qualified Non-Elective Contributions made on behalf
of Highly Compensated Participants for the Plan Year over the maximum amount of
such contributions permitted under Section 4.5(a).
1.20 Excess Deferred Compensation means, with respect to any taxable year of a
----------------------------
Participant, the excess of the aggregate amount of such Participant's Deferred
Compensation and the elective deferrals pursuant to Section 4.2(f) actually made
on behalf of such Participant for such taxable year, over the dollar
-4-
<PAGE>
limitation provided for in Code Section 402(g), which is incorporated herein by
reference.
1.21 Family Member means, with respect to an affected Participant, such
-------------
Participant's spouse, and such Participant's lineal descendants and ascendants
and their spouses, all as described in Code Section 414(q)(6)(B).
1.22 Fiduciary means any person who: (a) exercises any discretionary authority
---------
or discretionary control respecting management of the Plan or exercises any
authority or control respecting man agement or disposition of its assets; (b)
renders investment advice for a fee or other compensation, direct or indirect
with respect to any monies or other property of the Plan or has any authority or
responsibility to do so; or (c) has any discretion ary authority or
discretionary responsibility in the administra tion of the Plan, including, but
not limited to, the Trustee, the Employer and its representative body, and the
Administrator.
1.23 Fiscal Year means the Employer's accounting year which is the calendar
-----------
year.
1.24 Forfeiture means that portion of a Participant's Non-Elective Account that
----------
is not Vested, and occurs on the earlier of:
(a) the distribution of the entire Vested portion of a Participant's Non-
Elective Account, or
(b) the last day of the Plan Year in which the Participant incurs five
(5) consecutive 1-Year Breaks in Service.
Furthermore, for purposes of paragraph (a) above, in the case of a Terminated
Participant whose Vested benefit is zero, such Terminated Participant shall be
deemed to have received a distribution of his Vested benefit upon his
termination of employment. In addition, the term Forfeiture shall also include
amounts deemed to be Forfeitures pursuant to any other provision of this Plan.
1.25 Former Participant means a person who has been a Participant, but who has
------------------
ceased to be a Participant for any reason.
1.26 414(s) Compensation with respect to any Employee means his Compensation as
-------------------
defined in Section 1.9, except that for purposes of this Section, Compensation
shall be determined by including bonuses and overtime. The amount of "414(s)
Compensation" with respect to any Employee shall include "414(s) Compensation"
during the entire twelve (12) month period ending on the last day of such Plan
Year, except that "414(s) Compensation" shall only be recognized as of an
Employee's effective date of participation.
-5-
<PAGE>
1.27 415 Compensation means compensation as defined in Section 4.9(f)(2).
----------------
1.28 Highly Compensated Employee means an Employee described in Code Section
---------------------------
414(q) and the Regulations thereunder and generally means an Employee who
performed services for the Employer during the "determination year" and is in
one or more of the following groups:
(a) Employees who at any time during the "determination year" or "look-
back year" were "five percent owners" as defined in Section 1.31(c).
(b) Employees who received "415 Compensation" during the "look-back year"
from the Employer in excess of $75,000.
(c) Employees who received "415 Compensation" during the "look-back year"
from the Employer in excess of $50,000, and were the Top Paid Group
of Employees for the Plan Year.
(d) Employees who during the "look-back year" were officers of the
Employer (as that term is defined within the meaning of the
Regulations under Code Section 416) and received "415 Compensation"
during the "look-back year" from the Employer greater than 50 percent
of the limit in effect under Code Section 415(b)(1)(A) for any such
Plan Year. The number of officers shall be limited to the lesser of
(i) 50 employees, or (ii) the greater of 3 employees or 10 percent of
all employees. If the Employer does not have at least one officer
whose annual "415 Compensation" is in excess of 50 percent of the
Code Section 415(b)(1)(A) limit, then the highest paid officer of the
Employer will be treated as a Highly Compensated Employee.
(e) Employees who are in the group consisting of the 100 Employees paid
the greatest "415 Compensation" during the "determination year" and
are also described in (b), (c) or (d) above when these paragraphs are
modified to substitute "determination year" for "look-back year".
The "determination year" shall be the Plan Year for which testing is being
performed, and the "look-back year" shall be the immediately preceding twelve-
month period. However, if the Plan Year is a calendar year, or if another Plan
of the Employer so provides, then the "look-back year" shall be the calendar
year ending with or within the Plan Year for which testing is being performed,
and the "determination year (if applicable) shall be the period of time, if any,
which extends beyond the "look-back year" and ends on the last day of the Plan
Year for which testing
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is being performed (the "lag period"). With respect to this election, it shall
be applied on a uniform and consistent basis to all plans, entities, and
arrangements of the Employer.
For purposes of this Section, the determination of "415 Compensation" shall be
made by including amounts that would otherwise be excluded from a Participant's
gross income by reason of the application of Code Sections 125, 402(e)(3),
402(h)(1)(B) and, in the case of Employer contributions made pursuant to a
salary reduction agreement, Code Section 403(b). Additionally, the dollar
threshold amounts specified in (b) and (c) above shall be adjusted at such time
and in such manner as is provided in Regulations. In the case of such an
adjustment the dollar limits which shall be applied are those for the calendar
year in which the "determination year" or "look back year" begins.
In determining who is a Highly Compensated Employee, Employers who are non-
resident aliens and who received no earned income (within the meaning of Code
Section 911(d)) from the Employer constituting United States source income
within the meaning of Code Section 861(a)(3) shall not be treated as Employees.
Additionally, all Affiliated Employers shall be taken into account as a single
employer and Leased Employees within the meaning of Code Sections 414(n)(2) and
414(o)(2) shall be considered Employees unless such Leased Employees are covered
by a plan described in Code Section 414(n)(5) and are not covered in any
qualified plan maintained by the Employer. The exclusion of Leased Employees
for this purpose shall be applied on a uniform and consistent basis for all of
the Employer's retirement plans. In addition, Highly Compensated Former
Employees shall be treated as Highly Compensated Employees without regard to
whether they performed services during the "determination year".
1.29 Highly Compensated Former Employee means a former Employee who had a
----------------------------------
separation year prior to the "determination year" and was a Highly Compensated
Employee in the year of separation from service or in any "determination year"
after attaining age 55. Notwithstanding the foregoing, an Employee who
separated from service prior to 1987 will be treated as a Highly Compensated
Former Employee only if during the separation year (or year preceding the
separation year) or any year after the Employee attains age 55 (or the last year
ending before the Employee's 55th birthday), the Employee either received "415
Compensation" in excess of $50,000 or was a "five percent owner". For purposes
of this Section, "determination year", "415 Compensation" and "five percent
owner" shall be determined in accordance with Section 1.26. Highly Compensated
Former Employees shall be treated as Highly Compensated Employees. The method
set forth in this Section for determining who is a "Highly Compensated Former
Employee" shall be applied on a uniform and consistent basis for all purposes
for which the Code Section 414(q) definition is applicable.
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1.30 Highly Compensated Participant means any Highly Compensated Employee who
------------------------------
is eligible to participate in the Plan.
1.31 Hour of Service means (l) each hour for which an Employee is directly or
---------------
indirectly compensated or entitled to compensation by the Employer for the
performance of duties during the applicable computation period; (2) each hour
for which an Employee is directly or indirectly compensated or entitled to
compensation by the Employer (irrespective of whether the employment
relationship has terminated) for reasons other than performance of duties (such
as vacation, holidays, sickness, jury duty, disability, lay-off, military duty
or leave of absence) during the applicable computation period; (3) each hour for
which back pay is awarded or agreed to by the Employer without regard to
mitigation of damages. The same Hours of Service shall not be credited both
under (1) or (2), as the case may be, and under (3).
Notwithstanding the above, (i) no more than 501 Hours of Service are required to
be credited to an Employee on account of any single continuous period during
which the Employee performs no duties (whether or not such period occurs in a
single computation period); (ii) an hour for which an Employee is directly or
indirectly paid, or entitled to payment, on account of a period during which no
duties are performed is not required to be credited to the Employee if such
payment is made or due under a plan maintained solely for the purpose of
complying with applicable worker's compensation, or unemployment compensation or
disability insurance laws; and (iii) Hours of Service are not required to be
credited for a payment which solely reimburses an Employee for medical or
medically related expenses incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be made by or due
from the Employer regardless of whether such payment is made by or due from the
Employer directly, or indirectly through, among others, a trust fund, or
insurer, to which the Employer contributes or pays premiums and regardless of
whether contributions made or due to the trust fund, insurer, or other entity
are for the benefit of particular Employees or are on behalf of a group of
Employees in the aggregate.
An Hour of Service must be counted for the purpose of determining a Year of
Service, a year of participation for purposes of accrued benefits, a 1-Year
Break in Service, and employment commencement date (or reemployment commencement
date). The provisions of Department of Labor regulations 2530.200b-2(b) and (c)
are incorporated herein by reference.
Hours of Service will be credited for employment with all Affiliated Employers
and for any individual considered to be a Leased Employee pursuant to Code
Sections 414(n) or 414(o) and the Regulations thereunder.
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Hours of Service will be determined on the basis of actual hours for which an
Employee is paid or entitled to payment.
1.32 Investment Manager means an entity that (a) has the power to manage,
------------------
acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility
to the Plan in writing. Such entity must be a person, firm, or corporation
registered as an investment adviser under the Investment Adviser Act of 1940, a
bank, or an insurance company.
1.33 Key Employee means an Employee as defined in Code Section 416(i) and the
------------
Regulations thereunder. Generally, any Employee or former Employee (as well as
each of his Beneficiaries) is considered a Key Employee if he, at any time
during the Plan Year that contains the "Determination Date" or any of the
preceding four (4) Plan Years, has been included in one of the following
categories:
(a) an officer of the Employer (as that term is defined within the
meaning of the Regulations under Code Section 416) having annual "415
Compensation" greater than 50 percent of the amount in effect under
Code Section 415(b)(1)(A) for any such Plan Year.
(b) one of the ten employees having annual "415 Compensation" from the
Employer for a Plan Year greater than the dollar limitation in effect
under Code Section 415(c)(1)(A) for the calendar year in which such
Plan Year ends and owning (or considered as owning within the meaning
of Code Section 318) both more than one-half percent interest and the
largest interests in the Employer.
(c) a "five percent owner" of the Employer. "Five percent owner" means
any person who owns (or is considered as owning within the meaning of
Code Section 318) more than five percent (5%) of the outstanding
stock of the Employer or stock possessing more than five percent (5%)
of the total combined voting power of all stock of the Employer or,
in the case of an unincorporated business, any person who owns more
than five percent (5%) of the capital or profits interest in the
Employer. In determining percentage ownership here under, employers
that would otherwise be aggregated under Code Sections 414(b), (c),
(m) and (o) shall be treated as separate employers.
(d) a "one percent owner" of the Employer having an annual "415
Compensation" from the Employer of more than $150,000. "One percent
owner" means any person who owns (or is considered as owning within
the meaning of Code Section 318) more than one percent (1%) of the
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outstanding stock of the Employer or stock possessing more than one percent
(1%) of the total combined voting power of all stock of the Employer or, in
the case of an unincorporated business, any person who owns more than one
percent (1%) of the capital or profits interest in the Employer. In
determining percentage ownership hereunder, employers that would otherwise
be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated
as separate employers. However, in determining whether an individual has
"415 Compensa tion" of more than $150,000, "415 Compensation" from each
employer required to be aggregated under Code Sections 414(b), (c), (m) and
(o) shall be taken into account.
For purposes of this Section, the determination of "415 Compensa tion" shall be
made by including amounts that would otherwise be excluded from a Participant's
gross income by reason of the application of Code Sections 125.402(e)(3),
402(h)(1)(B) and, in the case of Employer contributions made pursuant to a
salary reduction agreement, Code Section 403(b).
1.34 Late Retirement Date means the date of a Participant's actual retirement
--------------------
after having reached his Normal Retirement Date.
1.35 Leased Employee means any person (other than an Employee of the recipient)
---------------
who pursuant to an agreement between the recipient and any other person
("leasing organization") has performed services for the recipient (or for the
recipient and related per sons determined in accordance with Code Section
414(n)(6)) on a substantially full time basis for a period of at least one year,
and such services are of a type historically performed by employees in the
business field of the recipient employer. Contributions or benefit provided a
leased employee by the leasing organization which are attributable to services
performed for the recipient employer shall be treated as provided by the
recipient employer.
A leased employee shall not be considered an Employee of the recipient if: (i)
such employee is covered by a money purchase pension plan providing: (1) a
nonintegrated employer contribution rate of at least 10 percent of compensation,
as defined in Code Section 415(c)(3), but including amounts contributed pursuant
to a salary reduction agreement which are excludable from the employee's gross
income under Code Sections 125.402(e)(3), 402(h), or 403(b), (2) immediate
participation, and (3) full and immediate vesting; and (ii) leased employees do
not constitute mom than 20 percent of the recipient's non-highly compensated
workforce.
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1.36 Net Profit means with respect to any Fiscal Year the Employer's net income
----------
or profit for such Fiscal Year determined upon the basis of the Employer's books
of account in accordance with generally accepted accounting principles, without
any reduc tion for taxes based upon income, or for contributions made by the
Employer to this Plan and any other qualified plan.
1.37 Non-Elective Contribution means the Employer's contributions to the Plan
-------------------------
other than those made pursuant to the Participant's deferral election made
pursuant to Section 4.1(a) and any Qualified Non-Elective Contribution. The
Employer's matching contribution made pursuant to Section 4.1(b) shall be
considered a Non-Elective Contribution for purposes of the Plan.
1.38 Non-Highly Compensated Participant means any Participant who is neither a
----------------------------------
Highly Compensated Employee nor a Family Member.
1.39 Non-Key Employee means any Employee or former Employee (and his
----------------
Beneficiaries) who is not a Key Employee.
1.40 Normal Retirement Age means the date a Participant attains his 65th
---------------------
birthday, at which time he shall become fully Vested in his Participant's Non-
Elective Account.
1.41 Normal Retirement Date means the Participant's Normal Retirement Age, on
----------------------
which he shall become eligible to have his benefits distributed to him.
1.42 1-Year Break in Service means the applicable computation period during
-----------------------
which an Employee has not completed more than 500 Hours of Service with the
Employer. Further, solely for the purpose of determining whether a Participant
has incurred a 1-Year Break in Service, Hours of Service shall be recognized for
"authorized leaves of absence" and "maternity and paternity leaves of absence."
"Authorized leave of absence" means an unpaid, temporary cessa tion from active
employment with the Employer pursuant to an established nondiscriminatory
policy, whether occasioned by illness. military service, or any other reason.
A "maternity or paternity leave of absence" means an absence from work for any
period by reason of the Employee's pregnancy, birth of the Employee's child,
placement of a child with the Employee in connection with the adoption of such
child, or any absence for the purpose of caring for such child for a period
immediately following such birth or placement. For this purpose, Hours of
Service shall be credited for the computation period in which the absence from
work begins, only if credit therefore is necessary to prevent the Employee from
incurring a 1-year Break in Service, or, in any other case, in the immediately
following computation period. The Hours of Service credited for a "maternity or
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paternity leave of absence" shall be those which would normally have been
credited but for such absence, or, in any case in which the Administrator is
unable to determine such hours normally credited, eight (8) Hours of Service per
day. The total Hours of Service required to be credited for a "maternity or
paternity leave of absence" shall not exceed 501.
1.43 Participant means any Employee who participates in the Plan as provided in
-----------
Section 3.1 and has not for any reason become ineligible to participate further
in the Plan.
1.44 Participant's Non-Elective Account means the account established and
----------------------------------
maintained by the Administrator for each Participant with respect to his total
interest under the Plan resulting from the Employer's Non-Elective
Contributions. A separate accounting shall be maintained in this Account for
matching contributions.
1.45 Participant's Combined Account means the total aggregate amount of each
------------------------------
Participant's Elective Account, Qualified Non Elective Account, and
Participant's Non-Elective Account.
1.46 Participant's Elective Account means the account established and
------------------------------
maintained by the Administrator for each Participant with respect to his total
interest in the Plan and Trust resulting from the Employer's Elective
Contributions. A separate accounting shall be maintained with respect to that
portion of the Participant's Elective Account attributable to Elective
Contributions made pursuant to Section 4.1(b), and any Qualified Non-Elective
Contributions.
1.47 Participant's Rollover Account means the account established and
------------------------------
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from amounts transferred from another qualified
plan or "conduit" Individual Retirement Account in accordance with Section 4.11.
1.48 Plan means the Yurie Systems, Inc. 401(k) Employee Savings Plan.
----
1.49 Plan Year means the calendar year.
---------
1.50 Qualified Non-Elective Contribution means the Employer's contributions to
-----------------------------------
the Plan that are made pursuant to Section 4.6(b) which are used to satisfy the
"Actual Deferral Percentage" tests. Qualified Non-Elective Contributions are
nonforfeitable when made and are distributable only as specified in Sections
4.2(c) and 6.11. In addition, the Employer's contributions to the Plan that are
made pursuant to Section 4.8(h) and which are used to satisfy the "Actual
Contribution Percentage" tests shall be considered Qualified Non-Elective
Contributions.
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1.51 Regulation means the Income Tax Regulations as promulgated by the
----------
Secretary of the Treasury or his delegates and as amended from time to time.
1.52 Retired Participant means a person who has been a Participant, but who has
-------------------
become entitled to retirement benefits under the Plan.
1.53 Retirement Date means the date as of which a Participant retires for
---------------
reasons other than Total and Permanent Disability, whether such retirement
occurs on a Participant's Normal Retire ment Date, Early or Late Retirement Date
(see Section 6.1).
1.54 Shareholder-Employee means a Participant who owns more than five percent
--------------------
(5%) of the Employer's outstanding capital stock during any year in which the
Employer elected to be taxed as a Small Business Corporation under the
applicable Code Section.
1.55 Super Top Heavy Plan means a plan described in Section 2.2(b).
--------------------
1.56 Terminated Participant means a person who has been a Participant, but
----------------------
whose employment has been terminated other than by death, Total and Permanent
Disability or retirement.
1.57 Top Heavy Plan means a plan described in Section 2.2(a).
--------------
1.58 Top Heavy Plan Year means a Plan Year commencing after December 31, 1983
-------------------
during which the Plan is a Top Heavy Plan.
1.59 Top Paid Group shall be determined pursuant to Code Section 414(q) and the
--------------
Regulations thereunder and generally means the top 20 percent of Employees who
performed services for the Employer during the applicable year, ranked according
to the amount of "415 Compensation" (as determined pursuant to Section 1.26)
received from the Employer during such year. All Affiliated Employers shall be
taken into account as a single employer, and Leased Employees shall be treated
as Employees pursuant to Code Section 414(n) or (o). Employees who are
nonresident aliens who received no carried income (within the meaning of Code
Section 911(d)(2)) from the Employer constituting United States source income
within the meaning of Code Section 861(a)(3) shall not be treated as Employees.
Additionally, for the purpose of determining the number of active Employees in
any year, the following additional Employees shall also be excluded, however,
such Employees shall still be considered for the purpose of identifying the
particular Employees in the Top Paid Group:
(a) Employees with less than six (6) months of service;
(b) Employees who normally work less than 17 1/2 hours per week;
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(c) Employees who normally work less than six (6) months during a year; and
(d) Employees who have not yet attained age 21.
In addition, if 90 percent or more of the Employees of the Employer are covered
under agreements the Secretary of Labor finds to be collective bargaining
agreements between Employee representatives and the Employer, and the Plan
covers only Employees who are not covered under such agreements, then Employees
covered by such agreements shall be excluded from both the total number of
active Employees as well as from the identi fication of particular Employees in
the Top Paid Group.
The foregoing exclusions set forth in this Section shall be applied on a uniform
and consistent basis for all purposes for which the Code Section 414(q)
definition is applicable.
1.60 Total and Permanent Disability means the inability to engage in any
------------------------------
substantial gainful activity by reason of any medically determinable physical or
mental impairment that can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months. The
disability of a Participant shall be determined by a licensed physician chosen
by the Administrator. However, if the condition constitutes total disability
under the federal Social Security Acts, the Administrator may rely upon such
determination that the Participant is Totally and Permanently Disabled for the
purposes of this Plan. The determination shall be applied uniformly to all
Participants.
1.61 Trustee means the individual, individuals or financial institution, or a
-------
combination of them, who shall be designated by Yurie Systems, Inc. and who
shall agree in writing to hold in trust any assets of the Plan for the purpose
of providing bene fits under the Plan, and shall include any successor trustee
to the trustee initially designated thereunder.
1.62 Trust Fund means the assets of the Plan and Trust as the same shall exist
----------
from time to time.
1.63 Vested with respect to any benefit payable to, or any portion of any
------
account maintained on behalf of, a Participant means nonforfeitable.
1.64 Year of Service means the computation period of twelve (12) consecutive
---------------
months, herein set forth, and during which an Employee has completed at least
1000 Hours of Service.
For purposes of eligibility for participation, the initial computation period
shall begin with the date on which the Employee first performs an Hour of
Service (employment com-
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mencement date). The computation period beginning after a 1-Year Break in
Service shall be measured from the date on which an Employee again performs an
Hour of Service. After the initial eligibility computation period, the
eligibility computation period shall shift to the current Plan Year which
includes the anniversary of the date on which the Employee first performed an
Hour of Service.
For vesting purposes, and all other purposes not specifically addressed in this
Section, the computation period shall be the Plan Year, including periods prior
to the Effective Date of the Plan.
Years of Service and breaks in service will be measured on the same computation
period.
Years of Service with any predecessor Employer which maintained this Plan shall
be recognized. Years of Service with any other predecessor Employer shall not
be recognized.
Years of Service with any Affiliated Employer shall be recognized.
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ARTICLE II
TOP HEAVY PROVISIONS AND ADMINISTRATION
2.1 TOP HEAVY PLAN REQUIREMENTS.
For any Top Heavy Plan Year, the Plan shall provide the special vesting
requirements of Code Section 416(b) pursuant to Section 6.4 of the Plan and the
special minimum allocation requirements of Code Section 416(c) pursuant to
Section 4.4(i) of the Plan.
2.2 DETERMINATION OF TOP HEAVY STATUS
(a) This Plan shall be a Top Heavy Plan for any Plan Year in which, as of
the Determination Date, (1) the Present Value of Accrued Benefits of
Key Employees and (2) the sum of the Aggregate Accounts of Key
Employees under this Plan and all plans of an Aggregation Group,
exceeds sixty percent (60%) of the Present Value of Accrued Benefits
and the Aggregate Accounts of all Key and Non-Key Employees under this
Plan and all plans of an Aggregation Group.
If any Participant is a Non-Key Employee for any Plan Year, but such
Participant was a Key Employee for any prior Plan Year, such
Participant's Present Value of Accrued Benefit and/or Aggregate Account
balance shall not be taken into account for purposes of determining
whether this Plan is a Top Heavy or Super Top Heavy Plan (or whether
any Aggregation Group which includes this Plan is a Top Heavy Group).
In addition, if a Participant or Former Participant has not performed
any services for any Employer maintaining the Plan at any time during
the five year period ending on the Determination Date, any accrued
benefit for such Participant or Former Participant shall not be taken
into account for the purposes of determining whether this Plan is a Top
Heavy or Super Top Heavy Plan.
(b) This Plan shall be a Super Top Heavy Plan for any Plan Year in which,
as of the Determination Date, (1) the Present Value of Accrued Benefits
of Key Employees and (2) the sum of the Aggregate Accounts of Key
Employees under this Plan and all plans of an Aggregation Group,
exceeds ninety percent (90%) of the Present Value of Accrued Benefits
and the Aggregate Accounts of all Key and Non-Key Employees under this
Plan and all plans of an Aggregation Group.
(c) Aggregate Account: A Participant's Aggregate Account as of the
Determination Date is the sum of:
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(1) his Participant's Combined Account balance as of the most recent
valuation occurring within a twelve (12) month period ending on the
Determination Date;
(2) an adjustment for any contributions due as of the Determination
Date. Such adjustment shall be the amount of any contributions
actually made after the valuation date but on or before the
Determination Date, except for the first Plan Year when such
adjustment shall also reflect the amount of any contributions made
after the Determination Date that are allocated as of a date in
that first Plan Year;
(3) any Plan distributions made within the Plan Year that includes the
Determination Date or within the four (4) preceding Plan Years.
However, in the case of distributions made after the valuation date
and prior to the Determination Date, such distributions are not
included as distributions for top heavy purposes to the extent that
such distributions are already included in the Participant's
Aggregate Account balance as of the valuation date. Notwithstanding
anything herein to the contrary, all distributions, including
distributions made prior to January 1, 1984, and distributions
under a terminated plan which if it had not been terminated would
have been required to be included in an Aggregation Group, will be
counted. Further, distributions from the Plan (including the cash
value of life insurance policies) of a Participant's account
balance because of death shall be treated as a distribution for
the purposes of this paragraph.
(4) any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified voluntary
employee contributions shall not be considered to be a part of the
Participant's Aggregate Account balance.
(5) with respect to unrelated rollovers and plan-to-plan transfers
(ones which are both initiated by the Employee and made from a plan
maintained by one employer to a plan maintained by another
employer), if this Plan provides the rollovers or plan-to-plan
transfers, it shall always consider such rollovers or plan-to-plan
transfers as a distribution for the purposes of this Section. If
this Plan is the plan accepting such rollovers or plan-to-plan
transfers, it shall not consider such
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rollovers or plan-to-plan transfers accepted after December 31,
1983 as part of the Participant's Aggregate Account balance.
However, rollovers or plan-to-plan transfers accepted prior to
January 1, 1984 shall be considered as part of the Participant's
Aggregate Account balance.
(6) with respect to related rollovers and plan-to-plan transfers (ones
either not initiated by the Employee or made to a plan maintained
by the same employer), if this Plan provides the rollover or plan-
to-plan transfer, it shall not be counted as a distribution for
purposes of this Section. If this Plan is the plan accepting such
rollover or plan-to-plan transfer, it shall consider such rollover
or plan-to-plan transfer as part of the Participant's Aggregate
Account balance, irrespective of the date on which such rollover or
plan-to-plan transfer is accepted.
(7) For the purposes of determining whether two employers are to be
treated as the same employer in 2.2(c)(5) and 2.2(c)(6) above, all
employers aggregated under Code Section 414(b), (c), (m) and (o)
are treated as the same employer.
(d) "Aggregation Group" means either a Required Aggregation Group or a
Permissive Aggregation Group as hereinafter determined.
(1) Required Aggregation Group: In determining a Required Aggregation
Group hereunder, each qualified plan of the Employer, including any
Simplified Employee Pension Plan, in which a Key Employee is a
participant in the Plan Year containing the Determination Date or
any of the four preceding Plan Years, and each other qualified plan
of the Employer which enables any qualified plan in which a Key
Employee participates to meet the requirements of Code Sections
401(a)(4) or 410, will be required to be aggregated. Such group
shall be known as a Required Aggregation Group.
In the case of a Required Aggregation Group, each plan in the group
will be considered a Top Heavy Plan if the Required Aggregation
Group is a Top Heavy group. No plan in the Required Aggregation
Group will be considered a Top Heavy Plan if the Required
Aggregation Group is not a Top Heavy Group.
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(2) Permissive Aggregation Group: The Employer may also include any
other plan of the Employer, including any Simplified Employee
Pension Plan, not required to be included in the Required
Aggregation Group, provided the resulting group, taken as a whole,
would continue to satisfy the provisions of Code Sections 401(a)(4)
and 410. Such group shall be known as a Permissive Aggregation
Group.
In the case of a Permissive Aggregation Group, only a plan that is
part of the Required Aggregation Group will be considered a Top
Heavy Plan if the Permissive Aggregation Group is a Top Heavy
Group. No plan in the Permissive Aggregation Group will be
considered a Top Heavy Plan if the Permissive Aggregation Group is
not a Top Heavy Group.
(3) Only those plans of the Employer in which the Determination Dates
fall within the same calendar year shall be aggregated in order to
determine whether such plans are Top Heavy Plaits.
(4) When aggregating plans, the value of Aggregate Accounts and Accrued
Benefits will be calculated with reference to the Determination
Dates that fall within the same calendar year.
(5) An Aggregation Group shall include any terminated plan of the
Employer if it was maintained within the last five (5) years ending
on the Determination Date.
(e) "Determination Due" means (a) the last day of the preceding Plan Year,
or (b) in the case of the first Plan Year, the last day of such Plan
Year.
(f) Present Value, of Accrued Benefit: In the case of a defined benefit
plan, the Present Value of Accrued Benefit for a Participant other than
a Key Employee shall be as determined using the single accrual method
used for all plans of the Employer and Affiliated Employers, or if no
such single method exists, using a method which results in benefits
accruing not more rapidly than the slowest accrual rate permitted under
Code Section 411(b)(1)(C). The determination of the Present Value of
Accrued Benefit shall be determined as of the most recent valuation
date that falls within or ends with the 12-month period ending on the
Determination Date, except as provided in Code Section 416 and
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the Regulations thereunder for the first and second plan years of a
defined benefit plan.
However, any such determination must include present value of accrued
benefit attributable to any Plan distributions referred to in Section
2.2(c)(3) above, any Employee contributions referred to in Section
2.2(c)(4) above or any related or unrelated rollovers referred to in
Sections 2.2(c)(5) and 2.2(c)(6) above.
(g) "Top Heavy Group" means an Aggregation Group in which, as of the
Determination Date, the sum of:
(1) the Present Value of Accrued Benefits of Key Employees under all
defined benefit plans included in the group, and
(2) the Aggregate Accounts of Key Employees under all defined
contribution plans included in the group, exceeds sixty percent
(60%) of a similar sum determined for all Participants.
(h) The Administrator shall determine whether this Plan is a Top Heavy Plan
on each December 31st. Such determination of the top heavy ratio shall
be in accordance with Code Section 416 and the Regulations thereunder.
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER
(a) The Employer shall be empowered to appoint and remove the Trustee and
the Administrator from time to time as it deems necessary for the
proper administration of the Plan to assure that the Plan is being
operated for the exclusive benefit of the Participants, and their Bene
ficiaries in accordance with the terms of the Plan, the Code, and the
Act.
(b) The Employer shall establish a "funding policy and method", i.e., it
shall determine whether the Plan has a short run need for liquidity
(e.g., to pay benefits) or whether liquidity is a long run goal and
investment growth (and stability of same) is a more current need, or
shall appoint a qualified person to do so. The Employer or its delegate
shall communicate such needs and goals to the Trustee, who shall
coordinate such Plan needs with its investment policy. The communica-
tion of such a "funding policy and method" shall not, however,
constitute a directive to the Trustee as to investment of the Trust
Funds. Such "funding policy and method" shall be consistent with the
objectives of
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this Plan and with the requirements of Title I of the Act.
(c) The Employer may, in its discretion, appoint an Investment Manager to
manage all or a designated portion of the assets of the Plan. In such
event, the Trustee shall follow the directive of the Investment Manager
in investing the assets of the Plan managed by the Investment Manager.
(d) The Employer shall periodically review the performance of any Fiduciary
or other person to whom duties have been delegated or allocated by it
under the provisions of this Plan or pursuant to procedures established
hereunder. This requirement may be satisfied by formal periodic review
by the Employer or by a qualified person specifically designated by the
Employer, through day-to-day conduct and evaluation, or through other
appropriate ways.
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY
The Employer shall appoint one or more Administrators. Any person, including,
but not limited to, the Employees of the Employer, shall be eligible to serve as
an Administrator. Any person so appointed shall signify his acceptance by
filing written acceptance with the Employer. An Administrator may resign by
delivering his written resignation to the Employer or be removed by the Employer
by delivery of written notice of removal, to take effect at a date specified
therein, or upon delivery to the Administrator if no date is specified.
The Employer, upon the resignation or removal of an Adminis trator, shall
promptly designate in writing a successor to this position. If the Employer
does not appoint an Administrator, the Employer will function as the
Administrator.
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES
If more than one person is appointed as Administrator, the responsibilities of
each Administrator may be specified by the Employer and accepted in writing by
each Administrator. In the event that no such delegation is made by the
Employer, the Administrators may allocate the responsibilities among them
selves, in which event the Administrators shall notify the Employer and the
Trustee in writing of such action and specify the responsibilities of each
Administrator. The Trustee there after shall accept and rely upon any documents
executed by the appropriate Administrator until such time as the Employer or the
Administrators file with the Trustee a written revocation of such designation.
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2.6 POWERS AND DUTIES OF THE ADMINISTRATOR
The primary responsibility of the Administrator is to administer the Plan for
the exclusive benefit of the Participants and their Beneficiaries, subject to
the specific terms of the Plan. The Administrator shall administer the Plan in
accordance with its terms and shall have the power and discretion to construe
the terms of the Plan and determine all questions arising in connection with
the administration, interpretation, and application of the Plan. Any such
determination by the Administrator shall be conclusive and binding upon all
persons. The Administrator may establish procedures, correct any defect, supply
any information, or reconcile any inconsistency in such manner and to such
extent as shall be deemed necessary or advisable to carry out the purpose of the
Plan; provided, however, that any procedure, discretionary act, interpretation
or construction shall be done in a nondiscriminatory manner based upon uniform
principles consistently applied and shall be consistent with the intent that the
Plan shall continue to be deemed a qualified plan under the terms of Code
Section 401(a), and shall comply with the terms of the Act and all regulations
issued pursuant thereto. The Administrator shall have all powers necessary or
appropriate to accomplish his duties under this Plan.
The Administrator shall be charged with the duties of the general administration
of the Plan, including, but not limited to the following:
(a) the discretion to determine all questions relating to the eligibility
of Employees to participate or remain a Participant hereunder and to
receive benefits under the Plan;
(b) to compute, certify, and direct the Trustee with respect to the amount
and the kind of benefits to which any Participant shall be entitled
hereunder;
(c) to authorize and direct the Trustee with respect to all
nondiscretionary or otherwise directed disbursements from the Trust
Fund;
(d) to maintain all necessary records for the administration of the Plan;
(e) to interpret the provisions of the Plan and to make and publish such
rules for regulation of the Plan as are consistent with the terms
hereof;
(f) to compute and certify to the Employer and to the Trustee from time to
time the sums of money necessary or desirable to be contributed to the
Trust Fund;
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(g) to consult with the Employer and the Trustee regarding the short and
long-term liquidity needs of the Plan in order that the Trustee can
exercise any investment discretion in a manner designed to accomplish
specific objectives;
(h) to prepare and implement a procedure to notify Employees that they may
elect to have a portion of their Compensation deferred or paid to them
in cash;
(i) to assist any Participant-regarding his rights, benefits, or elections
available under the Plan;
2.7 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and shall keep all
other books of account, records, and other data that may be necessary for proper
administration of the Plan and shall be responsible for supplying all
information and reports to the Internal Revenue Service, Department of Labor,
Participants, Beneficiaries and others as required by Law.
2.8 APPOINTMENT OF ADVISERS
The Administrator, or the Trustee with the consent of the Administrator, may
appoint counsel, specialists, advisers, and other persons as the Administrator
or the Trustee deems necessary or desirable in connection with the
administration of this Plan.
2.9 INFORMATION FROM EMPLOYER
To enable the Administrator to perform his functions, the Employer shall supply
full and timely information to the Administrator on all matters relating to the
Compensation of all Participants, their Hours of Service, their Years of
Service, their retirement, death, disability, or termination of employment, and
such other pertinent facts as the Administrator may require, and the
Administrator shall advise the Trustee of such of the foregoing facts as may be
pertinent to the Trustee's duties under the Plan. The Administrator may rely
upon such information as is supplied by the Employer and shall have no duty or
responsibility to verify such information.
2.10 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund unless paid by
the Employer. Such expenses shall include any expenses incident to the
functioning of the Administrator, including, but not limited to, fees of
accountants, counsel, and other specialists and their agents, and other costs of
administering the Plan. Until paid, the expenses shall constitute a liability
of the Trust Fund. However, the Employer may reimburse
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the Trust Fund for any administration expense incurred. Any administration
expense paid to the Trust Fund as a reimbursement shall not be considered an
Employer contribution.
2.11 MAJORITY ACTIONS
Except where there has been an allocation and delegation of administrative
authority pursuant to Section 2.5, if there shall be more than one
Administrator, they shall act by a majority of their number, but may authorize
one or more of them to sign all papers on their behalf.
2.12 CLAIMS PROCEDURE
Claims for benefits under the Plan may be filed in writing with the
Administrator. Written notice of the disposition of a claim shall be furnished
to the claimant within 90 days after the application is filed, unless special
circumstances require an extension of time for processing the claim, in which
case written notice shall be furnished to the claimant within 180 days after the
application is filed. In the event the claim is denied, the reasons for the
denial shall be specifically set forth in the notice in language calculated to
be understood by the claimant, pertinent provisions of the Plan shall be cited,
and, where appropriate, an explanation as to how the claimant can perfect the
claim will be provided. In addition, the claimant shall be furnished with an
explanation of the Plan's claims review procedure.
2.13 CLAIMS REVIEW PROCEDURE
Any Employee, former Employee, or Beneficiary of either, who has been denied a
benefit by a decision of the Administrator pursuant to Section 2.12 shall be
entitled to request the Administrator to give further consideration to his claim
by filing with the Administrator a written appeal. Such appeal, including a
written statement of the reasons why the claimant believes his claim should be
allowed, shall be filed with the Administrator no later than 60 days after
receipt of the written notification provided for in Section 2.12. The
Administrator shall determine whether to conduct a hearing or to decide the
appeal based solely on written presentations. In either event, the claimant may
be represented by an attorney or any other representative of his choosing and
expense and shall have an opportunity to submit written evidence and arguments
in support of his claim. The claimant or his representative shall have an
opportunity to review all documents in the possession of the Administrator which
are pertinent to the claim at issue and its disallowance. If the Administrator
determines to hold a hearing either the claimant or the Administrator may cause
a court reporter to attend the hearing and record the proceedings. In such
event, a complete written transcript of the proceedings shall be furnished to
both
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parties by the court reporter. The full expense of any such court reporter and
such transcripts shall be borne by the party causing the court reporter to
attend the hearing. A final decision as to the allowance of the claim shall be
made by the Administrator within 60 days of receipt of the appeal (unless there
has been an extension of 60 days due to special circum stances, provided the
delay and the special circumstances occa sioning it are communicated to the
claimant within the 60 day period). Such communication shall be written in a
manner calculated to be understood by the claimant and shall include specific
reasons for the decision and specific references to the pertinent Plan
provisions on which the decision is based.
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ARTICLE III
ELIGIBILITY
3.1 ELIGIBILITY AND PARTICIPATION
(a) Each person who is a Participant on March 31, 1997 shall, except as
otherwise provided in the Plan, continue to be a Participant after
such date.
(b) Each person who is an Employee on April 1, 1997 but who was not a
Participant on March 31, 1997 shall become a Participant on April 1,
1997, subject to Section 3.5.
(c) Each person who becomes an Employee after April 1, 1997 shall become a
Participant on the first day of the quarter coinciding with or
following completion of his first Hour of Service, subject to Section
3.5.
(d) Notwithstanding Section 3.1(a) through (c), however, a Participant
shall not be considered a Participant for purposes of allocation of an
Employer's Non-Elective Contributions (including matching
contributions but not including Qualified Non-Elective Contributions)
until the earlier of the first January 1 or July 1 next following the
date on which he has completed one Year of Service.
3.2 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each person for
participation in the Plan. Such determination shall be con clusive and binding
upon all persons, as long as the same is made pursuant to the Plan and the Act.
Such determination shall be subject to review per Section 2.13.
3.3 OMISSION OF ELIGIBLE PERSON
If, in any Plan Year, any Employee who should be included as a Participant in
the Plan is erroneously omitted and discovery of such omission is not made until
after a contribution by his Employer for the year has been made, the Employer
shall make a subsequent contribution, if necessary after the application of
Section 4.4(e), so that the omitted Employee receives a total amount which the
said Employee would have received had he not been omitted. Such contribution
shall be made regardless of whether or not it is deductible in whole or in part
in any taxable year under applicable provisions of the Code.
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3.4 INCLUSION OF INELIGIBLE PERSON
If, in any Plan Year, any person who should not have been included as a
Participant in the Plan is erroneously included and discovery of such incorrect
inclusion is not made until after a contribution for the year has been made, the
Employer shall not be entitled to recover the contribution made with respect to
the ineligible person regardless of whether or not a deduction is allowable with
respect to such contribution. In such event, the amount contributed with
respect to the ineligible person shall constitute a Forfeiture for the Plan Year
in which the discovery is made.
3.5 ELECTION NOT TO PARTICIPATE
An Employee may, subject to the approval of the Employer, elect voluntarily not
to participate in the Plan. The election not to participate must be
communicated to the Employer, in writing, at least 30 days before the beginning
of a Plan Year.
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ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
(a) For each Plan Year, the Employer shall contribute to the Plan the
amount of the total salary reduction elections of all Participants made
pursuant to Section 4.2(a). Such amount shall be deemed an Employer's
Elective Contribution.
(b) For each Plan Year the Employer may in its discretion contribute to the
Plan a matching contribution equal to 100 percent of the Deferred
Compensation of each Allocation Participant, not including any Deferred
Compensation in excess of five (5) percent of the Participant's
Compensation. Such matching contribution, if any, shall be deemed an
Employer's Non-Elective Contribution.
(c) For each Plan Year the Employer may in its discretion contribute to the
Plan an additional discretionary amount. Such amount, if any, shall
also be deemed an Employer's Non-Elective Contribution.
(d) Notwithstanding the foregoing, however, the Employer's contributions
for any Fiscal Year shall not exceed the maximum amount allowable as a
deduction to the Employer under the provisions of Code Section 404.
Contributions by the Employer shall be made in cash, Common Stock (as
provided in Section 4.14) or such other property as is acceptable to
the Trustee. Provided, however, that to the extent necessary to provide
the top heavy minimum allocations, the Employer shall make a
contribution even if it exceeds current or accumulated Net Profit or
the amount which is deductible under Code Section 404.
4.2 PARTICIPANT'S SALARY REDUCTION ELECTION
(a) Effective April 1, 1997 each Participant may elect to defer from 1
(one) to 12 (twelve) percent of his Compensation which would otherwise
have been received in the Plan Year, subject to the limitations of this
Section. A Participant may elect to commence deferrals as of the first
day of any quarter. A deferral election (or modification of an earlier
election) may not be made with respect to Compensation which is cur
rently available on or before the date the Participant executed such
election, or if later, the latest of the date the Employer adopts this
cash or deferred arrangement or the date such arrangement first became
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effective. Any elections made pursuant to this Section shall become
effective as soon as is administratively feasible.
Participants may not elect to defer and have allocated for a Plan Year
all or a portion of any bonus.
Once made, a Participant's election to reduce Compen sation shall
remain in effect until modified or termi nated. Modifications may be
made as of the beginning of any quarter, and terminations may be made
at any time. Any modification or termination of an election will become
effective as soon as is administratively feasible.
(b) The balance in each Participant's Elective Account shall be fully
Vested at all times and shall not be subject to Forfeiture for any
reason.
(c) Amounts held in the Participant's Elective Account may be distributable
as permitted under the Plan, but in no event prior to the earlier of:
(1) a Participant's termination of employment, Total and Permanent
Disability, or death;
(2) a Participant's attainment of age 59 1/2;
(3) the proven financial hardship of a Participant, subject to the
limitations of Section 6.11;
(4) the termination of the Plan without the existence at the time of
Plan termination of another defined contribution plan (other than
an employee stock ownership plan as defined in Code Section
4975(e)(7)) or the establishment of a successor defined
contribution plan (other than an employee stock ownership plan as
defined in Code Section 4975(e)(7)) by the Employer or an
Affiliated Employer within the period ending twelve months after
distribution of all assets from the Plan maintained by the
Employer.
(5) the date of the sale by the Employer to an entity that is not an
Affiliated Employer of substan tially all of the assets (within the
meaning of Code Section 409(d)(2)) with respect to a Partic ipant
who continues employment with the corpora tion acquiring such
assets; or
(6) the date of the sale by the Employer or an Affiliated Employer of
its interest in a
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subsidiary (within the meaning of Code Section 409(d)(3)) to an
entity that is not an Affiliated Employer with respect to a
Participant who continues employment with such subsidiary.
(d) A Participant's Deferred Compensation made under this Plan and all
other plans, contracts or arrangements of the Employer maintaining this
Plan shall not exceed the limitation imposed by Code Section 402(g), as
in effect for the calendar year in which such Plan Year began. If such
dollar limitation is excluded solely from elective deferrals under this
Plan or any other Plan maintained by the Employer, a Participant will
be deemed to have notified the Administrator of such excess amount
which shall be distributed in a manner consistent with Section 4.2(f).
This dollar limitation shall be adjusted annually pursuant to the
method provided in Code Section 415(d) in accordance with Regulations.
(e) In the event a Participant has received a hardship distribution
pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any other plan
maintained by the Employer or from his Participant's Elective Account
pursuant to Section 6.11(c), then such Participant shall not be
permitted to elect to have Deferred Compensation contributed to the
Plan on his behalf for a period of twelve (12) months following the
receipt of the distribution. Furthermore, the dollar limitation under
Code Section 402(g) shall be reduced, with respect to the Participant's
taxable year following the taxable year in which the hardship
distribution was made, by the amount of such Participant's Deferred
Compensation, if any, made pursuant to this Plan (and any other plan
maintained by the Employer) for the taxable year of the hardship
distribution.
(f) If a Participant's Deferred Compensation under this Plan together with
any elective deferrals (as defined in Regulation 1.402(g)-1(b)) under
another qualified cash or deferred arrangement (as defined in Code
Section 401(k)), a simplified employee pension (as defined in Code
Section 408(k)), a salary reduction arrangement (within the meaning of
Code Section 3121(a)(5)(D)), a deferred compensation plan under Code
Section 457, or a trust described in Code Section 501(c)(18)
cumulatively exceed the limitation imposed by Code Section 402(g) (as
adjusted annually in accordance with the method provided in Code
Section 415(d) pursuant to Regulations) for such Participant's taxable
year, the Participant may, not later than March 1st following the close
of his taxable year,
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notify the Administrator in writing of such excess and request that his Deferred
Compensation under this Plan be reduced by an amount specified by the
Participant. In such event, the Administrator shall direct the Trustee to
distribute such excess amount (and any Income allocable to such excess amount)
to the Participant not later than the first April 15th following the close of
the Participant's taxable year. Distributions in accordance with this paragraph
may be made for any taxable year of the Participant which begins after December
31, 1996. Any distribution of less than the entire amount of Excess Deferred
Compens ation and Income shall be treated as a pro rata distri bution of Excess
Deferred Compensation and Income. The amount distributed shall not exceed the
Participant's Deferred Compensation under the Plan for the taxable year. Any
distribution on or before the last day of the Participant's taxable year must
satisfy each of the following conditions:
(1) the Participant shall designate the distribution as Excess Deferred
Compensation;
(2) the distribution must be made after the date on which the Plan received
the Excess Deferred Compensation; and
(3) the Plan must designate the distribution as a distribution of Excess
Deferred Compensation.
(4) Any distribution made pursuant to this Section shall be made first from
unmatched Deferred Compensation and, thereafter, simultaneously from
Deferred Compensation which is matched and matching contributions which
relate to such Deferred Compensation. However, any such matching
contributions which are not Vested shall be forfeited in lieu of being
distributed.
Any distribution under this Section shall be made first from unmatched Deferred
Compensation and, thereafter, simultaneously from Deferred Compensation which is
matched and matching contributions which relate to such Deferred Compensation.
However, any such matching contributions which are not Vested shall be forfeited
in lieu of being distributed.
For the purpose of this Section, "Income" means the amount of income or loss
allocabic to a Participant's Excess Deferred Compensation and shall be equal to
the sum of the allocable gain or loss for the taxable year of the Participant.
The income or loss allocable to
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each such period is calculated separately and is determined by
multiplying the income or loss allocable to the Participant's Deferred
Compensation for the respective period by a fraction. The numerator of
the fraction is the Participant's Excess Deferred Compensation for the
taxable year of the Participant. The denominator is the balance, as of
the last day of the respective period, of the Participant's Elective
Account that is attributable to the Participant's Deferred Compensation
reduced by the gain allocable to such total amount for the respective
period and increased by the loss allocable to such total amount for the
respective period.
(g) Notwithstanding Section 4.2(f) above, a Participant's Excess Deferred
Compensation shall be reduced, but not below zero, by any distribution
and/or recharacterization of Excess Contributions pursuant to Section
4.6(a) for the Plan Year beginning with or within the taxable year of
the Participant.
(h) At Normal Retirement Date, or such other date when the Participant
shall be entitled to receive benefits, the fair market value of the
Participant's Elective Account shall be used to provide benefits to the
Participant or his Beneficiary.
(i) The Employer and the Administrator shall adopt a procedure necessary to
implement the salary reduction elections provided for herein.
4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION
The Employer shall generally pay to the Trustee its contribution to the Plan for
each Plan Year within the time prescribed by law, including extensions of time,
for the filing of the Employer's federal income tax return for the Fiscal Year.
Provided, however, that (A) matching contributions, if any, shall be made as
soon as practicable following the end of each quarter; and (B) Employer Elective
Contributions accumulated through payroll deductions shall be paid to the
Trustee as of the earliest date on which such contribution can reasonably be
segregated from the Employer's general assets, but in no event later than the
15th business day of the month following the month in which such contributions
would otherwise have been payable to the Participant in cash. The provisions of
Department of Labor regulations 2510.3-102 are incorporated herein by reference.
Furthermore, any additional Employer contributions which are allocable to the
Participant's Elective Account for a Plan Year shall be paid to the Plan no
later than the twelve-month period immediately following the close of such Plan
Year.
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4.4 ALLOCATION OF CONTRIBUTIONS, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an account in the name
of each Participant to which the Administrator shall credit all amounts
allocated to each such Participant as set forth herein.
(b) The Employer shall provide the Administrator with all information
required by the Administrator to make a proper allocation of the
Employer's contributions for each Plan Year. Within a reasonable period
of time after the date of receipt by the Administrator of such
information, the Administrator shall allocate such contribution as
follows:
(1) With respect to the Employer's Elective Contribution made pursuant
to Section 4.1(a), to each Participant's Elective Account in an
amount equal to each such Participant's Deferred Compensation for
the year.
(2) With respect to the Employer's Matching Contribution made pursuant
to Section 4.1(b), to each Allocation Participant's Non-Elective
Account, in an amount equal to the portion allocable to such
Allocation Participant.
(3) With respect to the Employer's Non-Elective Contribution made
pursuant to Section 4.1(c), to each Allocation Participant's Non-
Elective Account in the same ratio as each Allocation Participant's
Compensation bears to the total Compensation of all Allocation
Participants.
(c) Except as provided in Section 4.13(b), as of each Anniversary Date or
other valuation date, before allocation of Employer contributions and
Forfeitures, any earnings or losses (net appreciation or net depre
ciation) of the Trust Fund shall be allocated in the same proportion
that each Participant's and Former Participant's nonsegregated accounts
bear to the total of all Participants' and Former Participants'
nonsegregated accounts as of such date. If any nonsegregated account of
a Participant has been distributed prior to the Anniversary Date or
other valuation date subsequent to a Participant's termina tion of
employment no earnings or losses shall be credited to such account.
Notwithstanding the above, with respect to contribu tions made to a
401(k) Plan after the previous
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Anniversary Date or allocation date, earnings and losses shall be allocated
by using the actual investment experience of individual accounts.
(d) As of each Anniversary Date any amounts which became Forfeitures since the
last Anniversary Date shall first be made available to reinstate previously
forfeited account balances of Former Participants, if any, in accordance
with Section 6.4(g)(2) or be used to satisfy any contribution that may be
required pursuant to Section 3.4 and/or 6.9. The remaining Forfeitures, if
any, shall be treated as follows: (i) Forfeitures of contributions other
than matching contributions shall be added to the Employer's Non-Elective
Contribution under the Plan; and (ii) Forfeitures of matching contributions
shall be used to reduce the Employer's matching contribution.
(e) Minimum Allocations Required for Top Heavy Plan Years: Notwithstanding the
foregoing, for any Top Heavy Plan Year, the sum of the Employer's
contributions and For feitures allocated to the Participant's Combined
Account of each Non-Key Employee shall be equal to at least three percent
(3%) of such Non-Key Employee's "415 Compensation" (reduced by contributions
and forfeitures, if any, allocated to each Non-Key Employee in any defined
contribution plan included with this plan in a Required Aggregation Group).
However, if (i) the sum of the Employer's contributions and Forfeitures
allocated to the Participant's Combined Account of each Key Employee for
such Top Heavy Plan Year is less than three percent (3%) of each Key
Employee's "415 Compensation" and (ii) this Plan is not required to be
included in an Aggregation Group to enable a defined benefit plan to meet
the requirements of Code Section 401(a)(4) or 410, the sum of the Employer's
contributions and Forfeitures allocated to the Participant's Combined
Account of each Non-Key Employee shall be equal to the largest percentage
allocated to the Participant's Combined Account of any Key Employee.
However, in determining whether a Non- Key Employee has received the
required minimum alloca tion, such Non-Key Employee's Deferred Compensation
and matching contributions used to satisfy the "Actual Deferral Percentage"
test pursuant to Section 4.5(a) or the "Actual Contribution Percentage" test
of Section 4.7(a) shall not be taken into account.
(f) For purposes of the minimum allocations set forth above, the percentage
allocated to the Participant's Combined Account of any Key Employee shall be
equal to the ratio of the sum of the Employer's contributions
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and Forfeitures allocated on behalf of such Key Employee divided by the "415
Compensation" for such Key Employee.
(g) For any Top Heavy Plan Year, the minimum allocations set forth above shall
be allocated to the Participant's Combined Account of all Non-Key Employees
who are Participants and who are employed by the Employer on the last day of
the Plan Year, including Non-Key Employees who have (1) failed to complete a
Year of Service; or (2) declined to make mandatory contribu tions (if
required) or salary reduction contributions to the Plan.
(h) Notwithstanding anything herein to the contrary, in any Plan Year in which
the Employer maintains both this Plan and a defined benefit pension plan
included in a Required Aggregation Group which is top heavy, the Employer
shall not be required to provide a Non-Key Employee with both the full
separate minimum defined benefit plan benefit and the full separate defined
contribution plan allocations.
(i) For the purposes of this Section, "415 Compensation" shall be limited to the
same dollar limitations set forth in Section 1.9.
(j) Notwithstanding anything herein to the contrary, participants who terminated
employment during the Plan Year shall share in the Employer Elective
Contributions for the year of termination without regard to the Hours of
Service credited.
(k) Notwithstanding anything herein to the contrary (other than Sections 4.4(j)
and 6.6(e)(1)), any Participant who terminated employment during the Plan
Year for reasons other than death, Total and Permanent Disability, or
retirement: (i) shall share in the allocations of the Employer's Matching
Contribution made pursuant to Section 4.1(b); and, (ii) shall not share in
the Employer's Non-Elective Contributions made pursuant to Section 4.1(c) or
Forfeitures.
(l) Notwithstanding anything herein to the contrary, Participants terminating
for reasons of death, Total and Permanent Disability, or retirement shall
share in the allocation of the Employer's Matching Contribution made
pursuant to Section 4.1(b), the Employer's Non-Elective Contributions made
pursuant to Section 4.1(c), and Forfeitures as provided in this Section
regardless of whether they completed a Year of Service during the Plan Year.
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(m) If a Former Participant is reemployed after five (5) consecutive 1-Year
Breaks in Service, then separate accounts shall be maintained as follows:
(1) one account for nonforfeitable benefits attributable to pre-break
service; and
(2) one account representing his status in the Plan attributable to post-
break service.
(n) Notwithstanding anything in the Plan to the contrary, if this Plan would
otherwise fail to meet the requirements of Code Sections 401(a)(26),
410(b)(1), or 410(b)(2)(A)(i) and the Regulations thereunder because
Employer matching Contributions made pursuant to Section 4.1(b) or Employer
Non-Elective Contributions made pursuant to Section 4.1(c) have not been
allocated to a sufficient number or percentage of Participants for a Plan
Year, then the following rules shall apply:
(1) Allocations of the respective contribution and Forfeitures shall first
be made to all active Participants who are employed on the last day of
the Plan Year, regardless of the number of Hours of Service completed;
and
(2) If after application of paragraph (1) above, the applicable test is
still not satisfied, then the group of Participants eligible to share
in the Employer's contribution and Forfeitures for the Plan Year shall
be further expanded to include the minimum number of Participants who
are not actively employed on the last day of the Plan Year as are
necessary to satisfy the applicable test. The specific Participants who
shall become eligible to share shall be those Participants, when
compared to similarly situated Participants, who have completed the
greatest number of Hours of Service in the Plan Year before terminating
employment.
Nothing in this Section shall permit the reduction of a Partici pant's accrued
benefit. Therefore any amounts that have previ ously been allocated to
Participants may not be reallocated to satisfy these requirements. In such
event, the Employer shall make an additional contribution equal to the amount
such affected Participants would have received had they been included in the
allocations, even if it exceeds the amount which would be deduc tible under Code
Section 404. Any adjustment to the allocations pursuant to this paragraph shall
be considered a retroactive amendment adopted by the last day of the Plan Year.
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4.5 ACTUAL DEFERRAL PERCENTAGE TESTS
(a) Maximum Annual Allocation: The annual allocation derived from Employer
Elective Contributions and Qualified Non-Elective Contributions to a
Participant's Elective Account shall satisfy one of the following
tests:
(1) The "Actual Deferral Percentage" for the Highly Compensated
Participant group shall not be more than the "Actual Deferral
Percentage" of the Non-Highly Compensated Participant group
multiplied by 1.25, or
(2) The excess of the "Actual Deferral Percentage" for the Highly
Compensated Participant group over the "Actual Deferral Percentage"
for the Non-Highly Compensated Participant group shall not be more
than two percentage points. Additionally, the "Actual Deferral
Percentage" for the Highly Compensated Participant group shall not
exceed the "Actual Deferral Percentage" for the Non-Highly
Compensated Participant group multiplied by 2. The provisions of
Code Section 401(k)(3) and Regulation 1.401(k)-1(b) are
incorporated herein by reference.
However, to prevent the multiple use of the alternative method
described in (2) above and Code Section 401(m)(9)(A), any Highly
Compensated Participant eligible to make elective deferrals
pursuant to Section 4.2 and to make Employee contributions or to
receive matching contributions under this Plan or under any other
plan maintained by the Employer or an Affiliated Employer shall
have his actual contribution ratio reduced pursuant to Regulation
1.401(m)-2, the provisions of which are incorporated herein by
reference.
(b) For the purposes of this Section "Actual Deferral Percentage" means,
with respect to the Highly Compensated Participant group and Non-Highly
Compensated Participant group for a Plan Year, the average of the
ratios, calculated separately for each Participant in such group, of
the amount of Employer Elective Contributions and Qualified Non-
Elective Contributions allocated to each Participant's Elective Account
for such Plan Year, to such Participant's "414(s) Compensation" for
such Plan Year. The actual deferral ratio for each Participant and the
"Actual Deferral Percentage" for each group shall be calculated to the
nearest one-hundredth of one percent of the
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Participant's "414(s) Compensation". Employer Elective Contributions
allocated to each Non-Highly Compensated Participant's Elective Account
shall be reduced by Excess Deferred Compensation to the extent such
excess amounts are made under this Plan or any other plan maintained by
the Employer.
(c) For the purpose of determining the actual deferral ratio of a Highly
Compensated Participant who is subject to the Family Member aggregation
rules of Code Section 414(q)(6) because such Participant is either a
"five percent owner" of the Employer or one of the ten (10) Highly
Compensated Employees paid the greatest "415 Compensation" during the
year, the following shall apply:
(1) The combined actual deferral ratio for the family group (which
shall be determined by aggregating Employer Elective Contributions
and "414(s) Com pensation" of all eligible Family Members (includ
ing Highly Compensated Participants), However, in applying the
$150,000 limit to "414(s) Compensa tion," Family Members shall
include only the affected Employee's spouse and any lineal descen
dants who have not attained age 19 before the close of the Plan
Year.
(2) The Employer Elective Contributions and "414(s) Compensation" of
all Family Members shall be disregarded for purposes of determining
the "Actual Deferral Percentage" of the Non-Highly Compensated
Participant group except to the extent taken into account in
paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of more
than one family group in a plan, all Participants who are members
of those family groups that include the Participant are aggregated
as one family group in accordance with paragraphs (1) and (2)
above.
(d) For the purposes of Sections 4.5(a) and 4.6, a Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any
Employee eligible to make a deferral election pursuant to Section 4.2,
whether or not such deferral election was made or suspended pursuant to
Section 4.2.
(e) For the purposes of this Section and Code Sections 401(a)(4), 410(b)
and 401(k), if two or more plans which include cash or deferred
arrangements are considered one plan for the purposes of Code Section
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401(a)(4) or 410(b) (other than Code Section 401(b)(2)(A)(ii) as in
effect for Plan Years beginning after December 31, 1988), the cash or
deferred arrangements included in such plans shall be treated as one
arrangement. In addition, two or more cash or deferred arrangements
may be considered as a single arrangement for purposes of determining
whether or not such arrangements satisfy Code Sections 401(a)(4),
410(b) and 401(k). In such a case, the cash or deferred arrangements
included in such plans and the plans including such arrangements shall
be treated as one arrangement and as one plan for purposes of this
Section and Code Sections 401(a)(4), 410(b) and 401(k). Plans may be
aggregated under this paragraph (e) only if they have the same plan
year.
Notwithstanding the above, an employee stock ownership plan described
in Code Section 4975(c)(7) may not be combined with this Plan for
purposes of determining whether the employee stock ownership plan or
this Plan satisfies this Section and Code Sections 401(a)(4), 410(b)
and 401(k).
(f) For the purposes of this Section, if a Highly Compensated Participant
is a Participant under two (2) or more cash or deferred arrangements
(other than a cash or deferred arrangement which is part of an
employee stock ownership plan as defined in Code Section 4975(e)(7)
for Plan Years beginning after December 31, 1988) of the Employer or
an Affiliated Employer, all such cash or deferred arrangements shall
be treated as one cash or deferred arrangement for the purpose of
determining the actual deferral ratio with respect to such Highly
Compensated Participant. However, if the cash or deferred arrangements
have different Plan Years, this paragraph shall be applied by treating
all cash or deferred arrangements ending with or within the same
calendar year as a single arrangement.
4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS
In the event that the initial allocations of the Employer's Elective
Contributions made pursuant to Section 4.4 do not satisfy one of the tests set
forth in Section 4.5, the Administrator shall adjust Excess Contributions
pursuant to the options set forth below:
(a) (1) On or before the fifteenth day of the third month following the
end of each Plan Year, the Highly Compensated Participant having
the highest actual deferral ratio shall have his portion of
Excess
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Contributions distributed to him until one of the tests set
forth in Section 4.5 is satisfied, or until his actual deferral
ratio equals the actual deferral ratio of the Highly Compensated
Participant having the second highest actual deferral ratio.
This process shall continue until one of the tests set forth in
Section 4.5 is satisfied. For each Highly Compensated
Participant, the amount of Excess Contributions is equal to the
Elective Contributions made on behalf of such Highly Compensated
Participant (determined prior to the application of this
paragraph) minus the amount determined by multiplying the Highly
Compensated Participant's actual deferral ratio (determined
after application of this paragraph) by his "414(s)
Compensation". However, in determining the amount of Excess
Contributions to be distributed with respect to an affected
Highly Compensated Participant as determined herein, such amount
shall be reduced by any Excess Deferred Compensation previously
distributed to such affected Highly Compensated Participant for
his taxable year ending with or within such Plan Year. Any
distribution of Excess Contributions:
(i) may be postponed but not later than the close of the Plan
Year following the Plan Year to which they are allocable;
(ii) shall be made first from unmatched Deferred Compensation
and, thereafter, simultaneously from Deferred Compensation
which is matched and matching contributions which relate
to such Deferred Compensation. However, any such matching
contributions which are not Vested shall be forfeited in
lieu of being distributed;
(iii) shall be adjusted for Income; and
(iv) shall be designated by the Employer as a distribution of
Excess Contributions (and Income).
(2) Any distribution of less than the entire amount of Excess
Contributions shall be treated as a pro rata distribution and/or
recharacterization of Excess Contributions and Income.
(3) The determination and correction of Excess Contributions of a
Highly Compensated Participant whose actual deferral ratio is
determined under the
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family aggregation rules shall be accomplished by reducing the
actual deferral ratio as required herein and the Excess
Contributions for the family unit shall be allocated among the
Family Members in proportion to the Elective Contributions of
each Family Member that were combined to determine the group
actual deferral ratio.
(b) Within twelve (12) months after the end of the Plan Year, the Employer
shall make a special Qualified Non-Elective Contribution on behalf of
Non-Highly Compensated Participants in an amount sufficient to satisfy
one of the tests set forth in Section 4.5(a). Such contribution shall
be allocated to the Participant's Elective Account of each Non-Highly
Compensated Participant in the same proportion that each Non-Highly
Compensated Participant's Compensation for the year bears to the total
Compensation of all Non-Highly Compensated Participants.
(c) For purposes of this Section, "Income" means the income or loss
allocable to Excess Contributions which shall equal the sum of the
allocable gain or loss for the Plan Year. The income or loss allocable
to Excess Contributions for the Plan Year is determined by multiplying
the income or loss for the Plan Year by a fraction. The numerator of
the fraction is the Excess Contributions for the Plan Year. The
denominator of the fraction is the total of the Participant's Elective
Account as of the end of the Plan Year, reduced by the gain allocable
to such total amount for the Plan Year and increased by the loss
allocable to such total amount for the Plan Year.
(d) Any amounts not distributed within 2 1/2 months after the end of the
Plan Year shall be subject to the 10% Employer excise tax imposed by
Code Section 4979.
4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) The "Actual Contribution Percentage" for the Highly Compensated
Participant group shall not exceed the greater of:
(1) 125 percent of such percentage for the Non-Highly Compensated
Participant group; or
(2) the lesser of 200 percent of such percentage for the Non-Highly
Compensated Participant group, or such percentage for the Non-
Highly Compensated Participant group plus 2 percentage points.
However, to prevent the multiple use of the alterna-
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tive method described in this paragraph and Code Section
401(m)(9)(A), any Highly Compensated Participant eligible to
make elective deferrals pursuant to Section 4.2 or any other
cash or deferred arrangement maintained by the Employer or an
Affiliated Employer and to make Employee contributions or to
receive matching contributions under any plan maintained by the
Employer or an Affiliated Employer shall have his actual
contribution ratio reduced pursuant to Regulation 1.401(m)-2.
The provisions of Code Section 401(m) and Regulations 1.401(m)-
1(b) and 1.401(m)-2 are incorporated herein by reference.
(b) For the purposes of this Section and Section 4.8, "Actual Contribution
Percentage" for a Plan Year means, with respect to the Highly
Compensated Participant group and Non-Highly Compensated Participant
group, the average of the ratios (calculated separately for each
Participant in each group) of:
(1) the sum of Employer matching contributions pursuant to Section
4.1(b)(to the extent such matching contributions are not used to
satisfy the tests set forth in Section 4.5) contributed under
the Plan on behalf of each such Participant for such Plan Year,
to
(2) the Participant's "414(s) Compensation" for such Plan Year.
(c) For purposes of determining the "Actual Contribution Percentage" and
the amount of Excess Aggregate Contributions pursuant to Section
4.8(c), only Employer matching contributions contributed to the Plan
prior to the end of the succeeding Plan Year shall be considered. In
addition, the Administrator may elect to take into account, with
respect to Employees eligible to have Employer matching contributions
made pursuant to Section 4.1(b) elective deferrals (as defined in
Regulation 1.402(g)-1(b)) and qualified non-elective contributions (as
defined in Code Section 401(m)(4)(C)) contributed to any plan
maintained by the Employer. Such elective deferrals and qualified non-
elective contributions shall be treated as Employer matching
contributions subject to Regulation 1.401(m)-1(b)(2) which is
incorporated herein by reference. However, the Plan Year must be the
same as the plan year of the plan to which the elective deferrals and
the qualified non-elective contributions are made.
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(d) For the purpose of determining the actual contribution ratio of a
Highly Compensated Employee who is subject to the Family Member
aggregation rules of Code Section 414(q)(6) because such Employee is
either a "five percent owner of the Employer or one of the ten (10)
Highly Compensated Employees paid the greatest "415 Compensation"
during the year, the following shall apply:
(1) The combined actual contribution ratio for the family group
(which shall be treated as one Highly Compensated Participant)
shall be the ratio determined by aggregating Employer matching
contributions made pursuant to Section 4.1(b)(to the extent such
matching contributions are not used to satisfy the tests set
forth in Section 4.5), and "414(s) Compensation" of all eligible
Family Members (including Highly Compensated Participants).
However, in applying the $150,000 limit to "414(s) Compensation"
for Plan Years beginning after December 31, 1988, Family Members
shall include only the affected Employee's spouse and any lineal
descendants who have not attained age 19 before the close of the
Plan Year.
(2) The Employer matching contributions made pursuant to Section
4.1(b) (to the extent such matching contributions are not used
to satisfy the tests set forth in Section 4.5), and "414(s)
Compensation" of all Family Members shall be disregarded for
purposes of determining the "Actual Contribution Percentage" of
the Non-Highly Compensated Participant group except to the
extent taken into account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are
members of those family groups that include the Participant are
aggregated as one family group in accordance with paragraphs (1)
and (2) above.
(e) For purposes of this Section and Code Sections 401(a)(4), 410(b) and
401(m), if two or more plans of the Employer to which matching
contributions, Employee contributions, or both, are made are treated
as one plan for purposes of Code Sections 401(a)(4) or 410(b) (other
than the average benefits test under Code Section 410(b)(2)(A)(ii) as
in effect for Plan Years beginning after December 31, 1988), such
plans shall be treated as one plan. In addition, two or more plans of
the Employer to which matching contributions, Employee
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contributions, or both, are made may be considered as a single plan
for purposes of determining whether or not such plans satisfy Code
Sections 401(a)(4), 410(b) and 401(m). In such a case, the aggregated
plans must satisfy this Section and Code Sections 401(a)(4), 410(b)
and 401(m) as though such aggregated plans were a single plan. Plans
may be aggregated under this paragraph only if they have the same plan
year.
Notwithstanding the above, an employee stock ownership plan described
in Code Section 4975(e)(7) may not be aggregated with this Plan for
purposes of determining whether the employee stock ownership plan or
this Plan satisfies this Section and Code Sections 401(a)(4), 410(b)
and 401(m).
(f) If a Highly Compensated Participant is a Participant under two or more
plans (other than an employee stock ownership plan as defined in Code
Section 4975(e)(7) for Plan Years beginning after December 31, 1988)
which are maintained by the Employer or an Affiliated Employer to
which matching contributions, Employee contributions, or both, are
made, all such contribu tions on behalf of such Highly Compensated
Participant shall be aggregated for purposes of determining such
Highly Compensated Participant's actual contribution ratio. However,
if the plans have different plan years, this paragraph shall be
applied by treating all plans ending with or within the same calendar
year as a single plan.
(g) For purposes of Sections 4.7(a) and 4.8, a Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any
Employee eligible to have matching contributions made pursuant to
Section 4.1(b) (whether or not a deferred election was made or
suspended pursuant to Section 4.2(e)) allocated to his account for the
Plan Year or to make salary deferrals pursuant to Section 4.2 (if the
Employer uses salary deferrals to satisfy the provisions of this
Section).
(h) For purposes of this Section, "Matching Contribution" shall mean an
Employer contribution made to the Plan, or to a contract described in
Code Section 403(b), on behalf of a Participant on account of an
Employee contribution made by such Participant, or on account of a
participant's deferred compensation, under a plan maintained by the
Employer.
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4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) In the event that the "Actual Contribution Percentage" for the Highly
Compensated Participant group exceeds the "Actual Contribution
Percentage" for the Non-Highly Compensated Participant group pursuant
to Section 4.7(a), the Administrator (on or before the fifteenth day
of the third month following the end of the Plan Year, but in no event
later than the close of the following Plan Year) shall direct the
Trustee to distribute to the Highly Compensated Participant having the
highest actual contribution ratio, his portion of Excess Aggregate
Contributions (and Income allocable to such contributions) or, if
forfeitable, forfeit such non-Vested Excess Aggregate Contributions
attributable to Employer matching contributions (and Income allocable
to such Forfeitures) until either one of the tests set forth in
Section 4.7(a) is satisfied, or until his actual contribution ratio
equals the actual contribution ratio of the Highly Compensated Partici
pant having the second highest actual contribution ratio. This process
shall continue until one of the tests set forth in Section 4.7(a) is
satisfied. The distribution and/or Forfeiture of Excess Aggregate
Contributions shall be made in the following order.
(1) Employer matching contributions distributed and/or forfeited
pursuant to Section 4.6(a)(1);
(2) Remaining Employer matching contributions.
(b) Any distribution or Forfeiture of less than the entire amount of
Excess Aggregate Contributions (and Income) shall be treated as a pro
rata distribution of Excess Aggregate Contributions and Income.
Distribution of Excess Aggregate Contributions shall be designated by
the Employer as a distribution of Excess Aggregate Contributions (and
Income). Forfeitures of Excess Aggregate Contributions shall be
treated in accordance with Section 4.4. However, no such Forfeiture
may be allocated to a Highly Compensated Participant whose
contributions are reduced pursuant to this Section.
(c) Excess Aggregate Contributions, including forfeited matching
contributions, shall be treated as Employer contributions for purposes
of Code Sections 404 and 415 even if distributed from the Plan.
(d) For the purposes of this Section and Section 4.7, "Excess Aggregate
Contributions" means, with respect to any Plan Year, the excess of:
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(1) the aggregate amount of Employer matching contributions made
pursuant to Section 4.1(b) (to the extent such contributions are
taken into account pursuant to Section 4.7(b)) and any Qualified
Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 4.7(c) actually made on behalf of
the Highly Compensated Participant group for such Plan Year,
over
(2) the maximum amount of such contributions permitted under the
limitations of Section 4.7(a).
(e) For each Highly Compensated Participant, the amount of Excess
Aggregate Contributions is equal to the total Employer matching
contributions made pursuant to Section 4.1(b)(to the extent taken into
account pursuant to Section 4.7(b)), and any Qualified Non-Elective
Contributions or elective deferrals taken into account pursuant to
Section 4.7(c) on behalf of the Highly Compensated Participant
(determined prior to the application of this paragraph) minus the
amount determined by multiplying the Highly Compensated Participant's
actual contribution ratio (determined after application of this
paragraph) by his "414(s) Compensation". The actual contribution ratio
must be rounded to the nearest one-hundredth of one percent. In no
case shall the amount of Excess Aggregate Contribution with respect to
any Highly Compensated Participant exceed the amount of Employer
matching contributions made pursuant to Section 4.1(b) (to the extent
taken into account pursuant to Section 4.7(b)), and any Qualified Non-
Elective Contributions or elective deferrals taken into account
pursuant to Section 4.7(c) on behalf of such Highly Compensated
Participant for such Plan Year.
(f) The determination of the amount of Excess Aggregate Contributions with
respect to any Plan Year shall be made after first determining the
Excess Contributions, if any, to be treated as voluntary employee
contribu tions due to recharacterization for the plan year of any
other qualified cash or deferred arrangement (as defined in Code
Section 401(k)) maintained by the Employer that ends with or within
the Plan Year.
(g) The determination and correction of Excess Aggregate Contributions of
a Highly Compensated Participant whose actual contribution ratio is
determined under the family aggregation rules shall be accomplished by
reducing the actual contribution percentage ratio as required herein
and the Excess Aggregate Contributions
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for the family unit shall be allocated among the Family Members in
proportion to the sum of Employer matching contributions made pursuant
to Section 4.1(b)(to the extent taken into account pursuant to Section
4.7(b)), and any Qualified Non-Elective Contributions or elective
deferrals taken into account pursuant to Section 4.7(c) of each Family
Member that were combined to determine the group actual contribution
ratio.
(h) Notwithstanding the above, within twelve (12) months after the end of
the Plan Year, the Employer may make a special Qualified Non-Elective
Contribution on behalf of Non-Highly Compensated Participants in an
amount sufficient to satisfy one of the tests set forth in Section
4.7(a). Such contribution shall be allocated to the Participant
Elective Account of each Non-Highly Compensated Participant in the
same proportion that each Non-Highly Compensated Participant's
Compensation for the year bears to the total Compensation of all Non-
Highly Compensated Participants. A separate accounting shall be
maintained for the purpose of excluding such contributions from the
"Actual Deferral Percentage" tests pursuant to Section 4.5(a).
(i) For purposes of this Section, "Income" means the income or loss
allocable to Excess Aggregate Contributions which shall equal the sum
of the allocable gain or loss for the Plan Year. The income or loss
allocable to Excess Aggregate Contributions for the Plan Year is
determined by multiplying the income or Loss for the Plan Year by a
fraction. The numerator of the fraction is the Excess Aggregate
Contributions for the Plan Year. The denominator of the fraction is
the total Participant's Non-Elective Account attributable to Employer
matching contributions subject to Section 4.7, and any Qualified Non-
Elective Contributions and elective deferrals taken into account
pursuant to Section 4.7(c) as of the end of the Plan Year, reduced by
the gain allocable to such total amount for the Plan Year and
increased by the loss allocable to such total amount for the Plan
Year.
(j) Distributions of matching contributions pursuant to this Section 4.8
shall be made in cash or Common Stock, at the discretion of the
Administrator.
4.9 MAXIMUM ANNUAL ADDITIONS
(a) (1) If the Participant does not participate in, and has never
participated in another qualified plan maintained by the
Employer, or a welfare benefit fund (as defined in Code Section
419(c)),
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maintained by the Employer, or an individual medical account (as
defined in Code Section 415(l)(2)) maintained by the Employer,
which provides Annual Additions, the amount of Annual Additions
which may be credited to the Participant's accounts for any
Limitation Year shall not exceed the lesser of the Maximum
Permissible Amount or any other limitation contained in this
Plan. If the Employer contribution that would otherwise be
contributed or allocated to the Participant's accounts would
cause the Annual Additions for the Limitation Year to exceed the
Maximum Permissible Amount, the amount contributed or allocated
will be reduced so that the Annual Additions for the Limitation
Year will equal the Maximum Permissible Amount.
(2) Prior to determining the Participant's actual compensation for
the Limitation Year, the Employer may determine the Maximum
Permissible Amount for a Participant on the basis of a
reasonable estimation of the Participant's Compensation for the
Limitation Year, uniformly determined for all Participants
similarly situated.
(3) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for such
Limitation Year shall be determined on the basis of the
Participant's actual compensation for such Limitation Year.
(4) If pursuant to Section 4.9(a)(2) or Section 4.5, there is an
Excess Amount, the excess will be disposed of in one of the
following manners, as uniformly determined by the Administrator
for all Participants similarly situated.
(i) Any Deferred Compensation, to the extent it would reduce
the Excess Amount, will be distributed to the Participant;
(ii) If, after the application of subparagraph (i), an Excess
Amount still exists, and the Participant is covered by the
Plan at the end of the Limitation Year, the Excess Amount
in the Participant's account will be used to reduce
Employer contributions (including any allocation of
Forfeitures) for such Participant in the next Limitation
Year, and each succeeding Limitation Year if necessary;
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(iii) If, after the application of subparagraph (i), an Excess Amount
still exists, and the Participant is not covered by the Plan at
the end of a Limitation Year, the Excess Amount will be held
unallocated in a suspense account. The suspense account will be
applied to reduce future Employer contribu tions (including
allocation of any For feitures) for all remaining Participants
in the next Limitation Year, and each succeeding Limitation Year
if necessary;
(iv) If a suspense account is in existence at any time during a
Limitation Year pursuant to this Section, it will not
participate in the allocation of investment gains and losses. If
a suspense account is in existence at any time during a
particular limitation year, all amounts in the suspense account
must be allocated and reallocated to participants' accounts
before any employer contributions or any employee contributions
may be made to the plan for that limitation year. Excess amounts
may not be distributed to participants or former participants.
(b) (1) This subsection applies if, in addition to this Plan, the Participant
is covered under another qualified Prototype defined contribution
plan maintained by the Employer, or a welfare benefit fund (as
defined in Code Section 419(e)) main tained by the Employer, or an
individual medical account (as defined in Code Section 415(l)(2))
maintained by the Employer, which provides Annual Additions, during
any Limitation Year. The Annual Additions which may be credited to a
Participant's accounts under this Plan for any such Limitation Year
shall not exceed the Maximum Permissible Amount reduced by the Annual
Additions credited to a Participant's accounts under the other plans
and welfare benefit funds for the same Limitation Year. If the Annual
Additions with respect to the Participant under other defined
contribution plans and welfare benefit funds maintained by the
Employer are less than the Maximum Permissible Amount and the
Employer contribution that would otherwise be contributed or
allocated to the Participant's accounts under this Plan would cause
the Annual Additions for the Limitation Year to exceed this
limitation, the amount contributed or allocated will be reduced so
that the Annual Additions under all such plans and welfare benefit
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funds for the Limitation Year will equal the Maximum Permissible
Amount. If the Annual Additions with respect to the Participant under
such other defined contribution plans and welfare benefit funds in
the aggregate are equal to or greater than the Maximum Permissible
Amount, no amount will be contributed or allocated to the
Participant's account under this Plan for the Limitation Year.
(2) Prior to determining the Participant's actual Compensation for the
Limitation Year, the Employer may determine the Maximum Permissible
Amount for a Participant in the manner described in Section
4.9(a)(2).
(3) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permis sible Amount for the Limitation
Year will be determined on the basis of the Participant's actual
Compensation for the Limitation Year.
(4) If, pursuant to Section 4.9(b)(2) or Section 4.5, a Participant's
Annual Additions under this Plan and such other plans would result in
an Excess Amount for a Limitation Year, the Excess Amount will be
deemed to consist of the Annual Additions last allocated, except that
Annual Additions attributable to a welfare benefit fund or individual
medical account will be deemed to have been allocated first
regardless of the actual allocation date.
(5) If an Excess Amount was allocated to a Participant on an allocation
date of this Plan which coincides with an allocation date of another
plan, the Excess Amount attributed to this Plan will be the product
of:
(i) the total Excess Amount allocated as of such date, times
(ii) the ratio of (1) the Annual Additions allocated to the
Participant for the Lim itation Year as of such date under this
Plan to (2) the total Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
and all the other qualified defined contribution plans.
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(6) Any Excess Amount attributed to this Plan will be disposed in the
manner described in Section 4.9(a)(4).
(c) If the Participant is covered under another qualified defined
contribution plan maintained by the Employer which is not a Prototype
Plan, Annual Additions which may be credited to the Participant's account
under this Plan for any Limitation Year will be limited in accordance
with Section 4.9(b).
(d) If the Employer maintains, or at any time maintained, a qualified defined
benefit plan covering any Participant in this Plan the sum of the
Participant's Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction will not exceed 1.0 in any Limitation Year.
(e) For purposes of applying the limitations of Code Section 415, the
transfer of funds from one qualified plan to another is not an "annual
addition". In addition, the following are not Employee contributions for
the purposes of Section 4.9(f)(1): (1) rollover contributions (as defined
in Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (2)
repayments of loans made to a Participant from the Plan; (3) repay ments
of distributions received by an Employee pursuant to Code Section
411(a)(7)(B) (cashouts); (4) repayments of distributions received by an
Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions);
and (5) Employee contributions to a simplified employee pension
excludable from gross income under Code Section 408(k)(6).
(f) For purposes of this Section, the following terms shall be defined as
follows:
(1) Annual Additions means the sum credited to a Participant's accounts
for any Limitation Year of (1) Employer contributions, (2) Employee
contributions, (3) forfeitures, (4) amounts allocated, after March
31, 1984, to an individual medical account, as defined in Code
Section 415(l)(2), which is part of a pension or annuity plan
maintained by the Employer and (5) amounts derived from contributions
paid or accrued after December 31, 1985, in taxable years ending
after such date, which are attributable to post-retirement medical
benefits allocated to the separate account of a key employee (as
defined in Code Section 419A(d)(3)) under a welfare benefit fund (as
defined in Code Section 419(c)) maintained by the Employer. Except,
however, the
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"415 Compensation" percentage limitation referred to in paragraph
(a)(2) above shall not apply to: (1) any contribution for medical
benefits (within the meaning of Code Section 419A(f)(2)) after
separation from service which is otherwise treated as an "annual
addition", or (2) any amount otherwise treated as an "annual
addition" under Code Section 415(l)(1).
For this purpose, any Excess Amount applied under Sections 4.9(a)(4)
and 4.9(b)(6) in the Limitation Year to reduce Employer contributions
shall be considered Annual Additions for such Limitation Year.
(2) Compensation means a Participant's Compensation as defined in
Section 1.9.
For purposes of applying the limitations of this Section 4.9,
Compensation for any Limitation Year is the Compensation actually
paid or includible in gross income during such year. Notwithstanding
the preceding sentence, Compensation for a Participant in a profit-
sharing plan who is permanently and totally disabled (as defined in
Code Section 22(e)(3)) is the Compensation such Participant would
have received for the Limitation Year if the Participant had been
paid at the rate of Compensation paid immediately before becoming
permanently and totally disabled; such imputed Compensation for the
disabled Participant may be taken into account only if the
Participant is not a Highly Compensated Employee and contributions
made on behalf of such Participant are nonforfeitable when made.
(3) Defined Benefit Fraction means a fraction, the numerator of which is
the sum of the Participant's Projected Annual Benefits under all the
defined benefit plans (whether or not terminated) main tained by the
Employer, and the denominator of which is the lesser of 125 percent
of the dollar limitation determined for the Limitation Year under
Code Sections 415(b) and (d) or 140 percent of his Highest Average
Compensation including any adjustments under Code Section 415(b).
Notwithstanding the foregoing, for any Top Heavy Plan Year, 100 shall
be substituted for 125.
(4) Defined Contribution Dollar Limitation means $30,000, or, if greater,
one-fourth of the defined
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benefit dollar limitation set forth in Code Section 415(b)(1) as in
effect for the Limitation Year.
(5) Defined Contribution Fraction means a fraction, the numerator of
which is the sum of the Annual Additions to the Participant's account
under all the defined contribution plans (whether or not terminated)
maintained by the Employer for the current and all prior Limitation
Years (including the Annual Additions attributable to the
Participant's nondeductible voluntary employee contributions to any
defined benefit plans, whether or not terminated, maintained by the
Employer and the annual additions attributable to all welfare benefit
funds, as defined in Code Section 419(c), and individual medical
accounts, as defined in Code Section 415(l)(2), maintained by the
Employer), and the denominator of which is the sum of the maximum
aggregate amounts for the current and all prior Limitation Years of
Service with the Employer (regardless of whether a defined
contribution plan was maintained by the Employer). The maximum
aggregate amount in any Limitation Year is the lesser of 125 percent
of the Defined Contribution Dollar Limitation or 35 percent of the
Participant's Compensation for such year.
Notwithstanding the foregoing, for any Top Heavy Plan Year, 100 shall
be substituted for 125.
(6) Employer means the Employer that adopts this Plan and all Affiliated
Employers, except that for purposes of this Section. Affiliated
Employers shall be determined pursuant to the modification made by
Code Section 415(h).
(7) Excess Amount means the excess of the Participant's Annual Additions
for the Limitation Year over the Maximum Permissible Amount.
(8) Highest Average Compensation means the average Compensation for the
three consecutive Years of Service with the Employer that produces
the highest average. A Year of Service with the Employer is the Plan
Year.
(9) Limitation Year means the Plan Year. All qualified plans maintained
by the Employer must use the same Limitation Year. If the Limitation
Year is amended to a different 12 consecutive month period, the new
Limitation Year must begin
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on a date within the Limitation Year in which the amendment is made.
(10) Master or Prototype Plan means a plan the form of which is the
subject of a favorable opinion letter from the Internal Revenue
Service.
(11) Maximum Permissible Amount means the maximum Annual Addition that may
be contributed or allocated to a Participant's account under the plan
for any Limitation Year, which shall not exceed the lesser of:
(i) the Defined Contribution Dollar Limitation, or
(ii) 25 percent of the Participant's Compensation for the Limitation
Year.
The Compensation Limitation referred to in (ii) shall not apply to
any contribution for medical benefits (within the meaning of Code
Sections 401(h) or 419A(f)(2)) which is otherwise treated as an
annual addition under Code Sections 415(l)(1) or 419A(d)(2).
If a short Limitation Year is created because of an amendment
changing the Limitation Year to a different 12 consecutive month
period, the Maximum Permissible Amount will not exceed the Defined
Contribution Dollar Contribution multiplied by the following
fraction:
number of months in the short Limitation Year 12
(12) Projected Annual Benefit means the annual retirement benefit
(adjusted to an actuarially equivalent straight life annuity if such
benefit is expressed in a form other than a straight life annuity or
qualified joint and survivor annuity as defined in the Code) to which
the Participant would be entitled under the terms of the plan
assuming:
(i) the Participant will continue employment until Normal Retirement
Age (or current age, if later), and
(ii) the Participant's Compensation for the current Limitation Year
and all other relevant factors used to determine benefits
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under the Plan will remain constant for all future Limitation
Years.
(g) Notwithstanding anything contained in this Section to the contrary, the
limitations, adjustments and other requirements prescribed in this
Section shall at all times comply with the provisions of Code Section 415
and the Regulations thereunder, the terms of which are specifically
incorporated herein by reference.
4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
If as a result of the allocation of Forfeitures, a reasonable error in
estimating a Participant's annual Compensation, a reasonable error in
determining the amount of elective deferrals (within the meaning of Code Section
402(g)(3), that may be made with respect to a Participant, or other facts and
circumstances to which Regulation 1.415-6(bX6) shall be applicable, the "annual
additions" under this Plan would cause the maximum provided in Section 4.9 to be
exceeded, the Administrator shall treat the excess in accordance with Section
4.9(a)(4).
4.11 TRANSFERS FROM QUALIFIED PLANS
(a) With the consent of the Administrator, amounts may be transferred from
other qualified plans, provided that the trust from which such funds are
transferred permits the transfer to be made and the transfer will not
jeopardize the tax exempt status of the Plan or create adverse tax
consequences for the Employer, The amounts transferred shall be set up in
a separate account herein referred to as a "Participant's Rollover
Account". Such account shall be fully Vested at all times and shall not
be subject to forfeiture for any reason.
(b) Amounts in a Participant's Rollover Account shall be held by the Trustee
pursuant to the provisions of this Plan and may not be withdrawn by, or
distributed to the Participant, in whole or in part, except as provided
in Paragraphs (c) and (d) of this Section.
(c) Amounts attributable to elective contributions (as defined in Regulation
1.401(k)-1(g)(4)), including amounts treated as elective contributions,
which are transferred from another qualified plan in a plan-to-plan
transfer shall be subject to the distribution limitations provided for in
Regulation 1.401(k)-1(d).
(d) At Normal Retirement Date, or such other date when the Participant or his
Beneficiary shall be entitled to receive benefits, the fair market value
of the
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Participant's Rollover Account shall be used to provide additional
benefits to the Participant or his Beneficiary. Any distributions of
amounts held in a Participant's Rollover Account shall be made in a
manner which is consistent with and satisfies the provisions of Section
6.5, including, but not limited to, all notice and consent requirements
of Code Sections 411(a)(11) and 417 and the Regulations thereunder.
Furthermore, such amounts shall be considered as part of a Participant's
benefit in determining whether an involuntary cash-out of benefits
without Participant consent may be made.
(e) The Administrator may direct that employee transfers made after a
valuation date be segregated into a separate account for each Participant
until such time as the allocations pursuant to this Plan have been made,
at which time they may remain segregated or be invested as part of the
general Trust Fund, to be determined by the Administrator.
(f) For purposes of this Section, the term "qualified plan" shall mean any
tax qualified plan under Code Section 401(a). The term "amounts
transferred from other qualified plans" shall mean: (i) amounts
transferred to this Plan directly from another qualified plan; (ii) lump-
sum distributions received by an Employee from another qualified plan
which are eligible for tax free rollover to a qualified plan and which
are transferred by the Employee to this Plan within sixty (60) days
following his receipt thereof; (iii) amounts transferred to this Plan
from a conduit individual retirement account provided that the conduit
individual retirement account has no assets other than assets which (A)
were previously distributed to the Employee by another qualified plan as
a lump-sum distribution (B) were eligible for tax-free rollover to a
qualified plan and (C) were deposited in such conduit individual
retirement account within sixty (60) days of receipt thereof and other
than earnings on said assets; and (iv) amounts distributed to the
Employee from a conduit individual retirement account meeting the
requirements of clause (iii) above, and transferred by the Employee to
this Plan within sixty (60) days of his receipt thereof from such conduit
individual retirement account.
(g) Prior to accepting any transfers to which this Section applies, the
Administrator may require the Employee to establish that the amounts to
be transferred to this Plan meet the requirements of this Section and may
also require the Employee to provide an opinion of counsel
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satisfactory to the Employer that the amounts to be transferred meet the
requirements of this Section.
(h) Notwithstanding anything herein to the contrary, a transfer directly to
this Plan from another qualified plan (or a transaction having the effect
of such a transfer) shall only be permitted if it will not result in the
elimination or reduction of any "Section 411(d)(6) protected benefit" as
described in Section 8.1.
4.12 VOLUNTARY CONTRIBUTIONS
Except as provided in Section 4.2, Participants may not voluntarily contribute
any portion of their compensation earned while a Participant under this Plan.
4.13 DIRECTED INVESTMENT ACCOUNT
(a) All Participants may direct the Trustee as to the investment of all or a
portion of any one or more of their individual account balances.
Participants may direct the Trustee in writing to invest their account in
specific assets as permitted by the Administrator provided such
investments are in accordance with the Department of Labor regulations
and are permitted by the Plan. That portion of the account of any
Participant so directing will thereupon be considered a Directed
Investment Account.
(b) A separate Directed Investment Account shall be established for each
Participant who has directed an investment. Transfers between the
Participant's regular account and their Directed Investment Account shall
be charged and credited as the case may be to each account. The Directed
Investment Account shall not share in earnings of the Trust Fund that are
otherwise invested, but it shall be charged or credited as appropriate
with the net earnings, gains, losses and expenses as well as any
appreciation or depreciation in market value during each Plan Year
attributable to such Account.
(c) The Administrator shall establish a procedure, to be applied in a uniform
and nondiscriminatory manner, setting forth the permissible investment
options under this Section, how often changes between investments may be
made, and any other limitations that the Adminis trator shall impose on a
Participant's right to direct investments.
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4.14 MATCHING CONTRIBUTIONS MADE IN COMMON STOCK
Effective for Plan Years beginning on and after January 1, 1997:
(a) Matching contributions made pursuant to Section 4.1(b) shall be made
in Common Stock.
(b) The number of shares of Common Stock that shall be contributed with
respect to, and allocated to the Participant's Non-Elective Account of,
an Allocation Participant shall be determined by dividing the matching
contribution required to be made to his Participant's Non-Elective
Account under Section 4.1(b) and allocated to his Participant's Non-
Elective Account under Section 4.4(b)(2) by the fair market value of the
Common Stock on the last day of the applicable quarter.
(i) For purposes of this Section 4.14(b) the term "fair market value" on
the last day of a quarter means the last reported sales price of the
Common Stock on the NASDAQ (National) System, as reported in a
national newspaper, on such day or on the nearest prior day on which
trading of the Common Stock occurred on the NASDAQ (National)
System, or if the stock is listed on a national stock exchange, the
last reported sales price of the Common Stock on such exchange, as
reported in a national newspaper, on such day or on the nearest
prior day on which trading of the Common Stock occurred on such
exchange.
(ii) Fractional shares of Common Stock may not be allocated to a
Participant's Account pursuant to this Section 4.14. If the
calculation described in Section 4.14(b)(i) would result in a
fractional number of shares, the number of shares shall be rounded
down and the remaining matching contribution shall be made in cash.
(c) The Trustee shall hold the Common Stock contributed pursuant to this
Section 4.14 and shall maintain for each Participant who has received an
allocation of Common Stock pursuant to this Section 4.14 a separate
account to be designated as the Participant's Common Stock Account. Any
such Common Stock Account shall be considered a part of the Participant's
Non-Elective Account for all purposes under the Plan, except to the
extent set forth in this Section 4.14.
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(d) The Trustee shall allocate among the Common Stock Accounts any dividends
which are declared on the Common Stock held by the Trustee and which are
paid to the Trustee, including cash dividends, stock dividends or any
other adjustments made to the authorized shares, based on the respective
number of shares represented by each Common Stock Account on the record
date of the dividend.
(e) Notwithstanding any other provision of the Plan:
(i) Distributions from a Participant's Common Stock Account shall be
made only in Common Stock. Provided, however, that if a Participant
elects to receive his benefit in installments, the Administrator
shall make distributions of any Common Stock allocated to his
Participant's Non-Elective Account in approximately equal number of
shares, without making any distribution in fractional shares.
(ii) A Participant may not borrow from his Common Stock Account under the
loan provisions of Section 7.4 or make a withdrawal from his Common
Stock Account under the financial hardship provisions of Section
6.11.
(iii) A Participant may not receive a pre-retirement distribution from his
Common Stock Account pursuant to Section 6.10.
(iv) A Participant may not direct that any portion of his Common Stock
Account be transferred to any other investment available under the
Plan.
(f) Subject to the requirements of Section 404 of the Act, each Participant
shall be entitled to instruct the Trustee as to the manner in which the
shares of Common Stock then allocated to his Common Stock Account will be
voted with respect to all matters requiring a vote of such shares. Any
shares of Common Stock with respect to which voting instructions are not
received from a Participant shall be voted in the same manner as the
majority of shares of Common Stock held by the Trustee with respect to
which voting instructions are received.
(g) For purposes of determining whether the value of a Participant's benefit
exceeds or has at the time of any prior distribution exceeded $3,500 for
purposes of Sections 6.5(e) and 6.6(h), the value
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of the Participant's Common Stock Account shall be determined by using
the fair market value of the Common Stock as defined in Section 4.14(b)
on the date as of which the determination is made.
(h) For purposes of determining: (I) the amount of an Employer's
contributions and Forfeitures pursuant to Section 4.4(e); (II) the
Actual Contribution Percentage of a group of employees pursuant to
Section 4.7(b) and the Excess Aggregate Contributions for a Highly
Compensated Participant pursuant to Section 4.8(e); and (III) the
Annual Additions credited to a Participant's accounts as defined in
Section 4.9(f)(1), the value of the Common Stock allocated to a
Participant's Common Stock Account shall be determined by using the
fair market value of the Common Stock as defined in Section 4.14(b) on
the date as of which such determination is required to be made under
those Sections.
(i) The provisions of Sections 4.14(b) through (f) shall apply to Former
Participants, Retired Participants and Beneficiaries in the same manner
as Participants.
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ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Anniversary Date, and at
such other date or dates deemed necessary by the Administrator, herein called
"valuation date", to determine the net worth of the assets comprising the Trust
Fund as it exists on the "valuation date". In determining such net worth, the
Trustee shall value the assets comprising the Trust Fund at their fair market
value as of the "valuation date" and shall deduct all expenses for which the
Trustee has not yet obtained reimbursement from the Employer or the Trust Fund.
5.2 METHOD OF VALUATION
In determining the fair market value of securities held in the Trust Fund which
are listed on a registered stock exchange, the Administrator shall direct the
Trustee to value the same at the prices they were last traded on such exchange
preceding the close of business on the "valuation date". If such securities
were not traded on the "valuation date", or if the exchange on which they are
traded was not open for business on the "valuation date", then the securities
shall be valued at the prices at which they were last traded prior to the
"valuation date". Any shares of registered investment companies shall be valued
at the net asset value of such shares for the applicable "valuation date." Any
unlisted security held in the Trust Fund shall be valued at its bid price next
preceding the close of business on the "valuation date", which bid price shall
be obtained from a registered broker or an investment banker. In determining
the fair market value of assets other than securities for which trading or bid
prices can be obtained, the Trustee may appraise such assets itself, or in its
discretion, employ one or more appraisers for that purpose and rely on the
values established by such appraiser or appraisers.
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ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT
Every Participant may terminate his employment with the Employer and retire for
the purposes hereof on or after his Normal Retirement Date or Early Retirement
Date. Upon such Normal Retirement Date or Early Retirement Date, all amounts
credited to such Participant's Combined Account shall become distributable.
However, a Participant may postpone the termination of his employment with the
Employer to a later date, in which event the participation of such Participant
in the Plan, including the right to receive allocations pursuant to Section 4.4,
shall continue until his Late Retirement Date. Upon a Participant's Retirement
Date, or as soon thereafter as is practicable, the Administrator shall direct
the distribution of all amounts credited to such Participant's Combined Account
in accordance with Section 6.5.
6.2 DETERMINATION OF BENEFITS UPON DEATH
(a) Upon the death of a Participant before his Retirement Date or other
termination of his employment, all amounts credited to such
Participant's Combined Account shall become fully Vested. The
Administrator shall direct, in accordance with the provisions of
Sections 6.6 and 6.7, the distribution of the deceased Participant's
accounts to the Participant's Beneficiary.
(b) Upon the death of a Former Participant, the Administrator shall
direct, in accordance with the provisions of Sections 6.6 and 6.7, the
distribution of any remaining amounts credited to the accounts of such
deceased Former Participant to such Former Participant's Beneficiary.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive payment of the value of
the account of a deceased Participant or Former Participant as the
Administrator may deem desirable. The Administrator's determination of
death and of the right of any person to receive payment shall be
conclusive.
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY
In the event of a Participant's Total and Permanent Disability prior to his
Retirement Date or other termination of his
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employment all amounts credited to such Participant's Combined Account shall
become fully Vested. In the event of a Participant's Total and Permanent
Disability, the Administrator, in accordance with the provisions of Sections 6.5
and 6.7, shall direct the distribution to such Participant of all amounts
credited to such Participant's Combined Account as though he had retired.
6.4 DETERMINATION OF BENEFITS UPON TERMINATION
(a) Except to the extent that assets are held in Directed Investment
Accounts pursuant to Section 4.13, on or before the Anniversary Date
coinciding with or subsequent to the termination of a Participant's
employment for any reason other than retirement, death, or Total and
Permanent Disability, the Administrator may direct the Trustee to
segregate the amount of the Vested portion of such Terminated
Participant's Combined Account and invest the aggregate amount thereof
in a separate, federally insured savings account, certificate of
deposit, common or collective trust fund of a bank or a deferred
annuity. In the event the Vested portion of a Participant's Combined
Account is not segregated, the amount shall remain in a separate
account for the Terminated Participant and share in allocations
pursuant to Section 4.4 until such time as a distribution is made to
the Terminated Participant. The amount of the portion of the
Participant's Combined Account which is not Vested may be credited to
a separate account (which will always share in gains and losses of the
Trust) and at such time as the amount becomes a Forfeiture shall be
treated in accordance with the provisions of the Plan regarding
Forfeitures.
Distribution of the funds due to a Terminated Participant shall be
made on the occurrence of an event which would result in the
distribution had the Terminated Participant remained in the employ of
the Employer (upon the Participant's death, Total and Permanent
Disability, Early or Normal Retirement). However, at the election of
the Participant, the Administrator shall direct that the entire Vested
portion of the Terminated Participant's Combined Account to be payable
to such Terminated Participant. Any distribution under this paragraph
shall be made in a manner which is consistent with and satisfies the
provisions of Section 6.5, including but not limited to, all notice
and consent requirements of Code Section 411(a)(11) and the
Regulations thereunder.
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(b) The Vested portion of any Participant's Account shall be a percentage
of such account determined on the basis of the Participant's number of
Years of Service according to the following vesting schedule:
0-1 years 0%
2 years 20%
3 years 40%
4 years 60%
5 years 80%
6 years 100%
(c) For any Top Heavy Plan Year the vesting schedules set forth in
Section 6.4(b) shall apply.
(d) Notwithstanding the vesting schedule above, upon the complete
discontinuance of the Employer's contributions to the Plan or upon any
full or partial termination of the Plan, all amounts credited to the
account of any affected Participant shall become 100% Vested and shall
not thereafter be subject to Forfeiture.
(e) The computation of a Participant's nonforfeitable percentage of his
interest in the Plan shall not be reduced as the result of any direct
or indirect amendment to this Article, or due to changes in the Plan's
status as a Top Heavy Plan.
(f) If the Plan's vesting schedule is amended, or if the Plan is amended
in any way that directly or indirectly affects the computation of the
Participant's nonforfeitable percentage or if the Plan is deemed
amended by an automatic change to a top heavy vesting schedule, then
each Participant with at least 3 Years of Service as of the expiration
date of the election period may elect to have his nonforfeitable
percentage computed under the Plan without regard to such amendment or
change. Notwithstanding the foregoing, with respect to Employees who
fail to complete at least one (1) Hour of Service in a Plan Year
beginning after December 31, 1988, five (5) shall be substituted for
three (3) in the preceding sentence. If a Participant fails to make
such election, then such Participant shall be subject to the new
vesting schedule. The Participant's election period shall commence on
the adoption date of the amendment and shall end 60 days after the
latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
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(3) the date the Participant receives written notice of the amendment
from the Employer or Administrator.
(g) (1) If any Former Participant shall be reemployed by the Employer
before a 1-Year Break in Service occurs, he shall continue to
participate in the Plan in the same manner as if such termination
had not occurred.
(2) If any Former Participant shall be reemployed by the Employer
before five (5) consecutive 1-Year Breaks in Service, and such
Former Participant had received a distribution of his entire
Vested interest prior to his reemployment, his forfeited account
shall be reinstated only if he repays the full amount distributed
to him before the earlier of five (5) years after the first date
on which the Participant is subsequently reemployed by the
Employer or the close of the first period of 5 consecutive 1-Year
Breaks in Service commencing after the distribution. If a
distribution occurs for any reason other than a separation from
service, the time for repayment may not end earlier than five (5)
years after the date of separation.
In the event the Former Participant does repay the full amount
distributed to him, the undistributed portion of the
Participant's Non-Elective Account must be restored in full,
unadjusted by any gains or losses occurring subsequent to the
Anniversary Date or other valuation date preceding his
termination. If an employee receives a distribution pursuant to
this Section and the employee resumes employment covered under
this plan, the employee's employer derived account balance will
be restored to the amount on the date of distribution if the
employee repays to the plan the full amount of the distribution
attributable to employer contribu tions before the earlier of 5
years after the first date on which the participant is subse
quently reemployed by the employer, or the date the participant
incurs 5 consecutive 1-year breaks in service following the date
of the distribution. If a nonvested Former Participant was deemed
to have received a distribution and such Former Participant is
reemployed by the Employer before five (5) consecutive 1-Year
Breaks in Service, then such Participant will be deemed to have
repaid the deemed distribution as of the date of reemployment.
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(3) If any Former Participant is reemployed after a 1-Year Break in
Service has occurred, Years of Service shall include Years of
Service prior to his 1-Year Break in Service subject to the
following rules:
(i) Any Former Participant who under the Plan does not have a
nonforfeitable right to any interest in the Plan resulting
from Employer contributions shall lose credits if his
consecutive 1-Year Breaks in Service equal or exceed the
greater of (A) five (5) or (B) the aggregate number of his
pre-break Years of Service;
(ii) After five (5) consecutive 1-Year Breaks in Service, a
Former Participant's Vested Account balance attributable to
pre-break, service shall not be increased as a result of
post-break service;
(iii) A Former Participant who is reemployed and who has not had
his Years of Service before a 1-Year Break in Service
disregarded pursuant to (i) above, shall participate in the
Plan as of his date of reemployment;
(iv) If a Former Participant completes a Year of Service (a 1-
Year Break in Service previously occurred, but employment
had not terminated), he shall participate in the Plan
retroac tively from the first day of the Plan Year during
which he completes one (1) Year of Service.
6.5 DISTRIBUTION OF BENEFITS TO PARTICIPANTS
(a) The Administrator, pursuant to the election of the Participant, shall
direct the distribution to a Participant any amount to which he is
entitled under the Plan in one or more of the following methods:
(1) One lump-sum payment;
(2) Payments over a period certain in monthly, quarterly, semiannual,
or annual installments. Except to the extent that the assets are
held in a Directed Investment Account under Section 4.13, in
order to provide such installment payments, the Administrator may
direct that the Participant's interest in the Plan be segregated
and invested separately, and that the funds in the segregated
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account be used for the payment of the installments. The period
over which such payment is to be made shall not extend beyond the
Participant's life expectancy (or the life expectancy of the
Participant and his designated Beneficiary);
(b) Any distribution to a Participant who has a benefit which exceeds, or
has ever exceeded at the time of any prior distribution, $3,500 shall
require such Participant's consent if such distribution commences
prior to the later of his Normal Retirement Age or age 62. With regard
to this required consent:
(1) No consent shall be valid unless the Participant has received a
general description of the material features and an explanation
of the relative values of the optional forms of benefit available
under the Plan that would satisfy the notice requirements of
Code Section 417.
(2) The Participant must be informed of his right to defer receipt of
the distribution. If a Participant fails to consent, it shall be
deemed an election to defer the commencement of payment of any
benefit. However, any election to defer the receipt of benefits
shall not apply with respect to distributions which are required
under Section 6.5(c).
(3) Notice of the rights specified under this paragraph shall be
provided no less than 30 days and no more than 90 days before the
"Annuity Starting Date".
(4) Written consent of the Participant to the distribution must not
be made before the Participant receives the notice and must not
be made more than 90 days before the "Annuity Starting Date".
(5) No consent shall be valid if a significant detriment is imposed
under the Plan on any Participant who does not consent to the
distribution.
(c) Notwithstanding any provision in the Plan to the contrary, the
distribution of a Participant's benefits shall be made in accordance
with the following requirements and shall otherwise comply with Code
Section 401(a)(9) and the Regulations thereunder
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(including Regulation 1.401(a)(9)-2), the provisions of which are
incorporated herein by reference:
(1) A Participant's benefits shall be distributed to him not later
than April 1st of the calendar year following the later of (i)
the calendar year in which the Participant attains age 70 1/2 or
(ii) the calendar year in which the Participant retires,
provided, however, that this clause (ii) shall not apply in the
case of a Participant who is a "five (5) percent owner" at any
time during the five (5) Plan Year period ending in the calendar
year in which he attains age 70 1/2 or, in the case of a
Participant who becomes a "five (5) percent owner" during any
subsequent Plan Year, clause (ii) shall no longer apply and the
required beginning date shall be the April 1st of the calendar
year following the calendar year in which such subsequent Plan
Year ends. Alternatively, distributions to a Participant must
begin no later than the applicable April 1st as determined under
the preceding sentence and must be made over the life expectancy
of the Participant (or the life expectancies of the Participant
and the Participant's designated Beneficiary) in accordance with
Regulations. However, clause (ii) above shall not apply to any
Participant unless the Participant had attained age 70 1/2 before
January 1, 1988 and was not a "five (5) percent owner" at any
time during the Plan Year ending with or within the calendar year
in which the Participant attained age 66 1/2 or any subsequent
Plan Year.
(2) Distributions to a Participant and his Beneficiaries shall only
be made in accordance with the incidental death benefit
requirements of Code Section 401(a)(9)(G) and the Regulations
thereunder.
(d) For purposes of this Section, the life expectancy of a participant and
a Participant's spouse shall be redetermined annually in accordance
with Regulations if the Participant so elects. If the Participant or
the Participant's spouse elects whether recalculations will be made,
then the election, once made, shall be irrevocable. If no election is
made by the time distributions must commence, then the life expectancy
of the Participant and the Participant's spouse shall not be subject
to recalculation. Life expectancy and joint and last survivor
expectancy shall be computed
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using the return multiples in Tables V and VI of Regulation 1.72-9.
(e) Notwithstanding anything to the contrary in this Section 6.5, but
subject to Section 6.14, if the value of a Participant's Vested Account
balance on the first day of the month that is at least two weeks
following his retirement or other termination of employment does not
exceed, and at the time of any prior distribution has not exceeded,
$3,500, the Administrator shall direct that the entire Vested benefit
be paid to such Participant in a single lump sum without regard to the
consent of the Participant.
6.6 DISTRIBUTION OF BENEFITS UPON DEATH
(a) Unless otherwise elected as provided in Section 6.6(c), a Participant
who has a surviving spouse shall have his entire Vested Account balance
paid to his surviving spouse.
(1) Payment shall be made to the surviving spouse in a manner provided
in Section 6.6(d).
(2) The surviving spouse may direct that payment of his or her benefit
commence within a reasonable period after the Participant's death.
If the spouse does not so direct, payment of such benefit will
commence at the time elected by the spouse, subject to the rules
specified in Section 6.6(e).
(b) If the Participant does not have a surviving spouse or has made an
election as provided in Section 6.6(c) to have some or all of his
Vested Account balance paid to someone other than his surviving spouse,
the Participant may designate a Beneficiary for that portion of his
Vested Account balance that is not payable to the spouse.
(1) The designation of a Beneficiary shall be made on a form
satisfactory to the Administrator.
(2) In the event no valid designation of Beneficiary exists at the
time of the Participant's death, the death benefit shall be
payable to his estate.
(3) The Beneficiary validly designated by the Participant pursuant to
this Section 6.6(b) may elect a distribution in a manner provided
in Section 6.6(d), and as permitted under Section 6.6(e).
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(c) Any election to waive the spouse's benefit before the Participant's
death must be made by the Participant in writing during the election
period and shall require the spouse's consent. The spouse's consent
must acknowledge the specific nonspouse Beneficiary. Notwithstanding
the foregoing, the nonspouse Beneficiary need not be acknowledged,
provided the consent of the spouse acknowledges that the spouse has
the right to limit consent only to a specific Beneficiary and that the
spouse voluntarily elects to relinquish such right. Such spouse's
consent shall be irrevocable and must acknowledge the effect of such
election and be witnessed by a Plan representative or a notary public.
Such consent shall not be required if it is established to the
satisfaction of the Administrator that: (1) the required consent
cannot be obtained because there is no spouse, the spouse cannot be
located, or other circumstances that may be prescribed by Regulations;
or (2) the Participant is legally separated or has been abandoned
(within the meaning of local law) and the Participant has a court
order to such effect (and there is no "qualified domestic relations
order" as defined in Code Section 414(p) which provides otherwise). If
the spouse is legally incompetent to give consent, the spouse's legal
guardian, even if such guardian is the Participant, may give consent.
A former spouse's waiver shall not be binding on a new spouse.
A Participant may at any time revoke his designation of a Beneficiary
or change his Beneficiary by filing written notice of such revocation
or change with the Administrator. The number of revocations shall not
be limited. However, the Participant's spouse must again consent in
writing to any change in Beneficiary unless the original consent
acknowledged that the spouse had the right to limit consent only to a
specific Beneficiary and that the spouse voluntarily elected to
relinquish such right.
The election period shall begin on the day the Participant becomes a
Participant and end on the date of the Participant's death.
(d) (1) Death benefits shall be paid to the Participant's Beneficiary by
either of the following methods, as elected by the Participant
(or if no election has been made prior to the Participant's
death, by his Beneficiary) subject to the rules specified in
Section 6.6(e):
(i) One lump-sum payment;
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(ii) Payment in monthly, quarterly, semi-annual, or annual cash
installments over a period to be determined by the
Participant or his Beneficiary. After periodic installments
commence, the Beneficiary shall have the right to reduce the
period over which such periodic installments shall be made,
and the amount of such periodic installments shall be
adjusted accordingly;
(2) In the event the death benefit payable pursuant to Section 6.2 is
payable in installments, then, upon the death of the Participant,
the Administrator may direct that the death benefit be segregated
and invested separately, and that the funds accumulated in the
segregated account be used for the payment of the installments.
(e) Notwithstanding any provision in the Plan to the contrary,
distributions upon the death of a Participant shall be made in
accordance with the following requirements and shall otherwise comply
with Code Section 401(a)(9) and the Regulations thereunder.
(1) If it is determined, pursuant to Regulations, that the
distribution of a Participant's interest has begun and the
Participant dies before his entire interest has been distributed
to him, the remaining portion of such interest shall be
distributed at least as rapidly as under the method of
distribution selected pursuant to Section 6.5 as of his date of
death.
(2) If a Participant dies before he has begun to receive any
distributions of his interest in the Plan or before distributions
are deemed to have begun pursuant to Regulations, then his death
benefit shall be distributed to his Beneficiaries in the manner
selected by the Participant or Beneficiary(ies), subject to the
following rules and Section 6.6(f) below:
(i) The entire death benefit shall be distributed to the
Participant's Beneficiaries by December 31st of the calendar
year in which the fifth anniversary of the Participant's
death occurs;
(ii) The 5-year distribution requirement of (i) above shall not
apply to any portion of the deceased Participant's interest
which is payable to or for the benefit of a designated
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Beneficiary. In such event, such portion shall be
distributed over the life of such designated Beneficiary (or
over a period not extending beyond the life expectancy of
such designated Beneficiary) provided such distribution
begins not later than December 31st of the calendar year
immediately following the calendar year in which the
Participant died.
(iii) However, in the event the Participant's spouse (determined
as of the date of the Participant's death) is his designated
Beneficiary, the provisions of (ii) above shall apply except
that the requirement that distributions commence within one
year of the Participant's death shall not apply. In lieu
thereof, distributions must commence on or before the later
of: (1) December 31st of the calendar year immediately
following the calendar year in which the Participant died;
or (2) December 31st of the calendar year in which the
Participant would have attained age 70 1/2. If the surviving
spouse dies before distributions to such spouse begin, then
the 5-year distribution requirement of this Section shall
apply as if the spouse was the Participant.
(f) For purposes of Section 6.6(e)(2), the election by a designated
Beneficiary to be excepted from the 5-year distribution requirement
must be made no later than December 31st of the calendar year
following the calendar year of the Participant's death. Except,
however, with respect to a designated Beneficiary who is the
Participant's surviving spouse, the election must be made by the
earlier of: (1) December 31st of the calendar year immediately
following the calendar year in which the Participant died or, if
later, the calendar year in which the Participant would have attained
age 70 1/2; or (2) December 31st of the calendar year which contains
the fifth anniversary of the date of the Participant's death. An
election by a designated Beneficiary must be in writing and shall be
irrevocable as of the last day of the election period stated herein.
In the absence of an election by the Participant or a designated
Beneficiary, the 5-year distribution requirement shall apply.
(g) For purposes of this Section, the life expectancy of a Participant and
a Participant's spouse shall be redetermined annually in accordance
with Regulations if the Participant so elects. If the Participant or
the
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Participant's spouse elects to have life expectancies recalculated,
then the election, once made shall be irrevocable. If no election is
made by the time distributions must commence, then the life expectancy
of the Participant and the Participant's spouse shall not be subject
to recalculation. Life expectancy and joint and last survivor
expectancy shall be computed using the return multiples in Tables V
and VI of Regulation 1.72-9.
(h) Notwithstanding anything to the contrary in Sections 6.6(a)(1) and (2)
and (b)(3), but subject to Section 6.14, if the value of a
Participant's Vested benefit at the time the Administrator learns of
the Participant's death does not exceed, and did not at any time after
the Participant's death or at the time of any prior distribution
exceed, $3,500, the Administrator shall direct that the entire Vested
benefit be paid to such Participant's Beneficiary as soon as
practicable in a single lump sum.
6.7 TIME OF SEGREGATION OR DISTRIBUTION
Except as limited by Sections 6.5 and 6.6, whenever a distribution is to be
made, or a series of payments are to commence, on or as of an Anniversary Date,
the distribution or series of payments may be made or begun on such date or as
soon thereafter as is practicable, but in no event later than 180 days after the
Anniversary Date. However, unless a Former Participant elects in writing to
defer the receipt of benefits (such election may not result in a death benefit
that is more than incidental), the payment of benefits shall begin not later
than the 60th day after the close of the Plan Year in which the latest of the
following events occurs: (a) the date on which the Participant attains the
earlier of age 65 or the Normal Retirement Age specified herein; (b) the 10th
anniversary of the year in which the Participant commenced participation in the
Plan; or (c) the date the Participant terminates his service with the Employer.
Notwithstanding the foregoing, the failure of a Participant and, if applicable,
the Participant's spouse, to consent to a distribution pursuant to Section
6.5(b), shall be deemed to be an election to defer the commencement of payment
of any benefit sufficient to satisfy this Section.
6.8 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the Administrator may
direct that such distribution be paid to the legal guardian, or if none, to a
parent of such Beneficiary or a responsible adult with whom the Beneficiary
maintains his resi dence, or to the custodian for such Beneficiary under the
Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by
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the laws of the state in which said Beneficiary resides. Such a payment to the
legal guardian, custodian or parent of a minor Beneficiary shall fully discharge
the Trustee, Employer, and Plan from further liability on account thereof.
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable to a
Participant or his Beneficiary hereunder shall, at the later of the
Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid
solely by reason of the inability of the Administrator, after sending a
registered letter, return receipt requested, to the last known address, and
after further diligent effort to ascertain the whereabouts of such Participant
or his Beneficiary, the amount so distributable shall be treated as a Forfeiture
pursuant to the Plan. In the event a Participant or Beneficiary is located
subsequent to his benefit being reallocated, such benefit shall be restored,
first from Forfeitures, if any, and then from an additional Employer
contribution if necessary.
6.10 PRE-RETIREMENT DISTRIBUTION
At such time as a Participant shall have attained age 59 1/2, the Administrator,
at the election of the Participant, shall direct the Trustee to distribute up to
the entire amount then credited to the accounts maintained on behalf of the
Participant. However, no such distribution may be made to any Participant unless
his Participant's Non-Elective Account has become fully Vested. In the event
that the Administrator makes such a distribution, the Participant shall continue
to be eligible to participate in the Plan on the same basis as any other
Employee. Any distribution made pursuant to this Section shall be made in a
manner consistent with Section 6.5, including but not limited to, all notice and
consent requirements required by Code Section 411(a)(11) and the Regulations
thereunder.
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP
(a) The Administrator, at the election of the Participant, shall direct the
Trustee to distribute to any Partic ipant in any one Plan Year up to
the lesser of (1) 100% of his accounts valued as of the last
Anniversary Date or other valuation date or (2) the amount necessary to
satisfy the immediate and heavy financial need of the Participant. Any
distribution made pursuant to this Section shall be deemed to be made
as of the first day of the Plan Year or, if later, the valuation date
immediately preceding the date of distribution, and the account from
which the distribution is made shall be reduced accordingly. Withdrawal
under this Section shall be authorized only if the distribution is on
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account of one of the following or any other items permitted by the
Internal Revenue Service:
(1) Medical expenses described in Code Section 213(d) incurred by the
Participant, his spouse, or any of his dependents (as defined in
Code Section 152);
(2) The purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) Payment of tuition and related educational fees for the next 12
months of post-secondary education for the Participant, his
spouse, children, or dependents; or
(4) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the
Participant's principal residence.
(b) No such distribution shall be made from a Participant's Non-Elective
Account until such account has become fully Vested.
(c) No distribution shall be made pursuant to this Section unless the
Administrator, based upon the Participant's representation and such
other facts as am known to the Administrator, determines that all of
the following conditions are satisfied:
(1) The distribution is not in excess of the amount of the immediate
and heavy financial need of the Participant (including any amounts
necessary to pay any federal, state, or local taxes or penalties
reasonably anticipated to result from the distribution).
(2) The Participant has obtained all distributions, other than
hardship distributions, and all nontaxable loans currently
available under all plans maintained by the Employer;
(3) The Plan, and all other plans maintained by the Employer, provide
that the Participant's elective deferrals and voluntary employee
contributions will be suspended for at least twelve (12) months
after receipt of the hardship distribution; and
(4) The Plan, and all other plans maintained by the Employer, provide
that the Participant may not make elective deferrals for the
Participant's taxable year immediately following the taxable
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year of the hardship distribution in excess of the applicable
limit under Code Section 402(g) for such next taxable year less
the amount of such Participant's elective deferrals for the
taxable year of the hardship distribution.
(d) Notwithstanding the above, distributions from the Participant's
Elective Account pursuant to this Section shall be limited solely to
the Participant's Deferred Compensation.
(e) Notwithstanding the above, a Participant may not make a withdrawal
from his Common Stock Account under this Section 6.11.
(f) Any distribution made pursuant to this Section shall be made in a
manner which is consistent with and satisfies the provisions of
Section 6.5, including, but not limited to, all notice and consent
requirements of Code Sections 411(a)(11) and 417 and the Regulations
there under.
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS
All rights and benefits, including elections, provided to a Participant in this
Plan shall be subject to the rights afforded to any "alternate payee" under a
"qualified domestic relations order." Furthermore, a distribution to an
"alternate payee" shall be permitted if such distribution is authorized by a
"qualified domestic relations order," even if the affected Participant has not
reached the "earliest retirement age" under the Plan. For the purposes of this
Section, "alternate payee," "qualified domestic relations order" and "earliest
retirement age" shall have the meaning set forth under Code Section 414(p).
6.13 SPECIAL RULE FOR TRANSFEREE PLANS
If it is determined that this Plan is a direct or indirect transferee of a
defined benefit plan or money purchase plan, or a target benefit plan, stock
bonus or profit sharing plan which would otherwise provide for a life annuity
form of payment to the Participant, the rules of Sections 401(a)(11) and 417 of
the Code shall apply to the extent required by those Sections.
6.14 DIRECT ROLLOVER
(a) This Section applies to distributions made on or after January 1, 1993.
Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Section, a
distributed may elect, at the time and in the manner pre-
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scribed by the Plan Administrator, to have any portion of an eligible
rollover distribution paid directly to an eligible retirement plan
specified by the distributee in a direct rollover.
(b) An eligible rollover distribution is any distribution of all or any
portion of the balance to the credit of the distributed, except that an
eligible rollover distribution does not include: any distribution that
is one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
distributee or the joint lives (or joint life expectancies) of the
distributed and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to the extent
such distribution is required under Section 401(a)(9) of the Code; and
the portion of any distribution that is not includible in gross
income(determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(c) An eligible retirement plan is an individual retirement account
described in Section 408(a) of the Code, an individual retirement
annuity described in Section 408(b) of the Code, an annuity plan
described in Section 403(a) of the Code, or the qualified trust
described in Section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution, However, in the case of an eligible
rollover distribution to the surviving spouse, an eligible retirement
plan is an individual retirement account or an individual retirement
annuity.
(d) A distributes includes an Employee or former Employee, In addition, the
Employee's or former Employee's surviving spouse and the Employee's or
former Employee's spouse or former spouse who is the alternate payee
under a qualified domestic relations order, as defined in Section
414(p) of the Code, are distributees with regard to the interest of the
spouse or former spouse.
(e) A direct rollover is a payment by the Plan to the eligible retirement
plan specified by the distributee.
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ARTICLE VII
TRUSTEE
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
The Trustee shall have the following categories of responsibilities:
(a) Consistent with the "funding policy and method" determined by the
Employer to invest, manage, and control the Plan assets subject,
however, to the direction of an Investment Manager if the Employer
should appoint such manager as to all or a portion of the assets of the
Plan;
(b) At the direction of the Administrator, to pay benefits required under
the Plan to be paid to Participants, or, in the event of their death,
to their Beneficiaries;
(c) To maintain records of receipts and disbursements and furnish to the
Employer and/or Administrator for each Plan Year a written annual
report per Section 7.7; and
(d) If there shall be more than one Trustee, they shall act by a majority
of their number, but may authorize one or more of them to sign papers
on their behalf.
7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE
(a) Except to the extent of amounts held in a Directed Investment Account,
the Trustee shall invest and reinvest the Trust Fund to keep the Trust
Fund invested without distinction between principal and income and in
such securities or property, real or personal, wherever situated, as
the Trustee shall deem advisable, including, but not limited to,
stocks, common or preferred, bonds and other evidences of indebtedness
or ownership, and real estate or any interest therein. The Trustee
shall at all times in making investments of the Trust Fund consider,
among other factors, the short and long-term financial needs of the
Plan on the basis of information furnished by the Employer. In making
such investments, the Trustee shall not be restricted to securities or
other property of the character expressly authorized by the applicable
law for trust investments; however, the Trustee shall give due regard
to any limitations imposed by the Code or the Act so that at all times
this Plan may qualify as a qualified Plan and Trust.
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(b) The Trustee may employ a bank or trust company pursuant to the terms of
its usual and customary bank agency agreement, under which the duties
of such bank or trust company shall be of a custodial, clerical and
record-keeping nature.
(c) Except to the extent of amounts held in a Directed Investment Account,
the Trustee may from time to time transfer to a common, collective, or
pooled trust fund maintained by any corporate Trustee hereunder
pursuant to Revenue Ruling 81-100, all or such part of the Trust Fund
as the Trustee may deem advisable, and such part or all of the Trust
Fund so transferred shall be subject to all the terms and provisions of
the common, collective, or pooled trust fund which contemplate the
commingling for investment purposes of such trust assets with trust
assets of other trusts. The Trustee may withdraw from such common,
collective, or pooled trust fund all or such part of the Trust Fund as
the Trustee may deem advisable.
7.3 OTHER POWERS OF THE TRUSTEE
The Trustee, in addition to all powers and authorities under common law,
statutory authority, including the Act, and other provisions of this Plan, shall
have the following powers and authorities, to be exercised in the Trustee's sole
discretion:
(a) To purchase, or subscribe for, any securities or other property and to
retain the same. In conjunction with the purchase of securities, margin
accounts may be opened and maintained;
(b) To sell, exchange, convey, transfer, grant options to purchase, or
otherwise dispose of any securities or other property held by the
Trustee, by private contract or at public auction. No person dealing
with the Trustee shall be bound to see to the application of the
purchase money or to inquire into the validity, expediency, or
propriety of any such sale or other disposition, with or without
advertisement;
(c) Subject to the instructions given by Participants pursuant to Section
4.14(f) to vote upon any stocks, bonds, or other securities, to give
general or special proxies or powers of attorney with or without power
of substitution; to exercise any conversion privileges, subscription
rights or other options, and to make any payments incidental thereto;
to oppose, or to consent to, or otherwise participate in, corporate
reorgani zations or other changes affecting corporate securities, and
to delegate discretionary powers, and
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to pay any assessments or charges in connection therewith; and
generally to exercise any of the powers of an owner with respect to
stocks, bonds, securities, or other property;
(d) To cause any securities or other property to be registered in the
Trustee's own name or in the name of one or more of the Trustee's
nominees, and to hold any investments in bearer form, but the books and
records of the Trustee shall at all times show that all such
investments are part of the Trust Fund;
(e) To borrow or raise money for the purposes of the Plan in such amount,
and upon such terms and conditions, as the Trustee shall deem
advisable, and for any sum so borrowed, to issue a promissory note as
Trustee, and to secure the repayment thereof by pledging all, or any
part, of the Trust Fund, and no person lending money to the Trustee
shall be bound to see to the application of the money lent or to
inquire into the validity, expedi ency, or propriety of any borrowing;
(f) To keep such portion of the Trust Fund in cash or cash balances as the
Trustee may, from time to time, deem to be in the best interests of the
Plan, without liability for interest thereon;
(g) To accept and retain for such time as the Trustee may deem advisable
any securities or other property received or acquired as Trustee
hereunder, whether or not such securities or other property would
normally be purchased as investments hereunder;
(h) To make, execute, acknowledge, and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be
necessary or appropriate to carry out the powers herein granted;
(i) To settle, compromise, or submit to arbitration any claims, debts, or
damages due or owing to or from the Plan, to commence or defend suits
or legal or administrative proceedings, and to represent the Plan in
all suits and legal and administrative proceedings;
(j) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation, and such agent or counsel may or may not be
agent or counsel for the Employer;
(k) To invest funds of the Trust in time deposits or savings accounts
bearing a reasonable rate of interest in the Trustee's bank;
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(l) To invest in Treasury Bills and other forms of United States government
obligations;
(m) To sell, purchase and acquire put or call options if the options are
traded on and purchased through a national securities exchange
registered under the Securities Exchange Act of 1934, as amended, or,
if the options are not traded on a national securities exchange, are
guaranteed by a member firm of the New York Stock Exchange;
(n) To deposit monies in federally insured savings accounts or certificates
of deposit in banks or savings and loan associations;
(o) To pool all or any of the Trust Fund, from time to time, with assets
belonging to any other qualified employee pension benefit trust created
by the Employer or any Affiliated Employer, and to commingle such
assets and make joint or common investments and carry joint accounts on
behalf of this Plan and such other trust or trusts, allocating
undivided shares or interests in such investments or accounts or any
pooled assets of the two or more trusts in accordance with their
respective interests;
(p) To do all such acts and exercise all such rights and privileges,
although not specifically mentioned herein, as the Trustee may deem
necessary to carry out the purposes of the Plan.
7.4 LOANS TO PARTICIPANTS
(a) The Trustee may, in the Trustee's sole discretion, make loans to
Participants or Beneficiaries under the following circumstances: (1)
loans shall be made available to all Participants and Beneficiaries on
a reasonably equivalent basis, (2) loans shall not be made available to
Highly Compensated Employees in an amount greater than the amount made
available to other Participants, (3) loans shall bear a reasonable rate
of interest; (4) loans shall be adequately secured; and (5) shall
provide for periodic repayment over a reasonable period of time.
(b) Loans shall not be made to any Shareholder-Employee unless an exemption
for such loan is obtained pursuant to Act Section 408 and further
provided that such loan would not be subject to tax pursuant to Code
Section 4975.
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(c) Loans shall not be granted to any Participant that provide for a
repayment period extending beyond such Participant's Normal Retirement
Date.
(d) Loans made pursuant to this Section (when added to the outstanding
balance of all other loans made by the Plan to the Participant) shall
be limited to the lesser of:
(1) $50,000 reduced by the excess (if any) of the highest outstanding
balance of loans from the Plan to the Participant during the one
year period ending on the day before the date on which such loan is
made, over the outstanding balance of loans from the Plan to the
Participant on the date on which such loan was made, or
(2) one-half (1/2) of the present value of the non-forfeitable accrued
benefit of the Employee under the Plan.
For purposes of this limit, all plans of the Employer shall be
considered one plan. Addition ally, with respect to any loan made
prior to January 1, 1987, the $50,000 limit specified in (1) above
shall be unreduced.
(e) Loans shall provide for level amortization with payments to be made not
less frequently than quarterly over a period not to exceed five (5)
years. However, loans used to acquire any dwelling unit which, within a
reasonable time, is to be used (determined at the time the loan is
made) as a principal residence of the Participant shall provide for
periodic repayment over a reasonable period of time that may exceed
five (5) years. Notwithstanding the foregoing, loans made prior to
January 1, 1997 which are used to acquire, construct, reconstruct or
substantially rehabilitate any dwelling unit which, within a reasonable
period of time is to be used (determined at the time the loan is made)
as a principal residence of the Participant or a member of his family
(within the meaning of Code Section 267(c)(4)) may provide for periodic
repayment over a reasonable period of time that may exceed five (5)
years.
(f) An assignment or pledge of any portion of a Participant's interest in
the Plan and a loan, pledge, or assignment with respect to any
insurance contract purchased under the Plan, shall be treated as a loan
under this Section.
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(g) Loans shall be treated as directed investments for purposes of
Section 4.13. The minimum amount of any loan shall be $1,000.
(h) Notwithstanding the above, a Participant or Beneficiary may not borrow
from his Common Stock Account under this Section 7.4.
(i) A Participant loan program shall be established which must include, but
need not be limited to, the following:
(1) the identity of the person or positions authorized to administer
the Participant loan program;
(2) a procedure for applying for loans;
(3) the basis on which loans will be approved or denied;
(4) limitations, if any, on the types and amounts of loans offered;
(5) the procedure under the program for determining a reasonable rate
of interest;
(6) the types of collateral which may secure a Participant loan; and
(7) the events constituting default and the steps that will be taken
to preserve plan assets.
Such Participant loan program shall be contained in a separate written
document which, when properly executed, is hereby incorporated by
reference and made a pan of this plan. Furthermore, such Participant
loan program may be modified or amended in writing from time to time
without the necessity of amending this Section of the Plan.
7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS
At the direction of the Administrator, the Trustee shall, from time to time, in
accordance with the terms of the Plan, make payments out of the Trust Fund. The
Trustee shall not be responsible in any way for the application of such
payments.
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES
The Trustee shall be paid such reasonable compensation as set forth in the
Trustee's fee schedule (if the Trustee has such a schedule) or as agreed upon in
writing by the Employer and the
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Trustee. An individual serving as Trustee who already receives full-time pay
from the Employer shall not receive compensation from this Plan. In addition,
the Trustee shall be reimbursed for any reasonable expenses, including
reasonable counsel fees incurred by it as Trustee. Such compensation and
expenses shall be paid by the Employer. All taxes of any kind and all kinds
whatsoever that may be levied or assessed under existing or future laws upon, or
in respect of, the Trust Fund or the income thereof, shall be paid from the
Trust Fund.
7.7 ANNUAL REPORT OF THE TRUSTEE
Within a reasonable period of time after the later of the Anniversary Date or
receipt of the Employer's contribution for each Plan Year, the Trustee, or its
agent, shall furnish to the Employer and Administrator a written statement of
account with respect to the Plan Year for which such contribution was made
setting forth:
(a) the net income, or loss, of the Trust Fund;
(b) the gains, or losses, realized by the Trust Fund upon sales or other
disposition of the assets;
(c) the increase, or decrease, in the value of the Trust Fund;
(d) all payments and distributions made from the Trust Fund; and
(e) such further information as the Trustee and/or Administrator deems
appropriate. The Employer, forthwith upon its receipt of each such
statement of account, shall acknowledge receipt thereof in writing and
advise the Trustee and/or Administrator of its approval or disapproval
thereof. Failure by the Employer to disapprove any such statement of
account within thirty (30) days after its receipt thereof shall be
deemed an approval thereof. The approval by the Employer of any
statement of account shall be binding as to all matters embraced
therein as between the Employer and the Trustee to the same extent as
if the account of the Trustee had been settled by judgment or decree in
an action for a judicial settlement of its account in a court of
competent jurisdiction in which the Trustee, the Employer and all
persons having or claiming an interest in the Plan were parties;
provided, however, that nothing herein contained shall deprive the
Trustee of its right to have its accounts judicially settled if the
Trustee so desires.
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7.8 AUDIT
(a) If an audit of the Plan's records shall be required by the Act and the
regulations thereunder for any Plan Year, the Administrator shall direct
the Trustee to engage on behalf of all Participants an independent
qualified public accoun tant for that purpose. Such accountant shall,
after an audit of the books and records of the Plan in accordance with
generally accepted auditing standards, within a reasonable period after the
close of the Plan Year, furnish to the Administrator and the Trustee a
report of his audit setting forth his opinion as to whether any statements,
schedules or lists, that are required by Act Section 103 or the Secretary
of Labor to be filed with the Plan's annual report, are presented fairly in
conformity with generally accepted accounting principles applied
consistently.
(b) All auditing and accounting fees shall be an expense of and may, at the
election of the Administrator, be paid from the Trust Fund.
(c) If some or all of the information necessary to enable the Administrator to
comply with Act Section 103 is maintained by a bank, insurance company, or
similar institution, regulated and supervised and subject to periodic
examination by a state or federal agency, it shall transmit and certify the
accuracy of that information to the Administrator as provided in Act
Section 103(b) within one hundred twenty (120) days after the end of the
Plan Year or such other date as may be prescribed under regulations of the
Secretary of Labor.
7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
(a) The Trustee may resign at any time by delivering to the Employer, at
least thirty (30) days before its effective date, a written notice of
his resignation.
(b) The Employer may remove the Trustee by mailing by registered or
certified mail, addressed to such Trustee at his last known address, at
least thirty (30) days before its effective date, a written notice of
his removal.
(c) Upon the death, resignation, incapacity, or removal of any Trustee, a
successor may be appointed by the Employer and such successor, upon
accepting such appointment in writing and delivering same to the
Employer, shall, without further act, become vested with all the
estate, rights, powers, discretions, and duties of his predecessor with
like respect as if he
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were originally named as a Trustee herein. Until such a successor is
appointed, the remaining Trustee or Trustees shall have full authority
to act under the terms of the Plan.
(d) The Employer may designate one or more successors prior to the death,
resignation, incapacity, or removal of a Trustee, In the event a
successor is so designated by the Employer and accepts such
designation, the succes sor shall, without further act, become vested
with all the estate, rights, powers, discretions, and duties of his
predecessor with the like effect as if he were originally named as
Trustee herein immediately upon the death, resignation, incapacity, or
removal of his predecessor.
(e) Whenever any Trustee hereunder ceases to serve as such, he shall
furnish to the Employer and Administrator a written statement of
account with respect to the portion of the Plan Year during which he
served as Trustee. This statement shall be either (i) included as part
of the annual statement of account for the Plan Year required under
Section 7.7 or (ii) set forth in a special statement Any such special
statement of account should be rendered to the Employer no later than
the due date of the annual statement of account for the Plan Year, The
procedures set forth in Section 7.7 for the approval by the Employer of
annual statements of account shall apply to any special statement of
account rendered hereunder and approval by the Employer of any such
special statement in the manner provided in Section 7.7 shall have the
same effect upon the statement as the Employer's approval of an annual
statement of account. No successor to the Trustee shall have any duty
or responsibility to investigate the acts or transactions of any
predecessor who has rendered all statements of account required by
Section 7.7 and this subparagraph.
7.10 TRANSFER OF INTEREST
Notwithstanding any other provision contained in this Plan, the Trustee at the
direction of the Administrator shall transfer the Vested interest, if any, of
such Participant in his account to another trust forming part of a pension,
profit sharing, or stock bonus plan maintained by such Participant's new
employer and represented by said employer in writing as meeting the require
ments of Code Section 401(a), provided that the trust to which such transfers
are made permits the transfer to be made.
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7.11 TRUSTEE INDEMNIFICATION
The Employer agrees to indemnify and save harmless the Trustee against any and
all claims, losses, damages, expenses and liabil ities the Trustee may incur in
the exercise and performance of the Trustee's powers and duties hereunder,
unless the same are determined to be due to gross negligence or willful
misconduct.
7.12 EMPLOYER SECURITIES AND REAL PROPERTY
The Trustee shall be empowered to acquire and hold "qualifying Employer
securities" and "qualifying Employer real property," as those terms are defined
in the Act. However, no more than 100% of the fair market value of all the
assets in the Trust Fund may be invested in "qualifying Employer securities" and
"qualifying Employer real property."
7.13 DIRECTED INVESTMENT AND INVESTMENT IN COMMON STOCK
Notwithstanding any other provision of this Article VII:
(a) Directed Investment. To the extent that a Participant has directed
-------------------
an investment pursuant to Section 4.13 such direction must be followed
by the Trustee. Neither the Trustee nor any other person, including the
Administrator, shall be under any duty to question any such direction
of the Participant or to review any securities or other property, real
or personal, or to make any suggestions to the Participant in
connection therewith, and the Trustee shall comply as promptly as
practicable with directions given by the Participant pursuant to
Section 4.13. Provided, however, that the Trustee may refuse to comply
with any direction from a Participant in the event the Trustee, in its
sole and absolute discretion, deems such direction improper by virtue
of applicable law, and in such event, the Trustee shall not be
responsible or liable for any loss or expense which may result. Any
costs and expenses related to compliance with the Participant's
directions shall be borne by the Participant's Directed Investment
Account.
Notwithstanding anything hereinabove to the contrary, the Trustee shall
not, at any time after December 31, 1981, invest any portion of a
Directed Investment Account in "collectibles" within the meaning of
that term as employed in Code Section 408(m).
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(b) Investment in Common Stock. If Common Stock has been allocated to a
--------------------------
Participant's Non-Elective Account pursuant to Section 4.14, the
provisions of Sections 7.1 through 7.12 shall be interpreted in a
manner consistent with Section 4.14.
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ARTICLE VIII
AMENDMENT, TERMINATION, AND MERGERS
8.1 AMENDMENT
(a) The Employer shall have the right at any time to amend this Plan
subject to the limitations of this Section. However, any amendment
which affects the rights, duties or responsibilities of the Trustee
may only be made with the Trustee's written consent. Any such
amendment shall become effective as provided therein upon its
execution. The Trustee shall not be required to execute any such
amendment unless the amendment affects the duties of the Trustee
hereunder.
(b) No amendment to the Plan shall be effective if it authorizes or
permits any part of the Trust Fund (other than such part as is
required to pay taxes and admin istration expenses) to be used for or
diverted to any purpose other than for the exclusive benefit of the
Participants or their Beneficiaries or estates, or causes any
reduction in the amount credited to the account of any Participant; or
causes or permits any portion of the Trust Fund to revert to or become
property of the Employer.
(c) Except as permitted by Regulations (including Regulation 1.411(d)-4),
no Plan amendment or transaction having the effect of a Plan amendment
(such as a merger, plan transfer or similar transaction) shall be
effective if it eliminates or reduces any "Section 411(d)(6) protected
benefit" or adds or modifies conditions relating to "Section 411(d)(6)
protected benefits" the result of which is a further restriction on
such benefit unless such protected benefits are pre served with
respect to benefits accrued as of the later of the adoption date or
effective date of the amendment "Section 411(d)(6) protected benefits"
are benefits described in Code Section 411(d)(6)(A), early retire ment
benefits and retirement-type subsidies, and optional forms of benefit.
8.2 TERMINATI0N
(a) The Employer shall have the right at any time to terminate the Plan by
delivering to the Trustee written notice of such termination. Upon any
full or partial termination all amounts credited to the affected
Participants' Combined Accounts shall become 100% Vested and shall not
thereafter be subject to forfeiture, and all unallocated amounts shall
be
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allocated to the accounts of all Participants in accordance with the
provisions hereof.
(b) Upon the full termination of the Plan, the Employer shall direct the
distribution of the assets to Participants in a manner which is
consistent with and satisfies the provisions of Section 6.5.
Distributions to a Participant shall be made in cash or through the
purchase of irrevocable nontransferable deferred commitments from a
legal reserve insurance company. Except as permitted by Regulations,
the termination of the Plan shall not result in the reduction of
"Section 411(d)(6) protected benefits" as described in Section 8.1.
8.3 MERGER OR CONSOLIDATION
This Plan may be merged or consolidated with, or its assets and/or liabilities
may be transferred to any other plan only if the benefits which would be
received by a Participant of this Plan, in the event of a termination of the
plan immediately after such transfer, merger or consolidation, are at least
equal to the benefits the Participant would have received if the Plan had
terminated immediately before the transfer, merger or consolidation and such
merger or consolidation does not otherwise result in the elimination or
reduction of any "Section 411(d)(6) protected benefits" as described in Section
8.1(c).
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ARTICLE IX
MISCELLANEOUS
9.1 EMPLOYER ADOPTIONS
(a) Any organization may, with the consent of Yurie Systems, Inc., become
an Employer hereunder by adopting the Plan in writing. The consent of
Yurie Systems, Inc. shall be signified by written minutes of a Board
of Directors meeting or a written action without a meeting by the
Board of Directors.
(b) Except as otherwise provided in this Plan, the affiliation of the
Employer and the participation of its Participants shall be separate
and apart from that of any other employer and its participants
hereunder.
9.2 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the Employer and
any Participant or to be a consideration or an inducement for the employment of
any Participant or Employee. Nothing contained in this Plan shall be deemed to
give any Participant or Employee the right to be retained in the service of the
Employer or to interfere with the right of the Employer to discharge any
Participant or Employee at any time regardless of the effect which such
discharge shall have upon him as a Participant of this Plan.
9.3 ALIENATION
(a) Subject to the exceptions provided below, no benefit which shall be
payable to any person (including a Participant or his Beneficiary)
shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge, and any attempt
to anticipate, alienate, sell, transfer, assign, pledge, encumber, or
charge the same shall be void; and no such benefit shall in any manner
be liable for, or subject to, the debts, contracts, liabilities,
engagements, or torts of any such person, nor shall it be subject to
attachment or legal process for or against such person, and the same
shall not be recognized except to such extent as may be required by
law.
(b) This provision shall not apply to the extent a Participant or
Beneficiary is indebted to the Plan, for any reason, under any
provision of this Plan. At the time a distribution is to be made to or
for a Participant's or Beneficiary's benefit, such proportion
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of the amount to be distributed as shall equal such indebtedness shall
be paid to the Plan, to apply against or discharge such indebtedness.
Prior to making a payment, however, the Participant or Beneficiary
must be given written notice by the Administrator that such
indebtedness is to be so paid in whole or part from his Participant's
Combined Account. If the Participant or Beneficiary does not agree
that the indebtedness is a valid claim against his Vested
Participant's Combined Account, he shall be entitled to a review of
the validity of the claim in accordance with procedures provided in
Sections 2.12 and 2.13.
(c) This provision shall not apply to a "qualified domestic relations
order" defined in Code Section 414(p), and those other domestic
relations orders permitted to be so treated by the Administrator under
the provisions of the Retirement Equity Act of 1984. The Administrator
shall establish a written procedure to determine the qualified status
of domestic relations orders and to administer distributions under
such qualified orders. Further, to the extent provided under a
"qualified domestic relations order", a former spouse of a Participant
shall be treated as the spouse or surviving spouse for all purposes
under the Plan.
9.4 CONSTRUCTION OF PLAN
This Plan and Trust shall be construed and enforced according to the Act and the
laws of the State or Commonwealth in which the Employer's principal office is
located, other than its laws respecting choice of law, to the extent not
preempted by the Act.
9.5 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or neuter gender,
they shall be construed as though they were also used in another gender in all
cases where they would so apply, and whenever any words are used herein in the
singular or plural form, they shall be construed as though they were also used
in the other form in all cases where they would so apply.
9.6 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding the Trust
and/or Plan established hereunder to which the Trustee or the Administrator may
be a party, and such claim, suit, or proceeding is resolved in favor of the
Trustee or Administrator, they shall be entitled to be reimbursed from the Trust
Fund for any and all costs, attorney's fees, and other expenses pertaining
thereto incurred by them for which they shall have become liable.
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9.7 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Except as provided below and otherwise specifically permitted by law,
it shall be impossible by operation of the Plan or of the Trust, by
termination of either, by power of revocation or amendment by the
happening of any contingency, by collateral arrangement or by any
other means, for any part of the corpus or income of any Trust Fund
maintained pursuant to the Plan or any funds contributed thereto to be
used for, or diverted to, purposes other than the exclusive benefit of
Participants, Retired Participants, or their Beneficiaries.
(b) In the event the Employer shall make a contribution under a mistake of
fact pursuant to Section 403(c)(2)(A) of the Act, the Employer may
demand repayment of such contribution at any time within one (1) year
following the time of payment and the Trustees shall return such
amount to the Employer within the one (1) year period. Earnings of the
Plan attributable to the contributions may not be returned to the
Employer but any losses attributable thereto must reduce the amount so
returned.
9.8 BONDING
Every Fiduciary, except a bank or an insurance company, unless exempted by the
Act and regulations thereunder, shall be bonded in an amount not less than 10%
of the amount of the funds such Fiduciary handles; provided, however, that the
minimum bond shall be $1,000 and the maximum bond, $500,000. The amount of
funds handled shall be determined at the beginning of each Plan Year by the
amount of funds handled by such person, group, or class to be covered and their
predecessors, if any, during the preceding Plan Year, or if there is no
preceding Plan Year, then by the amount of the funds to be handled during the
then current year. The bond shall provide protection to the Plan against any
loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in
connivance with others. The surety shall be a corporate surety company (as such
term is used in Act Section 412(a)(2)), and the bond shall be in a form approved
by the Secretary of Labor. Notwithstanding anything in the Plan to the
contrary, the cost of such bonds shall be an expense of and may, at the election
of the Administrator, be paid from the Trust Fund or by the Employer.
9.9 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary, or to any
guardian or committee appointed for such Participant or Beneficiary in
accordance with the provisions of
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this Plan, shall, to the extent thereof, be in full satisfaction of all claims
hereunder against the Trustee and the Employer.
9.10 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or required to do
or perform any act or matter or thing, it shall be done and performed by a
person duly authorized by its legally constituted authority.
9.11 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are (1) the Administrator, (2) the Trustee,
and (3) any Investment Manager appointed hereunder. The named Fiduciaries shall
have only those specific powers, duties, responsibilities, and obligations as
are spe cifically given them under the Plan. The Administrator shall have the
sole responsibility for the administration of the Plan, which responsibility is
specifically described in the Plan. The Trustee shall have the sole
responsibility of management of the assets held under the Trust, except those
assets, the management of which has been assigned to an Investment Manager, who
shall be solely responsible for the management of the assets assigned to it, all
as specifically provided in the Plan. Each named Fiduciary warrants that any
directions given, information fur nished, or action taken by it shall be in
accordance with the provisions of the Plan, authorizing or providing for such
direction, information or action. Furthermore, each named Fiduciary may rely
upon any such direction, information or action of another named Fiduciary as
being proper under the Plan, and is not required under the Plan to inquire into
the propriety of any such direction, information or action. It is intended
under the Plan that each named Fiduciary shall be responsible for the proper
exercise of its own powers, duties, responsibilities and obligations under the
Plan. No named Fiduciary shall guarantee the Trust Fund in any manner against
investment loss or depreciation in asset value. Any person or group may serve
in more than one Fiduciary capacity.
9.12 HEADINGS
The headings and subheadings of this Plan have been inserted for convenience of
reference and are to be ignored in any construc tion of the provisions hereof.
9.13 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Notwithstanding anything herein to the contrary, if, pursuant to a
timely application filed by or in behalf of the Plan, the Commissioner
of Internal Revenue Service or his delegate should determine that the
Plan does not initially qualify as a tax-exempt plan under
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Code Sections 401 and 501, and such determination is not contested, or
if contested, is finally upheld, then if the Plan is a new plan, it
shall be void ab initio and all amounts contributed to the Plan, by
the Employer, less expenses paid, shall be returned within one year
and the Plan shall terminate, and the Trustee shall be discharged from
all further obligations. If the disqualification relates to an amended
plan, then the Plan shall operate as if it had not been amended and
restated.
(b) Notwithstanding any provisions to the contrary, except Sections 3.5,
3.6, and 4.1(e), any contribution by the Employer to the Trust Fund is
conditioned upon the deductibility of the contribution by the Employer
under the Code and, to the extent any such deduction is disallowed,
the Employer may within one (1) year following the disallowance of the
deduction, demand repayment of such disallowed contribution and the
Trustee shall return such contribution within one (1) year following
the disallowance. Earnings of the Plan attributable to the excess
contribution may not be returned to the Employer, but any losses
attributable thereto must reduce the amount so returned.
(c) If an Employer's Plan fails to attain or retain qualification, then
such Plan will no longer participate in this Prototype Plan and will
be considered an individually designed plan.
9.14 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a uniform,
nondiscriminatory manner.
9.15 PAYMENT OF BENEFITS
Benefits under this Plan shall be paid, subject to Section 6.10 and Section 6.11
only upon death, Total and Permanent Disability, normal or early retirement,
termination of employment, or upon Plan Termination.
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ARTICLE X
PARTICIPATING EMPLOYERS
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER
Notwithstanding anything herein to the contrary, with the consent of the
Employer and Trustee, any Affiliated Employer may adopt this Plan and all of the
provisions hereof, and participate herein and be known as a Participating
Employer, by a properly executed document evidencing said intent and will of
such Participating Employer.
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS
(a) Each Participating Employer shall be required to select the same Plan
provisions as those selected by the Employer other than the Fiscal
Year and such other items that must, by necessity, vary among
employers.
(b) Each such Participating Employer shall be required to use the same
Trustee as provided in this Plan.
(c) The Trustee may, but shall not be required to, commingle, hold and
invest as one Trust Fund all contributions made by Participating
Employers, as well as all increments thereof.
(d) The transfer of any Participant from or to an Employer participating
in this Plan, whether he be an Employee of the Employer or a
Participating Employer, shall not affect such Participant's rights
under the Plan, and all amounts credited to such Participant's
Combined Account as well as his accumulated service time with the
transfer or predecessor, and his length of participation in the Plan,
shall continue to his credit.
(e) Any expenses of the Plan which are to be paid by the Employer or borne
by the Trust Fund shall be paid by each Participating Employer in the
same proportion that the total amount standing to the credit of all
Participants employed by such Employer bears to the total standing to
the credit of all Participants.
10.3 DESIGNATION OF AGENT
Each Participating Employer shall be deemed to be a part of this Plan, provided,
however, that with respect to all of its relations with the Trustee and
Administrator for the purpose of this Plan, each Participating Employer shall be
deemed to have designated irrevocably the Employer as its agent. Unless the
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context of the Plan clearly indicates the contrary, the word "Employer" shall be
deemed to include each Participating Employer as related to its adoption of the
Plan.
10.4 EMPLOYEE TRANSFERS
It is anticipated that an Employee may be transferred between Participating
Employers, and in the event of any such transfer, the Employee involved shall
carry with him his accumulated service and eligibility. No such transfer shall
effect a termination of employment hereunder, and the Participating Employer to
which the Employee is transferred shall thereupon become obligated hereunder
with respect to such Employee in the same manner as was the Participating
Employer from whom the Employee was transferred.
10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES
Any contribution or Forfeiture subject to allocation during each Plan Year shall
be allocated among all Participants of all Participating Employers in accordance
with the provisions of this Plan. On the basis of the information furnished by
the Administrator, the Trustee shall keep separate books and records concerning
the affairs of each Participating Employer hereunder and as to the accounts and
credits of the Employees of each Participating Employer. In the event of an
Employee transfer from one Participating Employer to another, the employing
Employer shall immediately notify the Trustee thereof.
10.6 AMENDMENT
Amendment of this Plan by the Employer at any time when there shall be a
Participating Employer hereunder shall only be by the written action of each and
every Participating Employer and with the consent of the Trustee where such
consent is necessary in accordance with the terms of this Plan.
10.7 DISCONTINUANCE OF PARTICIPATION
Any Participating Employer shall be permitted to discontinue or revoke its
participation in the Plan at any time. At the time of any such discontinuance
or revocation, satisfactory evidence thereof and of any applicable conditions
imposed shall be delivered to the Trustee. The Trustee shall thereafter
transfer, deliver and assign Trust Fund assets allocable to the Participants of
such Participating Employer to such new Trustee as shall have been designated by
such Participating Employer, in the event that it has established a separate
pension plan for its Employees provided, however, that no such transfer shall be
made if the result is the elimination or reduction of any "Section 411(d)(6)
protected benefits" in accordance with Section 8.1(c). If no successor is
designated, the Trustee shall retain such
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assets for the Employees of said Participating Employer pursuant to the
provisions of Article VII hereof. In no such event shall any part of the corpus
or income of the Trust Fund as it relates to such Participating Employer be used
for or diverted for purposes other than for the exclusive benefit of the
Employees of such Participating Employer.
10.8 ADMINISTRATOR'S AUTHORITY
The Administrator shall have authority to make any and all neces sary rules or
regulations, binding upon all Participating Employers and all Participants, to
effectuate the purpose of this Article.
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE
If any Participating Employer is prevented in whole or in part from making a
contribution which it would otherwise have made under the Plan by reason of
having no current or accumulated earnings or profits, or because such earnings
or profits are less than the contribution which it would otherwise have made,
then, pursuant to Code Section 404(a)(3)(B), so much of the contribution which
such Participating Employer was so prevented from making may be made, for the
benefit of the participating employees of such Participating Employer, by other
Participating Employers who are members of the same affiliated group within the
meaning of Code Section 1504 to the extent of their current or accumulated
earnings or profits, except that such contribution by each such other
Participating Employer shall be limited to the proportion of its total current
and accumulated earnings or profits remaining after adjustment for its
contribution to the Plan made without regard to this paragraph which the total
prevented contribution bears to the total current and accumulated earnings or
profits of all the Participating Employers remaining after adjustment for all
contributions made to the Plan without regard to this paragraph.
A Participating Employer on behalf of whose employers a contribu tion is made
under this paragraph shall not be required to reimburse the contributing
Participating Employers.
IN WITNESS WHEREOF, Yurie Systems, Inc. has caused this Plan to be executed by
its duly authorized officer this ______ day of _________________, 1997.
------------------------------
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<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 5 to Registration Statement No.
333-15759 of Yurie Systems, Inc. on Form S-1 of our report dated November 7,
1996 appearing in the Prospectus, which is part of the Registration Statement,
and the references to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Washington, D.C.
February 4, 1997
