<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
YURIE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3669 52-1778987
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
8301 PROFESSIONAL PLACE
LANDOVER, MD 20785-2237
(301) 352-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
JOHN J. MCDONNELL
GENERAL COUNSEL AND SECRETARY
YURIE SYSTEMS, INC.
8301 PROFESSIONAL PLACE
LANDOVER, MD 20785-2237
(301) 352-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-----------
COPIES TO:
RICHARD A. STEINWURTZEL, ESQUIRE
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
1001 PENNSYLVANIA AVENUE, N.W.
SUITE 800
WASHINGTON, DC 20004-2505
(202) 639-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AMOUNT PROPOSED AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 336,966 $20.65625 $6,960,453.90 $2,109.22
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) All of the shares of common stock, par value $0.01 per share ("Common
Stock"), offered hereby are being sold by certain stockholders (the
"Selling Shareholders") of the Company. The Company will not receive any
part of the proceeds from the sale of the shares by the Selling
Stockholders.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the high and low sales
prices reported on the Nasdaq National Market on January 26, 1998.
-----------
Pursuant to Rule 429 under the Securities Act of 1933, as amended, ("Rule
429") this Registration Statement contains a combined prospectus that relates
to the 336,966 shares of the Company's Common Stock being registered
hereunder, and to 1,818,400 of the 2,020,000 shares of the Company's Common
Stock registered on Registration Statement No. 333-36413 on Form S-1, as
amended, previously filed by the Registrant on November 4, 1997. 201,600 of
the shares of Common Stock previously registered on Registration Statement
333-36413, as amended, have been sold. Pursuant to Rule 429, the registration
fee covers only the 336,966 shares of Common Stock being registered for the
first time. A fee of $16,977.24 covering the previously registered shares was
paid by the Registrant upon filing Registration Statement No. 333-36413.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION
DATED FEBRUARY , 1998
2,155,366 Shares
[LOGO OF YURIE SYSTEMS APPEARS HERE]
Common Stock
------------
All the 2,155,366 shares of Common Stock, $.01 par value per share (the
"Common Stock") offered hereby are being sold by certain stockholders of the
Company (the "Selling Stockholders"). The Company has registered these shares,
at its own expense, pursuant to certain registration rights held by the
Selling Stockholders. Of the 2,155,366 shares of Common Stock offered hereby,
20,000 shares of Common Stock are to be issued from time to time upon the
exercise of stock options described herein. The Company will not receive any
proceeds from the sale of the shares to be sold by the Selling Stockholders.
The Company's common stock is traded on the Nasdaq National Market under the
trading symbol "YURI." On February , 1998, the last reported sale price of
the common stock on the Nasdaq National Market was $ per share. See "Price
Range of Common Stock."
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6 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
TO PROCEEDS TO PROCEEDS TO
PUBLIC COMPANY(1) STOCKHOLDERS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $ $0.00 $
- ------------------------------------------------------------------------------
Total.......................... $ $0.00 $
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Expenses, which are estimated at $194,500, are payable by the Company. Of
these expenses, $150,000 are attributable to the preparation and filing of
Registration Statement No. 333-36413, as amended, filed by the Registrant on
November 4, 1997, which covers 1,818,400 of the shares of Common Stock offered
herein; 201,600 of the shares of Common Stock previously registered on
Registration Statement 333-36413, as amended, have been sold. The remaining
$44,500 of expenses were incurred by the Registrant for the preparation and
filing of a separate Registration Statement on Form S-1, filed February ,
1998 covering the remaining 336,966 of Common Stock offered herein.
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 1998
<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.
THE COMPANY
Yurie Systems, Inc. ("Yurie" or the "Company") designs, manufactures, markets
and services asynchronous transfer mode ("ATM") access products for
telecommunications service providers, Internet 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, designed primarily for telecommunications carriers
and Internet service providers, was released in September 1996. The LDR50,
designed for mid-sized to large corporate offices, was released in March 1997.
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, and a broad
variety of access interfaces.
The Company's strategy centers on maintaining its technological leadership,
developing the telecommunications service provider, private label partner and
corporate end user markets while continuing to pursue government end user
markets, developing international markets and building strategic relationships.
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 23 sales personnel.
In pursuit of this strategy, Yurie has entered into private-label partner
agreements with Bay Networks, and Lucent Technologies, Inc. These agreements
permit each of Bay and Lucent to market and sell the Company's LDR products
under non-exclusive licenses into commercial and government markets for three
years, subject to renewal. None of these agreements have minimum purchase
guarantees. Previously, Yurie and AT&T entered an agreement (the "AT&T
Agreement"), under which AT&T had exclusive license to sell Yurie's products to
government customers and, with Yurie's consent, to certain non-governmental
customers. Pursuant to a recent amendment to the AT&T Agreement, AT&T no longer
has minimum purchase guarantees nor holds an exclusive license to sell Yurie
products in government markets. See "Business-- Strategic Relationships."
The Company has a significant customer relationship with Splitrock Services,
Inc., a Texas corporation that provides communications services specifically
configured to meet the needs of large network users ("Splitrock'). Splitrock
purchased the underlying network assets of Prodigy Services Corporation, an
Internet service provider (the "Prodigy Network") in 1997. During the first
nine months of 1997, Splitrock purchased $11.5 million of LDR products from the
Company. Yurie and Splitrock have an agreement (the "Splitrock Agreement") that
requires Splitrock to purchase a minimum of $20.0 million of LDR products in
the period from July 1997 to December 1998. Through September 30, 1997,
2
<PAGE>
Splitrock had purchased $6.6 million of LDR products under this agreement.
Under the Splitrock Agreement, Yurie provides services to support deployment
and implementation of Yurie's products in Splitrock's network on a time and
materials basis. Kwok L. Li, the Chief Technology Officer and Vice Chairman of
the Board of Yurie, is the majority shareholder and Chairman of the Board of
Directors of Splitrock.
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. In January 1997,
the Company won Data Communications' Hot Product Award for WAN gear and in May
1997, Business Week magazine named the Company America's #1 Hot Growth Company.
Yurie's executive offices are located at 8301 Professional Place, Landover,
Maryland 20785-2237, 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.
RECENT DEVELOPMENTS
On December 1, 1997, Yurie acquired Data Labs, Inc., a privately-held
Delaware corporation ("Data Labs"), in a stock-for-stock merger (the "Data Labs
Merger"). Yurie issued 358,414 shares of its common stock in the Data Labs
Merger in exchange for all of the outstanding capital stock of Data Labs and
the Data Labs common stock underlying all of the vested stock options and one-
half of the unvested stock options held by Data Labs directors, officers and
employees. The Data Labs Merger was treated as a pooling-of-interests for
financial reporting purposes. Accordingly, supplemental consolidated financial
statements referencing such a transaction are included in this Prospectus.
On February 2, 1998, Yurie announced the signing of a three-year private-
label partner agreement with Ericsson, Inc. ("Ericsson"), the U.S. subsidiary
of Telefonaktiebolaget LM Ericsson. Under this agreement, Yurie granted
Ericsson a non-exclusive license to resell Yurie's LDR products worldwide under
the Ericsson name. Ericsson anticipates that it will provide systems
integration and equipment management services related to Yurie's products to
the Internet service providers to whom Ericsson will sell Yurie's equipment.
There are no minimum purchase guarantees under this agreement.
3
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE OFFERING
Common Stock offered by the
Selling Stockholders......... 2,155,366 shares
Common Stock outstanding
after the offering........... 25,336,468 shares(1)
Use of proceeds...............
This offering is made by certain Selling
Stockholders and the Company will not receive
any of the proceeds of such sales. See "Use of
Proceeds" and "Principal and Selling
Stockholders".
Nasdaq National Market "YURI"
symbol.......................
- --------
(1) Assumes the exercise by Oneline Management, Inc. ("Oneline") of an option
to purchase 20,000 shares of common stock of the Company for an aggregate
exercise price of $240,000 (the "Oneline Option"). Excludes 5,622,229
shares of common stock issuable upon the exercise of stock options
outstanding as of December 31, 1997 at a weighted average exercise price of
approximately $7.69 per share. Also excludes 7,000,000 shares of common
stock reserved for future issuance under the Company's 1996 Non Statutory
Stock Option Plan (the "Stock Option Plan") and the Data Labs 1996 Stock
Option Plan (the "Data Labs 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," "--Data Labs Plan," "--Stock
Purchase Plan" and "--401(k) Plan."
4
<PAGE>
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>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1993 1994 1995 1996 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- ------- -------
ACTUAL AS ADJUSTED(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue........... $ 194 $ 1,144 $ 5,971 $21,611 $15,038 $33,351 $15,076 $33,446
Gross profit............ 52 420 3,460 13,192 9,407 20,175 9,426 20,304
Income (loss) from
operations............. (17) 161 1,444 5,099 4,503 7,027 3,847 5,032
Net income (loss)....... (23) 121 897 3,152 2,739 4,981 2,342 3,781
Net income per common
share.................. $ 0.00 $ 0.01 $ 0.04 $ 0.14 $ 0.13 $ 0.19 $ 0.11 $ 0.14
Weighted average common
and common equivalent
shares outstanding..... 17,542 17,542 21,710 21,811 21,751 26,347 22,109 26,705
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995 1996 SEPTEMBER 30, 1997
---- ----- ------ ------- ----------------------
ACTUAL AS ADJUSTED(1)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.. $ 5 $ 230 $3,780 $ 3,229 $22,767 $23,085
Working capital............ (82) (130) 552 7,001 54,299 55,427
Total assets............... 97 627 6,192 14,216 68,294 70,374
Total stockholders' equity
(deficit)................. (77) 44 1,103 9,055 59,799 61,116
</TABLE>
(1) Adjusted to show the pro forma effect of the Data Labs Merger.
5
<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.
The Private Securities Litigation Reform Act (the "PLSRA") provides a "safe
harbor" for "forward- looking" statements. Certain statements included in this
Prospectus are "forward-looking" within the meaning of the PLSRA 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 statements
relating to 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. The Company assumes no obligation to update
any forward-looking statements contained herein, or that may be made from time
to time by, or on behalf of the Company.
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. 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 for
the foreseeable future. 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."
6
<PAGE>
Dependence on Strategic Relationships. 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. Yurie has entered into private-label
partner agreements with Bay Networks, Lucent Technologies and Ericsson. These
agreements permit each of Bay, Lucent and Ericsson to market and sell the
Company's LDR products into commercial and government markets for three years,
subject to renewal. None of these agreements have minimum purchase guarantees.
Previously, under the AT&T Agreement, AT&T held an exclusive license to sell
Yurie products in government markets, and had agreed to certain minimum
purchase guarantees. In response to the interest expressed by other parties to
sell Yurie products in both commercial and government markets, Yurie and AT&T
amended the AT&T Agreement on November 3, 1997; under this amendment, AT&T no
longer has an exclusive license to sell Yurie's products in government
markets, nor is it required to make minimum annual purchases. Sales to AT&T
represented 52.4%, 71.8% and 87.0% of the Company's revenue during 1994, 1995
and 1996, respectively. For the nine months ended September 30, 1997, sales to
AT&T represented 25.8% of the Company's revenue. If the Company fails to
replace the sales that would have been made to AT&T under its minimum purchase
requirements with sales to other customers, there could be a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Strategic Relationships."
Dependence on Related Party Sales. During 1997, the Company has made
substantial product sales to Splitrock. Kwok L. Li, the Chief Technology
Officer and Vice Chairman of the Board of Yurie, is the majority shareholder
and Chairman of the Board of Splitrock. During the first nine months of 1997,
Splitrock purchased $11.5 million of LDR products from the Company, and sales
to Splitrock accounted for approximately 34.5% of the Company's gross revenue
during that period. The Splitrock Agreement requires Splitrock to purchase a
minimum of $20.0 million of LDR products from the Company in the period from
July 1997 to December 1998. Through September 30, 1997 Splitrock had purchased
$6.6 million of LDR equipment under this agreement. The failure of the Company
or Splitrock to fulfill any of its material obligations under the Splitrock
Agreement would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Splitrock
Relationship" and "Certain Transactions."
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 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 effect 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
7
<PAGE>
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 3Com. Each of these companies has already produced ATM access products
that are directly competitive with the Company's products. In addition, Ascend
Communications has developed an ATM access product that will be directly
competitive with the Company's products. Other companies, including Cisco
Systems/StrataCom, Nortel, General DataComm, Digital Link, Fore Systems 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, may seek to
apply their expertise to the ATM markets served by the Company.
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, Fore Systems,
Ascend Communications
8
<PAGE>
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.
Fluctuations in Quarterly and Annual Operating Results. The Company may
experience significant fluctuations in future quarterly and annual 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 and the LDR50; 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 Splitrock, and the Company's private label partners, such as Lucent
and Bay, or inventory buildups by such 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 three 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 "Risk Factors--Potential Volatility of Stock
Price" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Management of Growth. 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.
Data Labs Merger. Although Yurie expects that the Data Labs Merger will
result in beneficial synergies in the operations and technologies of Yurie and
Data Labs, achieving the anticipated effects of the Data Labs Merger will
depend in part upon whether the integration of the two companies' businesses,
technologies and key personnel is accomplished in an effective and efficient
manner, an outcome which cannot be assured. Achieving these anticipated
synergies will also depend on a number of other factors, including, without
limitation, industry-specific economic factors and Yurie's ability to market
and sell Data Labs' product to new customers. Yurie was Data Labs' largest
customer for the year ended December 31, 1997. There can be no assurance that
the anticipated beneficial synergies will be achieved or that sales of the LDR5
will be significant to the Company's operations. Yurie also expects that the
Data Labs Merger will be dilutive to earnings by approximately $.01 per share
for the quarter ending December 31, 1997, before any one time charges related
to transaction costs and expenses. There can be no assurance, however, that the
dilutive effect of the Data Labs Merger will not be greater or less than the
short-term dilution anticipated by Yurie.
9
<PAGE>
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 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."
Dependence on Manufacturers and Suppliers. Yurie relies on three
manufacturers, Sanmina Corporation, Teledyne Electronic Technologies and
Kuchera Industries, Inc., to manufacture the majority of its common equipment
circuit packs, backplanes, chassis and printed circuit board assemblies used
in the Company's products. Yurie does not have a contract with these or any
other manufacturer, and all of the Company's products are manufactured
pursuant to individual purchase orders. The Company believes that its orders
do not represent a significant portion of these subcontract manufacturers'
total business. 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
believes that its strategy of using subcontract manufacturers has increased
its flexibility and responsiveness to changes, as it is in a better position
to reduce product costs, acquire additional capacity and reduce its capital
investment. It is, however, currently relying on a limited number of
manufacturers, and if one or more of these manufacturers should experience
quality or other problems, such problems could result in delays in product
shipments by the Company. To the extent the Company would be required to find
replacements for its 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 from manufacturers. See "Business--Manufacturing and Suppliers."
10
<PAGE>
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., Texas
Instruments, Analog Devices 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 16 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, 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 Vice Chairman of the Board and Chief
Technical Officer, Harry J. Carr, 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. Mr. Li is the majority
shareholder and Chairman of the Board of Splitrock and, as such, devotes a
significant amount of time to Splitrock. The loss of the services of any of
the Company's key employees could have a material adverse effect on the
Company. Mr. Carr has served in his position only since June 1997. As a
result, key members of the Company's management team have worked together for
only a short time. 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, especially engineers, is intense and
competitors often employ aggressive tactics to recruit key employees. 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. A delay in obtaining, or the failure to
obtain, certification of its products domestically or in countries outside of
the U.S. could delay or preclude the Company's sales and marketing efforts,
which could have a material adverse effect on the Company's business and
operating results.
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,
11
<PAGE>
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 and Currency Exchanges. Less than
1% of the Company's revenue in each of the years ended December 31, 1994,
December 31, 1995 and December 31, 1996, was derived from orders from
international customers. In the nine months ended September 30, 1997, 11.0% of
the Company's revenue was derived from orders from international customers.
The Company intends to continue its sales and marketing efforts outside of the
U.S. and may enter into international markets which will require significant
management attention and financial resources. Currently, Yurie maintains
offices in Korea and the U.K.
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. For instance, the recent
devaluations of certain currencies in Asia, including the Korean won, could
adversely effect the Company's ability to sell LDR products in that region.
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. If 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."
Potential Stock Price Volatility. The market price of the Company's 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.
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.
12
<PAGE>
Control by Current Stockholders. Directors and executive officers of the
Company and their affiliates currently own beneficially approximately 69.0% of
the outstanding common stock. As a result, these stockholders are 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.
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.
As of December 31, 1997, there were 25,316,468 shares of common stock
outstanding, and upon the exercise of the Oneline Option, there will be
25,336,468 shares of common stock outstanding. Of these shares, approximately
17,471,382 shares are held by "affiliates" (as that term is defined in Rule
144 under the Securities Act) and are eligible for sale in accordance with the
volume and manner of sale restrictions under Rule 144.
The Company has registered on Form S-8 under the Securities Act 7,000,000
shares of common stock issued or reserved for issuance under the Stock Option
Plan and the Data Labs Plan, 200,000 shares of common stock issued or reserved
for issuance under the Stock Purchase Plan and 200,000 shares of common stock
issued or reserved for issuance under the 401(k) Plan. As of December 31,
1997, there were 5,622,229 outstanding options for the purchase of shares
under the Stock Option Plan and 27,233 outstanding options for the purchase of
shares under the Data Labs Plan. See "Management--Stock Option Plan" and "--
Data Labs Plan." Shares registered and issued pursuant to the Form S-8
registration statement will be freely tradable except to the extent that the
holders thereof are deemed to be affiliates of the Company, in which case the
transferability of such shares will be subject to the volume limitations set
forth in Rule 144 under the Securities Act. See "Description of Capital Stock"
and "Shares Eligible for Future Sale."
Absence of Dividends. The Company has never paid a cash dividend on its
common stock. The payment of cash dividends on the common stock is unlikely
for the foreseeable future. See "Dividend Policy."
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
This Prospectus relates to shares of Common Stock that may be offered from
time to time by the Selling Stockholders. See "Plan of Distribution" and
"Principal and Selling Stockholders." The Company will receive none of the
proceeds from the sale of the Common Stock offered hereby by the Selling
Stockholders.
The Company may, however, receive cash proceeds to the extent the Oneline
Option is exercised. If the Oneline Option is exercised in full, as to which
there can be no assurance, the net proceeds to the Company would be
approximately $240,000. The Company would use these proceeds, if any, for
general corporate purposes including working capital. See "Principal and
Selling Stockholders."
PRICE RANGE OF COMMON STOCK
The Company's common stock has been quoted on the Nasdaq National Market
under the symbol YURI since February 4, 1997 following its initial public
offering. The following table sets forth the high and low prices, as reported
by Nasdaq, for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
First Quarter (from February 4)............................ $16.750 $9.500
Second Quarter............................................. 19.125 9.375
Third Quarter.............................................. 37.250 15.750
Fourth Quarter............................................. 39.875 17.250
</TABLE>
On January 30, 1998, the last reported sale price of the Company's common
stock as reported by the Nasdaq National Market was $19.875. There were
approximately 3,300 holders of the Company's common stock as of December 1997.
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 any 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 as of
September 30, 1997. This table should be read in conjunction with the
Company's Financial Statements and the Notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
----------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <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, 24,909,976 shares issued and
outstanding(1)................................... 249 253
Additional paid-in capital.......................... 51,097 54,229
Retained earnings................................... 8,914 7,096
------- -------
Total stockholders' equity...................... 59,799 61,116
------- -------
Total capitalization............................ $59,799 61,116
======= =======
</TABLE>
- --------
(1) Excludes 20,000 shares issuable upon the exercise of the Oneline Option
for an aggregate exercise price of $240,000. Also excludes 5,033,168
shares of common stock issuable upon exercise of outstanding stock options
as of September 30, 1997 at a weighted average exercise price of
approximately $5.98 per share, and 1,675,165 shares of common stock
reserved for future issuance under the Stock Option Plan, 190,777 shares
of common stock reserved for future issuance under the Stock Purchase Plan
and 196,147 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."
(2) Adjusted to reflect the pro forma effects of the Data Labs Merger.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements of the Company and the notes
thereto included elsewhere in this Prospectus. The statements of operations
data and the balance sheet data for the years ended December 31, 1994, 1995
and 1996 have been derived from previously audited financial statements of the
Company. The statement of operations data and the balance sheet data for the
year ended December 31, 1993 have been derived from previously issued
financial statements which have been audited by Deloitte & Touche LLP,
independent auditors. The statement of operations data and the balance sheet
data for the nine months ended September 30, 1996 and September 30, 1997 have
been derived from the Company's unaudited financial statements, and in the
case of the adjusted figures for that same period, Data Labs' 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>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------- -------
1993 1994 1995 1996 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- ------- -------
ACTUAL AS ADJUSTED(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Product revenue....... $ -- $ -- $ 2,870 $18,728 $13,023 $30,437 $13,024 $30,532
Service revenue....... 194 1,144 1,993 2,491 1,623 2,914 1,660 2,914
Other revenue......... -- -- 1,108 392 392 -- 392 --
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........ 194 1,144 5,971 21,611 15,038 33,351 15,076 33,446
Cost of revenue:
Cost of product
revenue.............. -- -- 1,327 6,784 4,536 11,023 4,536 10,990
Cost of service
revenue.............. 143 723 1,184 1,635 1,095 2,153 1,114 2,152
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenue............. 143 723 2,511 8,419 5,631 13,176 5,650 13,142
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 52 420 3,460 13,192 9,407 20,175 9,426 20,304
Operating expenses:
Research and
development.......... 8 40 428 3,846 2,380 5,340 2,704 6,107
Sales and marketing... -- -- -- 1,547 790 3,686 920 4,437
General and
administrative....... 61 219 1,588 2,700 1,733 4,122 1,955 4,728
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 69 259 2,016 8,093 4,903 13,148 5,579 15,272
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (17) 161 1,444 5,099 4,503 7,027 3,847 5,032
Other income (expense).. (6) 2 13 83 62 1,130 67 1,159
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (23) 162 1,458 5,182 4,565 8,158 3,914 6,191
Income taxes............ -- 42 561 2,030 1,826 3,177 1,572 2,410
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (23) $ 121 $ 897 $ 3,152 $ 2,739 $ 4,981 $ 2,342 $ 3,781
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
common share........... $ (0.00) $ 0.01 $ 0.04 $ 0.14 $ 0.13 $ 0.19 $ 0.11 $ 0.14
======= ======= ======= ======= ======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding(1).. 17,542 17,542 21,710 21,811 21,751 26,347 22,109 26,705
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------- AS OF
1993 1994 1995 1996 SEPTEMBER 30, 1997
---- ------ ------ ------- ----------------------
ACTUAL AS ADJUSTED(2)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash
equivalents.............. $ 5 $ 230 $3,780 $ 3,229 $22,767 $23,085
Working capital........... (82) (130) 552 7,001 54,299 55,427
Total assets.............. 97 627 6,192 14,216 68,294 70,374
Stockholders' equity
(deficit)................ (77) 44 1,103 9,055 59,799 61,116
</TABLE>
- -------
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements.
(2) Adjusted to show the pro forma effect of the Data Labs Merger.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Yurie, founded in 1992, designs, manufactures, markets and services ATM
access products for telecommunications service providers, corporate end users
and government end users. The Company began developing ATM access products in
1994 and began product shipments in February 1995. Prior to 1995, the
Company's revenue was derived primarily from telecommunications consulting and
related services.
Today, the Company generates revenue primarily from the sale of the LDR200,
an ATM access product released in September 1996, and the LDR50, a related ATM
access product which was first shipped in March 1997. 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.
Yurie has entered into private-label partner agreements with Bay Networks
and Lucent Technologies. These agreements permit each of Bay and Lucent to
market and sell the Company's LDR products into commercial and government
markets for three years, subject to renewal. None of these agreements have
minimum purchase guarantees. Previously, under the AT&T Agreement, AT&T held
an exclusive license to sell Yurie's products in government markets, and was
required to make minimum purchases of $10 million for each of 1997 and 1998.
In response to the interest expressed by other parties to sell Yurie products
in both commercial and government markets, Yurie and AT&T amended the AT&T
Agreement on November 3, 1997; under this amendment, AT&T no longer has an
exclusive license to sell Yurie's products in government markets, nor is AT&T
required to make minimum annual purchases. In 1994, 1995 and 1996 and the nine
months ended September 30, 1997, sales to AT&T represented 52.4%, 71.8%, 87.0%
and 25.8%, respectively, of the Company's revenue. 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. During the nine months ended September 30, 1997, the Company
shipped to AT&T $7.4 million of LDR200s and LDR50s, a product with features
and functionalities similar to the LDR200. See "Business--Strategic
Relationships." In early 1998, the Company entered into a private-label
agreement with another telecommunications company. See "--Recent
Developments."
The Company has a significant customer relationship with Splitrock.
Splitrock purchased the Prodigy Network in 1997. During the first nine months
of 1997, Splitrock purchased $11.5 million of LDR products from the Company.
The Splitrock Agreement requires Splitrock to purchase a minimum of $20.0
million of LDR products from the Company in the period from July 1997 to
December 1998. Through September 30, 1997, Splitrock had purchased $6.6
million of LDR equipment pursuant to the agreement. Under the Splitrock
Agreement, Yurie provides services to support deployment and implementation of
Yurie's products in Splitrock's network on a time and materials basis. Kwok L.
Li, the Chief Technology Officer and Vice Chairman of the Board of Yurie, is
the majority shareholder and Chairman of the Board of Splitrock. See
"Business--Splitrock Relationship."
In 1995 and 1996, the Company 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--Strategic
Relationships."
17
<PAGE>
Revenue from the sale of Yurie's LDR product line is recognized upon
shipment or upon acceptance of the product depending on the terms of sale.
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 and LDR50 purchase price
includes a standard warranty on parts and service, which provides that the
product will be free from defects for a period of one year from the date of
shipment. The Company does not generate revenue from extended service
contracts at this time. The Company is currently considering whether to
provide extended service for the Company's products through a third party or
in-house.
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.
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.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenue. Total revenue for the third quarter of 1997 was $14.1 million,
compared with $6.2 million for the third quarter of 1996. This 125.8% increase
resulted primarily from an increase in sales of the Company's LDR products,
and particularly from increased product sales to the commercial marketplace.
Product revenue was $13.0 million during the 1997 period compared with $5.6
million during the 1996 period. Of this $13.0 million in product revenue,
99.6%, resulted from sales to commercial customers. There were no sales to
commercial customers in the third quarter of 1996. Of the $13.0 million in
product sales during the quarter ended September 30, 1997, $6.6 million were
made to SplitRock Services, Inc. An additional $2.4 million in revenue
resulted from product sales to Bay Networks under an OEM agreement. Service
revenue was $1.0 million in the third quarter of 1997 compared with $601,000
in the comparable quarter in 1996. During the third quarter of 1997, SplitRock
purchased $527,000 of services from the Company.
Gross Profit. Gross profit increased to $8.7 million in the third quarter of
1997 from $3.7 million in the comparable 1996 period. Gross margins were 61.6%
and 59.2% during the 1997 and 1996 quarters, respectively. The increase in
gross margin was due largely to a decrease in product cost of goods sold, to
35.5% of product revenue in the 1997 quarter from 38.7% of product revenue in
the 1996 quarter. This reflects the spread of the fixed portion of direct
costs over a larger number of units, an increase in shipments of product to
commercial customers, and an increase in the number of higher margin software
features sold. Cost of service increased to 75.7% of service revenue in the
1997 quarter from 60.9% in the comparable 1996 period.
18
<PAGE>
Research and Development. Research and development expenses were $2.0
million in the third quarter of 1997, compared with $1.0 million in the third
quarter of 1996. 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. As a percentage of total revenue,
research and development expenses were 14.3% and 16.6% in the third quarters
of 1997 and 1996 respectively.
Sales and Marketing. Sales and marketing expenses were $1.4 million in the
third quarter of 1997, compared with $504,000 in the third quarter of 1996.
This increase resulted primarily from the hiring of sales and marketing
personnel to support generally, the Company's entry into the commercial
marketplace, and specifically, the release of the Company's LDR200 product. As
a percentage of total revenue, sales and marketing expenses were 9.9% and 8.1%
in the third quarters of 1997 and 1996 respectively.
General and Administrative. General and administrative expenses were $1.8
million in the third quarter of 1997 compared with $897,000 in the third
quarter of 1996. 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, in June
1996 and again in June 1997, the Company relocated its operations to larger,
leased facilities, resulting in higher occupancy costs in the 1997 period. As
a percentage of total revenue, general and administrative expenses were 12.7%
and 14.4% in the third quarters of 1997 and 1996, respectively.
Provision for Income Taxes. The provision for income taxes in the third
quarter of 1997 was $1.5 million, resulting in an effective tax rate of 38.9%.
In the third quarter of 1996, the provision for income taxes was $504,000,
resulting in an effective tax rate of 40.0%.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenue. Total revenue for the first nine months of 1997 was $33.4 million,
compared with $15.0 million for the first nine months of 1996. This 121.8%
increase resulted primarily from an increase in sales of the Company's LDR
products, and particularly from increased product sales to the commercial
marketplace. Product revenue was $30.4 million during the 1997 period compared
with $13.0 million during the 1996 period. Of this $30.4 million in product
revenue, $23.3 million, or 76.7%, resulted from sales to commercial customers.
There were no sales to commercial customers in the first nine months of 1996.
Of the $30.4 million in product sales in the 1997 period, $11.5 million were
made to SplitRock Services, Inc. An additional $6.0 million in product revenue
resulted from sales to AT&T under the AT&T Agreement. In the first nine months
of 1996, 96.9% of product revenue resulted from sales to AT&T under the AT&T
Agreement.
Service revenue was $2.9 million in the first nine months of 1997 compared
with $1.6 million in the first nine months of 1996. This 79.6% increase was
attributable to growth in both the number and size of contracts with U.S.
government customers and government contractors. In addition, the Company had
service revenue totaling $527,000 during the first nine months of 1997 to
SplitRock. Other revenue in the first nine months of 1996 totaled $392,000,
coming from 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.
Gross Profit. Gross profit increased to $20.2 million in the first nine
months of 1997 from $9.4 million in the comparable 1996 period. Gross margins
were 60.5% and 62.6% during the 1997 and 1996 periods, respectively. The
decline in gross margin was due to an increase in product cost of goods sold
to 36.2% of product revenue in the 1997 period from 34.8% of product revenue
in the 1996 period. This reflects the migration of the Company's cost
structure to a commercially sustainable model, both for commercial and
government market sales. The higher gross margin in the 1996 period was also
due to the inclusion of $392,000 in fees earned under an agreement with AT&T
which had no associated direct cost. Cost of service revenue increased to
73.9% of service revenue in the 1997 period, from 67.5% in the comparable 1996
period.
19
<PAGE>
Research and Development. Research and development expenses were $5.3
million, or 16.0% of total revenue, in the first nine months of 1997, compared
with $2.4 million, or 15.8% of total revenue in the first nine months of 1996.
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 $3.7 million, or
11.1% of total revenue, in the first nine months of 1997, compared with
$790,000, or 5.3% of total revenue, in the first nine months of 1996. This
increase resulted primarily from the hiring of sales and marketing personnel
to support generally, the Company's entry into the commercial marketplace, and
specifically, the release of the Company's LDR200 product.
General and Administrative. General and administrative expenses were $4.1
million or 12.4% of total revenue in the first nine months of 1997 compared
with $1.7 million or 11.5% of total revenue in the first nine months of 1996.
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, in June 1996 and again in
June 1997, the Company relocated its operations to larger, leased facilities,
resulting in higher occupancy costs in the 1997 period.
Provision for Income Taxes. The provision for income taxes in the first nine
months of 1997 was $3.2 million, resulting in an effective tax rate of 38.9%.
In the first nine months of 1996, the provision for income taxes was $1.8
million, resulting in an effective tax rate of 40.0%.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenue for 1996 was $21.6 million, compared with $6.0
million for 1995. This increase resulted primarily from an increase in sales
of the Company's LDR products. Product revenue was $18.7 million during 1996
compared with $2.9 million during 1995. The Company also experienced a 25.0%
increase in service revenue in 1996 compared to 1995, attributable to growth
in both the number and size of contracts with U.S. government customers and
government contractors. Other revenue in both periods came from 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 1996 and 1995, product sales to and service contracts with U.S.
government customers and government contractors comprised 96.3% and 100.0% of
total revenue, respectively. Sales to or through AT&T represented $17.4
million, or 92.9% of product revenue during 1996 compared with $1.6 million,
or 57.3% of product revenue during 1995. Sales to or through AT&T represented
87.0% and 71.8% of total revenue during 1996 and 1995, respectively.
Gross Profit. Gross profit increased to $13.2 million in 1996 from $3.5
million in 1995. Gross margins were 61.0% and 57.9% during 1996 and 1995,
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. During 1996, product gross margin was 63.8%
compared with service gross margin of 34.4%. During 1995, product gross margin
was 53.8% compared with service gross margin of 40.6%.
Research and Development. Research and development expenses were $3.8
million, or 17.8% of total revenue, in 1996, compared with $428,000 or 7.2% of
total revenue, in 1995. 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 $1.5 million, or 7.2%
of total revenue, in 1996. The Company incurred no sales and marketing
expenses in 1995. The expenses incurred during 1996 resulted from the hiring
of sales and marketing personnel to support the release of the Company's
20
<PAGE>
LDR200 product, and the Company's entry into the telecommunications service
provider and corporate end user markets.
General and Administrative. General and administrative expenses increased to
$2.7 million in 1996 from $1.6 million in 1995. 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 12.5% and 26.6% in 1996 and 1995, respectively. The decrease as
a percent of total revenue between the two years was due to the Company's
significant increase in total revenue.
Provision for Income Taxes. The provision for income taxes in 1996 was $2.0
million, resulting in an effective tax rate of 39.2%. In 1995, the provision
was $561,000, 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.
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.
21
<PAGE>
QUARTERLY INFORMATION--UNAUDITED
The following table presents unaudited statement of operations data for each
of the ten quarters in the period ended September 30, 1997. This information
has been prepared by the Company on a basis consistent with the Company's
audited financial statements and includes all adjustments (consisting only of
normal recurring adjustments) that management considers necessary for a fair
presentation of the data. These quarterly results are not necessarily
indicative of future results of operations and may fluctuate, depending on the
timing of new product introductions, market acceptance of enhanced or new
versions of Yurie's products, the size and timing of individual orders of the
Company's products, price reductions by the Company, changes in the Company's
distribution channels, the addition or loss of significant customers, the
Company's ability to obtain components for its products and general economic
conditions. This information should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product
revenue........ $695 $ 830 $1,140 $ 204 $2,804 $4,588 $5,632 $5,705 $7,433 $ 9,967 $13,038
Service
revenue........ 156 354 534 949 591 430 601 868 923 956 1,035
Other revenue... -- -- 250 858 392 -- -- -- -- -- --
---- ------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Total revenue... 851 1,184 1,924 2,011 3,787 5,018 6,233 6,573 8,356 10,923 14,073
Cost of revenue:
Cost of product
revenue........ 318 375 526 107 735 1,623 2,179 2,247 2,807 3,589 4,626
Cost of service
revenue........ 86 235 375 488 413 316 366 541 623 747 784
---- ------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Total cost of
revenue........ 404 610 901 595 1,148 1,939 2,545 2,788 3,430 4,336 5,410
---- ------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Gross profit..... 447 574 1,023 1,416 2,639 3,079 3,688 3,785 4,926 6,586 8,663
Operating
expenses:
Research and
development.... 20 30 36 342 402 944 1,034 1,467 1,570 1,759 2,010
Sales and
marketing...... -- -- -- -- 49 237 504 757 1,115 1,181 1,390
General and
administrative.. 374 192 719 303 471 365 897 966 1,001 1,328 1,793
---- ------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Total operating
Expenses....... 394 222 755 645 922 1,546 2,435 3,190 3,686 4,268 5,193
---- ------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Income from
operations...... 53 352 268 771 1,717 1,533 1,253 595 1,240 2,318 3,470
Other income..... -- -- 3 10 39 15 8 21 264 465 401
---- ------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Income before
income taxes.... 53 352 271 781 1,756 1,548 1,261 616 1,504 2,783 3,871
Income taxes..... 20 135 104 300 702 619 504 203 589 1,084 1,505
---- ------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Net income....... $ 33 $ 217 $ 167 $ 481 $1,054 $ 929 $ 757 $ 413 $ 915 $ 1,699 $ 2,336
==== ====== ====== ====== ====== ====== ====== ====== ====== ======= =======
Net income per
share........... $-- $ .01 $ .01 $ .04 $ .05 $ .04 $ .03 $ .14 $ .04 $ .06 $ .09
==== ====== ====== ====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
- -------
(1) The results reported in this table have not been adjusted to reflect the
pro forma effects of the Data Labs Merger.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its working capital and capital expenditure
requirements primarily from the proceeds from its February 1997 initial public
offering. At September 30, 1997, the Company had cash and cash equivalents of
$22.8 million, short term investments of $21.9 million and working capital of
$54.3 million. This compares to cash and cash equivalents of $3.2 million, no
short term investments and working capital of $7.0 million at December 31,
1996. The Company had no long term debt at either date. Interest receivable
increased by $302,000 reflecting the investment of proceeds from the Company's
February 1997 initial public offering. The Company provided collateral of $1.0
million for a letter of credit relating to its new headquarters facility which
will be reduced periodically until it terminates in December 1998. Accounts
payable and income taxes payable increased by $541,000 and $1.9 million,
respectively, from December 31, 1996. Accrued expenses increased by $2.1
million. The significant components of this increase were a $653,000 decrease
in deferred offering costs, a $1.3 million increase in warranty accrual, and a
$917,000 increase in accrued salaries and employee benefits. The Company
anticipates that the warranty accrual portion of accrued liabilities may
fluctuate significantly from period to period due to the timing of customer
upgrades and other warranty work.
Cash used in investing activities was $26.7 million for first nine months of
1997. Short term investments increased by $21.9 million from December 31, 1996
to September 30, 1997, resulting from the investment of certain proceeds of
the Company's initial public offering. An additional $4.8 million was used for
the purchase of property and equipment, primarily computer hardware and
software and assembly and test equipment.
Financing activities generated cash of $44.7 million in the first nine
months of 1997, reflecting primarily the receipt of proceeds, net of offering
costs, from the Company's February 1997 initial public offering, as well as
the exercise of certain employee stock options. The Company sold 4.0 million
shares of common stock at $12.00 per share in its February 1997 initial public
offering.
During the second quarter of 1997, Yurie entered into a lease to occupy, and
relocated its headquarters facility to, a 137,000 square foot facility located
at 8301 Professional Place, Landover, Maryland. This lease commenced on June
1, 1997 and expires on November 30, 2004, with an optional 5-year extension.
RECENT DEVELOPMENTS
On December 1, 1997, Yurie acquired Data Labs in stock-for-stock merger.
Yurie issued 358,414 shares of its common stock in the Data Labs Merger in
exchange for all of the outstanding capital stock of Data Labs and the Data
Labs common stock underlying all of the vested stock options and one-half of
the unvested stock options held by Data Labs directors, officers and
employees. The Data Labs Merger was treated as a pooling-of-interests for
financial reporting purposes.
On February 2, 1998, Yurie announced the signing of a three-year private-
label partner agreement with Ericsson. Under this agreement, Yurie granted
Ericsson a non-exclusive license to resell Yurie's LDR products worldwide
under the Ericsson name. Ericsson anticipates that it will provide systems
integration and equipment management services related to Yurie's products to
the Internet service providers to whom Ericsson will sell Yurie's equipment.
There are no minimum purchase guarantees under this agreement.
RESULTS OF OPERATIONS--YURIE SUPPLEMENTAL
The following discussion of Results of Operations for Yurie is based on
financial data restated to give retroactive affect to the Data Labs Merger on
December 1, 1997, which was accounted for as a pooling of interest as if it
has occured at the beginning of Fiscal Year 1994.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenue. Total revenue for the third quarter of 1997 was $14.1 million,
compared with $6.2 million for the third quarter of 1996. This 125.8% increase
resulted primarily from an increase in sales of the Company's LDR products,
and particularly from increased product sales to the commercial marketplace.
Product revenue was $13.1 million during the 1997 period compared with $5.6
million during the 1996
23
<PAGE>
period. Of this $13.1 million in product revenue, 99.6%, resulted from sales
to commercial customers. There were no sales to commercial customers in the
third quarter of 1996. Of the $13.1 million in product sales during the
quarter ended September 30, 1997, $6.6 million were made to SplitRock
Services, Inc. An additional $2.4 million in revenue resulted from product
sales to Bay Networks under an OEM agreement. Service revenue was $1.0 million
in the third quarter of 1997 compared with $614,000 in the comparable quarter
in 1996. During the third quarter of 1997, SplitRock purchased $527,000 of
services from the Company.
Gross Profit. Gross profit increased to $8.7 million in the third quarter of
1997 from $3.7 million in the comparable 1996 period. Gross margins were 61.5%
and 59.2% during the 1997 and 1996 quarters, respectively. The increase in
gross margin was due largely to a decrease in product cost of goods sold, to
35.5% of product revenue in the 1997 quarter from 38.7% of product revenue in
the 1996 quarter. This reflects the spread of the fixed portion of direct
costs over a larger number of units, an increase in shipments of product to
commercial customers, and an increase in the number of higher margin software
features sold. Cost of service increased to 75.7% of service revenue in the
1997 quarter from 60.6% in the comparable 1996 period.
Research and Development. Research and development expenses were $2.3
million in the third quarter of 1997, compared with $1.1 million in the third
quarter of 1996. 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. As a percentage of total revenue,
research and development expenses were 16.4% and 18.3% in the third quarters
of 1997 and 1996 respectively.
Sales and Marketing. Sales and marketing expenses were $1.7 million in the
third quarter of 1997, compared with $548,000 in the third quarter of 1996.
This increase resulted primarily from the hiring of sales and marketing
personnel to support generally, the Company's entry into the commercial
marketplace, and specifically, the release of the Company's LDR200 product. As
a percentage of total revenue, sales and marketing expenses were 12.1% and
8.8% in the third quarters of 1997 and 1996 respectively.
General and Administrative. General and administrative expenses were $2.1
million in the third quarter of 1997 compared with $971,000 in the third
quarter of 1996. 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, in June
1996 and again in June 1997, the Company relocated part of its operations to
larger, leased facilities, resulting in higher occupancy costs in the 1997
period. As a percentage of total revenue, general and administrative expenses
were 15.1% and 15.5% in the third quarters of 1997 and 1996, respectively.
Provision for Income Taxes. The provision for income taxes in the third
quarter of 1997 was $1.1 million, resulting in an effective tax rate of 38.8%.
In the third quarter of 1996, the provision for income taxes was $420,000,
resulting in an effective tax rate of 40.2%.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenue. Total revenue for the first nine months of 1997 was $33.4 million,
compared with $15.1 million for the first nine months of 1996. This 121.9%
increase resulted primarily from an increase in sales of the Company's LDR
products, and particularly from increased product sales to the commercial
marketplace. Product revenue was $30.5 million during the 1997 period compared
with $13.0 million during the 1996 period. Of this $30.5 million in product
revenue, $23.3 million, or 76.7%, resulted from sales to commercial customers.
There were no sales to commercial customers in the first nine months of 1996.
Of the $30.5 million in product sales in the 1997 period, $11.5 million were
made to SplitRock Services, Inc. An additional $6.0 million in product revenue
resulted from sales to AT&T under the AT&T Agreement. In the first nine months
of 1996, 96.9% of product revenue resulted from sales to AT&T.
Service revenue was $2.9 million in the first nine months of 1997 compared
with $1.7 million in the first nine months of 1996. This 75.6% increase was
attributable to growth in both the number and size of
24
<PAGE>
contracts with U.S. government customers and government contractors. In
addition, the Company had service revenue totaling $527,000 during the first
nine months of 1997 to SplitRock. Other revenue in the first nine months of
1996 totaled $392,000, coming from 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.
Gross Profit. Gross profit increased to $20.3 million in the first nine
months of 1997 from $9.4 million in the comparable 1996 period. Gross margins
were 60.7% and 62.5% during the 1997 and 1996 periods, respectively. The
decline in gross margin was due to an increase in product cost of goods sold
to 36.0% of product revenue in the 1997 period from 34.8% of product revenue
in the 1996 period. This reflects the migration of the Company's cost
structure to a commercially sustainable model, both for commercial and
government market sales. The higher gross margin in the 1996 period was also
due to the inclusion of $392,000 in fees earned under an agreement with AT&T
which had no associated direct cost. Cost of service revenue increased to
73.9% of service revenue in the 1997 period, from 67.1% in the comparable 1996
period.
Research and Development. Research and development expenses were $6.1
million, or 18.3% of total revenue, in the first nine months of 1997, compared
with $2.7 million, or 17.9% of total revenue in the first nine months of 1996.
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 $4.4 million, or
13.3% of total revenue, in the first nine months of 1997, compared with
$920,000, or 6.1% of total revenue, in the first nine months of 1996. This
increase resulted primarily from the hiring of sales and marketing personnel
to support generally, the Company's entry into the commercial marketplace, and
specifically, the release of the Company's LDR200 product.
General and Administrative. General and administrative expenses were $4.7
million or 14.1% of total revenue in the first nine months of 1997 compared
with $2.0 million or 13.0% of total revenue in the first nine months of 1996.
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, in June 1996 and again in
June 1997, the Company relocated part of its operations to larger, leased
facilities, resulting in higher occupancy costs in the 1997 period.
Provision for Income Taxes. The provision for income taxes in the first nine
months of 1997 was $2.4 million, resulting in an effective tax rate of 38.9%.
In the first nine months of 1996, the provision for income taxes was $1.6
million, resulting in an effective tax rate of 40.2%.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenue for 1996 was $21.7 million, compared with $6.6
million for 1995. This increase resulted primarily from an increase in sales
of the Company's LDR products. Product revenue was $18.7 million during 1996
compared with $2.9 million during 1995. Service revenues were relatively flat
when comparing 1995 to 1996. Other revenue in both periods came from 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.
Gross Profit. Gross profit increased to $13.2 million in 1996 from $4.0
million in 1995. Gross margins were 60.9% and 59.8% during 1996 and 1995,
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. During 1996, product gross margin was 63.7%
compared with service gross margin of 34.1%. During 1995, product gross margin
was 53.9% compared with service gross margin of 49.5%.
Research and Development. Research and development expenses were $4.4
million, or 20.4% of total revenue, in 1996, compared with $563,000 or 8.5% of
total revenue, in 1995. 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.
25
<PAGE>
Sales and Marketing. Sales and marketing expenses were $1.9 million, or 8.7%
of total revenue, in 1996. The Company incurred virtually no sales and
marketing expenses in 1995. The expenses incurred during 1996 resulted from
the hiring of sales and marketing personnel to support the release of the
Company's LDR200 product, and the Company's entry into the telecommunications
service provider and corporate end user markets.
General and Administrative. General and administrative expenses increased to
$3.0 million in 1996 from $1.9 million in 1995. 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 part of its operations to a larger, leased facility, resulting
in higher occupancy costs. As a percentage of total revenue, general and
administrative expenses were 13.8% and 28.8% in 1996 and 1995, respectively.
The decrease as a percent of total revenue between the two years was due to
the Company's significant increase in total revenue.
Provision for Income Taxes. The provision for income taxes in 1996 was $1.6
million, resulting in an effective tax rate of 39.2%. In 1995, the provision
was $575,000, resulting in an effective tax rate of 37.7%.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenue. Total revenue in 1995 was $6.6 million, compared with $1.3 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 virtually
none in 1994. Service revenue increased to $2.6 million in 1995 from $1.3
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.
Gross Profit. Gross profit increased to $4.0 million in 1995 from $557,000
in 1994. Gross margins were 59.8% and 43.0% 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 53.9% compared with service gross margin of
43.8%. In 1994, service gross margin was 43.0%.
Research and Development. Research and development expenses were $562,000,
or 8.5% of total revenue in 1995, compared with $50,000, or 3.8% of total
revenue, in 1994. The increase was due primarily to the hiring of additional
engineering personnel related to development of the Company's LDR product
line.
Sales and Marketing. The Company incurred sales and marketing expenses of
$4,700 for 1995 and $22,300 for 1994.
General and Administrative. General and administrative expenses were $1.9
million, or 28.2% of total revenue in 1995, compared with $314,000, or 24.2%
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
$575,000, resulting in an effective tax rate of 37.7%. In 1994, the provision
was $43,000, resulting in an effective tax rate of 24.9%. 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.
26
<PAGE>
BUSINESS
Yurie designs, manufactures, markets and services ATM access equipment for
telecommunications service providers, Internet 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, designed primarily for telecommunications
carriers and Internet service providers, was released in September 1996. The
LDR50, designed for mid-size to large corporate offices, was released in March
1997. 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 and a broad variety of access interfaces.
The Company's strategy centers on maintaining its technological leadership,
developing the telecommunications service provider, private label partner and
corporate end user markets while continuing to pursue government end users,
developing international markets and building strategic relationships. To
enhance its distribution efforts and pursue the telecommunications service
provider, private label partners and corporate end user markets, the Company
has established a nationwide direct sales force which currently consists of 23
sales personnel.
To further this strategy, Yurie has entered into private-label partner
agreements with Bay Networks, Lucent Technologies and Ericsson. These
agreements permit each of Bay, Lucent and Ericsson to market and sell the
Company's LDR products into commercial and government markets for three years,
subject to renewal. None of these agreements have minimum purchase guarantees.
In 1995, Yurie and AT&T entered the AT&T Agreement pursuant to which Yurie
granted AT&T an exclusive license to sell Yurie products in government
markets, and with Yurie's consent, to certain commercial end users. AT&T also
agreed to certain minimum purchase guarantees. In response to the interest
expressed by other parties to sell Yurie products in both commercial and
government markets, Yurie and AT&T amended the AT&T Agreement on November 3,
1997; under this amendment, AT&T no longer has the exclusive right to market
and sell Yurie products in government markets. In addition, AT&T will no
longer be required to make its remaining minimum purchases of LDR products in
1997 and 1998 totaling approximately $14.0 million.
The Company has a significant customer relationship with Splitrock.
Splitrock purchased the Prodigy Network in 1997. The Splitrock Agreement
requires Splitrock to purchase a minimum of $20.0 million of LDR products from
the Company in the period from July 1997 to December 1998. Through September
30, 1997, Splitrock had purchased $6.6 million of LDR products from Yurie
under this agreement. Under the Splitrock Agreement, Yurie provides services
to support deployment and implementation of Yurie's products in Splitrock's
network on a time and materials basis. Kwok L. Li, the Chief Technology
Officer and Vice Chairman of the Board of Yurie, is the majority shareholder
and Chairman of the Board of Splitrock. See "Certain Transactions."
27
<PAGE>
AT&T and Splitrock have also entered into agreements pursuant to which AT&T
network services will be provided to Splitrock. In conjunction therewith, AT&T
Credit Corporation will lease to Splitrock Yurie products, including Yurie
products previously sold to AT&T.
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
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 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
28
<PAGE>
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.
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.
The major telecommunications service providers have 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
29
<PAGE>
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.
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 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.
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.
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,
30
<PAGE>
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; the LDR200,
released in September 1996; the LDR50, released in March 1997 and the LDR5
originally released by Data Labs. The LDR100, the LDR200 and the LDR50 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 and the LDR50 are both 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. Also, because the LDR50 and the LDR200 support the
same I/O and server modules, customers whose configurations outgrow the
LDR50's four user slots can upgrade to the LDR200 (which has 11 or 15 user
slots, depending on chassis size) with minimal expense.
Reliability. Yurie's LDR200 satisfies a telecommunications service
providers' need for reliability, offering uninterrupted service through
comprehensive redundancy options, including power, central processing unit,
clock, backplane and interface cards.
31
<PAGE>
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 remain a 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 the Telecommunications Service Provider, Private Label Partner
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, private
label partners 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, private label partner and corporate
end user markets. The Company has signed three-year agreements with each of
Lucent Technologies, Bay Networks and Ericsson under which each of Lucent,
Bay and Ericsson may sell Yurie's LDR products under their respective
brands. The Company is also pursuing other private label agreements to
extend its coverage of the access market. In addition, the Company is
expanding its direct sales force, particularly in the geographic areas
where the telecommunications service provider, private label partner and
corporate end user markets are concentrated. This direct sales force is
currently comprised of 23 direct sales personnel who have all had prior
experience in commercial sales of networking and/or telecommunications
products.
Develop International Markets. Since ATM is an international standard,
Yurie believes that the potential market for its ATM access products is
global in scope. Yurie has begun to establish a sales and support
organization in Europe and Asia, and to develop the product features and
obtain the certifications required to pursue international markets. Yurie
believes that international sales may provide an increasing portion of its
revenues in the future.
32
<PAGE>
Build and Leverage Strategic Relationships. Yurie has entered into
private-label agreements with each of Lucent Technologies, Bay Networks and
Ericsson under which each of Lucent, Bay and Ericsson may sell Yurie's LDR
products under their respective brands. The Company also has an agreement
with Splitrock. Under the Splitrock Agreement, Yurie has agreed to provide
the ATM equipment for Splitrock's network which was purchased for Prodigy.
The Company is actively seeking to establish similar relationships for
other markets with other telecommunications industry participants,
including equipment suppliers and telecommunications service providers. As
such 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 LDR200, the LDR50,
the LDR5 and the LDR100. 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 current LDR
products:
<TABLE>
<CAPTION>
NUMBER OF BUS
PLATFORM USER SLOTS BANDWIDTH DIMENSIONS
-------- ---------- ---------- ----------
<S> <C> <C> <C>
LDR200 (15" or 73").......... 11 or 15 1.2 Gbps 7H X 10.5D X 19W or 23W
LDR50........................ 4 600 Mbps 5.25 H X 10.25D X 19W
LDR5......................... 2 1.544 Mbps 3.5H X 10D X 19W
</TABLE>
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, an industry standard method of detecting and
correcting transmission errors, and an error-tolerant addressing scheme that
ensures highly reliable communication over circuits of varying speeds and
quality. In addition, the LDR200 expands the capabilities of the Company's
first generation LDR product by offering higher throughput, greater port
density, a greater variety of interface types, enhanced scaleability and
higher speed.
The LDR200, which comes in a 19^ or 23^ chassis, has a bus bandwidth of 1.2
gigabits per second and is scaleable up to 11 or 15 interface module slots,
depending on chassis size. 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 and OC3c
for the North American marketplace and via E3 and STM-1 for the International
Marketplace. It uses DSI and E1 cards to support structured and unstructured
service in compliance with ATM forum's circuit emulation specification as well
as ATM cell-bearing and frame relay capabilities. The system also offers OC3-
c, High Speed, Ethernet, TAXI, and analog voice interfaces and a DPSI server
card, which provides voice compression, echo cancellation, and silence
suppression capabilities. The Company plans to introduce other interface and
server cards in the future.
The current version of the LDR200 contains most of the features included in
the earlier LDR100, and the Company is in the process of developing the LDR200
to include all of the LDR100's attributes, along
33
<PAGE>
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 LDR50
Yurie's LDR50, which started shipping in March 1997, was designed to provide
access to ATM services for mid-sized to large corporate offices. Like the
LDR200, the LDR50 incorporates AQueMan and LANET, and contains most of the
features included in the LDR100.
The LDR50 has a bus bandwidth of 600 megabits per second and is scaleable up
to 4 interface module slots supporting up to 32 ports, depending on
configuration. The LDR50 provides PVC support for ATM Forum UNI 3.0 and UNI
3.1 standard signaling and thus can interoperate with ATM equipment from other
manufacturers. Because the LDR50 supports the same I/O and server modules as
the LDR200, sites that outgrow the smaller system can easily upgrade to the
LDR200. The LDR50 currently supports all the standard network and user
interfaces supported on the LDR200.
The LDR50's 19^ x 10.25^ x 5.25^ chassis can be wall mounted, secured in a
standard 19 telco rack, or fitted for table-top use.
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 LDR200 or the LDR50 access products. The
LDR5 enables the Company to offer a full range of ATM access products.
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.
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. To further ensure quality over a
wide variety of circuit types, the LDR100 employs Reed Solomon forward error
correction, and a simple error-tolerant addressing scheme. The Company has
shipped more than 150 LDR100 access concentrators since February 1995.
Product Management Protocol; Pricing
Each of the Company's 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 and LDR50 can also be managed using a
simple "dumb" terminal interface.
The LDR200 product sells for prices ranging from $35,000 to $135,000, the
LDR50 from $20,000 to $40,000 and the LDR5's price ranges from $5,000 to
$10,000. Actual price depends on the configuration of the product selected.
34
<PAGE>
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 and the LDR50 are sold with a standard
one-year warranty. The Company's customer support representatives are located
in Landover, 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. In the future, the Company expects to
offer extended service for the Company's products that will be available 24
hours a day, seven days a week. The Company is currently considering whether
this service will be provided by a third party or in-house.
STRATEGIC RELATIONSHIPS
Yurie has entered into private-label partner agreements with Bay Networks,
Lucent Technologies and Ericsson. These agreements permit each of Bay, Lucent
and Ericsson to market and sell the Company's LDR products into commercial and
government markets for three years. subject to renewal. None of these
agreements have minimum purchase guarantees. In 1995, Yurie and AT&T entered
the AT&T Agreement pursuant to which Yurie granted AT&T the exclusive right to
market and sell the LDR100 and the LDR200, including future designs, upgrades
features and functionalities, in U.S. federal, state and local government
markets, as well as certain foreign government markets, through December 1998.
AT&T also agreed to certain minimum purchase guarantees at that time. In
response to the interest expressed by other parties to sell Yurie products,
Yurie and AT&T amended the AT&T Agreement on November 3, 1997. As a result of
these amendments, AT&T no longer has an exclusive license to market and sell
Yurie products in government markets. In addition, AT&T will no longer be
required to make its remaining minimum purchases of LDR products in 1997 and
1998 totaling approximately $14.0 million.
SPLITROCK RELATIONSHIP
The Company has a significant customer relationship with Splitrock, a Texas
corporation that provides communications services specifically configured to
meet the needs of large network users. Splitrock purchased the Prodigy Network
in 1997. The Splitrock Agreement between Yurie and Splitrock requires
Splitrock to purchase a minimum of $20.0 million of LDR products from the
Company in the period from July 1997 to December 1998. Through September 30,
1997, Splitrock had purchased $6.6 million of LDR products from Yurie under
this agreement. Under the Splitrock Agreement, Yurie provides services to
support deployment and implementation of Yurie's products in Splitrock's
network on a time and materials basis. Kwok L. Li, the Chief Technology
Officer and Vice Chairman of the Board of Yurie, is the majority shareholder
and Chairman of the Board of Splitrock. See "Certain Transactions."
AT&T and Splitrock have also entered into agreements pursuant to which AT&T
network services will be provided to Splitrock. In conjunction therewith, AT&T
Credit Corporation will lease to Splitrock Yurie products, including Yurie
products previously sold to AT&T.
CUSTOMERS AND END USERS
The Company markets and sells its products to telecommunication service
providers, Internet service providers, corporate end users and government end
users. The principal end users of Yurie's ATM access products have
historically been U.S. government agencies and their support contractors. The
Company has recently begun to obtain purchase orders from commercial
customers. In the quarter ended December 31, 1996, 14.0% of the Company's
product sales were to commercial customers. In the quarter ended September 30,
1997, 99.6% of the Company's product revenue resulted from sales
35
<PAGE>
to commercial customers. Among the more than 30 government organizations and
commercial customers that have purchased or used or have agreed to purchase
the Company's products are:
<TABLE>
<S> <C>
Advanced Research Project Agency/Defense
Information Mitre Corporation
Systems Agency Joint Program Office Booz-Allen & Hamilton, Inc.
U.S. Army Communications Electronics
Command Applied Innovation, Inc.
Defense Aerospace Reconnaissance
Organization Oneline Management, Inc.
North Atlantic Treaty Organization Lunex Group, LLC
Naval Research Laboratory K-NET Ltd.
Los Angeles Department of Water & Power Government of Canada, Communications
Lucent Technologies Research Center
Splitrock Services, Inc. Ericsson, Inc.
Bay Networks, Inc. Kyung-In
</TABLE>
Although there are more than 30 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%, 87.0% and
25.8% of the Company's total revenues in 1994, 1995, 1996 and the nine months
ended September 30, 1997. Sales to Splitrock accounted for approximately 34.5%
of the Company's total revenues in the nine months ended September 30, 1997.
See "Certain Transactions." The Company continues to expand its sales and
marketing efforts to 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 and
LDR50's interface modules, develop new server modules (such as primary rate
ISDN and voice compression), 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 1994, 1995, 1996 and the nine months ended September 30, 1997, total
research and development expenditures were $40,000, $428,000, $3.8 million and
$5.3 million, respectively. The Company expects its future research and
development expenditures will grow commensurately with its revenue growth.
Approximately 109 Company employees were engaged in research and development
programs, including hardware and software development, test and engineering
support personnel as of January 30, 1998. The majority of these employees
currently are located in the Company's Landover, Maryland headquarters. The
Company has recently opened a research and development facility in Alameda,
California. 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. As of January 30, 1998, the
Company had 23 sales personnel in its direct sales organization. Domestic
sales offices are located in New York, Phoenix, San Francisco, Los Angeles,
Hartford, Chicago, Dallas, Boston, Tampa,
36
<PAGE>
Atlanta and Landover, MD. In 1997, sales offices were also opened in Aubrey,
Texas; Wyndham, New Hampshire; Richardson, Texas; Buffalo Grove, Illinois; as
well as Linden and Berkeley Heights, New Jersey. All of these offices, except
the office in Landover, MD, are currently located in the homes of sales
people. In 1997, the Company opened a marketing and technical support office
in Korea and maintained a sales office in the United Kingdom.
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 and private
label partners. The primary roles of the Company's sales force are (i) to
provide support to commercial customers 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 23-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. Members of Yurie's sales team have had an
average of 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 three manufacturers, Sanmina Corporation,
Teledyne Electronic Technologies and Kuchera Industries, Inc. to manufacture
the majority of its common equipment circuit packs, backplanes, chassis and
printed circuit board assemblies used in the Company's products. Yurie does
not have a contract with these or any other manufacturer, and all of the
Company's products are manufactured pursuant to individual purchase orders.
The Company believes that its orders do not represent a significant portion of
these subcontract manufacturers' total business. 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 believes that its strategy of using
subcontract manufacturers has increased its flexibility and responsiveness to
changes, as it is in a better position to reduce product costs, acquire
additional capacity and reduce its capital investment. It is, however,
currently relying on a limited number of manufacturers, and if one or more of
these manufacturers should experience quality or other problems, such problems
could result in delays in product shipments by the Company.
Final testing of the Company's products is performed by the Company at its
Landover, 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
37
<PAGE>
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.,
Texas Instruments, Analog Devices 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 3Com. In addition,
Ascend Communications has developed an ATM access product. Other companies,
including Cisco Systems/StrataCom, Nortel, General DataComm, Digital Link,
Fore Systems and Newbridge Networks, have already developed networking
equipment that may be competitive with the Company's products. The Company
expects that some of these companies and other networking and computer systems
companies may in the future announce plans to develop ATM access products that
are directly competitive with the Company's products.
The Company does not intend to compete solely on the basis of price.
Instead, it intends to compete by offering superior features, performance,
reliability and flexibility at competitive prices. Yurie's management is
adopting this strategy because equipment price is only one component in
overall communications costs. WAN bandwidth and network operating expenses
generally exceed the total cost of the network equipment for a typical
customer.
As competition in the ATM access market increases, the Company believes that
the ATM access industry may be characterized by the intense price competition
similar to that present in the broader networking market. In response to this,
the Company has already implemented cost improvement measures and will
continue to seek ways to improve upon the LDR products' price-to-performance
ratio.
INTELLECTUAL PROPERTY, PROPRIETARY INFORMATION AND TECHNICAL KNOW HOW
The Company believes that its future success depends, in part, upon its
ability to develop and protect proprietary technology contained in its
products. The Company currently relies upon a combination of trade secret,
copyright, patent and trademark laws, as well as contractual restrictions, to
establish and protect proprietary rights in its products. The Company also has
entered into nondisclosure, noncompete and invention assignment agreements
with substantially all of its employees and nondisclosure agreements with
certain of its suppliers, distributors and customers so as to limit access to
and disclosure of its proprietary information. There can be no assurance that
these statutory and contractual arrangements will prove sufficient to deter
misappropriation of the Company's technologies or independent third-party
development of similar technologies. The Company also possesses and relies
upon a valuable body of technical know how related to the design and operation
of its products.
38
<PAGE>
The U.S. Patent and Trademark Office has 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 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 137,000 square foot
facility leased by the Company at 8301 Professional Place, Landover, MD 20785-
2237 (a suburb of Washington, DC). Approximately 40% of the space in this
facility is used or reserved for manufacturing, product development and
testing; the balance is used or reserved for sales, marketing and other
general and administrative activities.
The Company also leases 6,000 square feet of space for a research and
development facility at 2020 Challenger Drive, Suite 101, Alameda, California
and approximately 5,443 square feet in Atlanta, Georgia. 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 30, 1998, Yurie employed 238 individuals on a full-time
equivalent basis. Of these, 86 were involved in engineering, 23 were working
in applications engineering in the federal division, 48 were employed in
sales, marketing and customer support, 48 were engaged in operations and
manufacturing and the remaining 33 were devoted to administration, finance and
strategic planning. 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.
39
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and Key Employees of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeong H. Kim....................... 37 Chief Executive Officer and Chairman of
the Board of Directors
Harry J. Carr(1)................... 41 President, Chief Operating Officer and
Director
Kwok L. Li......................... 40 Chief Technology Officer and Vice-
Chairman of the Board of Directors
Barton Y. Shigemura................ 38 Senior Vice President, Sales and
Marketing and Director
Harry J. D'Andrea.................. 41 Chief Financial Officer and Treasurer
Quon S. Chow(5).................... 57 Vice President, Engineering
Anthony J. DeMambro(5)............. 55 Vice President, Operations
Joseph Miller(5)................... 40 Vice President, Marketing
John J. McDonnell.................. 51 Corporate Counsel and Secretary
Kenneth D. Brody(2)................ 54 Director
Herbert Rabin(2)................... 69 Director
R. James Woolsey(3)................ 56 Director
William J. Perry(4)................ 70 Director
</TABLE>
- --------
(1) Mr. Carr replaced Mr. Li as President and Chief Operating Officer of the
Company effective June 30, 1997.
(2) Member of the Audit Committee and Compensation Committee.
(3) Member of the Audit Committee.
(4) Member of the Compensation Committee.
(5) Key Employee.
Dr. Kim is the founder of Yurie and has served as Chief Executive Officer
and Chairman of the Board of Directors 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 Allied-Signal
Technical Services Corporation, a subsidiary of Allied-Signal 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 Chief Technical Officer and Vice Chairman of the Board
of Directors of the Company since July 1, 1997. Mr. Li 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. Carr has served as President, Chief Operating Officer and a Director of
the Company since June 30, 1997. Prior to joining the Company, he spent five
years with AT&T, the last 18 months of which was spent at AT&T Local Services
where he was Market Development Vice President for the Atlantic States region.
For six months of that period, he also acted as National Program Manager. Mr.
Carr was also AT&T
40
<PAGE>
Defense Markets Vice President from 1992 to 1996. From 1989 to 1992, Mr. Carr
practiced law, most recently as a partner at Veneble, Baetjer, Howard &
Civiletti. Prior to that, he was with AT&T for over 11 years, holding a
variety of positions in finance, marketing, operations and law. Mr. Carr holds
a B.S. in Finance from Fairfield University and a J.D. from the University of
Connecticut School of Law.
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.
Mr. D'Andrea has served as Chief Financial Officer and Treasurer of the
Company since June 1997. During 1996, he was Chief Financial Officer for
American Communications Services, Inc., a company specializing in fiber optic
network development and local telecommunications services. From 1993 to 1995,
he was Executive Vice President, Chief Financial Officer and Treasurer for
Caterair International Corporation, an in-flight catering company. From 1989
to 1993, he was Vice President, Finance and Treasurer for Caterair. Prior to
joining Caterair, he held various financial positions with Marriott
Corporation and Xerox Corporation. Mr. D'Andrea holds an M.B.A. from Drexel
University and a B.A. in Foreign Service from The Pennsylvania State
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, PHP Healthcare Corporation and
Sequoia National Bank. Mr. McDonnell holds an A.B. from Boston College and a
J.D. from Fordham Law 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. 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. 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,
41
<PAGE>
Mr. Brody served as President and Chairman of the Export-Import Bank of the
United States. Prior thereto, he was a Partner at Goldman, Sachs & Co., where
he served as a member of the firm's Management Committee and founded and headed
the high technology investment banking group. Mr. Brody holds an M.B.A. from
the Harvard Business School and a B.S. in Electrical Engineering from the
University of Maryland.
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.
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, Woolsey and Carr are Class II
directors whose terms will expire in 1998, and Drs. Kim and Rabin are Class III
directors whose terms will expire in 2000.
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) with respect to executive officers and
directors of the Company and for recommending other compensation decisions to
the Board of Directors. The members of the Compensation Committee are Mr.
Brody, Dr. Perry and Dr. Rabin (Chairman).
The Stock Option Committee is responsible for administering the Stock Option
Plan with respect to employees that are not executive officers of the Company.
The Stock Option Committee was formed in order to provide timely option grants
to new employees. The current members of the Stock Option Committee are Dr.
Kim, Mr. Li, Mr. Carr, Mr. Shigemura and Mr. Brody.
42
<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 four most highly compensated officers of the
Company other than the Chief Executive Officer for the fiscal years ended
December 31, 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- -------------------------
SECURITIES
NAME AND OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITIONS* YEAR SALARY ($) BONUS ($) COMPENSATION STOCK AWARDS OPTIONS (#) COMPENSATION
-------------------- ---- ---------- --------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeong H. Kim(3)......... 1997 200,010 -- (8) 13,666(9) -- -- --
Chief Executive Officer 1996 200,000 -- 16,616(1) -- -- --
1995 206,112 656,865 41,346(2) -- -- --
Harry J. Carr(7)........ 1997 100,758 -- (8) 2,256(9) -- 1,000,000 22,038(5)
President and Chief 1996 -- -- -- -- -- --
Operating Officer 1995 -- -- -- -- -- --
Kwok L. Li(3)........... 1997 150,008 -- (8) 13,562(9) -- -- --
Chief Technical Officer 1996 150,000 -- 11,407(1) -- -- --
1995 140,851 250,077 25,962(2) 154,000(4) -- 15,940(5)
Barton Y. Shigemura(6).. 1997 135,007 -- (8) 1,525(9) -- -- 7,229(5)
Senior Vice President, 1996 89,559 5,000 308(1) -- 1,000,000 4,680(5)
Sales & Marketing 1995 -- -- -- -- -- --
Harry D'Andrea(7)....... 1997 65,492 -- (8) -- -- 150,000 --
Chief Financial Officer 1996 -- -- -- -- -- --
and Treasurer 1995 -- -- -- -- -- --
</TABLE>
- --------
(1) For Dr. Kim and Mr. Li, includes the Company's contribution to their
401(k) plan of $10,000 and $7,500, respectively. For Dr. Kim and Messrs.
Li and Shigemura, also includes compensation related to their use of
Company-leased vehicles in the amount of $6,616, $1,846 and $308,
respectively.
(2) Includes payments for unused vacation and sick leave and the Company's
contribution to pension plans.
(3) The Company has employment agreements with Dr. Kim, Mr. Li and Mr. Carr.
See "--Employment Agreements."
(4)Represents 4,000,000 shares of common stock granted to Mr. Li in March
1995.
(5)Represents reimbursed relocation expenses and, for Messrs. Li and Carr,
applicable associated taxes.
(6)Mr. Shigemura joined the Company in July 1996.
(7) Mr. Carr replaced Mr. Li as President and Chief Operating Officer in July
1997, and Harry J. D'Andrea joined the Company in July 1997 as its Chief
Financial Officer. Both are included in the Fiscal 1997 Summary
Compensation Table for the first time.
(8) The Company has accrued approximately $1.4 million for bonuses to its
employees for 1997 but has not yet allocated these amounts to individual
employees. None of the executive officers listed in this table had been
awarded a bonus for 1997 as of January 30, 1998.
(9) For Dr. Kim and Mr. Li, includes the Company's contribution to their
401(k) plan of 313 and 277 shares, respectively, of the Company's Common
Stock. For Dr. Kim and Messrs. Carr, Li and Shigemura, also includes
compensation related to their use of Company leased or owned vehicles in
the amount of $8,750, $2,286, $8,750 and $1,525, respectively.
43
<PAGE>
OPTION GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE/ OPTION TERM(2)
OPTIONS IN FISCAL BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% 10%
---- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jeong H. Kim(3)......... 0 0% -- -- -- --
Harry J. Carr........... 1,000,000 35.8% $ 9.625 4/30/07 6,053,111 15,349,771
Kwok L. Li(3)........... 0 0 -- -- -- --
Barton Y. Shigemura.....
Harry D'Andrea.......... 150,000 5.4% 17.0625 6/30/07 1,609,577 4,078,985
</TABLE>
- --------
(1) All awards listed on table were in the form of option grants made pursuant
to the Company's Stock Option Plan.
(2) Sets forth potential option gains based on assumed annualized rates of
stock price appreciation from the market price at the date of grant of 5%
and 10% (compounded annually) over the full term of the grant with
appreciation determined as of the expiration date. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Securities and
Exchange Commission, and do not represent the Company's estimate or
projection of future common stock prices.
(3) To date, neither Dr. Kim nor Mr. Li has been granted options to purchase
common stock of the Company.
Aggregated Option Values. The following table sets forth the stock option
values as of December 31, 1997 for each of the named executive officers. One
of the named executive officers, Mr. Shigemura, there were exercised 10,000 of
his stock options in the fiscal year ended December 31, 1997.
AGGREGATED OPTION VALUES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
(#) ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeong H. Kim............... -- -- -- --
Harry J. Carr.............. -- 1,000,000 -- $10,562,500
Kwok L. Li................. -- -- -- --
Barton Y. Shigemura........ 427,500 562,500 8,407,856 11,062,969
Harry D'Andrea............. -- 150,000 -- 468,750
</TABLE>
- --------
(1) Sets forth values for "in the money" options that represent the positive
spread between the respective exercise/base prices of outstanding stock
options and the fair value of $20.1875 per share of common stock at
December 31, 1997, as determined by the Board of Directors.
44
<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 purposes of
the Stock Option Plan are to attract, retain and motivate the best available
officers (executive or otherwise), other employees and consultants for
positions of substantial responsibility, to give such officers, employees and
consultants a greater personal stake in the success of the Company's business,
to provide additional incentive to the Company's officers and employees to
continue and advance in their employment and service to the Company and to
promote the success of the Company's business.
The Stock Option Plan was adopted by the Company's Board of Directors on
January 31, 1996 and amended and restated on May 14, 1997 to increase the
maximum number of shares issuable under the Stock Option Plan. The Company's
shareholders approved the amended and restated Stock Option Plan on June 26,
1997. A total of 7.0 million shares have been reserved for issuance under the
Stock Option Plan, 27,233 of which may be issued under the Data Labs Plan
described below. 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. An additional amendment
to the Stock Option Plan, adopted by the Board of Directors on July 30, 1997,
provides that stock options granted pursuant to the Stock Option Plan are
transferable to members of the option holder's "immediate family" (as defined
in the Stock Option Plan), subject to the terms and conditions of 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 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 December 31, 1997, options to acquire an aggregate of 5,622,229 shares
of common stock were outstanding pursuant to the Stock Option Plan (net of
canceled options) and 992,171 shares remained for future grants. 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 nor Mr. Li
hold any options to purchase shares of common stock under the Stock Option
Plan. Other executive officers and directors have been granted options to
purchase shares under the Stock Option Plan as of December 31, 1997 as
follows: Harry J. Carr--1,000,000 shares, Barton Y. Shigemura--1,000,000
shares; Harry J. D'Andrea--150,000 shares; John J. McDonnell--30,000 shares;
Herbert Rabin--126,000 shares; R. James Woolsey--105,000 shares; Kenneth D.
Brody--80,000 shares; and William J. Perry--80,000 shares. These options have
exercise prices ranging from $.52 to $17.06 per share and a weighted average
exercise price of $4.84. All of these options vest periodically through June
2001.
45
<PAGE>
The options granted under the Stock Option Plan are not incentive stock
options within the meaning of Section 422 of the Internal Revenue Code.
DATA LABS PLAN
Pursuant to the Data Labs Merger Agreement, all of the outstanding stock
options awarded under the Data Labs Plan as of the date of the Data Labs
Merger (the "Data Labs Options") were converted into options to purchase
common stock of Yurie, with appropriate adjustments to the exercise price and
number of shares subject to each option to reflect the ratio at which the
shares of Data Labs common stock, par value $.01, were converted to shares of
Yurie common stock pursuant to the Data Labs Merger. Each Data Labs Option
outstanding under the Data Labs Plan as of the effective date of the Data Labs
Merger, December 1, 1997, continues to be governed by and subject to the terms
of the Data Labs Plan, although no more options will be granted under the Data
Labs Plan.
As of December 31, 1997, options to purchase a total of 27,233 shares of
Yurie common stock had been issued under the Data Labs Plan. All of the Data
Labs Options expire in July, 2006, except for those granted to Mr. Wenli Yu
which expire on July 2, 2001. All options granted under the Data Labs Plan
have vested and have exercise prices of $3.41 per share, except for those
awarded to Mr. Wenli Yu which have an exercise price of $3.75 per share.
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 permits 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 is 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 became effective on February 18, 1997,
the date on which a registration statement on Form S-8 filed by the Company
with respect thereto became 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
prescribed 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.
46
<PAGE>
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) 200,000 shares of common stock to
Yung-Lung Ho and 2,400 shares of common stock to several employees; and (iii)
on June 14, 1995, the Company issued 6,000 shares of common stock to several
employees. See "--Summary Compensation Table."
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Dr. Kim, its Chief Executive
Officer, Mr. Li, its Chief Technical Officer, and Mr. Carr, its President and
Chief Operating Officer. Pursuant to the Company's employment agreement with
Dr. Kim, dated July 31, 1996 (the "Kim Employment Agreement"), Dr. Kim will
receive an annual salary of $200,000 and bonus of $40,000 or such other amount
as the Board of Directors may determine. Dr. Kim's employment is for a one-
year term that renews automatically unless terminated by either party. If the
Kim Employment Agreement is terminated by the Company for any reason other
than "disability" or "cause" or by Dr. Kim for "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").
Dr. Kim has waived his registration rights with respect to this offering. See
"Shares Eligible for Future Sale."
The employment agreement between the Company and Mr. Li, dated July 31,
1996, as amended on June 24, 1997 (the "Li Employment Agreement"), provides
for Mr. Li to 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 "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, as amended, reflects Mr.
Li's new position as Chief Technology Officer and Vice Chairman of the Board
of Directors and allows him, to a material extent, to participate in other
business activities relating to Splitrock. The Li Employment Agreement
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"). Mr. Li has waived his registration rights with respect to
this offering. See "Shares Eligible for Future Sale."
Pursuant to the Company's employment agreement with Mr. Carr dated April 30,
1997 (the "Carr Employment Agreement"), Mr. Carr will receive an annual salary
of $200,000 and a bonus of 20% of his annual base salary or such other amount
as the Board of Directors may determine. Mr. Carr's employment
47
<PAGE>
is for a three-year term that renews automatically for a one-year term unless
terminated by either party. If the Carr Employment Agreement is terminated by
the Company for any reason other than "disability" or "cause" or by Mr. Carr
for "good reason" (as those terms are defined in the Carr Employment
Agreement), the Company must make a cash lump sum severance payment equal to
Mr. Carr's base salary for the then-current year and a "bonus amount" (as
defined in the Carr Employment Agreement), and continue his benefits for up to
one year. Throughout his employment, Mr. Carr 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. Unless terminated by the Company other
than for "disability" or cause, or by Mr. Carr for "good reason," Mr. Carr
will continue to be bound by this covenant not to compete for one year after
his termination. In connection with the Carr Employment Agreement, the Company
also granted Mr. Carr stock options to purchase 1,000,000 shares of the
Company common stock (the "Carr Options"). The vesting schedule of the Carr
Options follows the Stock Option Plan, including such provisions relating to
Change in Control. If Mr. Carr's employment is terminated by the Company
without "cause" or for "disability" or by Mr. Carr for "good reason," the Carr
Options will automatically become fully exercisable. In the case of any
voluntary termination by Mr. Carr or termination for "cause" by the Company,
the then vested Carr Options will not terminate until the expiration of their
term.
COMPENSATION OF DIRECTORS
During 1995, 1996 and 1997, 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 1998. 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 1997, Dr.
Perry received options to purchase 80,000 shares of common stock and each of
Dr. Rabin and Messrs. Woolsey and Brody received options to purchase 5,000
shares of common stock . These options have a weighted average exercise price
of $2.99 and vest periodically over 4 years. The Company's Stock Option Plan
provides for annual automatic option grants of 5,000 options to its
independent directors, and on June 30, 1997, each director received options to
purchase 5,000 shares of common stock. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, which is responsible for administering the
Company's Stock Option Plan with respect to executive officers and directors
and for recommending other compensation decisions to the Board of Directors,
was formed in June 1996. The members of the Compensation Committee are Dr.
Herbert Rabin (Chairman), Dr. William J. Perry and Kenneth D. Brody. Mr.
Brody, Dr. Kim and the Company are parties to an agreement under which Mr.
Brody purchased an option to purchase 1,000,000 shares of common stock from
Dr. Kim at an exercise price of $4.00 per share. Mr. Brody also has a
registration rights agreement with the Company. See "Certain Transactions."
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.
48
<PAGE>
CERTAIN TRANSACTIONS
On July 1, 1996, Dr. Jeong H. Kim and Kenneth D. Brody entered into an
option purchase agreement (the "Option Purchase Agreement"), pursuant to which
Mr. Brody paid $500,000 to buy an option (the "Brody Option") to purchase
1,000,000 shares of the common stock from Dr. Kim at an exercise price of
$4.00 per share. The Brody Option became fully vested on June 3, 1997. 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. As of December 31, 1997, Mr. Brody had exercised and sold 201,600
shares of common stock pursuant to the Brody Option.
Certain executive officers and directors of the Company have been granted
options to purchase shares of the common stock of the Company as follows:
Harry J. Carr, 1,000,000 shares; Barton Y. Shigemura--1,000,000 shares; Harry
J. D'Andrea--150,000 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 $17.06 per share.
On January 14, 1997, the Company entered into a consulting agreement with In
Y. Chung, under which Mr. Chung performed 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 exercised these options in June
1997 and the Company issued 50,000 shares of common stock to Mr. Chung. Mr.
Chung is currently employed as a Special Assistant to President Harry Carr,
for which he was paid $17,502 in 1997. Mr. Chung is the father-in-law of Dr.
Jeong H. Kim.
The Company has a significant customer relationship with Splitrock, a Texas
corporation that provides communications services specifically configured to
meet the needs of large network users. Splitrock purchased the Prodigy Network
in 1997. During the nine months ended September 30, 1997, Splitrock purchased
$11.5 million of LDR products from the Company. In July 1997, Yurie and
Splitrock entered into the Splitrock Agreement, which requires Splitrock to
purchase a minimum of $20.0 million of LDR products in the period from July
1997 to December 1998. Through September 30, 1997 Splitrock had purchased $6.6
million of LDR products pursuant to this agreement. Under the Splitrock
Agreement, Yurie provides services to support deployment and implementation of
Yurie's products in Splitrock's network on a time and materials basis.
Kwok L. Li, Chief Technology Officer and Vice Chairman of the Board of
Directors of Yurie, is the majority shareholder in Splitrock. Mr. Li also
serves as the Chairman of the Board of Splitrock and, in that capacity, is
responsible for the strategic initiatives and direction of Splitrock. It is
anticipated that Mr. Li will devote a significant amount of his time to
Splitrock.
On June 16, 1997, the Board formed an independent committee (the "Splitrock
Committee") to oversee and provide guidance to the Company in its relationship
with Splitrock. The Splitrock Committee is responsible for reviewing,
authorizing and approving all transactions between Yurie and Splitrock, and
for ratifying and recommending contracts, policies and other matters in
connection with Yurie's relationship with Splitrock. The current members of
the Splitrock Committee are Kenneth D. Brody, Dr. William J. Perry, Dr.
Herbert Rabin, Barton Y. Shigemura and Harry J. Carr.
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.
49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of common stock as of December 31, 1997, (i) by
each person who is known by the Company to beneficially own 5% or more of
outstanding common stock, (ii) by each of the Company's directors, (iii) by
each executive officer named in the Summary Compensation Table, and (iv) by
all directors and executive officers of the Company as a group; and (vi) by
the Selling Stockholders. The table also sets forth the number of shares of
common stock owned by each Selling Stockholder, the number of shares offered
for sale in this offering and the number of shares each Selling Shareholder
will beneficially own after the offering, assuming the sale of all shares
being offered hereby. Unless otherwise indicated, the person or persons named
have sole voting and investment power.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED
OFFERING(1) AFTER OFFERING(3)
--------------------- SHARES TO BE ---------------------
NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
---- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Jeong H. Kim(4)......... 13,398,713 52.9% -- 12,600,313 52.9%
Kwok L. Li(5)........... 3,470,277 13.7 -- 3,470,277 13.7
Harry J. Carr........... -- -- -- -- --
Kenneth D. Brody(4)..... 822,150 3.2 798,400 23,750 *
Barton Y. Shigemura..... 434,163 1.7 -- 434,163 1.7
R. James Woolsey(6)..... 100,000 * -- 100,000 *
Herbert Rabin........... 38,500 * -- 38,500 *
Harry J. D'Andrea....... -- -- -- -- --
John J. McDonnell....... 5,979 * -- 5,979 *
William J. Perry........ -- -- -- -- --
Amerindo Technology
Growth
Fund, Inc.(7).......... 2,926,100 11.5 1,000,000 1,926,100 8.3
Oneline Management,
Inc.(8)................ 20,000 * 20,000 -- --
Bessemer Venture
Partners IV L.P. ...... 101,706 * 101,706 -- --
Edision Venture Fund
III, L.P. ............. 96,686 * 96,686 -- --
Wenli Yu................ 87,824 * 87,824 -- --
Raul Montalvo........... 5,855 * 5,855 -- --
Christopher Gabrieli.... 4,124 * 4,124 -- --
G. Felda Hardymon....... 3,866 * 3,866 -- --
BVP IV Special
Situations, L.P. ...... 3,428 * 3,428 -- --
Thomas H. Jones......... 3,174 * 3,174 -- --
Jack L. Lewis........... 2,442 * 2,442 -- --
William T. Burgin....... 1,933 * 1,933 -- --
Brimstone Island Co.
L.P. .................. 1,933 * 1,933 -- --
Michael I. Barach....... 1,933 * 1,933 -- --
Bradford Mills.......... 1,933 * 1,933 -- --
G&H Partners............ 1,933 * 1,933 -- --
John R. Peeler.......... 1,744 * 1,744 -- --
Jenny Zhou.............. 1,463 * 1,463 -- --
Ken Lee................. 1,394 * 1,394 -- --
David J. Cowan.......... 1,160 * 1,160 -- --
Gautam A. Prakash....... 1,160 * 1,160 -- --
Richard R. Davis........ 1,160 * 1,160 -- --
Quentin Corporation..... 1,160 * 1,160 -- --
Mark Jung............... 1,160 * 1,160 -- --
Igor Sill............... 1,160 * 1,160 -- --
John F. Imber........... 1,046 * 1,046 -- --
Neil H. Brownstein...... 773 * 773 -- --
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED
OFFERING(1) AFTER OFFERING(3)
--------------------- SHARES TO BE ---------------------
NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
---- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Robert H. Buescher...... 773 * 773 -- --
Belisarous Corporation.. 773 * 773 -- --
Robi Soni............... 695 * 695 -- --
Barbara M. Henagan...... 617 * 617 -- --
Gabrielli Family
Foundation............. 457 * 457 -- --
Joanna A. Strober....... 386 * 386 -- --
Ravi B. Mhatre.......... 308 * 308 -- --
Diane N. McPartlin...... 154 * 154 -- --
Rodney A. Cohen......... 154 * 154 -- --
Adam P. Godfrey......... 154 * 154 -- --
Russell D. Sternlicht... 154 * 154 -- --
Robert J.S. Roriston.... 115 * 115 -- --
Thomas F. Ruhm.......... 76 * 76 -- --
All executive officers
and directors
as a group (10
persons)............... 17,471,382 69.0% 2,155,366 16,672,982 65.8%
</TABLE>
- --------
* Less than 1%.
(1) Includes shares issuable pursuant to options exercisable currently or
within 60 days of the date of this Prospectus.
(2) Applicable percentage is based on 25,316,468 shares of common stock
outstanding on December 31, 1997 and 25,336,468 shares of common stock
outstanding after the Offering.
(3) Assumes the sale of all shares being offered hereby by each Selling
Stockholder. There can be no assurances that such sales will be made.
(4) Includes 798,400 shares subject to an option held by Mr. Brody to purchase
798,400 shares of common stock from Dr. Kim. The option originally covered
1,000,000 shares of common stock; however, as of December 31, 1997, Mr.
Brody had exercised the option as to 201,600 shares of common stock. See
"Certain Transactions." For purposes of this table, and until Mr. Brody
exercises his option to purchase the remaining 798,400 shares, Dr. Kim and
Mr. Brody share beneficial ownership of these shares of common stock.
(5) Includes 2,500,000 shares held by Linsang Partners, LLC, of which Mr. Li
holds a controlling interest. Also includes 950,000 shares owned by Mr.
Li's spouse, as to which he disclaims beneficial ownership.
(6)Mr. Woolsey holds 75,000 shares jointly with his spouse.
(7) On November 7, 1997, Amerindo Technology Growth Fund ("Amerindo"), Inc.
purchased an aggregate of 1,000,000 shares of common stock of the Company
from the Company (400,000 shares), Dr. Kim (500,000 shares) and Mr. Li
(100,000 shares). Amerindo received registration rights in connection with
the stock it purchased in these transactions.
(8) Represents shares to be issued upon the exercise of the Oneline Option.
The Oneline Option was granted by the Company to Oneline in April 1997 and
expires in April 1998. In January 1996, Oneline and the Company entered
into a Distributorship and Marketing Agreement with respect to the
Company's products pursuant to which Oneline has exclusive marketing
rights with respect to certain Latin American countries and Spain. The
agreement has a one-year term that renews annually unless terminated by
either party.
51
<PAGE>
PLAN OF DISTRIBUTION
The purpose of this Prospectus is to permit the Selling Stockholders, if
they desire, to dispose of some or all of their shares of common stock, on a
delayed or continuous basis. Whether offers and sales will be made pursuant to
this Prospectus, and the timing and amount of any offers or sales that are
made, is and will be within the sole discretion of the Selling Stockholders.
Most of the Selling Stockholders are currently not eligible to dispose of
their shares pursuant to Rule 144 under the Securities Act and will not be
eligible to make such sales until they have satisfied the one-year holding
period under Rule 144. Amerindo's one-year holding period expired on November
6, 1997. Each of Mr. Brody's and Oneline's holding periods will expire one
year after they exercise their options. The one-year holding period for each
of the Data Labs Holders (defined herein below) will expire on December 1,
1998.
If the Selling Stockholders determine, in their discretion, to make sales
pursuant to this Prospectus, they may sell the shares being offered hereby
from time to time (i) through dealers or in ordinary broker transactions, in
the over-the-counter market or otherwise, (ii) "at the market" to or through
marketmakers or into an existing market for the shares, (iii) in other ways
not involving marketmakers or established trading markets, including direct
sales to purchasers or effected through agents, or (iv) in combinations of any
such methods of sale, subject to applicable state and federal securities laws.
One or more of the Selling Stockholders may coordinate sales of stock pursuant
to this registration statement with sales pursuant to Rule 144 by other
stockholders of the Company. The shares will be sold at market prices
prevailing at the time of sale or negotiated prices. In connection with the
distributions of the common stock or otherwise, the Selling Stockholders may
enter into hedging transactions with broker-dealers or other financial
institutions. In connection with such transactions, broker-dealers or other
financial institutions may engage in short sales of common stock in the course
of hedging the positions they assume with the Selling Stockholders. The
Selling Stockholders may also sell common stock short and redeliver the shares
to close out such short positions. The Selling Stockholders may also enter
into options or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealers or financial
institutions of the common stock offered hereby, which common stock such
broker-dealer or other financial institutions may resell pursuant to this
Prospectus (as supplemented or amended to reflect this transaction). The
Selling Stockholders may also pledge the shares registered hereunder to a
broker-dealer or other financial institution may effect sales of the pledged
common stock pursuant to this Prospectus (as supplemented or amended to
reflect such transaction). In addition, any shares covered by this Prospectus
which qualify for sale pursuant to Section 4(1) of the Securities Act or Rule
144 thereunder may be sold under such provisions rather than pursuant to this
Prospectus.
If a dealer is utilized in the sale of the shares in respect of which the
Prospectus is delivered, sales will be made by the Selling Stockholders to or
through a marketmaker, acting as principal or as agent. Other sales may be
made, directly or through an agent, to purchasers outside existing trading
markets. A selling broker may act as agent or may acquire the shares, warrants
or interests therein, as principal or pledgee and may, from time to time,
effect distributions of such sales.
In connection with this offering, the Company will pay all expenses of
preparing and filing the registration statement, including, without
limitation, registration and filing fees, printing expenses, fees and
disbursements of legal counsel and accountants for the Company, transfer
agents' and registrars' fees, fees and disbursements of experts used by the
Company in connection with such registration, expenses of any special audits
of the Company incidental to or required by such registration, and expenses
incidental to any post-effective amendment to any such registration statement.
The Company is also required to pay legal expenses, if any, of one of the
Selling Stockholders not to exceed $10,000.
All dealers', brokers', or agents' commissions, concessions, discounts, fees
or other compensation will be paid by the Selling Stockholders.
52
<PAGE>
The Company has advised the Selling Stockholders that during such time as
they may be engaged in a distribution of the Shares included herein they are
required to comply with Regulation M promulgated under the Exchange Act. With
certain exceptions, Regulation M precludes any Selling Stockholder, any
affiliated purchasers and any broker-dealer or other person who participates
is such distribution from bidding for or purchasing, or attempting to induce
any person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the common stock.
No sales or distributions other than as described herein may be effected
until after this Prospectus shall have been appropriately amended or
supplemented.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Certificate provides that the authorized capital of the Company consists
of 50,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of undesignated preferred stock, par value $.01 per share. As of
December 31, 1997, there were 25,316,468 shares of common stock outstanding
and no shares of preferred stock outstanding. In addition, there were
outstanding options to acquire 5,622,229 shares of common stock.
COMMON STOCK
The holders of common stock of the Company 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.
REGISTRATION RIGHTS
The holders of approximately 18,385,366 shares of common stock held by or
issuable to certain holders of options, and certain of their transferees, have
rights to have those shares of common stock registered by the Company under
the Securities Act. The 2,155,366 shares of Common Stock being sold by the
Selling Stockholders in this offering are being sold pursuant to the exercise
of these registration rights.
The Company and Mr. Brody are parties to 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 August 4, 1997 (April 4, 1998 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. The
shares offered by Mr. Brody as a Selling Stockholder in this offering are
being sold pursuant to the exercise of these registration rights. In any
registration, the Company must pay the registration expenses of the Holders,
including the legal fees of the Holders 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. Mr.
Brody has exercised his demand registration rights with respect to this
offering.
54
<PAGE>
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 each
of Dr. Kim and his assignees and Mr. Li and his assignees, as the case may be,
may, beginning August 4, 1997 (April 4, 1998 with respect to assignees) and
subject to certain limitations, make up to five registration demands with
respect to the sale of all or any portion of the Kim Shares or the Li Shares,
respectively, three of which may be shelf registration statements. Dr. Kim and
Mr. Li and their assignees have also been granted "piggyback" registration
rights with respect to certain registration statements filed by the Company or
other selling stockholders. 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. Dr. Kim and Mr. Li
have waived their "piggyback" registration rights in connection with this
offering.
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
in a private placement 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 February 4,
1997 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 also has "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. Amerindo has exercised its "piggyback" registration rights with
respect to this offering.
In April 1997, the Company granted "piggyback" registration rights to
Oneline with respect to 20,000 shares of common stock subject to the Oneline
Option. Oneline has exercised its "piggyback" registration rights with respect
to this offering.
Pursuant to a registration rights agreement between the Company and the
remaining Selling Stockholders (the "Data Labs Holders"), all of whom were
former shareholders of Data Labs (the "Data Labs Registration Rights
Agreement"), the Company granted registration rights to the Data Labs Holders
with respect to a total of 336,966 shares of common stock (the "Data Labs
Shares"). The Data Labs Holders acquired the Data Labs Shares in the Data Labs
Merger on December 1, 1997. This Registration Statement, and the Prospectus
thereof a part, are being filed pursuant to the Company's obligations under
the Data Labs Merger Agreement. In addition, the Data Labs 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 Data Labs Holders other than underwriting
commissions or discounts. The Company has agreed to indemnify the Data Labs
Holders against certain liabilities, including liabilities under the
Securities Act, in connection with the registration of the Data Labs Shares.
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
55
<PAGE>
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 2000. 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 Company's common stock is American
Stock Transfer & Trust Company.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1997, there were 25,316,468 shares of common stock
outstanding, and upon the exercise of the Oneline Option, there will be
25,336,468 shares of common stock outstanding. Of these shares, approximately
17,471,382 shares are held by "affiliates" of the Company (as that term is
defined in Rule 144 under the Securities Act) and are eligible for sale in
accordance with the volume and manner of sale restrictions under Rule 144.
In general, under Rule 144 as presently in effect, if a period of at least
one year 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 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 one-year holding
period requirement.
Assuming the sale by the Selling Stockholders of all the shares offered
hereby, the Company and its executive officers, directors and certain
stockholders will beneficially own an aggregate of 17,471,382 outstanding
shares immediately following this offering.
The 2,155,366 shares of Common Stock being sold by the Selling Stockholders
in this offering are being sold pursuant to the exercise of certain
registration rights to have those shares of common stock registered by the
Company under the Securities Act.
The Company has registered on Form S-8 under the Securities Act 7,000,000
shares of common stock issued or reserved for issuance under the Stock Option
Plan and the Data Labs Plan, 200,000 shares of common stock issued or reserved
for issuance under the Stock Purchase Plan and 200,000 shares of common stock
issued or reserved for issuance under the 401(k) Plan. See "Management--Stock
Option Plan," "--Data Labs Plan," "--Stock Purchase Plan" and "--401(k) Plan."
Shares registered and issued pursuant to such registration statements 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.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Selling Stockholders by Fried, Frank, Harris, Shriver & Jacobson,
Washington, DC.
EXPERTS
The financial statements of the Company as of December 31, 1995, 1996 and
for each of the three years ended December 31, 1994, 1995 and 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. The financial statements and schedules
of Data Labs as of December 31, 1995 and 1996 and for each of the years ended
1995 and 1996 included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
57
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 7th Floor, New York, New
York 10048. Copies of such materials may be obtained from the Web site that
the Commission maintains at http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Any
person to whom this Prospectus is delivered may obtain a copy of the
Registration Statement, including the exhibits thereto, without charge upon
written or oral request to the Secretary of the Company at 8301 Professional
Place, Landover, MD 20785-2237, Telephone: (301) 352-4600.
The common stock of the Company is listed on the Nasdaq National Market.
Reports, proxy statements and other information concerning the Company can be
inspected at the offices of the Nasdaq National Market, 1735 K Street, N.W.,
Washington, D.C. 20006-1506.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS FOR YURIE SYSTEMS, INC. AS OF DECEMBER 31, 1995 AND1996
AND FOR THE THREE YEARS ENDED DECEMBER 31, 1996:
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996........................... F-3
Statements of Operations for the Three Years Ended December 31, 1994, 1995
and 1996................................................................. F-4
Statements of Stockholders' Equity (Deficit) for the Three Years Ended De-
cember 31, 1994, 1995 and 1996........................................... F-5
Statements of Cash Flows for the Three Years Ended December 31, 1994, 1995
and 1996................................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
FINANCIAL STATEMENTS FOR YURIE SYSTEMS, INC. AS OF SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996 (UNAUDITED) AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 (UNAUDITED):
<TABLE>
<S> <C>
Balance Sheets as of September 30, 1997 and December 31, 1996 (Unau-
dited).................................................................. F-14
Statements of Operations for the Three and Nine Months Ended September
30, 1997 and 1996 (Unaudited)........................................... F-15
Statements of Cash Flows for the Three and Nine Months Ended September
30, 1997 and 1996 (Unaudited)........................................... F-16
Notes to Financial Statements (Unaudited)................................ F-17
</TABLE>
FINANCIAL STATEMENTS FOR DATA LABS, INC. AS OF DECEMBER 31, 1995 AND
1996 AND FOR THE TWO YEARS ENDED DECEMBER 31, 1996:
<TABLE>
<S> <C>
Report of Independent Public Accounts.................................... F-20
Balance Sheets as of December 31, 1995 and 1996.......................... F-21
Statements of Operations for the Two Years Ended December 31, 1995 and
1996 ................................................................... F-22
Statements of Stockholder's Equity for the Two Years Ended December 31,
1995 and 1996 .......................................................... F-23
Statements of Cash Flows for the Two Years Ended December 31, 1995 and
1996 ................................................................... F-24
Notes to Financial Statements............................................ F-25
</TABLE>
FINANCIAL STATEMENTS FOR DATA LABS, INC. AS OF SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996 (UNAUDITED) AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1997 (UNAUDITED):
<TABLE>
<S> <C>
Balance Sheets as of September 30, 1997 and December 31, 1996 (unau-
dited).................................................................. F-30
Statements of Operations for the Nine Months Ended September 30, 1997 and
1996 (unaudited) ....................................................... F-31
Statements of Cash Flows for the Nine Months Ended September 30, 1997 and
1996 (unaudited)........................................................ F-32
</TABLE>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR YURIE SYSTEMS, INC. AND
SUBSIDIARIES AS OF DECEMBER 31, 1995 AND 1996 AND FOR THE THREE YEARS ENDED
DECEMBER 31, 1996:
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-33
Supplemental Consolidated Balance Sheets as of December 31, 1995 and
1996..................................................................... F-34
Supplemental Consolidated Statements of Operations for the Two Years Ended
December 31, 1994, 1995 and 1996......................................... F-35
Supplemental Consolidated Statements of Stockholders' Equity (Deficit) for
the Two Years Ended December 31, 1994, 1995 and 1996..................... F-36
Supplemental Consolidated Statements of Cash Flows for the Two Years Ended
December 31, 1994, 1995 and 1996......................................... F-37
Notes to Supplemental Consolidated Financial Statements................... F-38
</TABLE>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR YURIE SYSTEMS, INC. AND
SUBSIDIARIES AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
(UNAUDITED) AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED):
<TABLE>
<S> <C>
Supplemental Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 (Unaudited) ........................................... F-45
Supplemental Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1996 (Unaudited)..................... F-46
Supplemental Consolidated Statements of Cash Flows for the Three and Nine
Months Ended September 30, 1997 and 1996 (Unaudited)..................... F-47
Notes to Supplemental Consolidated Financial Statements................... F-48
</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, 1995 and 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, 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, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation."
/s/ Deloitte & Touche LLP
Washington, DC
March 7, 1997
F-2
<PAGE>
YURIE SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $3,779,800 $ 3,229,069
Accounts receivable--trade.......................... 1,172,394 4,931,012
Accounts receivable--other.......................... 2,828 54,154
Inventory........................................... 654,447 2,599,915
Deferred offering costs............................. -- 910,442
Deferred income taxes............................... -- 9,301
Prepaid expenses.................................... 5,164 392,881
---------- -----------
Total current assets.............................. 5,614,633 12,126,774
---------- -----------
PROPERTY AND EQUIPMENT:
Furniture and equipment............................. 90,250 206,522
Software............................................ 50,622 355,168
Computer and office equipment....................... 504,481 1,803,362
---------- -----------
Total property and equipment...................... 645,353 2,365,052
Less accumulated depreciation and amortization...... (89,257) (333,751)
---------- -----------
Net property and equipment........................ 556,096 2,031,301
---------- -----------
OTHER ASSETS.......................................... 20,938 57,756
---------- -----------
TOTAL ASSETS...................................... $6,191,667 $14,215,831
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 295,591 $ 1,969,714
Accrued liabilities................................. 270,279 3,156,385
Unearned revenue.................................... 4,000,000 --
Deferred income taxes............................... 64,995 --
Income taxes payable................................ 432,059 --
---------- -----------
Total current liabilities......................... 5,062,924 5,126,099
ACCRUED RENT.......................................... 25,661 14,932
DEFERRED INCOME TAXES................................. -- 19,310
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, authorized
10,000,000 shares, none issued..................... -- --
Common Stock, par value $.01 per share; authorized
30,000,000 shares in 1995 and 50,000,000 in 1996;
issued and outstanding, 20,208,400 shares at
December 31, 1995 and 20,608,400 shares at December
31, 1996........................................... 202,084 206,084
Additional paid-in capital........................... 119,939 4,915,939
Retained earnings.................................... 781,059 3,933,467
---------- -----------
Total stockholder's equity........................ 1,103,082 9,055,490
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $6,191,667 $14,215,831
========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
REVENUE:
Product revenue............................ $ -- $2,869,937 $18,728,525
Service revenue............................ 1,143,520 1,992,669 2,490,563
Other revenue.............................. -- 1,108,333 391,667
---------- ---------- -----------
Total revenue............................ 1,143,520 5,970,939 21,610,755
COSTS OF REVENUE:
Cost of product revenue.................... -- 1,326,702 6,783,520
Cost of service revenue.................... 723,481 1,184,093 1,635,427
---------- ---------- -----------
Total cost of revenue.................... 723,481 2,510,795 8,418,947
---------- ---------- -----------
GROSS PROFIT................................. 420,039 3,460,144 13,191,808
OPERATING EXPENSES:
Research and development................... 39,875 427,815 3,846,654
Sales and marketing........................ -- -- 1,547,120
General and administrative................. 219,344 1,588,154 2,699,606
---------- ---------- -----------
Total operating expenses................. 259,219 2,015,969 8,093,380
---------- ---------- -----------
INCOME FROM OPERATIONS....................... 160,820 1,444,175 5,098,428
Other income............................... 1,583 13,341 83,375
---------- ---------- -----------
INCOME BEFORE INCOME TAXES................... 162,403 1,457,516 5,181,803
Provision for income taxes................. 41,535 560,661 2,029,395
---------- ---------- -----------
NET INCOME............................... $ 120,868 $ 896,855 $ 3,152,408
========== ========== ===========
NET INCOME PER COMMON SHARE.................. $ 0.01 $ 0.04 $ 0.14
========== ========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING.......... 17,542,408 21,710,064 21,811,082
========== ========== ===========
</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,
1994................... 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
issuance............. 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
Common stock
issuance............. 400,000 4,000 4,796,000 -- 4,800,000
Net income............ -- -- -- 3,152,408 3,152,408
---------- -------- ---------- ---------- ----------
BALANCE, DECEMBER 31,
1996................... 20,608,400 $206,084 $4,915,939 $3,933,467 $9,055,490
========== ======== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 120,868 $ 896,855 $ 3,152,408
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation........................... 11,220 76,249 244,494
Compensation due to stock issuance..... -- 162,023 --
Deferred income taxes.................. 22,315 42,680 (54,986)
Changes in assets and liabilities:
Accounts receivable.................... (137,943) (1,000,316) (3,809,944)
Inventory.............................. -- (654,447) (1,945,468)
Prepaid expenses....................... (10,665) 5,851 (387,717)
Other assets........................... (15,220) (5,718) (36,818)
Accounts payable and other accrued
expenses.............................. 73,368 318,695 3,907,229
Income taxes payable................... 19,220 412,839 (432,059)
Due to/from stockholder................ 50,601 (583) --
Unearned revenue....................... 275,437 3,724,563 (4,000,000)
Accrued rent........................... 18,511 7,150 (10,729)
--------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 427,712 3,985,841 (3,373,590)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..... (202,250) (436,229) (1,719,699)
--------- ----------- -----------
Net cash used in investing activities.... (202,250) (436,229) (1,719,699)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs................ -- -- (257,442)
Proceeds from issuance of common
stock................................. -- -- 4,800,000
--------- ----------- -----------
Net cash provided by financing
activities.............................. -- -- 4,542,558
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 225,462 3,549,612 (550,731)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR..................................... 4,726 230,188 3,779,800
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.... $ 230,188 $ 3,779,800 $ 3,229,069
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes............. $ -- $ 105,142 $ 2,699,000
========= =========== ===========
</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.
The Company has accrued deferred offering costs of $653,000.
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.
Warranty Reserve--Estimated warranty costs are accrued at the time revenue
is recognized and are charged to cost of revenues.
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 December 31, 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. 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. Deferred offering cost at December 31, 1996 was $910,442.
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.
F-7
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the financial statements and in the disclosures of
contingent assets and liabilities. Actual results could differ from those
estimates.
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 66% and 63% of gross accounts receivable at December 31, 1995
and 1996, respectively. In addition, other customers with balances in excess
of 10% accounted for approximately 23% of gross accounts receivable as of
December 31, 1995. There were no other customers with a balance in excess of
10% as of December 31, 1996. 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 December 31, 1994, 1995 and 1996 were 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 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.
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 December 31, 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).
Reclasssifications--Certain prior year amounts have been reclassified to
conform to the current year financial statement presentation.
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 December 31, 1996, the prime rate was 8.25%. The agreement
expires on May 31, 1997. At December 31, 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,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Billed.............................................. $ 748,372 $4,166,149
Unbilled............................................ 424,022 764,863
---------- ----------
Total accounts receivable--trade.................. $1,172,394 $4,931,012
========== ==========
4. INVENTORY
Inventory consisted of the following:
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Raw materials....................................... $ 246,291 $1,836,581
Work-in-process..................................... 325,101 688,686
Finished goods...................................... 83,055 74,648
---------- ----------
Total inventory................................... $ 654,447 $2,599,915
========== ==========
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Accrued salaries and employee benefits.............. $ 269,386 $1,563,704
Accrued sales and use tax........................... -- 272,784
Warranty accrued.................................... -- 544,306
Deferred offering costs............................. -- 653,000
Other accrued liabilities........................... 893 122,591
---------- ----------
Total accrued liabilities......................... $ 270,279 $3,156,385
========== ==========
</TABLE>
6. UNEARNED REVENUE
Unearned revenue at December 31, 1995 represents prepayment from AT&T for
purchases of products which had not been delivered as of the end of the
reporting period. All products had been delivered as of December 31, 1996.
7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Current....................................... $19,220 $519,700 $2,084,381
Deferred...................................... 22,315 40,961 (54,986)
------- -------- ----------
Total...................................... $41,535 $560,661 $2,029,395
======= ======== ==========
</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>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Expected statutory amount......................... 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 tax............ 4.6 4.6 4.6
Other............................................. -- (0.1) 0.6
------- ------- -------
Effective tax rate.............................. 26.0% 38.5% 39.2%
======= ======= =======
</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,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accrued salaries and employee benefits...... $ 28,621 $ -- $ --
Warranty reserve............................ -- -- 210,210
Uniform capitalization...................... -- -- 19,310
Deferred rent............................... 7,149 9,987 5,767
-------- -------- --------
Total deferred tax assets................. 35,770 9,987 235,287
Deferred tax liabilities:
Depreciation................................ 18,768 25,685 19,310
Unbilled receivables........................ 39,317 49,297 225,986
-------- -------- --------
Total gross deferred tax liabilities...... 58,085 74,982 245,296
-------- -------- --------
Net deferred tax liabilities.............. $(22,315) $(64,995) $(10,009)
======== ======== ========
</TABLE>
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.
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
F-10
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1997............................................................ $398,941
1998............................................................ 271,212
1999............................................................ 167,463
--------
Total minimum lease payments.................................. $837,616
========
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996, was
$38,500, $112,615, and $265,285, 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, 1994, and 1995 was $38,119 and $93,557, respectively. 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 year ended December 31, 1996 totaled $37,661.
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.
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, and June 14, 1995 the Company issued 202,400 and
6,000 shares of Common Stock, respectively, to several employees 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.
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%.
F-11
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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............................ 2,103,442
At exercise price of $2.70 per share........................... 841,100
At exercise price of $9.00 per share........................... 251,380
At exercise price of $12.00 per share.......................... 17,000
---------
Total Granted.................................................... 3,212,922
Exercised........................................................ --
---------
Outstanding, December 31, 1996................................... 3,212,922
=========
Exercisable options at December 31, 1996......................... 271,500
=========
</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 5.96%, expected life
of three years, dividend rate of zero percent, and expected volatility of
68.30%. Using these assumptions, the fair value of the stock options granted
in 1996 is $2,919,254, which would be amortized as compensation expense over
the vesting period of the options. The options generally vest equally over
four years. Had 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 year ended December 31, 1996 would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Net Income:
As Reported.................................................. $3,152,408
Pro forma.................................................... $2,993,026
Net income per common share:
As Reported.................................................. $0.14
Pro forma.................................................... $0.14
</TABLE>
The resulting pro forma compensation cost may not be representative of that
expected in future years.
F-12
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 (or February 5, 1998).
12. SIGNIFICANT CUSTOMER
For the years ended December 31, 1994, 1995 and 1996, approximately 53%, 72%
and 87%, 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 years ended December 31, 1995 and 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.
13. SUBSEQUENT EVENT
On February 5, 1997, the Company completed its initial public offering and
sold an aggregate of 4,000,000 shares of Common Stock at $12.00 per share,
resulting in net proceeds of $44,640,000, after deducting underwriting
discounts.
F-13
<PAGE>
YURIE SYSTEMS, INC.
BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
The following pages F-14 through F-19 set forth the information contained in
the Quarterly Report on Form 10-Q of Yurie Systems, Inc. for the quarter ended
September 30, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $22,766,548 $ 3,229,069
Restricted cash................................... 1,000,000 --
Short term investments............................ 21,833,297 --
Accounts receivable(1)............................ 10,071,495 4,985,166
Interest receivable............................... 302,483 --
Inventory......................................... 4,687,665 2,599,915
Deferred offering costs........................... -- 910,442
Deferred income taxes............................. 950,988 9,301
Prepaid expenses.................................. 414,407 392,881
----------- -----------
Total current assets............................ 62,076,883 12,126,774
PROPERTY AND EQUIPMENT, net......................... 6,075,448 2,031,301
OTHER ASSETS........................................ 141,372 57,756
----------- -----------
TOTAL ASSETS.................................... $68,293,703 $14,215,831
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 2,511,666 $ 1,969,714
Accrued liabilities............................... 5,225,022 3,156,385
Unearned revenue.................................. 41,250 --
----------- -----------
Total current liabilities....................... 7,777,438 5,126,099
ACCRUED RENT........................................ 390,621 14,932
DEFERRED INCOME TAXES............................... 326,463 19,310
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, authorized
10,000,000 shares, none issued................... -- --
Common Stock, par value $.01; 50,000,000 shares
authorized; issued and outstanding, 24,909,976
shares at September 30, 1997 and 20,608,400
shares at December 31, 1996...................... 249,100 206,084
Treasury Stock, 15,950 shares outstanding at
September 30, 1997............................... (461,166) --
Additional paid-in capital........................ 51,097,181 4,915,939
Retained earnings................................. 8,914,066 3,933,467
----------- -----------
Total stockholders' equity...................... 59,799,181 9,055,490
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $68,293,703 $14,215,831
=========== ===========
</TABLE>
- --------
(1) Accounts receivable includes amounts from related parties of $1,051,460
at September 30, 1997 (unaudited).
See notes to financial statements.
F-14
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue............. $13,037,809 $ 5,631,692 $30,436,798 $13,023,251
Service revenue............. 1,034,844 601,093 2,913,927 1,622,614
Other revenue............... -- -- -- 391,667
----------- ----------- ----------- -----------
Total revenue(1).......... 14,072,653 6,232,785 33,350,725 15,037,532
COSTS OF REVENUE:
Cost of product revenue..... 4,626,156 2,178,989 11,023,160 4,536,284
Cost of service revenue..... 783,547 365,628 2,152,620 1,094,741
----------- ----------- ----------- -----------
Total costs of revenue.... 5,409,703 2,544,617 13,175,780 5,631,025
----------- ----------- ----------- -----------
GROSS PROFIT.................. 8,662,950 3,688,168 20,174,945 9,406,507
OPERATING EXPENSES:
Research and development.... 2,010,304 1,033,865 5,339,509 2,379,923
Sales and marketing......... 1,389,582 504,238 3,686,102 790,256
General and administrative.. 1,793,229 896,798 4,121,988 1,733,013
----------- ----------- ----------- -----------
Total operating expenses.. 5,193,115 2,434,901 13,147,599 4,903,192
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS........ 3,469,835 1,253,267 7,027,346 4,503,315
Other income................ 401,354 7,540 1,130,253 62,064
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX
PROVISION.................... 3,871,189 1,260,807 8,157,599 4,565,379
Provision for income taxes.. 1,504,705 504,323 3,177,000 1,826,152
----------- ----------- ----------- -----------
NET INCOME................ $ 2,366,484 $ 756,484 $ 4,980,599 $ 2,739,227
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE... $ 0.09 $ 0.03 $ 0.19 $ 0.13
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING.................. 27,294,972 21,750,808 26,346,737 21,750,808
=========== =========== =========== ===========
</TABLE>
- --------
(1) Revenue includes amounts from related parties of $7,172,832 and $11,991,002
for the three and nine months ended September 30, 1997, respectively
(unaudited).
See notes to financial statements.
F-15
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1997 1996 1997 1996
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............... $ 2,366,482 $ 756,484 $ 4,980,599 $ 2,739,227
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 349,110 67,051 745,694 148,422
Compensation due to
stock issuance........ -- -- 120,500 --
Deferred income taxes.. 93,939 (232,646) (634,534) (232,646)
Changes in assets and
liabilities:
Accounts receivable.... (1,160,987) 1,902,248 (5,086,329) (486,666)
Restricted cash........ (1,000,000) -- (1,000,000) --
Interest receivable.... 103,132 -- (302,483) --
Advances............... 740,477 -- -- --
Inventory.............. (689,115) (657,861) (2,087,750) (621,890)
Prepaid expenses....... (12,262) (132,931) (21,526) (193,683)
Other assets........... (4,910) (5,644) (83,616) (31,784)
Accounts payable....... 844,003 1,094,010 541,452 1,939,606
Accrued expenses....... 1,931,202 969,968 2,068,637 1,568,640
Income taxes payable... 1,116,256 (118,031) 1,857,783 (238,920)
Unearned revenue....... 41,250 2,004,235 41,250 (1,153,765)
Accrued rent........... 291,868 (3,576) 375,689 (8,047)
------------ ---------- ------------ -----------
Net cash provided by
operating activities.... 5,010,445 5,643,307 1,515,366 3,428,494
------------ ---------- ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Short term
investments........... (9,002,185) -- (21,883,297) --
Purchase of property
and equipment......... (1,855,764) (280,632) (4,789,841) (859,940)
------------ ---------- ------------ -----------
Net cash used in
investing activities.... (10,857,949) (280,632) (26,673,138) (859,940)
------------ ---------- ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from
issuance of common
stock................. (127,625) (146,815) 44,695,251 (146,815)
------------ ---------- ------------ -----------
Net cash provided by
(used in) financing
activities.............. (127,625) (146,815) 44,695,251 (146,815)
------------ ---------- ------------ -----------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS.............. (5,975,129) 5,215,860 19,537,479 2,421,739
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD...... 28,741,677 985,679 3,229,069 3,779,800
------------ ---------- ------------ -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............ $ 22,766,548 $6,201,539 $ 22,766,548 $ 6,201,539
============ ========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for income
taxes................. $ 600,000 $ 855,000 $ 2,075,450 $ 2,296,000
============ ========== ============ ===========
</TABLE>
See notes to financial statements.
F-16
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--DESCRIPTION OF BUSINESS
Yurie Systems, Inc. (the "Company") 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, Internet 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.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with Regulation S-X pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information not misleading.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial position as of September 30, 1997,
the results of operations for the three and nine month periods ended September
30, 1997 and 1996, and the cash flows for the three and nine month periods
ended September 30, 1997 and 1996. These financial statements should be read
in conjunction with the financial statements and the notes thereto included
herein for the year ended December 31, 1996.
NOTE 3--SHORT TERM INVESTMENTS
The Company's short term investments at September 30, 1997 are classified as
held-to-maturity because the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity.
NOTE 4--ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Billed.......................................... $ 9,907,825 $4,166,149
Unbilled........................................ 407,331 764,863
Other........................................... 13,239 54,154
Allowance for doubtful accounts................. (256,900) --
----------- ----------
Total accounts receivable..................... $10,071,495 $4,985,166
=========== ==========
NOTE 5--INVENTORY
Inventory consisted of the following:
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials................................... $1,935,899 $1,836,581
Work-in-process................................. 1,324,768 688,686
Finished goods.................................. 1,426,998 74,648
----------- ----------
Total inventory............................... $4,687,665 $2,599,915
=========== ==========
</TABLE>
F-17
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 6--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Accrued salaries and employee benefits.......... $2,481,178 $1,563,704
Accrued sales and use tax....................... 418,747 272,784
Warranty accrual................................ 1,819,620 544,306
Deferred offering costs......................... -- 653,000
Other accrued liabilities....................... 505,477 122,591
---------- ----------
Total accrued liabilities..................... $5,225,022 $3,156,385
========== ==========
</TABLE>
NOTE 7--COMMITMENTS
On May 1, 1997, the Company entered into a lease for approximately 137,000
rentable square feet. This facility is being used as the Company's principal
offices. The lease commenced on June 1, 1997 and expires on November 30, 2004.
Rental payments begin on December 1, 1997, with the monthly rent being
recorded on a straight line basis over the life of the lease.
NOTE 8--RELATED PARTY TRANSACTIONS
In March 1997, one of the Company's officers became a majority shareholder
in and the acting Chairman of the Board of Splitrock Services, Inc.
("Splitrock") a corporation that provides communications services specifically
configured to meet the needs of large network users. Yurie had product sales
to this company totaling $6,645,840 and $11,464,010 during the three and nine
months ended September 30, 1997, respectively. In addition, during the third
quarter of this year, Yurie generated service revenue totaling $526,992 from
this company. At September 30, 1997, accounts receivable from Splitrock
totaled $1,051,460.
NOTE 9--EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (EPS) which
simplifies the standards for computing EPS previously found in APB Opinion No.
15 and makes them comparable to international EPS standards. The Statement is
effective for financial statements issued for periods ending after December
15, 1997. Had the following statement been effective for the three and nine
months ended September 30, 1997 and 1996, earnings per share would have been
presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings per common
share.................. $ .10 $ .04 $ .21 $ .14
====== ====== ====== ======
Earnings per common
share--assuming dilu-
tion................... $ .09 $ .03 $ .19 $ .13
====== ====== ====== ======
</TABLE>
NOTE 10--INITIAL PUBLIC OFFERING
On February 5, 1997, the Company completed its initial public offering and
sold an aggregate of 4,000,000 shares of Common Stock at $12.00 per share,
resulting in net proceeds of $44,640,000 after
F-18
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
deducting underwriting discounts. Other deferred offering costs related to the
initial public offering totaling $1,403,863 as of September 30, 1997 have been
netted against paid-in capital.
NOTE 11--SUBSEQUENT EVENT
On December 1, 1997, the Company issued 358,414 shares of its common stock
for all of the outstanding common stock of Data Labs, Inc. The merger has been
accounted for as a pooling of interests, and accordingly, the Company's
financial statements have been restated to include the accounts and operations
of Data Labs, Inc.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
To Data Labs, Inc.:
We have audited the accompanying balance sheets of Data Labs, Inc., a
Delaware Corporation, as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. 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 an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Data Labs, Inc., as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
_____________________________________
Arthur Andersen LLP
Washington, D.C. March 10, 1997
F-20
<PAGE>
DATA LABS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 2,016,252 $ 22,756
Accounts receivable.................................... 74,084 62,898
Prepaid expenses and other assets...................... 17,319 3,672
----------- --------
Total current assets................................. 2,107,655 89,326
FURNITURE AND EQUIPMENT.................................. 209,970 47,372
----------- --------
Total assets......................................... $ 2,317,625 $136,698
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 110,015 $ --
Accrued expenses and other current liabilities......... 93,587 23,425
----------- --------
Total current liabilities............................ 203,602 23,425
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION........ 38,210 --
----------- --------
Total liabilities.................................... 241,812 23,425
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Series A--Preferred stock, $.001 par value, 3,200,000
shares authorized, 3,130,000 and none issued or
outstanding in 1996 and 1995, respectively, entitled
to $1 per share liquidation preference ($3,130,000 in
the aggregate)........................................ 3,130,000 --
Series A1--Preferred stock, $.001 par value, 3,200,000
authorized, none issued or outstanding................ -- --
Common stock, $.001 par value, 10,000,000 shares
authorized, 3,257,534 and 3,249,200 issued and
outstanding in 1996 and 1995, respectively............ 3,258 3,249
Additional paid-in capital............................. 824 --
Accumulated deficit.................................... (1,058,269) 110,024
----------- --------
2,075,813 113,273
----------- --------
Total liabilities and stockholders' equity........... $ 2,317,625 $136,698
=========== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-21
<PAGE>
DATA LABS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- --------
<S> <C> <C>
REVENUES:
Product sales.......................................... $ 75,058 $ 9,945
Contract............................................... 37,260 641,247
----------- --------
Total revenues....................................... 112,318 651,192
OPERATING EXPENSES:
Costs of revenues...................................... 93,101 148,273
Sales and marketing.................................... 332,899 4,701
General and administrative............................. 280,714 282,485
Research and development............................... 581,156 134,782
----------- --------
Total operating expenses............................. 1,287,870 570,241
OTHER (INCOME) EXPENSE................................... (7,259) 15,117
----------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES.......... (1,168,293) 65,834
PROVISION FOR INCOME TAXES............................... -- 14,024
----------- --------
NET INCOME (LOSS)........................................ $(1,168,293) $ 51,810
=========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
DATA LABS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED ---------------- PAID-IN ACCUMULATED
STOCK SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... $ -- 3,249,200 $3,249 $-- $ 58,214 $ 61,463
Net income............ -- -- -- -- 51,810 51,810
---------- --------- ------ ---- ----------- -----------
BALANCE, DECEMBER 31,
1995................... -- 3,249,200 3,249 -- 110,024 113,273
Exercise of stock
options.............. -- 8,334 9 824 -- 833
Preferred stock
issuance............. 3,130,000 -- -- -- -- 3,130,000
Net loss.............. -- -- -- -- (1,168,293) (1,168,293)
---------- --------- ------ ---- ----------- -----------
BALANCE, DECEMBER 31,
1996................... $3,130,000 3,257,534 $3,258 $824 $(1,058,269) $ 2,075,813
========== ========= ====== ==== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
DATA LABS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................... $(1,168,293) $51,810
Adjustments to reconcile net (loss) income to net cash
flows provided by operating activities--
Depreciation.......................................... 37,015 15,833
Changes in assets and liabilities:
Accounts receivable................................. (11,186) (62,898)
Prepaid expenses and other assets................... (13,647) 29,803
Accounts payable.................................... 110,015 --
Accrued expenses and other current liabilities...... 53,542 23,425
----------- -------
(992,554) 57,973
----------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of furniture and equipment................... (144,783) (36,886)
----------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock issuance.............................. 3,130,000 --
Common stock issuance................................. 833 --
----------- -------
3,130,833 --
----------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 1,993,496 21,087
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............. 22,756 1,669
----------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR................... $ 2,016,252 $22,756
=========== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for income taxes............. -- $14,024
----------- =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1996, the Company entered into capital leases totaling $55,000 for
equipment
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
DATA LABS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
1. THE COMPANY:
Business
Data Labs, Inc. (the "Company") designs, manufactures and markets
telecommunications and data communications networking products. These products
enable network administrators to preserve existing network infrastructures and
meet current technology needs while still allowing for future expansion. The
Company currently markets and sells their products to network service
providers, equipment vendors and end users.
The Company is in the early stages of developing the market for its
products. Certain products proposed to be offered by the Company have not been
fully developed and will require additional research and development. There
can be no assurance that the Company's research and development activities
will result in the development of additional products that can be marketed in
a commercially successful manner, or that any such products will be able to
compete with other products that may be marketed at the time the Company's
products become available. The Company is dependent on the principal members
of its technical and management staff, and the loss of any of their services
may impede the achievement of certain of the Company's product development
activities.
The continued development of the Company's products and markets will require
substantial additional capital. There can be no assurance that the Company
will be able to obtain additional financing when needed, if at all, or on
terms acceptable to the Company.
Recapitalization of Common Stock
The Company, a Maryland corporation, elected to change its capital structure
in June 1996 and reincorporate into Data Labs, Inc., a Delaware corporation
(the "Recapitalization"). Pursuant to the Recapitalization and amended
certificate of incorporation, the Company exchanged existing outstanding
common stock for 3,249,200 shares of $.001 par value common stock completing a
50 to 1 stock split. All amounts have been restated to reflect the 50 to 1
stock split and change in par value.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Revenue relating to product sales is generally recognized upon shipment.
Revenue under product development contracts is recognized on a percentage-of-
completion basis.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of 90 days or less as cash equivalents. Cash equivalents at December 31, 1996,
consist primarily of U.S. Treasury bills and certificates of deposit. All
investments are classified as held-to-maturity securities and, accordingly,
are carried at cost.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company had concentrations of cash in a single bank in the form of demand
deposits and certificates of deposit totaling approximately $980,000 at
December 31, 1996.
F-25
<PAGE>
DATA LABS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Furniture and Equipment
Furniture and fixtures, computers, and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets, generally three to five years.
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures................................ $ 13,838 $ 9,494
Computers and equipment............................... 261,109 65,840
--------- --------
274,947 75,334
Less--Accumulated depreciation........................ (64,977) (27,962)
--------- --------
Total............................................... $ 209,970 $ 47,372
========= ========
</TABLE>
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," was adopted by the Company for fiscal
year ending December 31, 1996. The adoption did not have a material effect on
the Company's financial position.
3. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1996 1995
--------- ---------
<S> <C> <C>
Salaries.............................................. $ 37,512 $ 7,317
Vacation.............................................. 38,265 16,108
Current portion of capital lease obligation........... 16,620 --
Other................................................. 1,190 --
--------- ---------
Total............................................... $ 93,587 $ 23,425
========= =========
</TABLE>
4. INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."
Under the provisions of SFAS No. 109, deferred tax assets and liabilities are
recognized for the estimated future tax consequences of temporary differences
and income tax credits. Temporary differences are primarily the result of the
differences between the tax basis of assets and liabilities and their
financial reporting amounts. Deferred tax assets and liabilities are measured
by applying enacted statutory tax rates applicable to the future years in
which deferred tax assets or liabilities are expected to be settled or
realized. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
F-26
<PAGE>
DATA LABS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $1.1 million for Federal income tax reporting purposes. The
amount of U.S. net operating loss carryforwards available to be issued in any
given year may be limited in the event of significant changes in ownership of
the Company.
SFAS No. 109 requires that the tax benefit of financial reporting net
operating losses and tax credits be recorded as an asset to the extent that
management assesses the utilization of such net operating losses and tax
credits to be "more likely than not." As of December 31, 1996, the Company's
net deferred tax assets were approximately $400,000 and a valuation reserve
was recorded against the entire amount.
5. COMMITMENTS AND CONTINGENCIES:
The Company is obligated under an operating lease for space in its office
building and capital lease obligations for equipment. The lease term expires
in March 1999 and May 2000, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997............................................................. $110,535
1998............................................................. 113,355
1999............................................................. 41,346
2000............................................................. 4,970
--------
Total.......................................................... $270,206
========
</TABLE>
Rent expense charged to operations during the years ended December 31, 1996
and 1995, was $55,612 and $36,589, respectively.
6. STOCK OPTION PLAN:
During 1996, the Company adopted a stock option plan (the "Plan") and
reserved 2,100,800 shares for issuance. The Board of Directors administers the
Plan and determines the price, vesting, and other terms upon which awards
shall be made. All options have been granted with an exercise price equal to
the fair market value of the Company's common stock on date of grant as
determined by the Board of Directors. Options granted under the Company's plan
generally expire three months after termination of employment or five to ten
years after date of grant. A summary of option transactions during 1996 is as
follows.
<TABLE>
<CAPTION>
OPTION
WEIGHTED PRICE
NUMBER OF AVERAGE PER
STOCK OPTIONS EXERCISE PRICE SHARE
------------- -------------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1996.... -- -- --
Options granted................. 837,000 $.10-$.11 $.10-$.11
Options exercised............... (8,334) $.10 $.10
------- --------- ---------
Outstanding at December 31, 1996.. 828,666 $.10-$.11 $.10-$.11
======= ========= =========
Exercisable at December 31, 1996.. 357,502 $.10 $.10-$.11
Unexercisable at December 31,
1996............................. 471,164 $.10 $.10-$.11
</TABLE>
F-27
<PAGE>
DATA LABS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Net loss, on a pro forma basis assuming
that the Company had determined compensation cost consistent with SFAS No.
123, would have been increased by $55,000 to $1,223,293 in 1996.
The fair value for options was estimated at the date of grant using the
minimum value method with the following weighted-average assumptions for 1996:
risk free interest rates of 6.33 percent during the period, no expected
dividend yields, no volatility in the expected market price of the Company's
common stock and the estimated life of the option is the contractual term of
the option. The weighted average fair value of options granted during 1996 was
$.05.
7. PREFERRED STOCK:
In July 1996, the Company amended it's certificate of incorporation to
authorize two new classes of Convertible, Redeemable, and Voting preferred
stock ("Preferred Stock"). Preferred Stock can be issued in two series, A and
A1. Dividends are not cumulative and are paid at the rate of $.10 per share,
per annum, if declared by the Board of Directors. No series A1 Preferred Stock
has been issued.
In 1996, the Company issued 3,130,000 shares of Series A preferred stock for
$1 per share. The Preferred Stock is redeemable any time after June 30, 2001,
upon written request of not less than sixty-five percent of the outstanding
preferred stockholders. The redemption shall be paid in cash equal to the
original issue price per share ($1) plus any declared but unpaid dividends.
The declared and unpaid dividends accrue interest at the rate of 10 percent
compounded annually.
Each share of the Preferred Stock is convertible into common stock at any
time prior to the fifth day before redemption of the Preferred Stock at a 1 to
1 ratio. The Preferred Stock automatically converts to common stock upon a
firm commitment of an underwritten public offering, at not less than $5.00 per
share or $10,000,000 in aggregate proceeds. Conversion to common stock can
also occur upon written request of 65 percent of the outstanding preferred
stockholders.
In the event of liquidation, dissolution, or winding up of the Company, the
holders of each share of Preferred Stock are entitled to redeem their shares
for $1 for each outstanding share of Preferred Stock.
The Preferred Stock and other shareholder agreements provide for certain
registration rights, preemptive rights with respect to future issuances of
equity securities and rights of first refusal and co-sale in the event that
the stockholders sell their shares.
Warrants
In connection with the issuance of the series A preferred stock the Company
issued 900,000 warrants to purchase common stock at $.10 a share. The warrants
have a 10 year term.
8. STOCK PURCHASE AGREEMENTS:
The Company has in place several contingent stock purchase agreements
whereby the Company reserves the right to repurchase shares of common stock
from key employees upon termination of employment. The amount of shares that
the Company can repurchase decreases ratably over a four year period. In the
event of voluntary termination or termination for cause by the Company the
purchase price is $.002 per share, the employee's original purchase price. If
termination is for any other reason the purchase price will be the fair market
value at the date of termination.
F-28
<PAGE>
DATA LABS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. LINE OF CREDIT:
In October 1996, the Company entered into a line-of-credit agreement for
$400,000 that matures on April 5, 1998. The line of credit accrues interest at
a rate of prime plus 1 1/2 percent. There were no borrowings outstanding at
December 31, 1996.
F-29
<PAGE>
DATA LABS, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 318,142 $2,016,252
Accounts receivable............................... 41,696 74,084
Inventory......................................... 291,027 --
Prepaid expenses and other current assets......... -- 17,319
---------- ----------
Total current assets............................ 650,865 2,107,655
FURNITURE AND EQUIPMENT............................. 211,289 209,970
DEPOSITS............................................ 4,174 --
---------- ----------
TOTAL ASSETS.................................... $ 866,328 $2,317,625
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 140,000 $ 110,015
Accrued expenses and other current liabilities.... 310,904 93,587
Line of credit.................................... 300,000 --
---------- ----------
Total current liabilities....................... 750,904 203,602
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION... 25,745 38,210
---------- ----------
Total liabilities............................... 776,649 241,812
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A-Preferred stock $.001 par value,
3,200,000 shares authorized, 3,130,000
outstanding as of September 30, 1997 and December
31, 1996......................................... 3,130,000 3,130,000
Series A1-Preferred stock, $.001 par value,
3,200,000 authorized, none issued or
outstanding...................................... -- --
Common stock, $.001 par value, 10,000,000 shares
authorized, 3,270,035 and 3,257,534 issued and
outstanding as of September 30, 1997 and December
31, 1996, respectively........................... 3,270 3,258
Additional paid-in capital........................ 2,063 824
Accumulated deficit............................... (3,045,654) (1,058,269)
---------- ----------
89,679 2,075,813
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $ 866,328 $2,317,625
========== ==========
</TABLE>
F-30
<PAGE>
DATA LABS, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES:
Product sales....................................... $ 265,918 $ 995
Contract............................................ 37,260
----------- ---------
Total revenues.................................... 265,918 38,255
OPERATING EXPENSES
Costs of revenues................................... 158,128 19,250
Sales and marketing................................. 750,675 130,098
General and administrative.......................... 605,947 221,841
Research and development............................ 767,753 323,409
----------- ---------
Total operating expenses.......................... 2,282,503 694,598
OTHER INCOME, NET..................................... (29,200) (4,677)
----------- ---------
NET LOSS.............................................. $(1,987,385) $(651,666)
=========== =========
</TABLE>
F-31
<PAGE>
DATA LABS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(1,987,385) $ (592,957)
Adjustments to reconcile net loss to net cash flows
provided by operating activities-
Depreciation....................................... 39,093 12,317
Changes in assets and liabilities:
Accounts receivable.............................. 32,388 62,898
Inventory........................................ (291,027) --
Prepaid expenses and other current assets........ 17,319 (4,096)
Deposits......................................... (4,174)
Accounts payable................................. 29,985 34,902
Accrued expenses................................. 217,317 75,555
----------- ----------
(1,946,484) (411,381)
----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of furniture and equipment................ (40,412) (51,539)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock issuance........................... -- 3,055,000
Common stock issuance.............................. 1,251 --
Proceeds from line of credit....................... 300,000 --
Payments of capital lease obligation............... (12,465) --
----------- ----------
288,786 3,055,000
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. (1,698,110) 2,592,080
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 2,016,252 22,756
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 318,142 $2,614,836
=========== ==========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for interest........... $ 11,200 --
=========== ==========
</TABLE>
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Yurie Systems, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Yurie Systems, Inc. and subsidiaries (the "Company") (formed as a result of
the merger of Yurie Systems, Inc. and Data Labs, Inc.) as of December 31, 1995
and 1996, and the related supplemental consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These supplemental consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental consolidated financial statements
based on our audits. The supplemental consolidated financial statements give
retroactive effect to the merger of the Company and Data Labs, Inc., which has
been accounted for as a pooling of interests as described in Note 13 to the
supplemental consolidated financial statements. We did not audit the balance
sheets of Data Labs, Inc. as of December 31, 1995 and 1996, or the related
statements of operations, stockholders' equity and cash flows of Data Labs,
Inc. for the years then ended, which statements reflect total assets of
$136,698 and $2,317,625 as of December 31, 1995 and 1996, respectively, and
total revenues of $651,192 and $112,318, for the years ended December 31, 1995
and 1996, respectively. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Data Labs, Inc. for 1995 and 1996, is based solely on the
report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the supplemental consolidated financial
position of Yurie Systems, Inc. and subsidiaries as of December 31, 1995 and
1996, and the supplemental consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
after giving retroactive effect to the merger of Data Labs, Inc., as described
in the notes to the supplemental consolidated financial statements, in
conformity with generally accepted accounting principles.
January 30, 1998
F-33
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $3,802,556 $ 5,245,321
Accounts receivable--trade.......................... 1,235,292 4,939,206
Accounts receivable--other.......................... 2,828 54,154
Inventory........................................... 654,447 2,573,559
Deferred offering costs............................. -- 910,442
Deferred income taxes............................... -- 475,214
Prepaid expenses.................................... 8,836 410,200
---------- -----------
Total current assets.............................. 5,703,959 14,608,096
---------- -----------
PROPERTY AND EQUIPMENT:
Furniture and equipment............................. 99,744 220,360
Software............................................ 50,622 355,168
Computer and office equipment....................... 570,321 2,064,471
---------- -----------
Total property and equipment...................... 720,687 2,639,999
Less accumulated depreciation and amortization...... (117,219) (398,728)
---------- -----------
Net property and equipment........................ 603,468 2,241,271
---------- -----------
OTHER ASSETS.......................................... 20,938 57,756
---------- -----------
TOTAL ASSETS...................................... $6,328,365 $16,907,123
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 295,591 $ 2,013,839
Accrued liabilities................................. 293,704 3,249,972
Unearned revenue.................................... 4,000,000 --
Deferred income taxes............................... 64,995 --
Income taxes payable................................ 432,059 --
---------- -----------
Total current liabilities......................... 5,086,349 5,263,811
ACCRUED RENT.......................................... 25,661 14,932
DEFERRED INCOME TAXES................................. -- 19,310
CAPITAL LEASE OBLIGATIONS............................. -- 38,210
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, authorized
10,000,000 shares, none issued..................... -- --
Common Stock, par value $.01 per share; authorized
30,000,000 shares in 1995 and 50,000,000 in 1996;
issued and outstanding, 20,566,814 shares at
December 31, 1995 and 20,966,814 shares at December
31, 1996........................................... 205,668 209,668
Additional paid-in capital.......................... 119,604 8,046,437
Retained earnings................................... 891,083 3,314,755
---------- -----------
Total stockholder's equity........................ 1,216,355 11,570,860
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $6,328,365 $16,907,123
========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-34
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
REVENUE:
Product revenue........................... $ 5,075 $2,879,882 $18,737,693
Service revenue........................... 1,292,393 2,633,916 2,527,823
Other revenue............................. -- 1,108,333 391,667
---------- ---------- -----------
Total revenue........................... 1,297,468 6,622,131 21,657,183
COSTS OF REVENUE:
Cost of product revenue................... 3,045 1,328,966 6,806,202
Cost of service revenue................... 736,997 1,330,102 1,666,312
---------- ---------- -----------
Total cost of revenue................... 740,042 2,659,068 8,472,514
---------- ---------- -----------
GROSS PROFIT................................ 557,426 3,963,063 13,184,669
OPERATING EXPENSES:
Research and development.................. 49,383 562,597 4,427,810
Sales and marketing....................... 22,302 4,701 1,880,019
General and administrative................ 314,114 1,870,639 2,980,320
---------- ---------- -----------
Total operating expenses................ 385,799 2,437,937 9,288,149
---------- ---------- -----------
INCOME FROM OPERATIONS...................... 171,627 1,525,126 3,896,520
Other income.............................. 1,583 (1,776) 90,634
---------- ---------- -----------
INCOME BEFORE INCOME TAXES.................. 173,210 1,523,350 3,987,154
Provision for income taxes................ 43,156 574,685 1,563,482
---------- ---------- -----------
NET INCOME.............................. $ 130,054 $ 948,665 $ 2,423,672
========== ========== ===========
NET INCOME PER COMMON SHARE................. $ 0.01 $ 0.04 $ 0.11
========== ========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING......... 17,900,822 22,068,478 22,169,496
========== ========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-35
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED 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,
1994................... 16,358,414 $163,584 $ -- $ (187,636) $ (24,052)
Net income............ -- -- -- 130,054 130,054
---------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 31,
1994................... 16,358,414 163,584 -- (57,582) 106,002
Common stock
issuance............. 4,208,400 42,084 119,604 -- 161,688
Net income............ -- -- -- 948,665 948,665
---------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 31,
1995................... 20,566,814 205,668 119,604 891,083 1,216,355
Common stock
issuance............. 400,000 4,000 7,926,833 -- 7,930,833
Net income............ -- -- -- 2,423,672 2,423,672
---------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 31,
1996................... 20,966,814 $209,668 $8,046,437 $3,314,755 $11,570,860
========== ======== ========== ========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-36
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 130,054 $ 948,665 $ 2,423,672
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation........................... 43,436 71,995 281,509
Compensation due to stock issuance..... -- 162,023 --
Deferred income taxes.................. 22,315 42,680 (520,899)
Changes in assets and liabilities:
Accounts receivable.................... (137,943) (1,063,214) (3,755,240)
Inventory.............................. -- (654,447) (1,919,112)
Prepaid expenses....................... (10,665) 2,179 (401,364)
Other assets........................... (15,220) (5,718) (36,818)
Accounts payable and other accrued
expenses.............................. 77,316 342,120 4,674,516
Income taxes payable................... 19,220 412,839 (432,059)
Due to/from stockholder................ 50,601 (583) --
Unearned revenue....................... 275,437 3,724,563 (4,000,000)
Accrued rent........................... 18,511 7,150 (10,729)
--------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 473,062 3,990,252 (3,696,524)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..... (245,931) (467,882) (1,919,312)
--------- ----------- -----------
Net cash used in investing activities.... (245,931) (467,882) (1,919,312)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs................ -- -- (910,442)
Capital Lease Obligations.............. -- -- 38,210
Proceeds from issuance of Data Labs
preferred stock....................... -- 48,329 3,130,833
Proceeds from issuance of common
stock................................. -- -- 4,800,000
--------- ----------- -----------
Net cash provided by financing
activities.............................. -- 48,329 7,058,601
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 227,131 3,570,699 1,442,765
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR..................................... 4,726 231,857 3,802,556
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.... $ 231,857 $ 3,802,556 $ 5,245,321
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes............. $ -- $ 119,166 $ 2,699,000
========= =========== ===========
</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.
The Company has accrued deferred offering costs of $653,000 as of December
31, 1996.
In 1996, Data Labs, Inc. entered into capital leases totaling $55,000 for
equipment.
See notes to supplemental consolidated financial statements.
F-37
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED 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.
Basis of Presentation--The accompanying supplemental consolidated financial
statements include the accounts of Yurie Systems, Inc. and its subsidiaries,
including Data Labs, Inc. (the "Company"). All significant intercompany
transactions have been eliminated. These supplemental consolidated financial
statements have been restated to give retroactive effect to the merger with
Data Labs, Inc. on December 1, 1997, in a transaction accounted for as a
pooling of interests as if the merger had occurred at the beginning of fiscal
1994. (See note 13). These supplemental consolidated financial statements will
become the historical financial statements of the Company when financial
results for the year ended December 31, 1997 are issued.
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.
Warranty Reserve--Estimated warranty costs are accrued at the time revenue
is recognized and are charged to cost of revenues.
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 December 31, 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. 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. Deferred offering cost at December 31, 1996 was $910,442.
F-38
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes--The provision for income taxes includes Federal and state
income taxes currently payable plus the net change during the year in the
deferred tax liability or asset. The current or deferred tax consequences of
all events that have been recognized in the financial statements are measured
based on provisions of enacted tax law to determine the amount of taxes
payable or refundable in future periods.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the financial statements and in the disclosures of
contingent assets and liabilities. Actual results could differ from those
estimates.
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 66% and 63% of gross accounts receivable at December 31, 1995
and 1996, respectively. In addition, other customers with balances in excess
of 10% accounted for approximately 23% of gross accounts receivable as of
December 31, 1995. There were no other customers with a balance in excess of
10% as of December 31, 1996. 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 December 31, 1994, 1995 and 1996 were 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 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.
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 December 31, 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).
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year financial statement presentation.
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 December 31, 1996, the prime rate was 8.25%. The agreement
expires on May 31, 1997. At December 31, 1996, there were no borrowings under
this agreement.
In October 1996, Data Labs entered into a line of credit agreement for
$400,000 that matures on April 5, 1998. The line of credit accrues interest at
a rate of prime plus 1 1/2 percent. There were no borrowings outstanding at
December 31, 1996.
F-39
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE--TRADE
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Billed.............................................. $ 811,270 $4,174,343
Unbilled............................................ 424,022 764,863
---------- ----------
Total accounts receivable--trade.................. $1,235,292 $4,939,206
========== ==========
4. INVENTORY
Inventory consisted of the following:
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Raw materials....................................... $ 246,291 $1,836,581
Work-in-process..................................... 325,101 688,686
Finished goods...................................... 83,055 48,292
---------- ----------
Total inventory................................... $ 654,447 $2,573,559
========== ==========
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Accrued salaries and employee benefits.............. $ 292,811 $1,639,481
Accrued sales and use tax........................... -- 272,784
Warranty accrued.................................... -- 544,306
Deferred offering costs............................. -- 653,000
Other accrued liabilities........................... 893 140,401
---------- ----------
Total accrued liabilities......................... $ 293,704 $3,249,972
========== ==========
</TABLE>
6. UNEARNED REVENUE
Unearned revenue at December 31, 1995 represents prepayment from AT&T for
purchases of products which had not been delivered as of the end of the
reporting period. All products had been delivered as of December 31, 1996.
7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Current....................................... $20,841 $533,724 $1,618,468
Deferred...................................... 22,315 40,961 (54,986)
------- -------- ----------
Total....................................... $43,156 $574,685 $1,563,482
======= ======== ==========
</TABLE>
F-40
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED 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>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Expected statutory amount......................... 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 tax............ 4.6 4.6 4.6
Other............................................. (1.0) (0.9) 0.6
------- ------- -------
Effective tax rate.............................. 25.0% 37.7% 39.2%
======= ======= =======
</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,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accrued salaries and employee benefits....... $ 28,621 $ -- $ --
Warranty reserve............................. -- -- 210,210
Uniform capitalization....................... -- -- 19,310
Deferred rent................................ 7,149 9,987 5,767
Valuation allowance reversal................. -- -- 465,913
-------- -------- --------
Total deferred tax assets.................. 35,770 9,987 701,200
Deferred tax liabilities:
Depreciation................................. 18,768 25,685 19,310
Unbilled receivables......................... 39,317 49,297 225,986
-------- -------- --------
Total gross deferred tax liabilities....... 58,085 74,982 245,296
-------- -------- --------
Net deferred tax (liabilities)/assets...... $(22,315) $(64,995) $455,904
======== ======== ========
</TABLE>
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.
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
F-41
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Data Lab, Inc. is also obligated under an operating lease for space
in Gaithersburg, Maryland and capital lease obligations for equipment. The
lease terms expire in March 1999 and May 2000, respectively. The following is
a composite schedule, by year, of minimum rental payments as of December 31,
1996:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1997......................................................... $ 509,476
1998......................................................... 384,567
1999......................................................... 208,809
2000......................................................... 4,970
----------
Total minimum lease payments............................... $1,107,822
==========
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996, was
$49,800, $149,204, and $320,897, 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, 1994, and 1995 was $38,119 and $93,557, respectively. 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 year ended December 31, 1996 totaled $37,661.
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.
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, and June 14, 1995 the Company issued 202,400 and
6,000 shares of Common Stock, respectively, to several employees 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.
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%.
F-42
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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........................... 2,103,442
At exercise price of $2.70 per share.......................... 841,100
At exercise price of $3.41 per share.......................... 24,510
At exercise price of $9.00 per share.......................... 251,380
At exercise price of $12.00 per share......................... 17,000
---------
Total Granted................................................... 3,237,188
Exercised....................................................... (244)
---------
Outstanding, December 31, 1996.................................. 3,237,188
=========
Exercisable options at December 31, 1996........................ 281,969
=========
</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 5.96%, expected life
of three years, dividend rate of zero percent, and expected volatility of
68.30%. Using these assumptions, the fair value of the stock options granted
in 1996 is $2,959,222, which would be amortized as compensation expense over
the vesting period of the options. The options generally vest equally over
four years. Had 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 year ended December 31, 1996 would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Net Income:
As Reported.................................................. $2,423,672
Pro forma.................................................... $2,260,792
Net income per common share:
As Reported.................................................. $0.11
Pro forma.................................................... $0.10
</TABLE>
The resulting pro forma compensation cost may not be representative of that
expected in future years.
F-43
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (or February 5, 1998).
12. SIGNIFICANT CUSTOMER
For the years ended December 31, 1994, 1995 and 1996, approximately 46.7%,
64.9% and 87%, 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 years ended December 31, 1995 and 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.
13. SUBSEQUENT EVENTS
On February 5, 1997, the Company completed its initial public offering and
sold an aggregate of 4,000,000 shares of Common Stock at $12.00 per share,
resulting in net proceeds of $44,640,000, after deducting underwriting
discounts.
On December 1, 1997, the Company issued 358,414 shares of its common stock
for all of the outstanding common stock of Data Lab, Inc. The merger has been
accounted for as a pooling of interests, and accordingly, the Company's
financial statements have been restated to include the accounts and operations
of Data Lab, Inc.
F-44
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER
31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $23,084,690 $ 5,245,321
Restricted cash................................... 1,000,000 --
Short term investments............................ 21,883,297 --
Accounts receivable(1)............................ 10,099,691 4,993,360
Interest receivable............................... 302,483 --
Inventory......................................... 4,973,292 2,573,559
Deferred offering costs........................... -- 910,442
Deferred income taxes............................. 2,183,808 475,214
Prepaid expenses.................................. 414,407 410,200
----------- -----------
Total current assets............................ 63,941,668 14,608,096
PROPERTY AND EQUIPMENT, net......................... 6,286,737 2,241,271
OTHER ASSETS........................................ 145,546 57,756
----------- -----------
TOTAL ASSETS...................................... $70,373,951 $16,907,123
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 2,637,666 $ 2,013,839
Accrued liabilities............................... 5,535,926 3,249,972
Unearned revenue.................................. 41,250 --
Income taxes payable.............................. 300,000 --
----------- -----------
Total current liabilities....................... 8,514,842 5,263,811
ACCRUED RENT........................................ 390,621 14,932
DEFERRED INCOME TAXES............................... 326,463 19,310
CAPITAL LEASE OBLIGATION............................ 25,745 38,210
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, authorized
10,000,000 shares, none issued...................
Common Stock, par value $.01; 50,000,000 shares
authorized; issued and outstanding, 25,268,390
shares at September 30, 1997 and 20,966,814
shares at December 31, 1996...................... 252,684 209,668
Treasury Stock, 15,950 shares outstanding at
September 30, 1997............................... (461,166) --
Additional paid-in capital........................ 54,228,930 8,046,437
Retained earnings................................. 7,095,832 3,314,755
----------- -----------
Total stockholders' equity...................... 61,116,280 11,570,860
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $70,373,951 $16,907,123
=========== ===========
</TABLE>
- --------
(1) Accounts receivable includes amounts from related parties of $1,051,460 at
September 30, 1997 (unaudited).
See notes to supplemental consolidated financial statements.
F-45
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue.............. $13,083,829 $5,632,023 $30,532,134 $13,024,246
Service revenue.............. 1,034,844 613,513 2,913,927 1,659,874
Other revenue................ -- -- -- 391,667
----------- ---------- ----------- -----------
Total revenue(1)........... 14,118,673 6,245,536 33,446,061 15,075,787
COSTS OF REVENUE:
Cost of product revenue...... 4,651,165 2,178,989 10,989,750 4,536,284
Cost of service revenue...... 783,547 372,045 2,152,620 1,113,991
----------- ---------- ----------- -----------
Total costs of revenue..... 5,434,712 2,551,034 13,142,370 5,650,275
----------- ---------- ----------- -----------
GROSS PROFIT................... 8,683,961 3,694,502 20,303,691 9,425,512
OPERATING EXPENSES:
Research and development..... 2,136,999 970,745 4,727,935 1,954,854
Sales and marketing.......... 1,707,316 547,604 4,436,777 920,354
General and administrative... 2,317,243 1,141,668 6,107,262 2,703,332
----------- ---------- ----------- -----------
Total operating expenses... 6,161,558 2,660,017 15,271,974 5,578,540
----------- ---------- ----------- -----------
INCOME FROM OPERATIONS......... 2,522,403 1,034,485 5,031,717 3,846,972
Other income................. 402,155 9,099 1,159,453 66,741
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAX
PROVISION..................... 2,924,558 1,043,584 6,191,170 3,913,713
Provision for income taxes... 1,135,519 419,606 2,410,093 1,572,002
----------- ---------- ----------- -----------
NET INCOME................. $ 1,789,039 $ 623,978 $ 3,781,077 $ 2,341,711
=========== ========== =========== ===========
NET INCOME PER COMMON SHARE.... $ 0.06 $ 0.03 $ 0.14 $ 0.11
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING................... 27,653,386 22,109,222 26,705,151 22,109,222
=========== ========== =========== ===========
</TABLE>
- --------
(1) Revenue includes amounts from related parties of $7,172,832 and $11,991,002
for the three and nine months ended September 30, 1997, respectively
(unaudited).
See notes to supplemental consolidated financial statements.
F-46
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
1997 1996 1997 1996
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income................ $ 1,789,039 $ 623,978 $ 3,781,077 $ 2,341,711
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation............ 376,695 76,305 784,787 176,183
Compensation due to
stock issuance......... -- -- 120,500 --
Deferred income taxes... (280,649) (147,929) (1,401,441) 21,504
Changes in assets and
liabilities:
Accounts receivable..... (1,189,183) 1,899,451 (5,106,331) (495,056)
Restricted cash......... (1,000,000) -- (1,000,000) --
Interest receivable..... 105,132 -- (302,483) --
Advances................ 740,477 -- -- --
Inventory............... (723,742) (657,861) (2,399,733) (621,890)
Prepaid expenses........ (12,262) (136,343) (4,207) (203,918)
Other assets............ (9,084) (5,644) (87,790) (31,784)
Accounts payable........ 780,503 1,121,514 623,827 2,022,117
Accrued expenses........ 2,162,106 983,354 2,285,954 1,608,797
Income taxes payable.... 1,116,256 (118,031) 1,857,784 (238,920)
Unearned revenue........ 41,250 2,004,235 41,250 (1,153,765)
Accrued rent............ 291,868 (3,576) 375,689 (8,047)
----------- ---------- ------------ -----------
Net cash provided by (used
in) operating
activities............... 4,188,400 5,639,453 (431,117) 3,416,932
----------- ---------- ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Short term investments.. (9,002,185) -- (21,883,297) --
Purchase of property and
equipment.............. (1,856,056) (280,632) 4,830,254 (859,940)
----------- ---------- ------------ -----------
Net cash used in investing
activities............... 10,858,241 (280,632) (26,713,551) (859,940)
----------- ---------- ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Loan for equipment...... 100,000 -- (12,465) --
Capital lease
obligations............ (4,155) -- 300,000 --
Net proceeds from
issuance of common
stock.................. (126,791) (146,815) 44,696,502 2,984,018
----------- ---------- ------------ -----------
Net cash provided by (used
in) financing
activities............... (30,946) (146,815) 44,984,037 2,984,018
----------- ---------- ------------ -----------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............... (6,700,781) 5,212,006 17,839,369 5,541,010
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD....... 29,785,471 4,131,560 5,245,321 3,802,556
----------- ---------- ------------ -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............. $23,084,690 $9,343,566 $ 23,084,690 $ 9,343,566
=========== ========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for income
taxes.................. $ 600,000 $ 855,000 $ 2,075,450 $ 2,296,000
=========== ========== ============ ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-47
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--DESCRIPTION OF BUSINESS
Yurie Systems, Inc. (the "Company") 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, Internet 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.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with Regulation S-X pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information not misleading.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial position as of September 30, 1997,
the results of operations for the three and nine month periods ended September
30, 1997 and 1996, and the cash flows for the three and nine month periods
ended September 30, 1997 and 1996. These financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE 3--SHORT TERM INVESTMENTS
The Company's short term investments at September 30, 1997 are classified as
held-to-maturity because the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity.
NOTE 4--ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Billed.......................................... $ 9,936,021 $4,174,343
Unbilled........................................ 407,331 764,863
Other........................................... 13,239 54,154
Allowance for doubtful accounts................. (256,900) --
----------- ----------
Total accounts receivable..................... $10,099,691 $4,993,360
=========== ==========
NOTE 5--INVENTORY
Inventory consisted of the following:
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials................................... $ 2,058,719 $1,836,581
Work-in-process................................. 1,324,768 688,686
Finished goods.................................. 1,589,805 48,292
----------- ----------
Total inventory............................... $ 4,973,292 $2,573,559
=========== ==========
</TABLE>
F-48
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Accrued salaries and employee benefits.......... $2,607,379 $1,639,481
Accrued sales and use tax....................... 418,747 272,784
Warranty accrual................................ 1,819,620 544,306
Deferred offering costs......................... -- 653,000
Other accrued liabilities....................... 690,180 140,401
---------- ----------
Total accrued liabilities..................... $5,535,926 $3,249,972
========== ==========
</TABLE>
NOTE 7--COMMITMENTS
On May 1, 1997, the Company entered into a lease for approximately 137,000
rentable square feet. This facility is being used as the Company's principal
offices. The lease commenced on June 1, 1997 and expires on November 30, 2004.
Rental payments begin on December 1, 1997, with the monthly rent being
recorded on a straight line basis over the life of the lease.
NOTE 8--RELATED PARTY TRANSACTIONS
In March 1997, one of the Company's officers became a majority shareholder
in and the acting Chairman of the Board of SplitRock Services, Inc.
("Splitrock"), a corporation that provides communications services
specifically configured to meet the needs of large network users. Yurie had
product sales to this company totaling $6,645,840 and $11,464,010 during the
three and nine months ended September 30, 1997, respectively. In addition,
during the third quarter of this year, Yurie generated service revenue
totaling $526,992 from Splitrock. At September 30, 1997, accounts receivable
from this company totaled $1,051,460.
NOTE 9--EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (EPS) which
simplifies the standards for computing EPS previously found in APB Opinion No.
15 and makes them comparable to international EPS standards. The Statement is
effective for financial statements issued for periods ending after December
15, 1997. Had the following statement been effective for the three and nine
months ended September 30, 1997 and 1996, earnings per share would have been
presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings per common share.................... $ .07 $ .03 $ .15 $ .11
====== ====== ====== ======
Earnings per common share--assuming
dilution.................................... $ .07 $ .03 $ .14 $ .11
====== ====== ====== ======
</TABLE>
NOTE 10--INITIAL PUBLIC OFFERING
On February 5, 1997, the Company completed its initial public offering and
sold an aggregate of 4,000,000 shares of Common Stock at $12.00 per share,
resulting in net proceeds of $44,640,000 after
F-49
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
deducting underwriting discounts. Other deferred offering costs related to the
initial public offering totaling $1,403,863 as of September 30, 1997 have been
netted against paid-in capital.
NOTE 11--SUBSEQUENT EVENT
On December 1, 1997, the Company issued 358,414 shares of its common stock
for all of the outstanding common stock of Data Lab, Inc. The merger has been
accounted for as a pooling-of-interests, and accordingly, the Company's
financial statements have been restated to include the accounts and operations
of Data Labs, Inc.
F-50
<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....................................................... 2
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Price Range of Common Stock.............................................. 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 27
Management............................................................... 40
Certain Transactions..................................................... 49
Principal and Selling Stockholders....................................... 50
Plan of Distribution..................................................... 52
Description of Capital Stock............................................. 54
Shares Eligible For Future Sale.......................................... 57
Legal Matters............................................................ 57
Experts.................................................................. 57
Available Information.................................................... 58
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,155,366 Shares
[LOGO OF YURIE APPEARS HERE]
Common Stock
-----------------
PROSPECTUS
-----------------
February , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses payable by the Company in connection with the sale of the
Common Stock offered hereby are as follows:
<TABLE>
<S> <C>
Registration fee.................................................. $2,109.22
Printing and engraving expenses................................... 7,000.00
Legal fees and expenses........................................... 25,000.00
Accounting fees and expenses...................................... 9,500.00
Transfer agent and registrar fees and expenses.................... 500.00
Miscellaneous..................................................... 390.78
---------
Total........................................................... 44,500.00
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate and Bylaws provide that the Company shall
indemnify to the fullest extent authorized by the DGCL, each person who is
involved in any litigation or other proceeding because such person is or was a
director or officer of the Company or is or was serving as an officer or
director of another entity at the request of the Company, against all expense,
loss or liability reasonably incurred or suffered in connection therewith. The
Certificate and Bylaws provide that the right to indemnification includes the
right to be paid expenses incurred in defending any proceeding in advance of
its final disposition; provided, however, that such advance payment will only
be made upon delivery to the Company of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If the
Company does not pay a proper claim for indemnification in full within 60 days
after a written claim for such indemnification is received by the Company, the
Certificate of Incorporation and Bylaws authorize the claimant to bring an
action against the Company and prescribe what constitutes a defense to such
action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding brought by reason
of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (i.e.,
one brought by or on behalf of the corporation), indemnification may be made
only for expenses, actually and reasonably incurred by any director or officer
in connection with the defense or settlement of such an action or suit, if
such person acted in good faith and in a manner that he reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought shall determine that the defendant is
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, Article EIGHT of the Company's
Certificate eliminates the liability of a director to the corporation or its
stockholders for monetary damages for such breach of 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.
II-1
<PAGE>
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.
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.
In addition, on November 6, 1996, Amerindo acquired 400,000 shares of common
stock from the Company for $4.8 million.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger by and among Yurie Systems Inc., Nicole
Acquisition Corporation and Data Labs, Inc., dated December 1, 1997
(Schedules not included pursuant to Rule 601(b)(2) of Regulation S-K).
3.1* Amended and Restated Certificate of Incorporation of Yurie Systems,
Inc. (filed as Exhibit 3.1 to the Company's Registration Statement on
Form S-1, filed on November 7, 1996, as amended, No. 333-15759 (the
"November 1996 Form S-1")).
3.2* Amended and Restated Bylaws of Yurie Systems, Inc. (filed as Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 1997 (the "March 31, 1997 Form 10-Q")).
4.1* Specimen Certificate representing the Common Stock (filed as Exhibit
4.1 to the November 1996 Form S-1).
4.2 Registration Rights Agreement by and among Yurie Systems, Inc. and the
shareholders of Data Labs, Inc., dated as of December 1, 1997.
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson as to legality of
the securities registered hereunder.
10.1* Yurie Systems, Inc. Amended and Restated 1996 Non Statutory Stock
Option Plan, as amended June 30, 1997.
10.2* Jeong H. Kim Employment Agreement, dated as of July 31, 1996 (filed as
Exhibit 10.3 to the November 1996 Form S-1).
10.3* Kwok Li Employment Agreement, dated as of July 31, 1996 (filed as
Exhibit 10.4 to the November 1996 Form S-1).
10.4* Amendment to Kwok Li Employment Agreement, dated as of June 27, 1997.
10.5* Registration Rights Agreement between Yurie Systems, Inc. and Jeong H.
Kim, dated as of July 31, 1996 (filed as Exhibit 10.5 to the November
1996 Form S-1).
10.6* Registration Rights Agreement between Yurie Systems, Inc. and Kwok L.
Li, dated as of July 31, 1996 (filed as Exhibit 10.6 to the November
1996 Form S-1).
10.7* Registration Rights Agreement between Yurie Systems, Inc. and Kenneth
D. Brody, dated as of July 1, 1996 (filed as Exhibit 10.7 to the
November 1996 Form S-1).
10.8* Equity Incentive Agreement between Yurie Systems, Inc., Jeong H. Kim
and Kenneth D. Brody, dated as of July 1, 1996 (filed as Exhibit 10.8
to the November 1996 Form S-1).
10.9* Agreement of Lease between Digital Equipment Corporation and Yurie
Systems, Inc., dated as of April 18, 1997 (filed as Exhibit 10.9 to
the March 31, 1997 Form 10-Q).
10.10* Amended and Restated Agreement between AT&T Corp. Government
Markets/Defense Markets and Yurie Systems, Inc., dated as of December
4, 1996, and as amended on November 3, 1997 (see Exhibit 10.17 for
addendum) (filed as Exhibit 10.10 to the November 1996 Form S-1).
10.11* Stock Purchase Agreement between Yurie Systems, Inc. and Amerindo
Technology Growth Fund, Inc., dated October 31, 1996 (filed as Exhibit
10.11 to the November 1996 Form S-1).
10.12* Yurie Systems, Inc. Employee Stock Purchase Plan (filed as Exhibit
10.12 to the November 1996 Form S-1).
10.13* Yurie Systems, Inc. 401(k) Savings Plan (filed as Exhibit 10.13 to the
November 1996 Form S-1).
10.14* Harry J. Carr Employment Agreement, dated as of April 30, 1997 (filed
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997 (the "June 30, 1997 Form 10-Q").
10.15* Harry J. Carr Stock Option Agreement, dated as of April 30, 1997
(filed as Exhibit 10.2 to the June 30, 1997 Form 10-Q).
10.16* Purchase Agreement between Yurie Systems, Inc. and Splitrock Services,
Inc., dated as of July 1, 1997 (filed as Exhibit 10.3 to the June 30,
1997 Form 10-Q).
10.17* AT&T Yurie Addendum dated as of November 3, 1997.
11.1* Statement re computation of earnings per share (filed as Exhibit 11.1
to the September 30, 1997 Form 10-Q).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
23.1 Consent of Deloitte & Touche, LLP.
23.2 Consent of Arthur Andersen, LLP.
23.3 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
</TABLE>
- --------
* Incorporated herein by reference.
(b) Financial Statement Schedules:
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
established maximum offering range may be reflected in the form of
Prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL THE REQUIREMENTS FOR FILINGS ON FORM S-1 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN LANDOVER, MARYLAND ON FEBRUARY 3, 1998.
Yurie Systems, Inc.
/s/ Jeong H. Kim
By: _________________________________
JEONG H. KIM
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
II-5
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THIS 3RD DAY OF FEBRUARY, 1998.
SIGNATURE TITLE DATE
/s/ Jeong H. Kim Chairman of the
- ------------------------------------- Board and Chief
JEONG H. KIM Executive Officer
/s/ Kwok L. Li Vice Chairman of the
- ------------------------------------- Board and Chief
KWOK L. LI Technical Officer
/s/ Harry J. Carr President, Chief
- ------------------------------------- Operating Officer,
HARRY J. CARR and a Director
/s/ Barton Y. Shigemura Senior Vice
- ------------------------------------- President, Sales
BARTON Y. SHIGEMURA and Marketing and a
Director
/s/ Harry J. D'Andrea Chief Financial
- ------------------------------------- Officer and
HARRY J. D'ANDREA Treasurer (also
serves as Chief
Accounting Officer)
/s/ R. James Woolsey Director
- -------------------------------------
R. JAMES WOOLSEY
/s/ Herbert Rabin Director
- -------------------------------------
HERBERT RABIN
/s/ Kenneth D. Brody Director
- -------------------------------------
KENNETH D. BRODY
/s/ William J. Perry Director
- -------------------------------------
WILLIAM J. PERRY
II-6
<PAGE>
Exhibit 2.1
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
YURIE SYSTEMS, INC.,
NICOLE ACQUISITION CORPORATION
AND
DATA LABS, INC.
DATED AS OF DECEMBER 1, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - THE MERGER..................................................... 2
1.1 The Merger..................................................... 2
1.2 Effective Time................................................. 2
1.3 Certain Effects of the Merger.................................. 2
1.4 Certificate of Incorporation................................... 2
1.5 Bylaws......................................................... 3
1.6 Directors and Officers......................................... 3
1.7 Escrow Shares.................................................. 3
1.8 Shareholder Representative..................................... 3
ARTICLE II - CONVERSION AND EXCHANGE OF SECURITIES......................... 4
2.1 Shares of the Surviving Corporation............................ 4
2.2 Conversion of Company Common Stock............................. 4
2.3 Conversion of Data Labs Securities............................. 4
2.4 Exchange Agent................................................. 5
2.5 No Fractional Yurie Common Stock............................... 5
2.6 Exchange of Certificates; Distribution of Yurie Common Stock... 6
2.7 Data Labs Stock Options........................................ 8
2.8 Data Labs Warrants............................................. 9
2.9 Closing of Stock Transfer Books................................ 9
2.10 Dissenting Shares.............................................. 9
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF DATA LABS.................. 10
3.1 Corporate Existence and Power.................................. 10
3.2 Corporate Authorization........................................ 10
3.3 Consents and Approvals......................................... 10
3.4 Non-Contravention.............................................. 11
3.5 Capitalization................................................. 11
3.6 Subsidiaries................................................... 12
3.7 Financial Statements........................................... 12
3.8 Absence of Undisclosed Liabilities............................. 12
3.9 Properties..................................................... 13
3.10 Real Property.................................................. 13
3.11 Condition of Tangible Assets................................... 13
3.12 Intellectual Property.......................................... 13
3.13 Absence of Certain Changes..................................... 16
3.14 Litigation..................................................... 17
3.15 Material Contracts............................................. 18
3.16 Taxes.......................................................... 20
3.17 Employees...................................................... 22
3.18 Transactions with Affiliates................................... 22
-i-
<PAGE>
PAGE
3.19 Insurance Coverage............................................. 22
3.20 Compliance with Laws; No Defaults.............................. 23
3.21 Finders' Fees.................................................. 23
3.22 Environmental Matters.......................................... 23
3.23 Employees and Employee Plans................................... 25
3.24 Other Information.............................................. 26
3.25 Investment Representations..................................... 26
3.26 Shareholders................................................... 27
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF YURIE
AND THE COMPANY........................................................... 27
4.1 Corporate Existence and Power.................................. 27
4.2 Corporate Authorization........................................ 27
4.3 Consents and Approvals......................................... 27
4.4 Non-Contravention.............................................. 27
4.5 Capitalization................................................. 28
4.6 SEC Documents.................................................. 28
4.7 Yurie Common Stock............................................. 29
4.8 Ownership of the Company; No Prior Activities.................. 29
4.9 Absence of Material Adverse Changes............................ 29
4.10 Compliance with Laws; No Defaults.............................. 29
4.11 Finders' Fees.................................................. 30
4.12 Yurie Employee Plans........................................... 30
4.13 Taxes.......................................................... 30
4.14 Absence of Claims.............................................. 31
ARTICLE V - COVENANTS...................................................... 31
5.1 Mutual Covenants and Agreements................................ 31
5.2 Certain Covenants of Data Labs................................. 32
5.3 Covenants of Yurie and the Company............................. 36
ARTICLE VI - CLOSING MATTERS............................................... 38
6.1 The Closing.................................................... 38
6.2 Documents and Certificates..................................... 38
ARTICLE VII - CONDITIONS OF CLOSING........................................ 38
7.1 Conditions to Obligations of Yurie, the Company and Data Labs.. 38
7.2 Conditions Applicable to Yurie and the Company................. 38
7.3 Conditions Applicable to Data Labs............................. 40
ARTICLE VIII - TERMINATION................................................. 42
8.1 Termination.................................................... 42
8.2 Notice of Termination; Effect of Termination................... 42
8.3 Procedure Upon Termination..................................... 43
-ii-
<PAGE>
PAGE
ARTICLE IX -- INDEMNIFICATION.............................................. 43
9.1 Losses......................................................... 43
9.2 Indemnification of Yurie....................................... 43
ARTICLE X - MISCELLANEOUS.................................................. 44
10.1 Survival of Representations, Warranties and Covenants.......... 44
10.2 Expenses....................................................... 44
10.3 Further Assurances............................................. 44
10.4 Parties in Interest............................................ 44
10.5 Entire Agreement............................................... 44
10.6 Amendment...................................................... 45
10.7 Waiver......................................................... 45
10.8 Assignability.................................................. 45
10.9 Certain Definitions............................................ 45
10.10 Headings and Interpretation.................................... 46
10.11 Notices........................................................ 46
10.12 Governing Law.................................................. 47
10.13 Consent to Jurisdiction........................................ 47
10.14 Invalidity of Provisions....................................... 48
10.15 Mutual Contribution............................................ 48
10.16 Counterparts................................................... 48
-iii-
<PAGE>
EXHIBITS
Exhibit A: Amended and Restated Certificate of Incorporation of Data Labs,
Inc.
Exhibit B: Amended and Restated Bylaws of Data Labs, Inc.
Exhibit C: Calculation of Exchange Ratios
Exhibit D: Legal Opinion of Tucker, Flyer & Lewis
Exhibit E: Form of Yu Employment Agreement
Exhibit F: Form of Employment Agreement
Exhibit G: Escrow Agreement
Exhibit H: Legal Opinion of Fried, Frank, Harris, Shriver & Jacobson
Exhibit I: Registration Rights Agreement
Exhibit J: Affiliate Letter
SCHEDULES
Schedule 3.1 Jurisdiction in which Data Labs is Qualified to do Business
Schedule 3.3 Required Consents and Approvals
Schedule 3.4 Contraventions as a Consequences of the Merger
Schedule 3.5 Outstanding Equity Interests in Data Labs, Inc.
Schedule 3.8 Liabilities and Obligations
Schedule 3.9 Properties and Assets
Schedule 3.10 Real Property
Schedule 3.12(a) Intellectual Properties
Schedule 3.12(b) Licenses
Schedule 3.12(c) Employee Non-Disclosure and Assignment Agreements
Schedule 3.12(d) Intellectual Property Litigation
Schedule 3.13 Certain Changes and Events
Schedule 3.14 Litigation
Schedule 3.15 Material Contracts
Schedule 3.16 Taxes and Excessive Parachute Payments
Schedule 3.17 Employees
Schedule 3.18 Transactions With Affiliates
Schedule 3.19 Insurance
Schedule 3.21 Finders' Fees
Schedule 3.22 Environmental Liabilities
Schedule 3.23 Employees and Employee Plans
Schedule 3.25 Domicile and Principal Office of Shareholders
Schedule 3.26 List of Shareholders
Schedule 5.2(e) Severance and Termination Payments for Data Labs Employees
Schedule 5.2(k) Agreements Subject to Termination
Schedule 7.3(j) List of Employees, Wages and Years of Service
-iv-
<PAGE>
DEFINED TERMS
Term Section
- ---- --------
Acquisition Proposals....................................................5.2(k)
Affiliate...............................................................10.9(a)
Agreement..............................................................Preamble
CERCLA..................................................................3.22(d)
Closing Date................................................................6.1
Closing.....................................................................6.1
Common Exchange Ratio....................................................2.3(a)
Company................................................................Preamble
Confidentiality Agreement................................................5.1(c)
Constituent Corporations...............................................Preamble
Control.................................................................10.9(c)
Data Labs Common Stock.................................................Preamble
Data Labs Employee Plans...................................................3.23
Data Labs Intellectual Property Rights.....................................3.12
Data Labs Stock Options.....................................................2.7
Data Labs Preferred Stock..............................................Preamble
Data Labs Securities........................................................3.5
Data Labs Third Party Intellectual Property Rights......................3.12(b)
Data Labs Warrants..........................................................2.8
Data Labs..............................................................Preamble
Delaware General Corporation Law.......................................Preamble
Dissenting Shares..........................................................2.10
Effective Time..............................................................1.2
Employees..................................................................3.17
Environmental Laws......................................................3.22(e)
Environmental Liabilities...............................................3.22(f)
ERISA......................................................................3.23
ERISA Affiliate............................................................3.23
Escrow Agent................................................................1.7
Escrow Agreement............................................................1.7
Escrow Shares...............................................................1.7
Exchange Act................................................................3.3
Exchange Agent..............................................................2.4
Financial Statements........................................................3.7
Governmental Authority......................................................3.3
Hazardous Substance.....................................................3.22(g)
Information Statement....................................................5.2(h)
IRS.....................................................................3.23(b)
Liabilities or Obligations..................................................3.8
Loses.......................................................................9.1
Material Adverse Effect.................................................10.9(c)
-v-
<PAGE>
Merger......................................................................1.1
Order....................................................................8.1(c)
Person..................................................................10.9(d)
Preferred Exchange Ratio.................................................2.3(b)
Registration Rights Agreement............................................5.3(d)
Release.................................................................3.22(h)
Returns....................................................................3.16
Securities Act..............................................................2.7
Selling Shareholders................................................Article III
Shareholder Consent......................................................5.2(h)
Shareholder Representative..................................................1.8
Significant Shareholder.................................................3.15(c)
Subsidiary..............................................................10.9(f)
Surviving Corporation.......................................................1.1
Taxes......................................................................3.16
Unaudited Balance Sheet.................................................3.7(ii)
Yurie Closing Price.....................................................10.9(f)
Yurie Common Stock.....................................................Preamble
Yurie Employee Plans........................................................4.5
Yurie SEC Documents.........................................................4.6
Yurie..................................................................Preamble
-vi-
<PAGE>
AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION
This Agreement and Plan of Merger dated as of December 1, 1997 (the
"AGREEMENT") by and among Yurie Systems, Inc., a Delaware corporation ("YURIE"),
Nicole Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Yurie (the "COMPANY"), and Data Labs, Inc., a Delaware corporation
("DATA LABS"; Data Labs and the Company being hereinafter sometimes called the
"Constituent Corporations"):
WITNESSETH:
WHEREAS, the authorized capital stock of Yurie consists of (i) 10,000,000
shares of Preferred Stock, par value $.01 per share, of which no shares are
issued and outstanding, and (ii) 50,000,000 shares of Common Stock, par value
$.001 per share (the "YURIE COMMON STOCK"), of which 24,909,976 shares were
issued and outstanding as of September 30, 1997;
WHEREAS, the authorized capital stock of the Company consists of 100 shares
of Common Stock, par value $.01 per share, all of which shares are owned
beneficially and of record by Yurie;
WHEREAS, the authorized capital stock of Data Labs consists of (i)
6,400,000 shares of Preferred Stock, (a) of which 3,200,000 are designated as
Series A Preferred Stock, par value $.01 per share, of which 3,130,000 were
issued and outstanding (the "DATA LABS PREFERRED STOCK") as of September 30,
1997 and (b) of which 3,200,000 shares are designated as Series A-1 Preferred
Stock par value $.01 per share, of which no shares are issued and outstanding;
and (ii) 10,000,000 shares of Common Stock, par value $.001 per share (the "DATA
LABS COMMON STOCK"), of which 4,047,755 shares were issued and outstanding as of
December 1, 1997;
WHEREAS, the respective Boards of Directors of Yurie, the Company and Data
Labs have by resolutions approved this Agreement and deemed it advisable for
their respective mutual benefit and of their respective shareholders that the
Company merge with and into Data Labs under and pursuant to the General
Corporation Law of the State of Delaware (the "DELAWARE CORPORATION LAW") and
upon the terms and subject to the conditions hereinafter set forth;
WHEREAS, the Company, Yurie and Data Labs desire to make certain
representations, warranties, covenants and other agreements in connection with
this Agreement; and
WHEREAS, the parties intend that the Merger be treated as a "pooling of
interests" transaction for accounting purposes.
NOW, THEREFORE, in consideration of these premises and the mutual
agreements, provisions and covenants contained in this Agreement, the parties
hereby agree as follows:
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. In accordance with Section 251 of the Delaware
----------
Corporation Law, the Company shall be merged with and into Data Labs (the
"MERGER"), and Data Labs shall be the surviving corporation (such corporation in
its capacity as such surviving corporation being hereinafter called the
"SURVIVING CORPORATION"). The terms and conditions of the Merger, the mode of
carrying the same into effect, and the manner and basis of converting shares of
each of the Constituent Corporations into the consideration which the holders of
those shares are to receive upon conversion of such shares, shall be as set
forth in this Agreement.
1.2 Effective Time. The Merger shall become effective as of the time of
--------------
the filing of the executed certificate of merger with the Secretary of State of
Delaware pursuant to Section 251(c) of the Delaware Corporation Law (the
"EFFECTIVE TIME").
1.3 Certain Effects of the Merger. As of the Effective Time, the effect
-----------------------------
of the Merger shall be as provided in this Agreement, the Certificate of Merger
and the applicable provisions of the Delaware Corporation Law. Without limiting
the generality of the foregoing and subject thereto, at the Effective Time, the
separate existence of the Company shall cease and the Company shall be merged
into Data Labs; the Surviving Corporation shall possess, without further act or
deed, all the rights, privileges, powers and franchises of a public as well as
of a private nature, and be subject to all the restrictions, disabilities and
duties of each of the Constituent Corporations; and any and all rights,
privileges, powers and franchises of each of the Constituent Corporations, and
all property, real, personal and mixed, and all debts due to any of the
Constituent Corporations on whatever account, as well as stock subscriptions and
all other things in action or belonging to each of the Constituent Corporations,
shall be vested in the Surviving Corporation; and all property, rights,
privileges, powers and franchises, and all and every other interest shall be
thereafter as effectively the property of the Surviving Corporation as they were
of the several and respective Constituent Corporations, and the title to any
real estate vested by deed or otherwise, in any of the Constituent Corporations,
shall not revert or be in any way impaired by reason of the Merger; but all
rights of creditors and all liens upon any property of any of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the respective Constituent Corporations shall thenceforth attach to
the Surviving Corporation, and may be enforced against it to the same extent as
if such debts, liabilities and duties had been incurred or contracted by it.
Any action or proceeding, whether civil, criminal or administrative, pending by
or against any of the Constituent Corporations shall be prosecuted as if the
Merger had not taken place, and the Surviving Corporation may be substituted in
such action or proceeding.
1.4 Certificate of Incorporation. At the Effective Time, the certificate
----------------------------
of incorporation of the Surviving Corporation shall be amended and restated,
substantially in the form set forth on EXHIBIT A hereto, and shall be the
certificate of incorporation of the
-2-
<PAGE>
Surviving Corporation until thereafter amended as provided by law and such
certificate of incorporation.
1.5 Bylaws. At the Effective Time, the bylaws of the Surviving
------
Corporation shall be amended and restated, substantially in the form set forth
on EXHIBIT B hereto, and shall be the bylaws of the Surviving Corporation until
thereafter amended.
1.6 Directors and Officers. The directors and officers of the Surviving
----------------------
Corporation from and after the Effective Time shall be the directors and
officers of the Company immediately prior to the Effective Time, each to hold
office in accordance with applicable law and the certificate of incorporation
and bylaws of the Surviving Corporation.
1.7 Escrow Shares. At the Effective Time, Yurie shall deliver to an
-------------
escrow agent (the "ESCROW AGENT") appointed pursuant to an Escrow Agreement
(the "ESCROW AGREEMENT"), 35,841 shares of Yurie Common Stock issued in the name
of the Shareholder Representative (as defined below) pursuant to Section 2.3
(the "ESCROW SHARES") to be held and applied in accordance with Article IX
herein and the escrow agreement by and among Yurie, the Shareholder
Representative (as defined below) and American Stock Transfer & Trust Company
(the "Escrow Agreement"). By virtue of their approval of this Agreement under
the Delaware Corporation Law, the shareholders of Data Labs shall be deemed to
have approved and agreed to the Escrow Agreement and its terms and conditions,
including, without limitation, the indemnification of the Shareholder
Representative.
1.8 Shareholder Representative. The shareholders of Data Labs, by virtue
--------------------------
of their approval of the Agreement under the Delaware Corporation Law, shall be
deemed to have irrevocably constituted and appointed Wenli Yu, David Cowan and
Thomas Smith as a committee, effective as of the Effective Time (together with
such person's permitted successors, the "SHAREHOLDER REPRESENTATIVE"), as their
true and lawful agent and attorney-in-fact to enter into any agreement in
connection with the transactions contemplated by this Agreement, including,
without limitation, the resolution of indemnity claims under Article IX hereof
and in accordance with the Escrow Agreement, and any transactions contemplated
by the Escrow Agreement, to exercise all or any of the powers, authority and
discretion conferred on it under any such agreement, to waive any terms and
conditions of any such agreement (other than the consideration to be received by
the Data Labs shareholders in the Merger), to give and receive notices on their
behalf and to be their exclusive representative with respect to any matter,
suit, claim, action or proceeding arising with respect to any transaction
contemplated by any such agreement, including, without limitation, the defense,
settlement or compromise of any claim, action or proceeding for which Yurie or
the Company may be entitled to indemnification and the Shareholder
Representative agrees to act as, and to undertake the duties and
responsibilities of, such agent and attorney-in-fact. This power of attorney is
coupled with an interest and is irrevocable. The members constituting the
Shareholder Representative shall act by majority vote or consent. The
Shareholder Representative shall not be liable for any action taken or not taken
by it in connection with its obligations under this Agreement (i) with the
consent of shareholders who, as of the Effective Time, owned a majority in
number of the outstanding shares of Data Labs Common Stock (treating the Data
Labs Preferred Stock on an as converted basis) or (ii) in
-3-
<PAGE>
the absence of its own gross negligence or willful misconduct. If one or more of
the members of the committee acting as the Shareholder Representative shall be
unable or unwilling to serve in such capacity, any successor thereof shall be
named by those persons holding two-thirds of the outstanding shares of the Data
Labs Common Stock (treating Data Labs Preferred Stock on an as-converted basis)
at the Effective Time, and the successor(s) so named shall serve and exercise
the powers of the Shareholder Representative hereunder. If such committee is
composed of one person and no other members thereto are so named within 30 days
of the resignation or termination of the last resigning member thereof, the
remaining member of such committee shall serve as the Shareholder
Representative.
ARTICLE II
CONVERSION AND EXCHANGE OF SECURITIES
2.1 Shares of the Surviving Corporation. The authorized number and par
-----------------------------------
value of shares of all classes of stock of the Company immediately prior to the
Effective Time shall be the authorized number and par value of shares of the
classes of stock of the Surviving Corporation from and after the Effective Time.
2.2 Conversion of Company Common Stock. At the Effective Time, each share
----------------------------------
of Common Stock, par value $.01 per share, of the Company issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, automatically be converted
into and represent one validly issued, fully paid and nonassessable share of
Common Stock, par value $.01 per share, of the Surviving Corporation.
2.3 Conversion of Data Labs Securities. The maximum consideration to be
----------------------------------
issued in exchange for (i) all issued and outstanding shares of Data Labs Common
Stock and Data Labs Preferred Stock immediately prior to the Effective Time
(other than shares of Data Labs Common Stock and Data Labs Preferred Stock held
in the treasury of Data Labs, which shall not be considered as outstanding for
purposes of this Agreement), (ii) all warrants to purchase shares of Common
Stock of Data Labs outstanding immediately prior to the Effective Time, (iii)
all vested options and 50% of the unvested options to purchase shares of Common
Stock of Data Labs outstanding immediately prior to the Effective Time shall be
358,412 shares of Common Stock of Yurie (the "Consideration"). Pursuant to the
foregoing, at the Effective Time each share of Data Labs capital stock shall, by
virtue of the Merger and without any action on the part of the holder thereof,
automatically be canceled and extinguished and converted into the right to
receive the following:
(a) With respect to each share of Data Labs Common Stock, a fraction
of a share of Yurie Common Stock (the "COMMON EXCHANGE RATIO"), as determined in
accordance with EXHIBIT C, upon surrender of the certificate or certificates
representing such shares of Data Labs Common Stock in the manner provided in
Section 2.6;
-4-
<PAGE>
(b) With respect to each share of Data Labs Preferred Stock, a
fraction of a share of Yurie Common Stock (the "PREFERRED EXCHANGE RATIO"), as
determined in accordance with EXHIBIT C, upon surrender of the certificate or
certificates representing such shares of Series A Preferred in the manner
provided in Section 2.6;
(c) At the Effective Time, each share of Data Labs Common Stock or
Data Labs Preferred Stock held in the treasury of Data Labs, immediately prior
to the Effective Time shall, by virtue of the Merger and without any action on
the part of the holder thereof, automatically be canceled and retired and all
rights in respect thereof shall cease to exist.
(d) If between the date of this Agreement and the Effective Time, the
outstanding shares of Yurie Common Stock, Data Labs Common Stock or Data Labs
Preferred Stock shall have been changed (subject to compliance with the
applicable provisions of Article V) into a different number of shares or a
different class, by reason of any stock dividend, subdivision, reclassification,
split-up, combination, exchange of shares or the like, the Common Exchange Ratio
and Preferred Exchange Ratio, as the case may be, shall be appropriately
adjusted.
(e) Each certificate representing shares of Yurie Common Stock to be
issued in the Merger shall bear a legend substantially in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH
SHARES ARE REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO YURIE IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED. THE HOLDER OF THIS CERTIFICATE IS ENTITLED TO
CERTAIN REGISTRATION RIGHTS SET FORTH IN A REGISTRATION RIGHTS
AGREEMENT DATED AS OF DECEMBER 1, 1997, A COPY OF WHICH MAY BE
OBTAINED FROM THE SECRETARY OF YURIE SYSTEMS, INC.
2.4 Exchange Agent. American Stock Transfer & Trust Company, or such
--------------
other national or state bank or trust company as may be selected by Yurie, shall
act as the agent for Data Labs shareholders for purposes of mailing and
receiving transmittal letters and distributing consideration to Data Labs
shareholders (the "EXCHANGE AGENT").
2.5 No Fractional Yurie Common Stock. Notwithstanding any other provision
--------------------------------
of this Agreement, neither certificates nor scrip for fractional shares of Yurie
Common Stock shall be issued to any holder of Data Labs Common Stock or Data
Labs Preferred Stock in the Merger and the holder thereof shall not be entitled
to any voting or other rights of a holder of shares or a fractional share
interest. Each holder of shares of Data Labs Common Stock or Data Labs
Preferred Stock who otherwise would have been entitled to receive a fraction of
a share of Yurie
-5-
<PAGE>
Common Stock (after aggregating all fractional shares of Yurie Common Stock to
be received by such holder) shall receive in lieu thereof cash (rounded to the
nearest whole cent), without interest, in an amount determined by multiplying
such holder's fractional interest by the Yurie Closing Price (as defined in
Section 10.9(f) of this Agreement). All amounts of cash in respect of fractional
interests which have not been claimed at the end of three years from the
Effective Time by surrender of certificates for shares of Data Labs Common Stock
or Data Labs Preferred Stock shall be repaid to the Surviving Corporation,
subject to the provisions of applicable escheat or similar laws, for the account
of the holders entitled thereto.
2.6 Exchange of Certificates; Distribution of Yurie Common Stock. The
------------------------------------------------------------
procedures for exchanging outstanding shares of Data Labs Common Stock and Data
Labs Preferred Stock for Yurie Common Stock pursuant to the Merger are as
follows:
(a) Exchange Agent. Within five (5) business days after the Effective
--------------
Time, Yurie shall cause its transfer agent to deposit with the Exchange Agent
for the benefit of the holders of shares of Data Labs Common Stock and Data Labs
Preferred Stock, for exchange in accordance with this Section 2.6, through the
Exchange Agent, certificates representing the shares of Yurie Common Stock (such
shares of Yurie Common Stock, together with any dividends or distributions with
respect thereto, being hereinafter referred to as the "Exchange Fund") issuable
pursuant to Section 2.3 in exchange for outstanding shares of Data Labs Common
Stock and Data Labs Preferred Stock. The Exchange Agent shall not be entitled
to vote or exercise any rights of ownership with respect to any shares of Yurie
Common Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect to such shares for the account of the persons entitled thereto.
(b) Exchange Procedures. Within five (5) business days after the
-------------------
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Data Labs Common Stock or Data Labs Preferred
Stock (each a "Data Labs Certificate" and, collectively, the "Data Labs
Certificates") whose shares were converted pursuant to Section 2.3 into the
right to receive shares of Yurie Common Stock (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Data Labs Certificates shall pass, only upon delivery of the Data Labs
Certificates to the Exchange Agent) and (ii) instructions for use in effecting
the surrender of the Data Labs Certificates in exchange for certificates
representing shares of Yurie Common Stock. Upon surrender of a Data Labs
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Yurie, together with such letter of transmittal,
duly executed, the holder of such Data Labs' Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of Yurie Common Stock which such holder has the right to receive pursuant
to the provisions of this Article II and cash in lieu of any fractional shares,
and the Data Labs Certificate so surrendered shall immediately be canceled. In
the event of a transfer of ownership of Data Labs Common Stock or Data Labs
Preferred Stock which is not registered in the transfer records of Data Labs, a
certificate representing the proper number of shares of Yurie Common Stock may
be issued to a transferee if the Data Labs Certificate representing such Data
Labs Common Stock
-6-
<PAGE>
or Data Labs Preferred Stock is presented to the Exchange Agent, accompanied by
all documents required in evidence and effect such transfer and by evidence that
any applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.6, each Data Labs Certificate shall be deemed at
any time after the Effective Time to represent only the right to receive upon
such surrender the certificate representing shares of Yurie Common Stock and
cash in lieu of any fractional shares of Yurie Common Stock as contemplated by
Section 2.5 above, or the rights any holder may have with respect to Dissenting
Shares.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Yurie Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Data Labs Certificate with respect to the shares
of Yurie Common Stock represented thereby, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 2.5,
until the holder of record of such Data Labs Certificate shall surrender such
Data Labs Certificate. Subject to the effect of applicable laws, following
surrender of any such Data Labs Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Yurie Common Stock
issued in exchange therefor, without interest, (i) at the time of such Yurie
Common Stock to which such holder is entitled pursuant to this Section 2.6 and
the amount of dividends or other distributions with a record date after the
Effective Time previously paid with respect to such whole shares of Yurie Common
Stock, and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Yurie Common Stock.
(d) No Further Ownership Rights in Data Labs Common Stock or Data Labs
------------------------------------------------------------------
Preferred Stock. At the Effective Time, each holder of an outstanding
- ---------------
certificate or certificates for shares of Data Labs Common Stock or Data Labs
Preferred Stock shall cease to have any rights as a shareholder of Data Labs,
except such rights, if any, as such holder may have with respect to Dissenting
Shares (as hereinafter defined). All shares of Yurie Common Stock issued upon
the surrender for exchange of shares of Data Labs Common Stock or Data Labs
Preferred Stock in accordance with the terms hereof, including any cash paid
pursuant to Sections 2.6(c) and 2.5, shall be deemed to have been issued in full
satisfaction of al rights pertaining to such shares of Data Labs Common Stock or
Data Labs Preferred Stock, and there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of Data Labs Common Stock or Data Labs Preferred Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time, Data
Labs Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Section 2.6.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund
----------------------------
which remains undistributed to the stockholders of Data Labs for one year after
the Effective Time shall be delivered to Yurie, upon demand, and any
stockholders of Data Labs who have not previously complied with this Section 2.6
shall thereafter look only to Yurie for payment of their claim for Yurie Common
Stock, cash in lieu of fractional shares of Yurie Common Stock, and dividends or
distributions with respect to Yurie Common Stock.
-7-
<PAGE>
(f) No Liability. Neither Yurie nor Data Labs, nor any of their
------------
respective directors, officers, employees or agents, shall be liable to any
holder of shares of Data Labs Common Stock or Data Labs Preferred Stock or Yurie
Common Stock, as the case may be, for such shares (or dividends or distributions
with respect thereto) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(g) Lost Certificates. In the event that any Data Labs Certificate
-----------------
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claims such Data Labs Certificate to be lost, stolen or
destroyed and, if required by Yurie or the Exchange Agent, the posting by such
person of a bond in such reasonable amount as Yurie or the Exchange Agent may
direct as indemnity against any claim that may be made against it with respect
to such Data Labs Certificate, Yurie shall cause the Exchange Agent to issue, in
exchange for such lost, stolen or destroyed Data Labs Certificate the shares of
Yurie Common Stock, cash in lieu of fractional shares and unpaid dividends and
distributions on shares of Yurie Common Stock as contemplated by Sections 2.5
and 2.6.
2.7 Data Labs Stock Options. At the Effective Time, all options to
-----------------------
purchase shares of Data Labs Common Stock outstanding as of the Effective Time
under the Data Labs Stock Option Plan, whether vested or unvested (the "DATA
LABS OPTIONS"), shall, by virtue of the Merger and without further action on the
part of Data Labs or the holder thereof, be assumed by Yurie and shall be
converted into an option to purchase Yurie Common Stock without any other
changes in the terms and conditions of such options. The number of shares of
Yurie Common Stock that the holder of Data Labs Option shall be entitled to
receive upon the exercise of such option shall be a number of whole and
fractional shares determined by multiplying the number of shares of a Data Labs
Common Stock subject to such option, determined immediately before the Effective
Time, by the Common Exchange Ratio applicable to shares of Data Labs Common
Stock. The exercise price of each share of Yurie Common Stock subject to a Data
Labs Option shall be the amount (rounded up to the nearest whole cent) obtained
by dividing the exercise price per share of Data Labs Common Stock at which such
option is exercisable immediately before the Effective Time by the Common
Exchange Ratio applicable to shares of Data Labs Common Stock, but shall be not
less than $.01. The assumption and substitution of the Data Labs Options as
provided herein shall not give the holders of such options additional benefits
which they did not have immediately prior to the Effective Time or relieve the
holders of any obligations or restrictions applicable to their options or the
shares obtainable upon exercise of the options. Only whole shares of Yurie
Common Stock shall be issued upon exercise of any Data Labs Option, and in lieu
of receiving any fractional share of Yurie Common Stock, the holder of such
option shall receive in cash the fair market value of the fractional share, net
of the applicable exercise price of the fractional share and applicable
withholding taxes. Yurie shall (i) reserve out of its authorized but unissued
shares of Yurie Common Stock sufficient shares to provide for the exercise of
the Data Labs Options and (ii) shall register under the Securities Act of 1933,
as amended (the "SECURITIES ACT"), not later than 30 days after the Effective
Time and maintain the effectiveness of such registration statement for so long
as the Data Labs Options remain outstanding, those shares of Yurie Common Stock
to be issued upon the exercise of the Data Labs Options for a period ending on
the first date by which all Data Labs Options
-8-
<PAGE>
have been exercised, which registration shall initially be effective under a
registration statement on Form S-8 or such other form as may be permitted under
the Securities Act.
2.8 Data Labs Warrants. At the Effective Time, all of the warrants to
------------------
purchase shares of Data Labs Common Stock outstanding as of the Effective Time
("DATA LABS WARRANTS") shall, by virtue of the Merger and without further action
on the part of Data Labs or the holder thereof, be assumed by Yurie and shall be
converted into a warrant to purchase Yurie Common Stock without any other
changes in the terms and conditions of such warrants. The number of shares of
Yurie Common Stock that the holder of a Data Labs Warrant shall be entitled to
receive upon the exercise of such warrant shall be a number of whole and
fractional shares determined by multiplying the number of shares of Data Labs
Common Stock subject to such warrant, determined immediately before the
Effective Time, by the Exchange Ratio applicable to shares of Data Labs Common
Stock. The exercise price of each share of Yurie Common Stock subject to a Data
Labs Warrant shall be the amount (rounded up to the nearest whole cent) obtained
by dividing the exercise price per share of Data Labs Common Stock at which such
warrant is exercisable immediately before the Effective Time by the Common
Exchange Ratio applicable to shares of Data Labs Common Stock, but shall be not
less than $.01. The assumption and substitution of the warrants as provided
herein shall not give the holders of such warrants additional benefits which
they did not have immediately prior to the Effective Time or relieve the holders
of any obligations or restrictions applicable to their warrants or the shares
obtainable upon exercise of the warrants. Only whole shares of Yurie Common
Stock shall be issued upon exercise of any Data Labs Warrants, and in lieu of
receiving any fractional share of Yurie Common Stock, the holder of such Data
Labs Warrant shall receive in cash the fair market value of the fractional
share, net of the applicable exercise price of the fractional share and
applicable withholding taxes. Yurie shall reserve out of its authorized but
unissued shares of Common Stock sufficient shares to provide for the exercise of
the Data Labs Warrants.
2.9 Closing of Stock Transfer Books. The stock transfer books of Data
-------------------------------
Labs shall be closed at the close of business on the business day immediately
preceding the Effective Time. In the event of a transfer of ownership of Data
Labs Common Stock or Data Labs Preferred Stock which is not registered in the
transfer records of Data Labs, the shares of Yurie Common Stock and cash for
fractional shares (if any) to be issued in the Merger as provided herein may be
delivered to a transferee, if the certificate representing such Data Labs Common
Stock or Data Labs Preferred Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by payment of any applicable stock transfer taxes.
2.10 Dissenting Shares. Shares of Data Labs Common Stock or Data Labs
-----------------
Preferred Stock that have not been voted for adoption of this Agreement and with
respect to which appraisal rights shall have been properly perfected in
accordance with Section 262 of the Delaware Corporation Law (the "DISSENTING
SHARES") shall not be converted into the right to receive shares of Yurie Common
Stock and cash (if any) in accordance with this Agreement at or after the
Effective Time, unless and until the holder of such Dissenting Shares withdraws
such holder's demand for such appraisal in accordance with Section 262(k) of the
Delaware Corporation Law or becomes ineligible for such appraisal. If a holder
of Dissenting Shares shall
-9-
<PAGE>
withdraw in accordance with Section 262(k) of the Delaware Corporation Law or
such holder's demand for such appraisal shall become ineligible for such
appraisal, then, as of the later of the Effective Time or the occurrence of such
event, such holder's Dissenting Shares shall cease to be Dissenting Shares and
shall be converted into the right to receive the shares of Yurie Common Stock
and cash (if any) into which such holder's Data Labs Common Stock or Data Labs
Preferred Stock was converted as of the Effective Time pursuant to this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DATA LABS
Data Labs hereby represents and warrants to each of Yurie and the Company
as follows:
3.1 Corporate Existence and Power. Data Labs is a corporation duly
-----------------------------
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all corporate power and authority necessary to enable it to
own, lease or otherwise hold its properties and assets and to carry on its
business as now conducted. Data Labs is duly qualified to do business as a
foreign corporation and upon acknowledgment of receipt by the State of Maryland
of $206.00 in late filing fees, will be in good standing in each jurisdiction
where the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except for those jurisdictions
where the failure to be so qualified would not have a Material Adverse Effect
(as defined in Section 10.9(c) hereof) on Data Labs. All jurisdictions in which
Data Labs is so qualified to do business are listed on SCHEDULE 3.1. Data Labs
has previously delivered to Yurie and the Company true and complete copies of
the certificate of incorporation and bylaws of Data Labs, as amended to date and
as currently in effect, and all minutes of meetings (including actions in lieu
thereof) of the board of directors (and each committee thereof) and shareholders
of Data Labs.
3.2 Corporate Authorization. The execution, delivery and performance by
-----------------------
Data Labs of this Agreement and the agreements contemplated hereby, and the
consummation by Data Labs of the Merger and other transactions contemplated
hereby and thereby are within Data Labs' corporate power and authority, and have
been duly authorized by all necessary corporate action, including all necessary
shareholder votes. The Board of Directors of Data Labs has (i) determined that
this Agreement and the transactions contemplated hereby, including the Merger,
are fair to and in the best interest of Data Labs' shareholders, (ii) approved
this Agreement and the transactions contemplated hereby, including, but not
limited to the Merger and the Exhibits hereto, and (iii) resolved to recommend
approval and adoption of this Agreement and the Merger by Data Labs'
shareholders. This Agreement and the Exhibits hereto has been duly authorized,
executed and delivered by Data Labs and, subject to its execution by the other
parties hereto, constitutes a valid and binding obligation of Data Labs,
enforceable against Data Labs in accordance with its terms.
3.3 Consents and Approvals. Except as set forth on SCHEDULE 3.3, the
----------------------
execution, delivery and performance by Data Labs of this Agreement, and the
consummation of the Merger and other transactions contemplated by this Agreement
by Data Labs, do not and will not require
-10-
<PAGE>
any consent, approval or action by or in respect of, or any declaration, filing
or registration with, any governmental or regulatory body, court, agency,
official or authority (each, a "GOVERNMENTAL AUTHORITY") or other third party,
other than (i) routine filings with the Secretary of State of the State of
Delaware necessary to consummate the Merger, (ii) compliance with the applicable
requirements of the Securities Act, the Securities Exchange Act of 1934 (the
"EXCHANGE ACT") and any applicable state securities and blue sky laws in
connection with the offering, sale and delivery of the shares of Yurie Common
Stock to be issued in the Merger and (iii) consents, approvals, actions,
declarations, filings or registrations where the failure to obtain such
consents, approvals, action, or to make such declaration, filing or
registration, would not have a Material Adverse Effect.
3.4 Non-Contravention. Except as disclosed on SCHEDULE 3.4, the
-----------------
execution, delivery and performance by Data Labs of this Agreement, and the
consummation of the Merger and other transactions contemplated by this Agreement
by Data Labs, do not and will not, with or without the giving of notice, the
lapse of time or both: (i) contravene or conflict with the certificate of
incorporation or bylaws of Data Labs, (ii) assuming compliance with the matters
referred to in Section 3.3, contravene or conflict with or constitute a
violation of any provision of any law, rule, regulation, judgment, injunction,
order or decree currently in effect and binding upon or applicable to Data Labs,
(iii) to its knowledge, require any consent, approval or other action by any
person, contravene or conflict with or constitute a violation of or a default
under, or give rise to any right of termination, cancellation or acceleration of
any right or obligation of Data Labs or to a loss of any benefit to which Data
Labs is entitled, under any provision of (A) any material agreement, contract,
indenture, lease or other instrument binding upon Data Labs or (B) assuming
compliance with the matters referred to in Section 3.3, any license, franchise,
permit or other similar authorization held by Data Labs or (iv) except for the
rights of any holders of Dissenting Shares, result in the creation or imposition
of any mortgage, pledge, security interest, lien, claim, charge, restriction,
encumbrance or assessment of any kind (each, a "LIEN") on any asset of Data
Labs.
3.5 Capitalization. As of December 1, 1997, the authorized capital stock
--------------
of Data Labs consists of (i) 6,400,000 shares of Preferred Stock, of which
3,200,000 are designated Series A Preferred, 3,130,000 of which were issued and
outstanding and none of which are treasury shares, and (ii) 10,000,000 shares of
Data Labs Common Stock, of which 4,047,755 shares were issued and outstanding
and none of which are treasury shares. All issued and outstanding shares of
Data Labs Common Stock and Data Labs Preferred Stock are validly issued, fully
paid and nonassessable, and have not been issued in violation of any preemptive,
first refusal or other subscription rights of any shareholder of Data Labs or
any other person, and have been issued in compliance with federal and state
securities laws. Except as set forth on SCHEDULE 3.5, there are no outstanding
(i) shares of capital stock or other voting securities of Data Labs, (ii)
securities of Data Labs convertible into or exchangeable for shares of capital
stock or voting securities of Data Labs, (iii) options, warrants, exchange
rights, subscription rights or other agreements, commitments or rights to
purchase or otherwise acquire from Data Labs, or agreements, commitments or
obligations of Data Labs to issue or sell, any capital stock, voting securities
or securities convertible into or exchangeable for capital stock or voting
securities of Data Labs or (iv) any agreement, commitment or obligation of Data
Labs to grant, or enter into
-11-
<PAGE>
any such option, warrant, call, right, commitment or agreement (the items in
clauses (i), (ii) (iii) and (iv) being referred to collectively as the "DATA
LABS SECURITIES"). Except as set forth on SCHEDULE 3.5, there are no outstanding
obligations of Data Labs to sell, issue or deliver, or to repurchase, redeem or
otherwise acquire, any Data Labs Securities. SCHEDULE 3.5 sets forth a true and
complete list of the record owners of all Data Labs Securities.
3.6 Subsidiaries. Data Labs does not hold or own, directly or indirectly,
------------
any capital stock or other equity securities of any other corporation, or have
any direct or indirect equity or ownership interest in any association,
partnership, joint venture or other entity.
3.7 Financial Statements. Data Labs has previously delivered to Yurie and
--------------------
the Company the following financial statements (collectively, the "FINANCIAL
STATEMENTS"):
(i) the audited consolidated balance sheet of Data Labs as of
December 31, 1995 and December 31, 1996, and the related statements of
operations, shareholders' equity and cash flows for the period from
January 1, 1995 through December 31, 1995 and January 1, 1996 through
December 31, 1996, together with the notes thereto, in each case
audited by, and accompanied by the report thereon, of Arthur Andersen
LLP; and
(ii) the unaudited consolidated balance sheet of Data Labs as of
September 30, 1997 (the "UNAUDITED BALANCE SHEET") and the related
statements of operations and cash flows for the nine months then
ended.
Each of the Financial Statements has been prepared in accordance with generally
accepted accounting principles applied on a consistent basis, is correct and
complete in all material respects and fairly presents the financial position of
Data Labs as of its date or the results of operations or changes in financial
position, as is appropriate, of Data Labs for the periods then ended (subject,
in the case of unaudited interim financial statements to normal recurring year-
end adjustments, which adjustments will not be material in amount or effect).
The account records underlying the Financial Statements accurately and fairly
reflect, in reasonable detail, the transactions of Data Labs, and Data Labs'
books of account have been maintained on a consistent basis. To its knowledge,
all accounts receivable of Data Labs are valid and enforceable, are not subject
to any valid defense, set off or counterclaim, and are collectible in full in
accordance with their terms in the ordinary course of business of Data Labs,
except to the extent of any reserves therefor reflected on the Unaudited Balance
Sheet or taken in the ordinary course of business which in the aggregate are not
material to Data Labs.
3.8 Absence of Undisclosed Liabilities. To its knowledge, Data Labs has
----------------------------------
no Liabilities or Obligations, except those Liabilities or Obligations which are
(a) fully reflected or in the aggregate adequately reserved against in the
Unaudited Balance Sheet (including any notes thereto), (b) disclosed in this
Agreement or on SCHEDULE 3.8 hereto, or (c) incurred in the ordinary course of
business and in the aggregate are not material to Data Labs. There has not been
any assertion against Data Labs of any liability or obligation of any nature or
in any amount not (a) fully reflected or in the aggregate adequately reserved
against in the Unaudited Balance
-12-
<PAGE>
Sheet, (b) disclosed in this Agreement or on SCHEDULE 3.8 hereto, or (c)
incurred in the ordinary course of business and in the aggregate not material in
amount to Data Labs. For the purposes of this Agreement, the phrase "LIABILITIES
OR OBLIGATIONS" shall include any direct or indirect indebtedness, claim, loss,
damage, deficiency (including deferred income tax and other net tax
deficiencies), cost, expense, obligation, guarantee, or responsibility, whether
accrued, absolute or contingent, fixed or unfixed, liquidated or unliquidated,
secured or unsecured.
3.9 Properties. Except as set forth on SCHEDULE 3.9, all of the material
----------
assets and properties of Data Labs are reflected on the Unaudited Balance Sheet
(except to the extent not required to be so reflected by generally accepted
accounting principles), and Data Labs has good, valid and marketable title to
all of its owned assets and properties, whether real, personal or mixed,
tangible or intangible, free and clear of all liens, except (a) liens for
current Taxes not delinquent, (b) liens in connection with workers'
compensation, unemployment insurance or other social security obligations, (c)
deposits or pledges to secure bids, tenders, contracts (other than contracts for
the payment of money), leases, statutory obligations, surety and appeal bonds
and other obligations of like nature arising in the ordinary course of business
and (d) mechanic's, workman's, materialmen's or other like liens arising in the
ordinary course of business with respect to obligations which are not due or
which are being contested in good faith.
3.10 Real Property. Data Labs does not own any real property. Set forth
-------------
on SCHEDULE 3.10 is an accurate and complete list and summary description of all
real property currently leased by or on behalf of Data Labs and, except as set
forth on SCHEDULE 3.10, none of the described leases require any consent to the
transactions contemplated by this Agreement. Data Labs has previously delivered
to Yurie and the Company accurate and complete copies of all leases listed and
described on SCHEDULE 3.10. Except as set forth on SCHEDULE 3.10, Data Labs has
possession of each of the aforementioned properties and no event has occurred
which, with the lapse of time or notice or both, could result in a default under
any of the described leases. All rents or other payment obligations which have
become due in respect of each of such leased properties have been paid, Data
Labs has complied with its obligations under the said leases and Data Labs has
not received, since January 1, 1997, any notice of any breach of its obligations
under any covenants, agreements, statutory requirements, planning consents,
bylaws, orders and regulations affecting any of such properties, their use and
any business of Data Labs there carried on.
3.11 Condition of Tangible Assets. All tangible property, including
----------------------------
leased property and the fixtures therein, of Data Labs is in good operating
condition, reasonable wear and tear excepted and, the operation and use of such
property in the business of Data Labs conforms to all applicable laws,
ordinances, regulations, permits, licenses and certificates in all material
respects.
3.12 Intellectual Property. (a) Data Labs owns, or has the right to use
---------------------
by license, all patents, trademarks, trade names, service marks, copyrights, and
any applications therefor, maskworks, formulae, designs, schematics, technology,
trade secrets, know-how, computer software programs or applications (in both
source code and object code form), and tangible or intangible proprietary
information or material that are used or proposed to be used in the business
-13-
<PAGE>
of Data Labs as currently conducted (excluding any of the foregoing validly
licensed or purchased from third parties as set forth on SCHEDULE 3.12(b), the
"DATA LABS INTELLECTUAL PROPERTY RIGHTS"). SCHEDULE 3.12(a) sets forth a list of
all trademarks, service marks, trade names, registered copyrights and patents
(and any applications for the registration thereof) owned or licensed and used
by Data Labs during the last 3 years, specifying as to each, as applicable: (i)
the nature of such right; (ii) the owner of such right; and (iii) if applicable,
the jurisdictions by or in which such right has been issued or registered or in
which an application for such issuance or registration has been filed, including
the respective registration or application numbers. Data Labs has no patents or
patent applications. All registered trademarks, service marks and copyrights
held by Data Labs are valid and subsisting.
(b) SCHEDULE 3.12(b) sets forth a complete list of (i) all material
licenses, sublicenses and other agreements as to which Data Labs is a party and
pursuant to which any person is authorized to use any Data Labs Intellectual
Property Right, including the identity of all parties thereto (other than
customer licensing agreements received by customers in connection with purchases
of Data Labs' products that would not have a Material Adverse Effect on Data
Labs Intellectual Property Rights), and (ii) all licenses, sublicenses and other
agreements as to which Data Labs is a party and pursuant to which Data Labs is
authorized to use (1) any third party patents, trademarks or copyrights
(including software) (the "DATA LABS THIRD PARTY INTELLECTUAL PROPERTY RIGHTS")
which are incorporated in, or form a part of, any Data Labs product, or (2) any
trade secret of a third party in or as to any Data Labs product including the
identity of all parties thereto. Data Labs has no knowledge that the Data Labs
Third Party Intellectual Property Rights are not owned by or have not been
assigned or licensed to the licensor of such right. Data Labs is not, nor will
it be as a result of the execution and delivery of this Agreement or the
performance of its obligations hereunder, in breach or violation of any license,
sublicense or agreement described on SCHEDULE 3.12(b).
(c) No claims with respect to Data Labs Intellectual Property Rights
or Data Labs Third Party Intellectual Property Rights (to the extent arising out
of any use, reproduction or distribution of such Data Labs Third Party
Intellectual Rights by or through Data Labs), have been asserted or, to Data
Labs' knowledge, are threatened by any person. Data Labs has no knowledge of
any valid grounds for any bona fide claims (i) to the effect that the
manufacture, sale, licensing or use of any product as now used, sold or licensed
or proposed for use, sale or license by Data Labs infringes on any copyright,
patent, trademark, service mark or trade secret, (ii) against the use by Data
Labs of any trademarks, trade names, trade secrets, copyrights, patents,
technology, know-how or computer software programs and applications used in Data
Labs' business as currently conducted, (iii) challenging the ownership, validity
or effectiveness of any of Data Labs Intellectual Property Rights, or (iv)
challenging Data Labs' license or legally enforceable right to use, or the
validity or effectiveness of Data Labs Third Party Intellectual Property Rights.
Data Labs (i) has not been sued or charged in writing as a defendant in any
claim, suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other proprietary right of any third party, and (ii) except as set forth on
SCHEDULE 3.12(d), has not been threatened or charged in writing, orally or
otherwise with infringement or violation of any patents, trademarks, service
marks, copyrights or trade secrets or other proprietary right of any third
party.
-14-
<PAGE>
(d) To Data Labs' knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Data Labs Intellectual Property Rights
or any Data Labs Third Party Intellectual Property Right to the extent licensed
by or through Data Labs, by any third party, including any employee or former
employee of Data Labs.
(e) No Data Labs Intellectual Property Right or, to Data Labs'
knowledge, Data Labs Third Party Intellectual Property Right is subject to any
outstanding order, judgment, decree, legal or governmental proceeding (other
than pending applications for patent, trademark registration or copyright
registration) or stipulation restricting in any manner the licensing thereof by
Data Labs. Except for contracts licensing Data Labs' products executed in the
ordinary course of business and in accordance with Data Labs' past practices,
Data Labs has not entered into any agreement to indemnify any other person
against any charge of infringement of any third party's intellectual property
right.
(f) Data Labs has taken reasonable measures to protect and preserve
(i) the validity and enforceability of trademarks included in the Data Labs
Intellectual Property Rights, (ii) the confidentiality and validity and
enforceability of unpublished copyrighted works or pending patent applications
included in the Data Labs Intellectual Property Rights, (iii) the validity and
enforceability of patents included in the Data Labs Intellectual Property
Rights, and (iv) the confidentiality and validity and enforceability of its
trade secrets and other confidential information. Except as set forth on
SCHEDULE 3.12(c), each employee and consultant of Data Labs has executed a
nondisclosure and assignment of inventions agreement to protect the
confidentiality and to vest in Data Labs exclusive ownership of such
Intellectual Property Rights. To Data Labs' knowledge, no employee or
consultant of Data Labs has used any trade secrets or other confidential
information of any other person in the course of their work for Data Labs and,
except as set forth on SCHEDULE 3.12(d), Data Labs has not been sued, charged or
threatened with any such claim. To Data Lab's knowledge, no employee or
consultant has used, divulged or appropriated for the benefit of, himself or any
person other than Data Labs any trade secret or confidential information of Data
Labs. Data Labs has no written or oral agreements with employees or consultants
with respect to the ownership of inventions, trade secrets or other works
created by them as a result of which any such employee or consultant may have
nonexclusive rights to the portions of Data Labs' Intellectual Property Rights
so created by such individual.
(g) No officer or employee of Data Labs is in violation of any term of
any employment contract, patent disclosure agreement, proprietary information
agreement, noncompetition agreement, nonsolicitation agreement, confidentiality
agreement, or any other similar contract or agreement or any restrictive
covenant relating to the right of any such officer or employee to be employed or
engaged by Data Labs because of the nature of the business conducted or to be
conducted by Data Labs or relating to the use of trade secrets or proprietary
information of others; to Data Labs' knowledge, no consultant of Data Labs is in
violation of any term of any employment contract, patent disclosure agreement,
proprietary information agreement, noncompetition agreement, nonsolicitation
agreement, confidentiality agreement, or any other similar contract or agreement
or any restrictive covenant relating to the right of any
-15-
<PAGE>
such officer or employee to be employed or engaged by Data Labs because of the
nature of the business conducted or to be conducted by Data Labs or relating to
the use of trade secrets or proprietary information of others; and, to Data
Labs' knowledge, the continued employment or retention of its officers,
employees or consultants does not subject Data Labs to any material liability
with respect to any of the foregoing matters; and, except as set forth on
SCHEDULE 3.12(d), Data Labs has not been sued, charged or threatened with any
claim with respect to any of the foregoing matters.
3.13 Absence of Certain Changes. Except as disclosed on SCHEDULE 3.13,
--------------------------
since September 30, 1997, the business of Data Labs has been conducted in the
ordinary course and there has not been:
(i) any event, occurrence, development or state of
circumstances or fact which has had or could reasonably be expected to
result in or have a Material Adverse Effect on Data Labs;
(ii) any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of
Data Labs, or any repurchase, redemption or other acquisition by Data
Labs of any outstanding shares of capital stock or other securities
of, or other equity or ownership interests in, Data Labs;
(iii) any amendment of any term of any outstanding security of
Data Labs;
(iv) any incurrence, assumption or guarantee by Data Labs of
any indebtedness for borrowed money other than in the ordinary course
of business, but in any event not exceeding an aggregate of $20,000;
(v) any creation or assumption by Data Labs of any Lien on any
asset, other than liens incurred in the ordinary course of business or
that do not in the aggregate have a Material Adverse Effect;
(vi) any making of any loan, advance or capital contributions
to or investment in any person;
(vii) any damage, destruction or other casualty loss (whether or
not covered by insurance) affecting the business or assets of Data
Labs which has had or would reasonably be expected to result in or
have a Material Adverse Effect on Data Labs;
(viii) any acquisitions of any capital assets or any other
investments for aggregate consideration in excess of $20,000;
-16-
<PAGE>
(ix) any sale, lease, pledge, transfer or other disposition of
any capital assets for aggregate consideration in excess of $20,000;
(x) any transaction or commitment made, or any contract or
agreement entered into, by Data Labs relating to its assets or
business (including the acquisition or disposition of any assets)
other than those transactions covered by any other subparagraphs of
this Section 3.13 or any relinquishment by Data Labs of any contract
or other right, in either case, involving an amount in excess of
$20,000, other than transactions, commitments and relinquishments in
the ordinary course of business and those contemplated by this
Agreement;
(xi) any change in any method of accounting or significant
accounting practice by Data Labs;
(xii) any (A) grant of any severance or termination pay to any
director, officer or employee of Data Labs, (B) entering into of any
employment, severance, management, consulting, deferred compensation
or other similar agreement (or any amendment to any such existing
agreement) with any director, officer, consultant or employee of Data
Labs, (C) change in benefits payable under existing severance or
termination pay policies or employment, severance, management,
consulting or other similar agreements or (D) change in compensation,
bonus or other benefits payable to directors, consultants, officers or
employees of Data Labs;
(xiii) any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or
representative thereof to organize any employees of Data Labs, or any
lockouts, strikes, slowdowns, work stoppages or threats thereof by or
with respect to any employees of Data Labs;
(xiv) any agreement or commitment containing a covenant
limiting or purporting to limit the freedom of Data Labs to compete
with any person in any geographic area or engage in any line of
business;
(xv) any joint venture or similar arrangement which involves a
sharing of profits or future payments to other persons; or
(xvi) any agreement, undertaking or commitment to do any of the
foregoing.
3.14 Litigation. Except as set forth on SCHEDULE 3.14, there is no action,
----------
suit, investigation or proceeding pending or threatened against or affecting,
Data Labs or any of its properties or assets before any court or arbitrator or
any Governmental Authority. Except as set forth on SCHEDULE 3.14, there is no
litigation pending or, to Data Labs' knowledge, threatened against any officer
or key employee relating to Data Labs or its business. Neither Data Labs nor,
to Data Labs' knowledge, any officer or key employee is subject to any judgment,
order or
-17-
<PAGE>
decree relating to Data Labs entered in any lawsuit or proceeding or issued by
any Governmental Authority. The foregoing sentences include, without limiting
their generality, actions pending or threatened (or any basis therefor known to
Data Labs) involving the prior employment or engagement of any of the Data Labs'
officers or key employees or their use in connection with Data Labs' business of
any information or techniques allegedly proprietary to any of their former
employers or to any other Person.
3.15 Material Contracts. (a) Except for agreements, contracts, plans,
------------------
leases, arrangements or commitments disclosed on SCHEDULE 3.15 provided to Yurie
pursuant to this Agreement, Data Labs is not a party to or subject to:
(i) any collective bargaining agreement;
(ii) any agreements that contain any unpaid severance
Liabilities or Obligations;
(iii) any bonus, deferred compensation, incentive compensation,
pension, profit-sharing or retirement plans, or any other employee
benefit plans or arrangements;
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or
other organization;
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation right plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting
of benefits of which will be accelerated, by the occurrence of any of
the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement;
(vi) any fidelity or surety bond or completion bond;
(vii) any lease of personal property having a remaining value
individually in excess of $20,000;
(viii) any agreement of indemnification or guaranty;
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of Data Labs or any of its officers or
employees to engage in any line of business or compete with any
person;
(x) any agreement, contract or commitment relating to capital
expenditures and involving future obligations in excess of $20,000;
-18-
<PAGE>
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership,
joint venture or other business enterprise;
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the
borrowing of money or extension of credit, including guaranties
referred to in clause (viii) hereof;
(xiii) any purchase order or contract for the purchase of raw
materials or acquisition of assets involving $20,000 or more;
(xiv) any construction contracts;
(xv) any distribution, joint marketing, teaming or development
agreement;
(xvi) any distributor, dealer, franchise, original equipment
manufacturer, reseller, manufacturer's representative or sales agency
contract or commitment;
(xvii) any agreements pertaining to Data Labs' maintenance or
support of its products, services or supplies;
(xviii) any agreement, contract or commitment which involves
$20,000 or more and is not cancelable without penalty within thirty
(30) days; and
(xix) any other agreement, contract or commitment that is
material to Data Labs.
Data Labs has not breached, or received any claim or threat that it has
breached, any of the terms or conditions of any agreement, contract or
commitment set forth in any of Data Labs' Schedules in such a manner as would
permit any other party to cancel or terminate the same, which cancellation or
termination would not have a Material Adverse Effect. Each agreement, plan,
contract or commitment set forth in any of Data Labs' Schedules is a valid and
binding agreement of Data Labs and, to Data Labs' knowledge, each other party
thereto and is in full force and effect and is not subject to any default
thereunder of which Data Labs has knowledge by any party obligated to Data Labs
pursuant thereto. Data Labs has obtained all necessary consents, waivers and
approvals as are required in connection with the Merger under any of Data Labs'
agreements, contracts, licenses or leases.
(b) Except as disclosed on SCHEDULE 3.15, there is no contract,
agreement, commitment or obligation to which Data Labs is a party or is bound
that at the time it was entered into or made was, or is currently, known or
expected by Data Labs to result in any material loss to Data Labs upon
completion or performance thereof, or any bid, offer or proposal which if
accepted would result as such a contract, agreement, commitment or obligation.
-19-
<PAGE>
(c) Except as disclosed on SCHEDULE 3.15, Data Labs is not a party to
any agreement with any of its securityholders or optionholders, or any affiliate
of any Significant Shareholder of Data Labs, nor is any Significant Shareholder
of Data Labs a party to any agreement with any other such Significant
Shareholder relating to Data Labs or any of its securities. "SIGNIFICANT
SHAREHOLDER" shall mean any shareholder that holds greater than 10% of any class
of capital stock of Data Labs.
3.16 Taxes. (a) The term "TAXES" as used herein means all federal, state,
-----
local, foreign and other net income, gross income, gross receipts, sales, use,
ad valorem, transfer, franchise, profits, license, lease, service, service use,
withholding (including backup withholding), payroll, employment, excise,
severance, stamp, occupation, premium, property (real or personal), windfall
profits, customs duties, unemployment insurance, environmental (including taxes
under Internal Revenue Code (S) 59A), worker's compensation, Pension Benefit
Guaranty Corporation premiums, disability, capital stock, social security (or
similar), registration, alternative or add-on minimum, estimated, or other taxes
of any kind whatsoever, including any interest, penalty or addition thereto,
whether disputed or not, and the term "TAX" means any one of the foregoing
taxes. The term "RETURNS" as used herein means all returns, declarations,
reports, claims for refund, or information returns or statements relating to
Taxes, including any schedule or attachment thereto, and including any amendment
thereof, and "RETURN" means any one of the foregoing returns. All citations to
the Code, or the Treasury Regulations promulgated thereunder, shall include any
amendments or any substitute or successor provisions thereto.
(b) Data Labs has filed (or has had filed on its behalf) all Returns
required to be filed as of the date hereof with respect to periods ending on or
before the date hereof (taking into account all extensions of time within which
to file any Return that have been granted by the relevant taxing authority).
All such Returns are true, complete and correct, and Data Labs has maintained
all required records with respect thereto. Except as set forth on Schedule
3.16, Data Labs is not currently the beneficiary of any extension of time within
which to file any Return. All Taxes shown to be payable by Data Labs on the
Returns, or on subsequent assessments with respect thereto, with respect to any
period ending on or prior to the date hereof have been paid in full, and no
other material Taxes are payable by Data Labs with respect to items or periods
covered by such Returns (whether or not shown on or reportable on such Returns).
Data Labs has paid all estimated Taxes required to be paid on or prior to the
date hereof. No claim has ever been made by an authority in a jurisdiction
where Data Labs does not file Returns that it is or may be subject to taxation
by that jurisdiction.
(c) Data Labs has withheld and paid over all Taxes required to have
been withheld and paid over by it in connection with amounts paid or owing to
any employee, creditor, independent contractor, shareholder or other third
party.
(d) The amount of Data Labs' liability for unpaid Taxes as of the date
of the Unaudited Balance Sheet (including unpaid Taxes with respect to portions
of periods ending after the date of the Unaudited Balance Sheet) does not, in
the aggregate, exceed the amount of
-20-
<PAGE>
the net current liability accruals for Taxes set forth on the Unaudited Balance
Sheet and Data Labs will incur no additional Taxes subsequent to the date of the
Unaudited Balance Sheet until the Effective Time except in the ordinary course
of business (including, for this purpose, transactions of which Yurie has
knowledge which are required to be undertaken by Data Labs in order to
consummate the Merger).
(e) No issues have been raised (and are currently pending) by any
taxing authority in connection with any of the Returns of Data Labs. SCHEDULE
3.16 lists all federal, state, local and foreign income tax Returns filed with
respect to Data Labs for taxable periods ended on or after December 31, 1992,
indicates those returns that have been audited and indicates those returns that
currently are the subject of audit. Data Labs has delivered to Yurie and the
Company correct and complete copies of all federal income tax returns,
examination reports, and statements of deficiencies assessed against or agreed
to by Data Labs since December 31, 1992.
(f) Data Labs has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency, which waiver or extension remains currently in effect.
(g) Data Labs has not filed a consent under Section 341(f) of the
Code concerning collapsible corporations. Data Labs has not made any payments,
is not obligated to make any payments, and is not a party to any agreement that
could obligate it to make any payments that will not be deductible under Section
280G of the Code. Except as may be required under Section 448 of the Code in
connection with this transaction, Data Labs has not agreed to make any
adjustment under Section 481(a) of the Code by reason of a change in accounting
method or otherwise, and Data Labs will not be required to make any such
adjustment as a result of the transactions contemplated by this Agreement. Data
Labs is not a party to any safe harbor lease within the meaning of Section
168(f)(8) of the Code, as in effect prior to amendment by the Tax Equity and
Fiscal Responsibility Act of 1982. Data Labs is not and has not ever been, a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code. Data Labs is not (and has not ever been) a party to any
Tax allocation or sharing agreement. Data Labs (A) has not ever been a member
of a group of corporations filing a consolidated, unitary or combined Return and
(B) is not liable for the Taxes of any other person under Treas. Reg. (S)
1.1502-6 (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract, or otherwise. Data Labs has no
unrecognized gain as of the date hereof under Section 453 of the Code. Data
Labs has not participated in or cooperated with any international boycott within
the meaning of Section 999 of the Code. The ability of Data Labs to use its net
operating loss and other carryovers will not have been affected by Sections 382,
383 or 384 of the Code (other than as a result of the Merger and the
contemplated exercise of Data Labs Warrants in connection therewith). Data Labs
is not a party to any joint venture, partnership, or other arrangement or
contract which could be treated as a partnership for federal income tax
purposes. Data Labs has not had a permanent establishment in any foreign
country, as defined in any applicable Tax treaty or convention between the
United States and such foreign country. No power of attorney has been granted
by Data Labs, and is currently in force, with respect to any matter relating to
Taxes. To the best of Data Labs' knowledge, Data Labs has disclosed on its
federal income Tax Returns all positions taken therein that could give rise to a
-21-
<PAGE>
substantial understatement of federal income Tax within the meaning of Section
6662 of the Code.
(h) SCHEDULE 3.16 sets forth the following information with respect to
Data Labs as of the most recent practicable date: (A) the basis of Data Labs
and its assets, and (B) the amount of any net operating loss, net capital loss,
unused investment or other credit, unused foreign tax, or excess charitable
contribution allocable to Data Labs.
3.17 Employees. SCHEDULE 3.17 sets forth a true and complete list of (a)
---------
the names, titles, annual salaries and other compensation of all employees of
Data Labs (the "EMPLOYEES") as of the date first above written and the location
at which such Employees regularly perform services for Data Labs and (b) the
wage rates for non-salaried Employees of Data Labs (by classification). Any
agreements, commitments or understandings between Data Labs and any Employee
concerning such Employee's future salary, compensation or terms of employment
are summarized on SCHEDULE 3.17. Except as set forth on SCHEDULE 3.17, as of
the date first written above none of such Employees has indicated to Data Labs
that he intends to resign or retire as a result of the transactions contemplated
by this Agreement or otherwise. Data Labs has no Employees represented by a
union and Data Labs (i) is in compliance with all applicable laws and
regulations respecting employment wages and (ii) is not engaged in any unfair
labor practice.
3.18 Transactions with Affiliates. Except as set forth on SCHEDULE 3.18,
----------------------------
there are no loans, leases, royalty agreements or other agreements between Data
Labs, on the one hand, and any affiliate of Data Labs, any of the shareholders
of Data Labs, any affiliate of any Significant Shareholder of Data Labs, or any
member of any such Significant Shareholder's family, on the other hand. Except
as set forth on SCHEDULE 3.18, none of the officers or directors of Data Labs
(a) to Data Labs' knowledge, has any material direct or indirect interest in any
entity which does business with Data Labs, (b) has any material direct or
indirect interest in any property, asset or right which is used by Data Labs in
the conduct of its business, or (c) has any contractual relationship with Data
Labs other than such relationships which occur from being an employee, officer,
director or shareholder of Data Labs.
3.19 Insurance Coverage. SCHEDULE 3.19 sets forth an accurate and
------------------
complete list of all insurance policies and fidelity bonds covering the assets,
business, equipment, properties, operations, employees, officers and directors
of Data Labs. There is no claim by Data Labs pending under any of such policies
or bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums payable under all such
policies and bonds have been paid, and Data Labs has otherwise complied with the
terms and conditions of all such policies and bonds. Such policies of insurance
and bonds (or other policies and bonds providing substantially similar insurance
coverage) have been in effect since the dates indicated on SCHEDULE 3.19 and
remain in full force and effect. Data Labs has no knowledge of any threatened
termination of, and has not received written notice of, any premium increase
with respect to, any of such policies or bonds.
-22-
<PAGE>
3.20 Compliance with Laws; No Defaults. (a) Data Labs is not in violation
---------------------------------
of any applicable provisions of any law, statute, ordinance, regulation,
judgment, order, injunction, permit, license, certificate or other
authorization, or its governing instruments, except for violations that have not
had and would not reasonably be expected to have a Material Adverse Effect on
Data Labs.
(b) Data Labs is not in default under, and no condition exists that
with notice or lapse of time or both would constitute a default under, any
applicable law, statute, ordinance, regulation, judgment, order, injunction,
permit, license, certificate or other authorization, or its governing
instruments, except defaults that would not reasonably be expected to have a
Material Adverse Effect on Data Labs.
(c) Data Labs is in compliance with all currently applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours in all material respects, and is not engaged in
any unfair labor practice, failure to comply with which or engagement in which,
as the case may be, has had, or would reasonably be expected to have, a Material
Adverse Effect on Data Labs.
3.21 Finders' Fees. Except as set forth on SCHEDULE 3.21, there is no
-------------
investment banker, broker, finder or other intermediary that has been retained
by or is authorized to act on behalf of Data Labs who might be entitled to any
fee or commission from Yurie, the Company, Data Labs or any other person upon
consummation of the transactions contemplated by this Agreement.
3.22 Environmental Matters. (a) Except as disclosed on SCHEDULE 3.22,
---------------------
(i) to Data Labs' knowledge, no notice, notification, demand,
request for information, citation, summons, complaint or order has
been issued, no complaint has been filed, no penalty has been assessed
and no investigation or review is pending or threatened by any
governmental entity or other person with respect to any (A) alleged
violation by Data Labs of any Environmental Law (as defined below) or
liability thereunder, (B) alleged failure by Data Labs to have any
permit, certificate, license, approval, registration or authorization
required under any Environmental Law in connection with the conduct of
its business or (C) Release of Hazardous Substances;
(ii) to Data Labs' knowledge, no polychlorinated biphenyls,
radioactive material, urea formaldehyde, lead, asbestos, asbestos-
containing material or any other Hazardous Substance or underground
storage tank (active or abandoned) is or was present at any premises
now leased and actually occupied by Data Labs or was present at any
premises owned or leased and actually occupied by Data Labs in the
five years preceding the date of this Agreement; and
-23-
<PAGE>
(iii) to Data Labs' knowledge, there are no Environmental
Liabilities (as defined below) that have had or may reasonably be
expected to have a Material Adverse Effect on Data Labs.
(b) To Data Labs' knowledge, there has been no environmental
investigation, study, audit, test, review or other analysis conducted of which
Data Labs has possession, or to which it has access, in relation to the current
or prior business of Data Labs or any property or facility now or previously
owned or leased by Data Labs which has not been delivered to Yurie at least five
days prior to the date hereof.
(c) To Data Labs' knowledge, it has not transported or arranged for
the transportation (directly or indirectly) of any Hazardous Substance to any
location which is listed or proposed for listing under CERCLA (hereinafter
defined), or on any similar state list or which is the subject of Federal, state
or local enforcement actions or other investigations which may lead to claims
for clean-up costs, remedial work, damages to natural resources or for personal
injury claims, including, but not limited to, claims under CERCLA or analogous
state environmental clean-up laws.
(d) "CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
(e) "ENVIRONMENTAL LAWS" means any and all laws or regulations,
judicial decisions, orders or permits relating to the environment or human
health or safety or to emissions, discharges or releases of pollutants,
contaminants, petroleum or petroleum products, chemicals or industrial, toxic,
radioactive or hazardous substances or wastes into the environment including,
without limitation, ambient air, surface water, ground water, or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, petroleum
or petroleum products, chemicals or industrial, toxic, radioactive or hazardous
substances medical wastes or other wastes or the clean-up or other remediation
thereof.
(f) "ENVIRONMENTAL LIABILITIES" means all environmental liabilities
arising in connection with or in any way relating to the assets of Data Labs or
Data Labs' use or ownership thereof, whether vested or unvested, contingent or
fixed, actual or potential, which (i) arise under or relate to Environmental
Laws or arise in connection with or relate to any matter disclosed or required
to be disclosed on SCHEDULE 3.22 and (ii) arise from or relate in any way to
actions occurring or conditions existing before the Closing Date.
(g) "HAZARDOUS SUBSTANCE" means petroleum products or hazardous
substances as defined in Section 101 of CERCLA.
(h) "RELEASE" has the meaning specified in 42 U.S.C. (S) 9601(22).
-24-
<PAGE>
(i) For purposes of this Section, the term "Data Labs" shall include
any business or business entity (including a corporation) which is a
predecessor, in whole or in part, of Data Labs.
3.23 Employees and Employee Plans. (a) Data Labs has set forth on
----------------------------
SCHEDULE 3.23 all employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all
bonus, stock option, stock purchase, incentive, deferred compensation,
supplemental retirement, severance insurance (including any self-insured or
post-retirement arrangements), disability, vacation, profit-sharing and other
similar employee benefit plans, arrangements, policies or agreements, and all
unexpired employment and severance agreements, written or otherwise, for the
benefit of, or relating to, any current or former employee of Data Labs or any
trade or business (whether or not incorporated) which, together with Data Labs
would be treated as a single employer under Section 414 of the Code (an "ERISA
AFFILIATE"), (together, the "DATA LABS EMPLOYEE PLANS").
(b) With respect to each Data Labs Employee Plan, Data Labs has made
available to Yurie, a true and correct copy of (i) the most recent annual report
(Form 5500), if applicable, filed with the Internal Revenue Service ("IRS"),
(ii) such Data Labs Employee Plan, (iii) each trust agreement and group annuity
contract, if any, relating to such Data Labs Employee Plan, (iv) the most recent
actuarial report or valuation, if any, relating to a Data Labs Employee Plan and
(v) an accurate summary plan description of such Data Labs Employee Plan.
(c) With respect to the Data Labs Employee Plans, individually and in
the aggregate, to Data Labs' knowledge, no event has occurred and there exists
no condition or set of circumstances which could subject Data Labs to any
liability under ERISA, the Code or any other applicable law that may have a
Material Adverse Effect on Data Labs.
(d) Each Data Labs Employee Plan which is intended to be qualified
under Section 401(a) of the Code has been determined by the Internal Revenue
Service to be so qualified, and each trust forming a part thereof has been
determined by the Internal Revenue Service to be exempt from tax pursuant to
Section 501(a) of the Code. Data Labs has furnished to Yurie copies of the most
recent Internal Revenue Service determination letters with respect to each such
plan and, except as otherwise disclosed in Schedule 3.23, no such Data Labs
Employee Plan has been amended since the date of such determination letters.
(e) Each Data Labs Employee Plan has been maintained in material
compliance with its terms and the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such Data Labs Employee Plan.
(f) Neither Data Labs nor any of its ERISA affiliates maintains or has
ever maintained or contributed to any "multiemployer plan" (as that term is
defined in Section 3(37) of ERISA) or any plan subject to Title IV of ERISA. No
"prohibited transaction" (as that term is defined in Section 406 of ERISA or
Section 4975 of the Code) has occurred with respect to any
-25-
<PAGE>
Data Labs Employee Plan. There is no contract, agreement, plan or arrangement
covering any employee or former employee of Data Labs or any of its ERISA
affiliates that, individually or collectively, could give rise to the payment of
any amount that would not be deductible pursuant to the terms of Section 280G of
the Code. No tax under Section 4980B of the Code has been incurred with respect
to any Data Labs Employee Plan that is a group health plan, as defined in
Section 5000(b)(1) of the Code. With respect to the employees and former
employees of Data Labs or any of its ERISA affiliates, there are no employee
post-retirement medical or health plans in effect, except as required by Section
4980B of the Code.
(g) With respect to the Data Labs Employee Plans, individually and in
the aggregate, there are no funded benefit obligations for which contributions
have not been made or properly accrued and there are no unfunded benefit
obligations which have not been accounted for by reserves, or otherwise properly
footnoted in accordance with generally accepted accounting principles, on the
financial statements of Data Labs, which obligations in the aggregate may have a
Material Adverse Effect on Data Labs.
(h) Except as set forth on SCHEDULE 3.23, Data Labs is not a party to
any oral or written (i) agreement with any officer or any other key employee of
Data Labs, the benefits of which are contingent, or the terms of which are
altered, upon the occurrence of a transaction involving Data Labs of the nature
contemplated by this Agreement, (ii) agreement with any officer of Data Labs
providing any term of employment or compensation guarantee extending for a
period longer than one year from the date hereof or for the payment of
compensation in excess of $80,000 per annum, or (iii) agreement or plan,
including any stock option plan, stock appreciation right plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
3.24 Other Information. None of the representations and warranties of
-----------------
Data Labs contained herein or in and of the Schedules hereto contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained herein or therein not misleading in light of the
circumstances in which it was made. Data Labs has disclosed to Yurie and the
Company all material information relating to Data Labs.
3.25 Investment Representations. (a) Except as disclosed in SCHEDULE 3.25,
--------------------------
to Data Labs' knowledge, based on suitability questionnaires circulated to each
shareholder of Data Labs and such other knowledge as Data Labs may have obtained
with respect to its shareholders without additional inquiry, each shareholder of
Data Labs receiving shares of Yurie Common Stock in the Merger (each, a "Selling
Shareholder") is an "Accredited Investor" as defined in Securities Act Rule
501(a).
(b) To Data Labs' knowledge, SCHEDULE 3.25 sets forth the location
where each Selling Shareholder is a resident, is domiciled, or maintains its
principal executive office.
-26-
<PAGE>
3.26 Shareholders. Set forth on SCHEDULE 3.26(a) is a complete list of the
------------
shareholders of record of Data Labs as of December 1, 1997, together with each
shareholders' address and the amount of Data Labs Preferred Stock and/or Data
Labs Common Stock held by each such shareholder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF YURIE AND THE COMPANY
Yurie and the Company hereby represent and warrant to Data Labs as follows:
4.1 Corporate Existence and Power. Each of Yurie and the Company is a
-----------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all corporate power and authority
necessary to enable it to own, lease or otherwise hold its properties and assets
and to carry on its business as now conducted and proposed to be conducted.
4.2 Corporate Authorization. The execution, delivery and performance by
-----------------------
Yurie and the Company of this Agreement, the Registration Rights Agreement, and
the Escrow Agreement and all other agreements contemplated hereby and the
consummation by Yurie and the Company of the Merger and other transactions
contemplated hereby and thereby, are within the corporate power and authority of
Yurie and the Company, respectively, and, have been duly authorized by all
necessary corporate action. Each of this Agreement, the Registration Rights
Agreement and the Escrow Agreement and all other agreements contemplated hereby
has been duly and validly authorized, executed and delivered by Yurie and the
Company and, subject to its execution by the other parties hereto or thereto,
constitutes a valid and binding obligation of Yurie and the Company, enforceable
against Yurie and the Company in accordance with its terms.
4.3 Consents and Approvals. The execution, delivery and performance by
----------------------
Yurie and the Company of this Agreement, and the consummation of the Merger and
other transactions contemplated by this Agreement by Yurie and the Company, do
not and will not require any consent, approval or action by or in respect of, or
any declaration, filing or registration with, any Governmental Authority or
other third party, other than (i) routine filings with the Secretary of State of
the State of Delaware necessary to consummate the Merger, (ii) compliance with
the applicable requirements of the Securities Act, the Exchange Act and any
applicable state securities and blue sky laws in connection with the offering,
sale and delivery of the shares of Yurie Common Stock to be issued in the Merger
and (iii) consents, approvals, actions, declarations, filings or registrations
where the failure to obtain such consents, approvals, action, or to make such
declaration, filing or registration, would not have a Material Adverse Effect.
4.4 Non-Contravention. The execution, delivery and performance by Yurie
-----------------
and the Company of this Agreement, and the consummation of the Merger and other
transactions contemplated by this Agreement by Yurie and the Company, do not and
will not, with or without the giving of notice, the lapse of time or both: (i)
contravene or conflict with the certificates of incorporation or bylaws of Yurie
or the Company; or (ii) assuming compliance with the matters
-27-
<PAGE>
referred to in Section 4.3, contravene or conflict with or constitute a
violation of any provision of any law, rule, regulation, judgment, injunction,
order or decree binding upon or applicable to Yurie or the Company; (iii) to its
knowledge, require any consent, approval or other action by any person,
contravene or conflict with or constitute a violation of or a default under, or
give rise to any right of termination, cancellation or acceleration of any right
or obligation of Yurie or to a loss of any benefit to which Yurie is entitled,
under any provision of (A) any material agreement, contract, indenture, lease or
other instrument binding upon Yurie or (B) assuming compliance with the matters
referred to in Section 4.3, any license, franchise, permit or other similar
authorization held by Yurie or (iv) except for the rights of any holders of
Dissenting Shares, result in the creation or imposition of any Lien on any asset
of Yurie.
4.5 Capitalization. (a) As of September 30, 1997, the authorized capital
--------------
stock of Yurie consisted of (i) 10,000,000 shares of Preferred Stock, par value
$.01 per share, none of which were issued and outstanding or held in the
treasury of Yurie, and (ii) 50,000,000 shares of Common Stock, par value $.01
per share, of which 24,909,976 shares were issued and outstanding and no shares
were held in the treasury of Yurie. As of September 30, 1997, there were
reserved for issuance an aggregate of up to 2,082,089 shares of Common Stock
under Yurie's various employee benefit plans (the "YURIE EMPLOYEE PLANS") and an
aggregate of 20,000 shares of Common Stock reserved for issuance pursuant to
options granted outside of the Yurie Employee Plans. Except as disclosed in
this Agreement or any Yurie SEC Document (as defined below), there are no
options, warrants, exchange rights, subscription rights or other agreements,
commitments or rights to purchase or otherwise acquire from Yurie, or
agreements, commitments or obligations of Yurie to issue or sell, any capital
stock, voting securities or securities convertible into or exchangeable for
capital stock or voting securities of Yurie, other than those contemplated by
this Agreement.
(b) The authorized capital stock of the Company consists of 100 shares
of Common Stock, par value $.01 per share, all of which are issued and
outstanding and owned of record by Yurie. All issued and outstanding shares of
Yurie Common Stock and Common Stock, par value $.01 per share, of the Company
are validly issued, fully paid and nonassessable, and have not been issued in
violation of any preemptive, first refusal or other subscription rights of any
shareholder of Yurie, the Company or any other person.
4.6 SEC Documents. Yurie has filed with the SEC and has made available to
-------------
Data Labs a true and complete copy of the following Yurie documents: (i) its
annual report on Form 10-K for the fiscal year ended December 31, 1996; (ii) its
quarterly reports on Form 10-Q for the fiscal quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997; (iii) its proxy statement dated May 23,
1997; (iv) its registration statement on Form S-1 that was declared effective on
October 6, 1997; (v) post-effective amendments to its registration statement on
Form S-1 and (vi) its current report on Form 8-K filed on November 24, 1997
(collectively, the "YURIE SEC DOCUMENTS"), which are all of the documents that
Yurie was required to file with the Commission from February 5, 1997 through the
date hereof. As of their respective dates, the Yurie SEC Documents complied in
all material respects with the requirements of the Securities Act, or the
Exchange Act, as the case may be, and the rules and regulations of the
-28-
<PAGE>
Commission thereunder applicable to such Yurie SEC Documents, and none of the
Yurie SEC Documents, as of their respective dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of Yurie's
subsidiaries is required to file any forms, reports or other documents with the
Commission. The consolidated financial statements of Yurie and its subsidiaries
included in the Yurie SEC Documents complied as to form in all material respects
with the published rules and regulations of the Commission with respect thereto,
were prepared in accordance with general accepted accounting principles applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of the unaudited statements, as permitted by
Rule 10-01 of Regulation S-X) and fairly presented in accordance with applicable
requirements of generally accepted accounting principles (subject, in the case
of the unaudited statements, to normal recurring adjustments, none of which will
be material) the consolidated financial position of Yurie and its subsidiaries
as of their respective dates and the consolidated results of operations and the
consolidated cash flows of Yurie and its subsidiaries for the periods presented
therein.
4.7 Yurie Common Stock. The shares of Yurie Common Stock to be issued and
------------------
exchanged for shares of Data Labs Common Stock and Data Labs Preferred Stock in
the Merger will, at the Effective Time, be duly authorized, validly issued,
fully paid and nonassessable and subject to no preemptive rights. The shares of
Yurie Common Stock to be issued upon the exercise of the Data Labs Options and
the Data Labs Warrants, when issued in accordance with the terms of the
agreements relating to such Data Labs Options and Data Labs Warrants, will be
duly authorized, validly issued, fully paid and nonassessable and subject to no
preemptive rights.
4.8 Ownership of The Company; No Prior Activities. (a) The Company was
---------------------------------------------
formed solely for the purpose of engaging in the transactions contemplated by
this Agreement.
(b) As of the date hereof and the Effective Time, except for
obligations or liabilities incurred in connection with its incorporation or
organization and the transactions contemplated by this Agreement and except for
this Agreement and any other agreements or arrangements contemplated by this
Agreement, the Company has not and will not have incurred, directly or
indirectly, through any subsidiary or affiliate (other than its parent), any
obligations or liabilities or engaged in any business activities of any type or
kind whatsoever or entered into any agreements or arrangements with any person.
4.9 Absence of Material Adverse Changes. Since September 30, 1997, Yurie
-----------------------------------
has not, except as may result from the transactions contemplated by this
Agreement and except as disclosed in any public filing or press release issued
by Yurie, suffered any material adverse change in its business, results of
operations or financial condition.
4.10 Compliance With Laws; No Defaults. (a) Yurie is not in violation of
---------------------------------
any applicable provisions of any law, statute, ordinance, regulation, judgment,
order, injunction, permit, license, certificate or other authorization, or its
governing instruments, except for
-29-
<PAGE>
violations that have not had and would not reasonably be expected to have a
Material Adverse Effect on Yurie.
(b) Yurie is not in default under, and no condition exists that with
notice or lapse of time or both would constitute a default under, any applicable
law, statute, ordinance, regulation, judgment, order, injunction, permit,
license, certificate or other authorization, or its governing instruments,
except defaults that would not reasonably be expected to have a Material Adverse
Effect on Yurie.
(c) Yurie is in compliance with all currently applicable laws
respecting employment and wages in all material respects, and is not engaged in
any unfair labor practice, failure to comply with which or engagement in which,
as the case may be, has had, or would reasonably be expected to have, a Material
Adverse Effect on Yurie.
4.11 Finders' Fees. Except as provided in Section 5.3(f), there is no
-------------
investment banker, broker, finder or other intermediary that has been retained
by or is authorized to act on behalf of Yurie who might be entitled to any fee
or commission from Yurie or the Company or any other person upon consummation of
the transactions contemplated by this Agreement.
4.12 Yurie Employee Plans. Each employee benefit plan, as such term is
--------------------
defined in Section 3(3) of ERISA, of Yurie or any of its affiliates
(collectively the "Yurie Employee Plans") complies in all material respects with
all applicable requirements of ERISA and the Code, and other applicable laws.
None of the Yurie Employee Plans is an employee pension benefit plan, which is
subject to Title IV of ERISA or Section 412 of the Code, or a multiemployer
plan, as such terms are defined in ERISA. Neither Yurie nor any of its
directors, officers, employees or agents has, with respect to any Yurie Employee
Plan, engaged in any "prohibited transaction," as such term is defined in the
Code or ERISA, not has any Yurie Employee Plan engaged in such prohibited
transaction which could result in any taxes or penalties or other prohibited
transactions, which in the aggregate could have a Material Adverse Effect.
4.13 Taxes. (a) Yurie has (i) timely filed all Returns required to be
-----
filed (taking into account any extension of time within which to file any Return
that has been granted by the relevant taxing authority) for all taxable periods
ending on or prior to the date hereof, and such Returns are true, complete and
correct in all material respects, (ii) paid or accrued all Taxes shown to be
due and payable on such Returns, (iii) properly accrued all Taxes for periods
subsequent to the periods covered by such Returns, and (iv) disclosed on
Schedule 4.9 all actions, suits, proceedings, investigations, audits or claims
now pending against it in respect of any Taxes.
(b) Prior to the Merger, Yurie will be in control of the Company
within the meaning of Section 368(c) of the Internal Revenue Code.
(c) Yurie has no plan or intention to cause Data Labs to issue
additional shares of its stock that would result in Yurie losing control of Data
Labs within the meaning of Section 368(c) of the Code.
-30-
<PAGE>
(d) Yurie has no plan or intention to reacquire any of its stock
issued in the Merger.
(e) Yurie has no plan or intention to liquidate Data Labs; to merge
Data Labs with or into another corporation; to sell or otherwise dispose of the
stock of Data Labs except for transfers of its stock to corporations controlled
by Yurie; or to cause Data Labs to sell or otherwise dispose of any of its
assets or of any of the assets acquired from Company, except for dispositions
made in the ordinary course of business or transfers of assets to a corporation
controlled by Data Labs.
(f) The Company is a recently formed corporation, having no assets or
liabilities other than assets transferred to it pursuant to the Merger, and the
Company has been created and maintained through the Effective Time solely for
the purposes of effecting the Merger. The Company will have no liabilities
assumed by Data Labs, and will not transfer to the Company any assets subject to
liabilities, in the Merger.
4.14 Absence of Claims. To Yurie's knowledge, as of the Effective Time, (a)
-----------------
it has no claim or cause of action of any kind (in law or in equity) against
Data Labs or its directors, officers or employees arising from or relating to
Yurie's existing supplier-customer relationship with Data Labs, and (b) there is
no breach or noncompliance by Data Labs of its representations, warranties or
covenants under this Agreement.
ARTICLE V
COVENANTS
5.1 Mutual Covenants and Agreements. Each of the parties hereby covenants
-------------------------------
and agrees with the other parties as follows:
(a) Cooperation. It shall cooperate fully with the other parties
hereto in furnishing any information or performing any action reasonably
requested by any such party, which information or action is necessary to the
successful consummation of the transactions contemplated by this Agreement or is
necessary, appropriate or desirable for the corporate purposes of Yurie.
(b) Other Required Information. It shall furnish to the other parties
hereto any application or statement, and all information concerning itself and
its subsidiaries as is required to be set forth in any application or statement,
to be filed with any Governmental Authority in connection with the transactions
contemplated by this Agreement, or otherwise.
(c) Confidentiality. Data Labs and Yurie have agreed in a
confidentiality agreement dated September 30, 1997 (the "CONFIDENTIALITY
AGREEMENT") to protect, among other things, the confidential information of the
other party. The Company and Yurie each hereby affirm each of their obligations
under such agreement which shall continue in full force and effect in accordance
with its terms. If this Agreement is terminated in accordance with
-31-
<PAGE>
Section 8.1 hereof, Yurie shall, and shall cause its agents, accountants,
advisors, counsel and other representatives to deliver to Data Labs all
documents and other material, and all copies thereof, obtained by Yurie or on
its behalf from Data Labs in connection with this Agreement, whether so obtained
before or after the execution hereof, and will not disclose any such information
or documents to any third parties or make any use of any confidential
information contained therein. If this Agreement is terminated in accordance
with Section 8.1 hereof, Data Labs shall, and shall cause its agents,
accountants, advisors, counsel and other representatives to, deliver to Yurie
all documents and other material, and all copies thereof, obtained by Data Labs
or on its behalf or by a shareholder of Data Labs from Yurie in connection with
this Agreement, whether so obtained before or after the execution hereof, and
will not disclose any such information or documents to any third parties or make
any use of any confidential information contained therein.
(d) Publicity. Except as otherwise required by applicable law or by
any applicable rules of any securities exchange or market, Data Labs shall not
issue any press release or make any other public statement concerning the
transactions contemplated by this Agreement without obtaining the prior approval
of Yurie.
(e) Pooling. From and after the date hereof and until the Effective
Date, it shall not knowingly take any action, or knowingly fail to take any
action, that would jeopardize the treatment of the Merger as a "pooling of
interest" for accounting purposes.
(f) Miscellaneous Agreements And Consents. Subject to the terms and
conditions provided in this Agreement, it shall use all reasonable efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, appropriate or desirable under applicable laws and regulations
to consummate the transactions contemplated by this Agreement. It will, and
will cause each of its subsidiaries to, use their respective reasonable efforts
to obtain consents of all third parties and Governmental Authorities necessary,
appropriate or desirable for the consummation of the transactions contemplated
by this Agreement.
5.2 Certain Covenants of Data Labs. Data Labs hereby covenants and agrees
------------------------------
with Yurie and the Company, until the Effective Time, as follows:
(a) Preservation of Business Organization. Data Labs shall use all
reasonable efforts to preserve the business organization of Data Labs and its
goodwill as to payors, providers, suppliers, distributors, clients and others
having business relations with Data Labs.
(b) Carry On In Regular Course. Data Labs shall carry on its business
in the ordinary course in a manner consistent with its past practices.
(c) Consents. Data Labs shall use all reasonable efforts to obtain
consents in writing to the transactions contemplated by this Agreement and/or
such amendments, assignments or modifications of such documents or instruments
as may be required in order that the transactions contemplated by this Agreement
shall not result in any default with respect to
-32-
<PAGE>
any law, rule, regulation, order, decree, license, agreement, contract,
commitment or instrument to which Data Labs is a party or by which Data Labs, or
any of its assets is bound.
(d) Capital Stock. Data Labs shall not redeem, purchase or otherwise
acquire, any Data Labs Securities, or agree to do any of the foregoing. Except
for any agreement by which Data Labs was bound immediately prior to the date
hereof and specifically disclosed on the Data Labs Disclosure Schedules, Data
Labs shall not accelerate, amend or change the period of exercisability of
options granted under employee stock plans or authorize cash payments in
exchange for any options granted under any of such plans. Data Labs shall not
issue, deliver, sell or grant or authorize or propose the issuance, delivery,
sale or grant of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities, other
than the issuance by Data Labs of (i) stock options that Data Labs has disclosed
on SCHEDULE 3.5 hereto and (ii) shares of Data Labs Common Stock pursuant to the
exercise of Data Labs stock options or Data Labs warrants outstanding as of the
date of this Agreement.
(e) Other Actions. Without the prior written consent of Yurie, Data
Labs shall not (i) amend its certificate of incorporation or bylaws as described
on SCHEDULE 3.13, (ii) declare, set aside or pay any dividend or otherwise make
a distribution with respect to any shares of capital stock of Data Labs, or
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
or other securities of, or other equity or ownership interests in, Data Labs,
(iii) amend any term of any outstanding security of Data Labs, (iv) incur,
assume or guarantee any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with past
practices, but in any event not exceeding an aggregate of $10,000, (v) create or
assume any Lien on any asset, (vi) make any loan, advance or capital
contributions to or investment in any person, (vii) acquire any capital assets
or any other investments for aggregate consideration in excess of $10,000,
(viii) sell, lease, pledge, transfer or dispose of any capital assets for
aggregate consideration in excess of $10,000, (ix) enter into any transaction or
make any commitment or any contract or agreement relating to its assets or
business (including the acquisition or disposition of any assets) or relinquish
any contract or other right, in either case, involving an amount in excess of
$10,000, other than transactions, commitments and relinquishments in the
ordinary course of business consistent with past practices and those
contemplated by this Agreement, (x) other than in the ordinary course of
business, make or change any election in respect of Taxes, adopt or change any
method of accounting or accounting practice in respect of Taxes (except with
respect to any change required under Section 448 of the Code in connection with
the Merger), enter into any closing agreement, settle any claim in respect of
Taxes, or consent to any extension or waiver of the limitation period applicable
to any claim or assessment in respect of Taxes, (xi) except as disclosed on
SCHEDULE 5.2(e), grant any severance or termination pay to any director, officer
or employee of Data Labs, enter into any employment, severance, management,
consulting, deferred compensation or other similar agreement (or any amendment
to any such existing agreement) with any director, officer or employee of Data
Labs, change the benefits payable under existing severance or termination pay
policies or employment, severance, management, consulting or other similar
agreements or change the compensation, bonus or other benefits payable to
-33-
<PAGE>
directors, officers or employees of Data Labs, other than increases in the
ordinary course of business of the compensation of the employees of Data Labs,
(xii) enter into any partnership arrangements, joint development agreements or
strategic alliances, (xiii) transfer or license to any person or entity or
otherwise extend, amend or modify any rights to the Data Labs Intellectual
Property Rights or enter into grants to future patent rights, other than in the
ordinary course of business, (xiv) make any grant of exclusive rights to any
third party, (xv) enter into any transaction with any of its shareholders or any
affiliates of any of its shareholders, other than in the ordinary course of, and
pursuant to the reasonable requirements of, its business and upon terms that are
no less favorable to Data Labs than Data Labs could obtain in a comparable
transaction with a person who was not such a shareholder or an affiliate of
such a shareholder or other than as contemplated by this Agreement, or (xvi)
agree to do any of the foregoing.
(f) Access. Subject to the Confidentiality Agreement, Data Labs shall
permit officers, employees, agents, attorneys and accountants and other persons
designated by Yurie full access after reasonable notice during normal business
hours to the properties, books, contracts, commitments, tax returns, examination
reports of the Internal Revenue Service and other records of Data Labs in
connection with and in furtherance of the transactions contemplated by this
Agreement. Unless prohibited by law or contract, such designees of Yurie shall
be furnished with true, accurate and complete copies of such contracts,
commitments and other records and all other information with respect to the
assets and business of Data Labs as such designees may reasonably request.
(g) Documents and Information to be Furnished. Data Labs shall
deliver to Yurie promptly after such documents are available Data Labs'
unaudited monthly financial reports with respect to periods ending after the
date hereof and all other documents, financial statements, budgets, proxy or
information statements, reports, correspondence, notices and other items Data
Labs delivers, or is required to deliver, to any of its shareholders.
(h) Shareholder Consent. Data Labs shall take all action necessary
in accordance with applicable law to obtain the written consent of its
shareholders owning at least 95% of each class or series of Data Labs' issued
and outstanding capital stock entitled to vote on this matter no later than
December 1, 1997 (the "SHAREHOLDER CONSENT") for the purpose of approving and
adopting this Agreement (including the transactions contemplated hereby). On or
before December 1, 1997, or as promptly as practicable thereafter, Data Labs
shall mail to each shareholder who was a shareholder on the record date for
determining shareholders entitled to vote, (i) an information statement (the
"INFORMATION STATEMENT") with respect to the matters to be submitted for
shareholder approval in the Shareholder Consent, and its Board of Directors
shall recommend to its shareholders the adoption of this Agreement (including
the transactions contemplated hereby), (ii) the Consent, and (iii) a notice that
appraisal rights are available for the shares of Data Labs Common Stock and Data
Labs Preferred Stock held by each such shareholder of Data Labs, together with
a copy of Section 262 of the Delaware Corporation Law, in satisfaction of Data
Labs' obligations under Section 262(d)(2) of the Delaware Corporation Law. In
addition, the Information Statement shall be accompanied by such other
information provided by Yurie as Yurie deems necessary in order to provide for
the offer and sale of the Yurie Common Stock to be issued in the Merger to be
exempt from any applicable
-34-
<PAGE>
registration or qualification requirements under either federal or state
securities or "Blue Sky" laws. Data Labs shall use all reasonable efforts to
obtain all votes and approvals of its shareholders necessary for the approval
and adoption of this Agreement under the Delaware Corporation Law (including the
transactions contemplated hereby).
(i) Notices of Certain Events. Data Labs shall promptly notify Yurie
of:
(i) any notice or other communication from any person alleging
that the consent of such person is or may be required in connection
with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this
Agreement;
(iii) any actions, suits, claims, investigations or proceedings
commenced relating to or involving or otherwise affecting Data Labs
that, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Article III or that relate
to the consummation of the transactions contemplated by this
Agreement; and
(iv) any matter arising and discovered after the date of this
Agreement that, if existing or known on the date of this Agreement,
would have been required to be disclosed pursuant to this Agreement or
that constitutes a breach or prospective breach of this Agreement by
Data Labs or any of its affiliates.
(j) Accuracy of Representations And Warranties. Data Labs shall not
(a) take or agree or commit to take any action that would make any
representation and warranty of Data Labs hereunder inaccurate in any respect at,
or as of any time prior to, the Closing Date or (b) omit or agree or commit to
omit to take any action necessary to prevent any such representation or warranty
from being inaccurate in any respect at any such time.
(k) No Solicitation. Until the earlier of the Effective Time or
termination of this Agreement pursuant to its terms, Data Labs shall not, and
will instruct its directors, officers, employees, representatives, investment
bankers, agents and affiliates not to, directly or indirectly, initiate,
solicit, encourage or participate in discussions with, provide information to,
or approve a transaction with, any corporation, partnership, person or other
entity or group concerning any merger, purchase or sale of substantial assets,
sale of shares of capital stock (or securities convertible or exchangeable or
otherwise evidencing, or any agreement or instrument evidencing, the right to
acquire capital stock) or similar transaction involving Data Labs (all such
transactions being referred to herein as "ACQUISITION PROPOSALS"). Data Labs
will immediately cease any and all existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing. Data Labs will (i) notify Yurie as promptly as practicable if any
inquiry or proposal is made or any information or access is requested in writing
in connection with an Acquisition Proposal or potential Acquisition Proposal and
(ii) as promptly as practicable notify Yurie of the significant terms and
conditions of any such Acquisition
-35-
<PAGE>
Proposal. In addition, subject to the other provisions of this Section 5.2(l),
from and after the date of this Agreement until the earlier of the Effective
Time and termination of this Agreement pursuant to its terms, Data Labs will
not, and will instruct their respective directors, officers, employees,
representatives, investment bankers, agents and affiliates not to, directly or
indirectly, make or authorize any public statement, recommendation or
solicitation in support of any Acquisition Proposal made by any person, entity
or group (other than Yurie).
(l) Affiliates. On or prior to the Closing, Data Labs shall deliver
to Yurie a letter identifying all persons which are, at the time the Merger is
consented to by the shareholders of Data Labs, "affiliates" of Data Labs for
purposes of Rule 145 under the Securities Act. Data Labs shall cause each such
person which is identified as an "affiliate" in such letter to deliver to Yurie
on or prior to the Effective Date a written statement in form of Exhibit J to
the effect that each such person will not offer to sell, transfer or otherwise
dispose of any of the shares of Yurie Common Stock issued to such person
pursuant to the Merger except (i) in accordance with the applicable provisions
of the Securities Act and the rules and regulations thereunder and (ii) until
February 20, 1998 or such earlier time as financial results covering at least 30
days of combined operations of Yurie and Data Labs have been published.
5.3 Covenants of Yurie and the Company. Yurie and the Company hereby
----------------------------------
covenant and agree with Data Labs as follows:
(a) Consents. Yurie shall use all reasonable efforts to obtain
consents in writing to the transactions contemplated by this Agreement and/or
such amendments, assignments or modifications of such documents or instruments
as may be required in order that the transactions contemplated by this Agreement
shall not result in any default with respect to any law, rule, regulation,
order, decree, license, agreement, contract, commitment or instrument to which
Yurie is a party or by which Yurie or any of its assets is bound.
(b) Documents And Information To Be Furnished. Yurie shall furnish to
Data Labs, promptly after filed with the Commission, its unaudited quarterly
financial reports in the form filed with the Commission on Form 10-Q prescribed
under the Exchange Act and such other reports, statements, documents and other
items Yurie files with the Commission or delivers, or is required to deliver, to
any of its shareholders.
(c) Notices Of Certain Events. Yurie shall promptly notify Data Labs
of:
(i) any notice or other communication from any person alleging
that the consent of such person is or may be required in connection
with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this
Agreement; and
-36-
<PAGE>
(iii) any actions, suits, claims, investigations or proceedings
commenced relating to or involving or otherwise affecting Yurie or any
of its subsidiaries that, if pending on the date of this Agreement,
would have been required to have been disclosed pursuant to Article IV
or that relate to the consummation of the transactions contemplated by
this Agreement.
(d) Resale Registration Statement. Yurie shall grant registration
rights to the shareholders of Data Labs in accordance with the terms of a
registration rights agreement (the "Registration Rights Agreement") attached as
EXHIBIT I hereto.
(e) Financial Results of Combined Operations. Yurie shall use its
best efforts to publish, not later than February 20, 1998, financial results
covering at least thirty (30) days of combined operations of Yurie and Data
Labs.
(f) Prepayment or Assumption of Bank Loan. Yurie may, at its option,
(i) pay or cause the Surviving Corporation to pay Data Labs' obligations of up
to $385,122.23 that are due or owing at or after the Effective Date pursuant to
the Silicon Valley Line of Credit or (ii) assume (or cause the Surviving
Corporation to assume) Data Labs' obligations of up to $384,122.23 under the
Silicon Valley Line of Credit.
(g) Expenses of Advisors. On or promptly after the Effective Date,
Yurie shall, or shall cause Surviving Corporation to, pay financial advisor's
fees and expenses to Broadview Associates LLC, as described in a written
agreement between Broadview Associates LLC and Data Labs, a copy of which has
been delivered to Yurie.
(h) Taxes.
(i) Following the Merger, Data Labs will continue its historic
business or use a significant portion of its historic business assets
in a business.
(ii) Neither Yurie nor Data Labs will take any tax reporting
position inconsistent with the characterization of the Merger as a
reorganization under Section 368(a) of the Code.
(i) Credit to Employees. Yurie shall cause each Data Labs Employee
Plan in effect immediately prior to the date hereof to remain in full force and
effect until such time as Yurie effectuates a transition of all Data Labs
employees listed on Schedule 7.3(j) hereto to Yurie's Employee Plans. Such
transition will occur as soon as possible, but not later than January 1, 1998.
To the extent permitted by law and each of Yurie's employee benefit plans, the
Company shall preserve, transfer, carry forward and grant full credit for all
accruals, rights, interests, balances and seniority accrued by each such
employee in and under each Data Labs Employee Plan. Yurie shall, within thirty
days after the date hereof, pay each such employee the cash value of each and
every accrual, right, interest, balance and seniority to the extent it is not or
cannot be preserved, transferred, carried forward or fully credited by Yurie.
-37-
<PAGE>
ARTICLE VI
CLOSING MATTERS
6.1 The Closing. Subject to the satisfaction or waiver of all conditions
-----------
precedent set forth in Article VII, the closing of the Merger (the "CLOSING")
shall be held at the offices of Fried, Frank, Harris, Shriver & Jacobson, 1001
Pennsylvania Avenue, N.W., Suite 800, Washington, D.C. 20004, on December 1,
1997 or as soon as thereafter as practicable (the "CLOSING DATE"). If any
condition in Article VII is not satisfied (or is not duly waived) at the
Closing, any party whose obligations are subject to such condition may extend
the period in which the Closing must be consummated (during which period each
other party shall use its respective reasonable efforts to cause all such
conditions to be satisfied in all material respects). If all conditions are
determined to be satisfied (or are duly waived) at the Closing (whether or not
delayed), the Closing shall be consummated by the making of all necessary
filings with the Secretary of State of Delaware under the Delaware Corporation
Law. If the Closing is consummated, Yurie will be deemed to have waived any of
the conditions set forth in Sections 7.1 and 7.2 to the extent not satisfied at
or prior to the Closing.
6.2 Documents and Certificates. Each of Yurie, the Company and Data Labs
--------------------------
shall use all reasonable efforts, on or prior to the Closing, to execute and
deliver all such instruments, documents or certificates as may be necessary or
advisable, on the advice of counsel, for the consummation at the Closing of the
transactions contemplated by this Agreement or to cause the Effective Time,
subject to consummation at the Closing, to occur as soon as practicable.
ARTICLE VII
CONDITIONS OF CLOSING
7.1 Conditions to Obligations of Yurie, the Company and Data Labs. The
-------------------------------------------------------------
obligations of each of Yurie, the Company and Data Labs under this Agreement to
cause the Merger to be consummated are, at its option, subject to the
satisfaction of the following condition:
(a) No Litigation. None of the parties hereto shall be subject to
any order or injunction of a court of competent jurisdiction or any applicable
law, rule, regulation or decree restraining, enjoining or prohibiting
consummation of the Merger or placing any limitation upon such consummation or
invalidating, suspending or requiring modification of any provision of this
Agreement.
7.2 Conditions Applicable to Yurie and the Company. The obligations of
----------------------------------------------
Yurie and the Company under this Agreement to cause the Merger to be consummated
are, at their option, subject to the satisfaction of the following conditions,
in addition to the conditions contained in Section 7.1:
(a) Agreements and Covenants. Data Labs shall have performed or
complied with all agreements and covenants required by this Agreement to be
performed or complied with by Data Labs on or prior to the Closing Date.
-38-
<PAGE>
(b) Accuracy of Representations And Warranties. The representations
and warranties of Data Labs contained in this Agreement and in any document
delivered in connection herewith shall be true and correct in all material
respects as of the Closing Date.
(c) No Material Adverse Change. Since the date of this Agreement,
there shall have been no Material Adverse Effect on Data Labs.
(d) Officers' Certificate. Data Labs shall have furnished to Yurie
and the Company (i) a certificate dated the Closing Date, signed by its chief
executive officer and its principal financial officer, to the effect that the
conditions set forth in Sections 7.2(a) through 7.2(c) have been satisfied and
(ii) certified copies of resolutions duly adopted by Data Labs' Board of
Directors and shareholders evidencing the taking of all corporate action
necessary to authorize the execution, delivery and performance of this Agreement
and the consummation of the transactions evidenced hereby.
(e) Opinion of Counsel. Yurie and the Company shall have received
from Tucker, Flyer and Lewis, counsel to Data Labs, an opinion dated the Closing
Date substantially in the form set forth in EXHIBIT D.
(f) Governmental Approvals. Data Labs shall have received all
necessary approvals of Governmental Authorities of the transactions contemplated
by this Agreement, and each of such approvals shall remain in full force and
effect at the Closing Date.
(g) Third Party Consents. The holders of any note, guarantee or other
evidence of indebtedness of Data Labs, the lessors of any real or personal
property or assets leased by Data Labs, the parties (other than Data Labs) to
any other contract, commitment or agreement to which Data Labs is a party, and
any other person (other than Governmental Authorities) which owns or has
authority to grant any franchise, license, permit, easement, rights or other
authorization necessary for the business or operations of Data Labs, to the
extent that their consent or approval of the Merger or any other transactions
contemplated by this Agreement is required under the pertinent lease, contract,
commitment or agreement or other document or instrument or under applicable
laws, rules or regulations for the consummation of the transactions contemplated
hereby in the manner herein provided, shall have granted such consent or
approval.
(h) Litigation. On the Closing Date, there shall not be in force any
rule, regulation, order, decree or injunction restraining, enjoining or
prohibiting Yurie from consummation of the Merger or placing any limitation upon
such consummation or invalidating, suspending or requiring modification of any
provision of this Agreement.
(i) Appraisal Rights. Holders of 95% or more of the outstanding
shares of Data Labs Common Stock and Data Labs Preferred Stock shall have
consented to or voted at a duly called shareholders meeting in favor of this
Agreement and the Merger in accordance with the Delaware Corporation Law and
shall not have any appraisal rights under Section 262 of the Delaware
Corporation Law.
-39-
<PAGE>
(j) Tax Certificate. Data Labs shall have paid any sales, use,
transfer and documentary Taxes and recording and filing fees applicable to the
transactions set forth in this Agreement. Data Labs shall have delivered to
Yurie a properly executed statement satisfying the requirements of Treasury
Regulation Sections 1.897-2(h) and 1.1445-2(c)(3) in a form reasonably
acceptable to Yurie.
(k) Employment Agreements. Mr. Wenli Yu shall have executed and
delivered the Wenli Yu Employment Agreement, substantially in the form attached
as EXHIBIT E, and each Data Labs' employee listed on Schedule 7.3(j) shall have
delivered a standard employment agreement, substantially in the form attached as
EXHIBIT F.
(m) Employees. Neither Wenli Yu nor Raul Montalvo, no more than ten
percent (10%) of Data Labs' engineers as of the date hereof and no more than
twenty percent (20%) of Data Labs' employees as of the date hereof (excluding,
for purposes of such calculation, administrative and finance personnel) shall
have (i) voluntarily terminated their employment with Data Labs on or prior to
the Effective Time or (ii) refused to accept employment with, or given notice
that they do not intend to continue employment with, the Surviving Corporation.
(n) Due Diligence. Yurie shall be satisfied with the results of its
continuing due diligence regarding Data Labs.
(o) Receipt of Pooling Letter. Yurie shall have received a letter
from Deloitte & Touche LLP, dated as of the Effective Date and addressed to
Yurie, stating substantially to the effect that, based on such firm's review of
this Agreement and the other procedures set forth in such letter, such firm
concurs that the merger will qualify as a pooling of interests transaction under
Opinion 16 of the Accounting Principles Board.
(p) Comfort Letters. Yurie shall have received from Arthur Andersen
LLP, independent auditors for Data Labs, dated as of the Effective Date, a
letter to the effect that Data Labs qualifies as an entity for a "pooling of
interests" transaction under generally accepted accounting principles.
(q) Delivery of Books and Records. Data Labs shall have delivered all
of its books and records to Yurie including, but not limited to, the originals
of (i) all corporate and other records of Data Labs, including minute books,
stock books, stock transfer registers, books of account, leases, contracts and
financial statements and (ii) such other documents as reasonably requested by
Yurie.
(r) Escrow Agreement. Data Labs shall have delivered an Escrow
Agreement to Yurie, substantially in the form attached as EXHIBIT G.
-40-
<PAGE>
7.3 Conditions Applicable to Data Labs. The obligations of Data Labs
----------------------------------
under this Agreement to cause the Merger to be consummated are, at its option,
subject to the satisfaction of the following conditions, in addition to the
conditions contained in Section 7.1:
(a) Agreements and Covenants. Yurie and the Company shall have
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to the Closing
Date.
(b) Accuracy of Representations And Warranties. The representations
and warranties of Yurie contained in this Agreement and in any document
delivered in connection herewith shall be true and correct in all material
respects as of the Closing Date.
(c) No Material Adverse Change. Since the date of this Agreement,
there shall have been no Material Adverse Effect on Yurie and its subsidiaries,
taken as a whole.
(d) Officers' Certificate Concerning This Agreement. Yurie shall have
furnished to Data Labs a certificate dated the Closing Date, signed by the chief
financial officer of Yurie, to the effect that, the conditions set forth in
Sections 7.3(a) through 7.3(c) hereof have been satisfied.
(e) Opinion Of Counsel. Data Labs shall have received from Fried,
Frank, Harris, Shriver & Jacobson, counsel to Yurie an opinion dated the Closing
Date substantially in the form set forth on EXHIBIT H.
(f) Required Consents. Yurie shall have received all consents or
approvals of the Merger or any other transactions contemplated by this Agreement
required under any lease, contract, commitment, note, guaranty or other evidence
of indebtedness of Yurie or any of its subsidiaries, or any lease of any real
property of Yurie and its subsidiaries, or under applicable law for the
consummation of the transactions contemplated hereby.
(g) Governmental Approvals. Yurie and the Company shall have received
all necessary approvals of Governmental Authorities of the transactions
contemplated by this Agreement, and each of such approvals shall remain in full
force and effect at the Closing Date.
(h) Registration Rights Agreement. Yurie shall have executed and
delivered the Registration Rights Agreement substantially in the form of EXHIBIT
I hereto.
(i) Litigation. On the Closing Date, there shall not be in force any
rule, regulation, order, decree or injunction restraining, enjoining or
prohibiting Data Labs from consummation of the Merger or placing any limitation
upon such consummation or invalidating, suspending or requiring modification of
any provision of this Agreement.
(j) Benefits to Employees. Yurie shall, or shall cause the Surviving
Corporation to, (i) offer employment to each Data Labs employee listed on
Schedule 7.3(j) hereto, at the rate of pay and level of service (in years)
listed on Schedule 7.3(j) and (ii) provide
-41-
<PAGE>
each such employee with Yurie's standard employee benefits package effective as
of January 1, 1998, and, with the administrative assistance of Data Labs, make
arrangements for such employees Data Labs benefits to remain effective until
such date that Yurie's benefits package becomes effective. Yurie will take any
and all steps necessary to make Yurie's 401(k) Plan available for the benefit of
Data Labs' employees listed on Schedule 7.3(j), effective January 1, 1998. Any
Data Labs employee not listed on Schedule 7.3(j) shall receive cash severance
benefits equivalent to two weeks' pay at the employee's current rate of base
pay.
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Effective Time of the Merger, whether before or after approval of the Merger
by the shareholders of Data Labs:
(a) by mutual written consent duly authorized by the Boards of
Directors of Yurie and Data Labs;
(b) by either Data Labs or Yurie, if the Merger shall not have been
consummated by December 1, 1997; provided, however, that the right to terminate
this Agreement under this Section 8.1(b) shall not be available to any party
whose action or failure to act has been a principal cause of or resulted in the
failure of the Merger to occur on or before such date and such action or failure
to act constitutes a breach of this Agreement;
(c) by either Data Labs or Yurie, if a court of competent jurisdiction
or governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action (an "ORDER"), in any
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree or ruling is final and
nonappealable;
(d) by Yurie, upon breach of any representation, warranty, covenant or
agreement on the part of Data Labs set forth in this Agreement;
(e) by Data Labs, upon breach of any representation, warranty,
covenant or agreement on the part of Yurie set forth in this Agreement;
8.2 Notice of Termination; Effect of Termination. Any termination of this
--------------------------------------------
Agreement under Section 8.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties hereto.
In the event of the termination of this Agreement as provided in Section 8.1,
this Agreement shall be of no further force or effect, except (i) as set forth
in this Section 8.2, Sections 5.1(c), 5.1(d), 8.3 and Article X (Miscellaneous),
each of which shall survive the termination of this Agreement, and (ii) nothing
herein shall relieve any party from liability for any willful breach of this
Agreement. No termination of this Agreement
-42-
<PAGE>
shall affect the obligations of the parties contained in the Confidentiality
Agreement, all of which obligations shall survive termination of this Agreement
in accordance with their terms.
8.3 Procedure Upon Termination. In the event of the termination of this
--------------------------
Agreement, the Board or Boards of Directors so terminating may direct its or
their officers not to file the certificate of merger in the office of the
Secretary of State of the State of Delaware, notwithstanding favorable action by
the shareholders of the Company and Data Labs.
ARTICLE IX
INDEMNIFICATION
9.1 Losses. The terms "LOSS" or "LOSSES" shall mean each and all of the
------
following items: claims, losses, liabilities, settlement payments, obligations,
actions, causes of actions, encumbrances, damages, fines, forfeitures,
penalties, costs and expenses (including, without limitation, interest which may
be imposed in connection therewith); provided, however, that attorneys' fees and
expenses shall not be considered Losses for purposes of this Section 9.1 unless
such fees and expenses arise out of the defense of Third Party Claims.
9.2 Indemnification of Yurie. Data Labs shall indemnify and hold Yurie
------------------------
harmless from, against, for and in respect of (i) any and all LOSSES suffered,
sustained, incurred or required to be paid by Yurie, net of any resulting income
tax benefits to Yurie and net of any reserves reflected on Data Labs' balance
sheet at September 30, 1997, because of the breach of any written
representation, warranty, agreement, covenant, or other matter of Data Labs
contained in this Agreement or in other documents executed at or prior to the
Closing in connection herewith and (ii) all reasonable costs and expenses
(including, without limitation, interest and penalties and, solely in the case
of Third Party Claims, reasonable attorney's fees and expenses) incurred by
Yurie in connection with any action, suit, proceeding, demand, assessment or
judgment incident to any of the matters indemnified against in this Section 9.2.
Yurie's sole recourse with respect to the satisfaction of this indemnification
obligation of Data Labs shall be limited to claims which may be made by Yurie
under the Escrow Agreement, and no shareholder of Data Labs shall have any
personal liability in connection with such indemnification obligation. Yurie
shall have the right to make a claim against Data Labs under the Escrow
Agreement for breaches of representation, warranties, covenants, agreements, or
other matters set forth in this Agreement for a period of nine months from the
date of Closing. Yurie may employ counsel, at its own expense, in order to bring
such a claim. The representations, warranties, covenants, agreements and other
matters shall survive for this purpose for nine months from the date of Closing;
provided, however, that indemnification obligations as to which notice of any
claim for indemnification has been given prior to the end of such nine-month
period shall survive, without limitation as to time, until resolution of such
claim for indemnification.
-43-
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1 Survival of Representations, Warranties, and Covenants. Except as
------------------------------------------------------
provided in accordance with Article IX and the Escrow Agreement, the
representations and warranties of each party contained herein or in any exhibit,
certificate, document or instrument delivered pursuant to or in connection with
this Agreement shall not survive the Closing, and the covenants and agreements
of the parties (other than Sections 1.7, 1.8, 2.4, 2.6, 2.7, 2.8, 5.3(d),
5.3(e), 5.3(h), and Article IX (together with the Escrow Agreement)) shall not
survive the Closing. The covenants of Section 5.3(h) shall survive for nine
months from the date of Closing.
10.2 Expenses. All fees and expenses (including all accounting, legal and
--------
investment banking fees and expenses and all other expenses) incurred by Yurie
and the Company in connection with this Agreement and the transactions
contemplated hereby will be paid by Yurie. All fees and expenses (including
without limitation all accounting and investment banking fees and expenses)
incurred by Data Labs in connection with this Agreement and the transactions
contemplated hereby will be paid by Data Labs; provided, however, that all legal
fees and related expenses of Data Labs in connection with the Merger, as well as
any related post-closing legal fees and related expenses, shall be paid by the
Selling Shareholders.
10.3 Further Assurances. If at any time after the Effective Time, Yurie
------------------
or the Company shall consider it advisable that any further conveyance,
agreements, documents, instruments and assurances of law or any other things are
necessary or advisable to vest, perfect, confirm or record in the Surviving
Corporation the title to any property, rights, privileges, powers and franchises
of Data Labs, the officers of Data Labs last in office and such other persons,
if any, as the Board of Directors of Data Labs last in office may authorize
shall, at Yurie's expense, execute and deliver, upon Yurie's or the Company's
reasonable request, any and all proper conveyances, agreements, documents,
instruments and assurances of law, in a form acceptable to counsel to such
officers or other persons (at such officer's or other person's expense) and do
all things reasonably necessary or proper to vest, perfect, confirm or record
title to such property, rights, privileges, powers and franchises in the
Surviving Corporation, and otherwise to carry out the provisions of this
Agreement.
10.4 Parties in Interest; Third Party Beneficiaries. All the terms and
----------------------------------------------
provisions of this Agreement shall be binding upon, shall inure to the benefit
of and shall be enforceable by the respective successors and permitted assigns
of the parties hereto. Except as Sections 1.7, 2.6, 2.7 and 2.8 provide in
respect of holders of Data Labs Options or Data Labs Warrants, and except as
provided in Sections 5.3(d) and 5.3(e) with respect to the shareholders of Data
Labs, nothing expressed or implied in this Agreement is intended or shall be
construed to confer upon or give any person other than the parties hereto any
rights or remedies under or by reason of this Agreement or any transaction
contemplated hereby.
10.5 Entire Agreement. This Agreement, the Registration Rights Agreement,
----------------
the Escrow Agreement, the Confidentiality Agreement, and the Employment
Agreements together with the Schedules and Exhibits hereto and thereto,
supersede any other agreement, whether
-44-
<PAGE>
written or oral, that may have been made or entered into by Yurie and Data Labs
(or by any officer or officers of such parties) relating to the matters
contemplated hereby or thereby. This Agreement, the Registration Rights
Agreement, the Confidentiality Agreement, the Escrow Agreement and the
Employment Agreements, together with the Schedules and Exhibits hereto and
thereto, constitute the entire agreement by the parties, and there are no
agreements or commitments except as set forth herein and therein.
10.6 Amendment. This Agreement may not be amended except by an instrument
---------
in writing signed by Yurie and the Shareholder Representative.
10.7 Waiver. Any party to this Agreement may, by written notice to the
------
other parties to this Agreement, (a) extend the time for the performance of any
of the obligations or other actions of the other parties under this Agreement,
(b) waive any inaccuracies in the representations or warranties of the other
parties contained in this Agreement or in any document delivered pursuant to
this Agreement, (c) waive compliance with any of the conditions or covenants of
the other parties contained in this Agreement, or (d) waive or modify
performance of any of the obligations of the other parties under this Agreement.
Except as provided in the preceding sentence or as expressly provided in this
Agreement, no action taken pursuant to this Agreement, including without
limitation any investigation by or on behalf of any party, shall be deemed to
constitute a waiver by the party taking such action of compliance with any
representations, warranties, covenants, conditions or agreements contained in
this Agreement. The failure of any party hereto to enforce at any time any of
the provisions of this Agreement shall in no way be construed to be a waiver of
any such provision, nor in any way to affect the validity of this Agreement or
any part hereof or the right of such party thereafter to enforce each and every
such provision. No waiver of any breach of or non-compliance with this
Agreement shall be held to be a waiver of any other or subsequent breach or non-
compliance.
10.8 Assignability. This Agreement shall not be assignable by Data Labs,
-------------
on the one hand, or Yurie or the Company, on the other hand, without the prior
written consent of Yurie, on the one hand, or Data Labs, on the other hand, as
the case may be.
10.9 Certain Definitions. For purposes of this Agreement, the following
-------------------
terms shall have the meanings set forth below:
(a) "AFFILIATE" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with the
person specified;
(b) "CONTROL" (including, with its correlative meanings, "CONTROLLED
BY" and "UNDER COMMON CONTROL WITH") shall mean possession, directly or
indirectly, of power to direct or cause the direction of management or policies
(whether through ownership of securities or partnership or other ownership
interests, by contract or otherwise);
(c) "MATERIAL ADVERSE EFFECT" shall mean, when used with respect to
Data Labs, on the one hand, and Yurie and its subsidiaries, taken as a whole, on
the other
-45-
<PAGE>
hand, as the case may be, any change, effect or circumstance that, individually
or when taken together with all other such changes, effects or circumstances
that have occurred prior to the date of determination of the Material Adverse
Effect, is or could reasonably be materially adverse to the financial condition,
business, properties, intellectual property rights, assets, operations or
prospects of Data Labs or Yurie and its subsidiaries, taken as a whole, as the
case may be; provided, however, that the following shall not be considered a
Material Adverse Effect: any adverse effect that primarily results from the
execution and delivery of this Agreement or from changes in Data Labs' or
Yurie's respective industry or the financial markets.
(d) "PERSON" shall mean any individual, corporation, partnership,
limited liability company, trust, joint venture, unincorporated association,
Governmental Authority or other entity; and
(e) "SUBSIDIARY" of any person shall mean a corporation, company or
other entity (i) more than 50% of whose outstanding shares or securities
(representing the right to vote for the election of directors or other managing
authority) are, or (ii) which does not have outstanding shares or securities (as
may be the case in a partnership, limited liability company, joint venture or
unincorporated association), but more than 50% of whose ownership interest
representing the right to make decisions for such other entity is, now or
hereafter owned or controlled, directly or indirectly, by such person.
(f) "YURIE CLOSING PRICE" shall mean the closing price of the Yurie
Common Stock on the Closing Date.
10.10 Headings and Interpretation. The headings contained in this
---------------------------
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement. Terms such as "herein," "hereof" and
"hereinafter" refer to this Agreement as a whole and not to the particular
sentence or paragraph where they appear, unless the context otherwise requires.
Whenever the words "include," "includes" or "including" are used in this
Agreement they shall be deemed to be followed by the words "without limitation."
The phrase "made available" in this Agreement shall mean that the information
referred to has been made available if requested by the party to whom such
information is to be made available. Unless the context otherwise requires, (i)
terms used in the plural include the singular, and vice versa, and (ii) words in
the masculine gender include the feminine or neuter, and vice versa.
10.11 Notices. All notices and other communications under this Agreement
-------
shall be in writing and shall be delivered by hand or overnight courier service,
mailed or sent by telex, graphic scanning or other telegraphic communications
equipment of the sending party, as follows:
-46-
<PAGE>
If to Yurie or the Company:
Yurie Systems, Inc.
8301 Professional Place
Landover, Maryland 20785
Attention: John J. McDonnell, General Counsel
Facsimile: 301/986-5081
with a copy (which shall not constitute notice) to:
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue, N.W.
Suite 800
Washington, D.C. 20004
Attention: Richard A. Steinwurtzel, Esq.
Facsimile: 202/639-7003
If to Data Labs:
Data Labs, Inc.
444 N. Frederick Avenue
Suite 240
Gaithersburg, Maryland 20877
Attention: Wenli Yu
Facsimile: 301/990-0677
with a copy (which shall not constitute notice) to:
Tucker, Flyer & Lewis
1616 L Street, N.W.
Washington, D.C. 20036-5612
Attention: Jack Lewis, Esq.
Facsimile: 202/429-3231
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt. All notices and other communications given to
any party hereto in accordance with the provisions of this Agreement shall be
deemed to have been given on the date of receipt if delivered by hand or
overnight courier service or sent by telex, graphic scanning or other
telegraphic communications equipment of the sender, or on the date five business
days after dispatch by certified or registered mail if mailed, in each case
delivered, sent or mailed (properly addressed) to such party as provided in this
Section 10.11 or in accordance with the latest unrevised direction from such
party given in accordance with this Section 10.11.
-47-
<PAGE>
10.12 Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Delaware, without
giving effect to the principles of conflicts of law thereof.
10.13 Consent to Jurisdiction. Each of Data Labs, Yurie and the Company
-----------------------
hereby irrevocably submits to the exclusive jurisdiction of any state or federal
court in the State of Delaware over any suit, action or proceeding brought
against it by any of the other parties hereto and arising out of or relating to
this Agreement and the transactions contemplated hereby.
10.14 Invalidity of Provisions. Each of the provisions contained in this
------------------------
Agreement is distinct and severable and a declaration of invalidity or
unenforceability of any such provision or part thereof by a court of competent
jurisdiction shall not affect the validity or enforceability of any other
provision hereof. The parties agree to replace such invalid or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such invalid or unenforceable provision.
10.15 Mutual Contribution. The parties to this Agreement and their
-------------------
counsel have mutually contributed to its drafting. Consequently, no provision
of this Agreement shall be construed against any party on the ground that such
party drafted the provision or caused it to be drafted or the provision contains
a covenant of such party.
10.16 Counterparts. This Agreement may be executed simultaneously in one
------------
or more counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
-48-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties on the date first above written.
YURIE SYSTEMS, INC.
By:
----------------------------------
Name: Harry J. D'Andrea
Title: Chief Financial Officer
NICOLE ACQUISITION CORPORATION
By:
----------------------------------
Name: Harry J. D'Andrea
Title: President
DATA LABS, INC.
By:
----------------------------------
Name: Wenli Yu
Title: President and
Chief Executive Officer
-49-
<PAGE>
Exhibit 4.2
REGISTRATION RIGHTS AGREEMENT
BY AND AMONG
YURIE SYSTEMS, INC.
AND
CERTAIN SHAREHOLDERS OF
DATA LABS, INC.
DATED AS OF DECEMBER 1, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
<TABLE>
<S> <C>
1. CERTAIN DEFINITIONS................................................ 1
-------------------
2. REGISTRATION RIGHTS................................................ 2
-------------------
2.1. Required Registration......................................... 2
---------------------
2.2. Piggyback Registrations....................................... 4
-----------------------
2.3. Allocation of Securities Included in Registration Statement... 5
-----------------------------------------------------------
2.4. Registration Procedures....................................... 6
-----------------------
2.5. Registration Expenses......................................... 10
---------------------
2.6. Certain Limitations on Registration Rights.................... 10
------------------------------------------
2.7. No Required Sale.............................................. 11
----------------
2.8. Indemnification............................................... 11
---------------
3. PIGGYBACK UNDERWRITTEN OFFERINGS................................... 14
--------------------------------
4. GENERAL............................................................ 15
-------
4.1. Recapitalizations, Exchanges, etc., Affecting Merger Shares... 15
-----------------------------------------------------------
4.2. Rule 144...................................................... 15
--------
4.3. Nominees for Beneficial Owners................................ 16
------------------------------
4.4. Amendments and Waivers........................................ 16
----------------------
4.5. Notices....................................................... 16
-------
4.6. Miscellaneous................................................. 17
-------------
4.7. Prior Agreements.............................................. 18
----------------
4.8. No Inconsistent Agreements.................................... 19
--------------------------
4.9. Third-Party Beneficiaries..................................... 19
-------------------------
4.10. Designation of Shareholder Counsel........................... 19
----------------------------------
</TABLE>
i
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), dated as of
December 1, 1997, by and between Yurie Systems, Inc., a Delaware corporation
(the "Company"), and certain shareholders of Data Labs, Inc., a Delaware
corporation ("Data Labs"), listed on Exhibit A hereto (collectively, the
---------
"Representative Shareholders").
WHEREAS, the Company has entered into a merger agreement, dated as of
December 1, 1997 (the "Merger Agreement") by and among the Company, Nicole
Acquisition Corporation and Data Labs, pursuant to which the shareholders of
Data Labs listed on Exhibit B hereto (the "Shareholders") will receive shares of
---------
common stock of the Company; and
WHEREAS, it is a condition precedent to the consummation of the
transactions contemplated by the Merger Agreement that the Company enter into
this Agreement for the purpose of granting certain rights with respect to
registering under the Securities Act of 1933, as amended, the common stock and
common stock equivalents issuable pursuant to the Merger Agreement
NOW, THEREFORE, in consideration of these premises and the mutual
agreements, provisions and covenants contained in this Agreement, and certain
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS.
-------------------
As used in this Agreement, the following terms shall have the
following meanings:
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"COMMON STOCK" means the Common Stock, $.01 par value per share, of
the Company and warrants to acquire shares of such Common Stock, and any equity
securities issued or issuable with respect to the Common Stock in connection
with a reclassification, recapitalization, merger, consolidation or other
reorganization of the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, and the
rules and regulations of the Commission promulgated thereunder, all as the same
shall be in effect from time to time.
<PAGE>
"MERGER SHARES" means any (i) shares of Common Stock issued in
connection with the Merger Agreement to any Shareholder for shares of stock of
Data Labs (including the shares of Common Stock placed in escrow pursuant to the
Merger Agreement), (ii) shares of Common Stock issued or issuable upon exercise
of any warrants to purchase shares of Common Stock held as of the Effective Date
by any Shareholder, and (iii) any shares of Common Stock issued or issuable,
directly or indirectly, with respect to the Common Stock referenced in clauses
(i) or (ii), above by way of stock dividend, stock split or combination of
shares. Such shares of Common Stock shall continue to be Merger Shares until
(x) such shares have been disposed of in accordance with a registration
statement made effective in accordance with the terms of this Agreement; (y)
such shares are eligible for disposition pursuant to Rule 144 (or any successor
provision to Rule 144), or (z) such shares have been otherwise transferred or
disposed of pursuant to an applicable exemption under the Securities Act and new
certificates for such shares that do not bear legends restricting further
transfer have been delivered by the Company or its transfer agent.
"PERSON" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivisions thereof.
"RULE 144" means Rule 144 promulgated under the Securities Act or any
successor rule thereto or any complementary rule thereto.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect from time to time.
2. REGISTRATION RIGHTS.
-------------------
2.1. Required Registration.
---------------------
(a) (i) Not later than January 15, 1998, the Company shall
file such amendments to its registration statement on Form S-1 under the
Securities Act or file a new registration statement on Form S-1, if required by
the rules promulgated pursuant to the Securities Act, which registration
statement shall be a shelf registration pursuant to Rule 415 of the Securities
Act providing for the registration of the Merger Shares for resale. On or after
February 5, 1998, the Company may convert such registration statement filed
pursuant to this Section 2.1 into a registration statement on Form S-3 under the
Securities Act, provided, however, that, to the extent permitted by the
securities laws, the Company shall not withdraw the registration statement filed
on Form S-1 until
-2-
<PAGE>
the new registration statement is effective (the registration statements on Form
S-1 and S-3 are collectively referred to herein as the "Registration
Statement").
(ii) The Company may, at its option, register additional shares of
Common Stock on the Registration Statement (x) on behalf of shareholders of the
Company; or (y) in connection with a primary offering of Common Stock by the
Company; provided, however, that the inclusion of such additional shares will
not delay the filing of the Registration Statement or limit the Company's
obligations to the Shareholders under this Agreement.
(iii) The Company shall use its best efforts to cause the
Registration Statement to become effective as soon as possible, but not later
than the earlier of (x) February 20, 1998 and (y) the date on which the combined
financial results of the Company and Data Labs are filed pursuant to Section 5.3
of the Merger Agreement. The Company's obligation to maintain the effectiveness
of the Registration Statement shall terminate on December 7, 1998, or such
earlier time as there are no remaining Merger Shares.
(b) (i) If, after the Registration Statement becomes effective, the
Board of Directors of the Company, in its good faith judgment, determines that
any registration of Merger Shares should not be continued because it would
materially interfere with any underwritten offering by the Company or material
merger or acquisition (which merger or acquisition would be required to be
reported pursuant to Item 2 or Item 5 of Form 8-K) (a "Valid Business Reason"),
---------------------
the Company may cause the Registration Statement to be withdrawn and its
effectiveness terminated, or may postpone amending or supplementing such
Registration Statement until such Valid Business Reason no longer exists, but in
no event for more than one (1) month (such period of postponement or withdrawal,
the "Postponement Period"); and the Company shall give written notice of its
-------------------
determination to postpone or withdraw the Registration Statement and of the fact
that the Valid Business Reason for such postponement or withdrawal no longer
exists, in each case, promptly after the occurrence thereof; provided, however,
that (x) the Company shall not be permitted to postpone or withdraw a
registration statement within six (6) months after the expiration of any
Postponement Period, and (y) the Company must similarly postpone or withdraw all
registration statements for the resale of the Company's Common Stock by Persons
other than the Company.
(ii) Each Shareholder agrees that, upon receipt of any notice from
the Company that the Company has determined to withdraw the Registration
Statement pursuant to clause (b)(i) above, such Shareholder will discontinue any
disposition of Merger Shares pursuant to the Registration Statement and, if so
directed by the Company, will deliver to the Company (at the Company's expense)
all copies, other than permanent
-3-
<PAGE>
file copies, then in such Shareholder's possession of the prospectus covering
such Merger Shares that was in effect at the time of receipt of such notice.
(iii) If the Company shall give any notice of withdrawal or
postponement of the Registration Statement pursuant to clause (b)(i) above, the
Company shall, at such time as the Valid Business Reason that caused such
withdrawal or postponement no longer exists (but in no event later than one (1)
month after the date of the postponement or withdrawal), use its best efforts to
effect the registration under the Securities Act of the Merger Shares. If the
Company shall have withdrawn or prematurely terminated a registration statement
filed under Section 2.1 as a result of any stop order, injunction or other order
or requirement of the Commission or any other governmental agency or court, the
Company shall as soon as possible use its best efforts to effect the
registration under the Securities Act of Merger Shares covered by the withdrawn
or postponed registration statement in accordance with this Section 2.1.
2.2. Piggyback Registrations.
-----------------------
(a) If, at any time prior to December 1, 1998 or the earlier
termination of the Company's obligations under Section 2.1(a)(iii), the Company
proposes or is required to register any of its equity securities under the
Securities Act (other than pursuant to (i) registrations on such form or similar
form(s) solely for registration of securities in connection with an employee
benefit plan or dividend reinvestment plan or a merger or consolidation or (ii)
a registration under Section 2.1) on a registration statement on Form S-1, Form
S-2 or Form S-3 (or an equivalent general registration form then in effect),
whether or not for its own account, the Company shall give prompt written notice
of its intention to do so to one (1) counsel for the Shareholders designated in
Section 4.11 hereof (the "Shareholder Counsel"). Upon the written request of
the Shareholder Counsel, made within 10 days following the receipt of any such
notice (which request shall specify each Shareholder who wishes to exercise
piggyback rights and the maximum number of Merger Shares intended to be disposed
of by each such Shareholder), the Company shall, subject to Sections 2.2(b), 2.3
and 2.6 hereof, use its best efforts to cause all Merger Shares identified in
the Shareholder Counsel's notice to be registered under the Securities Act (with
the securities which the Company at the time proposes to register) to permit the
sale or other disposition by such Shareholders of the Merger Shares to be so
registered. There is no limitation on the number of such piggyback
registrations pursuant to the preceding sentence which the Company is obligated
to effect. No registration effected under this Section 2.2(a) shall relieve the
Company of its obligations to cause the Registration Statement to become
effective.
(b) If, at any time after giving notice of its intention to register
any equity securities and prior to the effective date of the registration
statement filed in connection with such registration, the Company shall
determine for any reason not to register or to delay registration of such equity
securities, the Company may, at its election, give notice of such determination
to the Shareholder Counsel and (i) in the case of a determination not to
-4-
<PAGE>
register, shall be relieved of its obligation to register any Merger Shares in
connection with such abandoned registration, without prejudice, however, to the
rights of the Shareholders under Section 2.1, and (ii) in the case of a
determination to delay such registration of its equity securities, shall be
permitted to delay the registration of such Merger Shares requested by a
Shareholder to be included therein for the same period as the delay in
registering such other equity securities.
(c) Any Shareholder shall have the right to withdraw its request for
inclusion of its Merger Shares in any registration statement pursuant to this
Section 2.2 by giving written notice to the Company of its request to withdraw;
provided, however, that (i) such request must be made in writing prior to the
earlier of the execution of the underwriting agreement or the execution of the
custody agreement with respect to such registration and (ii) such withdrawal
shall be irrevocable and, after making such withdrawal, a Shareholder shall no
longer have any right to include Merger Shares in the registration as to which
such withdrawal was made.
2.3. Allocation of Securities Included in Registration Statement.
-----------------------------------------------------------
If any registration pursuant to Section 2.2(a) involves an
underwritten offering, and the lead underwriter of such offering shall advise
the Company that, in its view, the number of securities requested to be included
in such registration by the Shareholders or by the Company exceeds the largest
number that can be sold in an orderly manner in such offering within a price
range acceptable to the Company, the Company shall include in such registration:
(a) first, all Common Stock that the Company proposes to register for
-----
its own account;
(b) second, all Common Stock requested to be registered by any
------
shareholder(s) of the Company who have exercised their demand registration
rights under registration rights agreements with the Company;
(c) third, all Common Stock requested to be registered by any
-----
shareholders of the Company, other than the Shareholders, who have exercised
their piggyback registration rights with respect to such offering, in accordance
with the terms of the registration rights agreements pursuant to which such
registration rights are granted; and
(d) fourth, all Common Stock requested to be registered by the
------
Shareholder, allocated on a pro rata basis among all Shareholders requesting
--------
that Merger
-5-
<PAGE>
Shares be included in such registration, based on the number of Merger Shares
then owned by each Shareholder requesting inclusion in relation to the number of
Merger Shares then owned by all Shareholders requesting inclusion.
2.4. Registration Procedures.
-----------------------
If and whenever the Company is required by the provisions of this
Agreement to use its best efforts to effect or cause the registration of any
Merger Shares under the Securities Act as provided in this Agreement, the
Company shall, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement on
an appropriate registration form of the Commission for the disposition of such
Merger Shares, which form (i) shall be selected by the Company and (ii) shall be
available for the sale of the Merger Shares by the Shareholders, and such
registration statement shall comply as to form in all material respects with the
requirements of the applicable form and include all financial statements
required by the Commission to be filed therewith, and the Company shall use its
best efforts to cause such registration statement to become and remain effective
for the time periods set forth in subsection (b) of this Section 2.4; provided,
however, that before filing a registration statement or prospectus or any
amendments or supplements thereto, or comparable statements under securities or
blue sky laws of any jurisdiction, the Company will furnish to the Shareholder
Counsel copies of all such documents proposed to be filed (including all
exhibits thereto), which documents will be subject to the reasonable review and
reasonable comment of such counsel, and the Company shall not file any
registration statement or amendment thereto or any prospectus or supplement
thereto to which the Shareholder Counsel shall reasonably object in writing;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period not to exceed one (1) year and to comply with the provisions of the
Securities Act with respect to the sale or other disposition of all Merger
Shares covered by such registration statement in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in such
registration statement;
(c) furnish, without charge, to each seller of such Merger Shares such
number of copies of such registration statement, each amendment and supplement
thereto (in each case including all exhibits), and the prospectus included in
such registration statement (including each preliminary prospectus, if any) in
conformity with the requirements of the Securities Act, and other documents, as
such seller may reasonably request in order to facilitate the public sale or
other disposition of the Merger Shares
-6-
<PAGE>
owned by such seller (the Company hereby consenting to the use in accordance
with applicable law of each such registration statement (or amendment or post-
effective amendment thereto) and each such prospectus (or preliminary
prospectus, if any, or supplement thereto) by each such seller of Merger Shares
in connection with the offering and sale of the Merger Shares covered by such
registration statement or prospectus);
(d) register or qualify the Merger Shares covered by such registration
statement under such other securities or "blue sky" laws of such jurisdictions
as any sellers of Merger Shares shall reasonably request, and do any and all
other acts and things which may be reasonably necessary or advisable to enable
such sellers to consummate the disposition of the Merger Shares in such
jurisdictions, except that in no event shall the Company be required to qualify
to do business as a foreign corporation in any jurisdiction where it would not,
but for the requirements of this paragraph (d), be required to be so qualified,
to subject itself to taxation in any such jurisdiction or to consent to general
service of process in any such jurisdiction;
(e) promptly notify the Shareholder Counsel: (i) when the
registration statement, any pre-effective amendment, the prospectus or any
prospectus supplement related thereto or post-effective amendment to the
registration statement has been filed and, with respect to the registration
statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the Commission or state securities authority for
amendments or supplements to the registration statement or the prospectus
related thereto or for additional information; (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose; (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of any Merger Shares for sale under the securities or blue sky
laws of any jurisdiction or the initiation of any proceeding for such purpose;
(v) of the existence of any fact of which the Company becomes aware which
results in the registration statement, the prospectus related thereto or any
document incorporated therein by reference containing an untrue statement of a
material fact or omitting to state a material fact required to be stated therein
or necessary to make any statement therein not misleading; and (vi) if at any
time the representations and warranties contemplated by Section 3 below cease to
be true and correct in any material respect; and, if the notification relates to
an event described in clause (v), the Company shall promptly prepare and furnish
to each such seller a reasonable number of copies of a prospectus supplemented
or amended so that, as thereafter delivered to the purchasers of such Merger
Shares, such prospectus shall not include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein in the light of the circumstances under which they
were made not misleading;
-7-
<PAGE>
(f) comply with the Exchange Act, the Securities Act and all
applicable rules and regulations of the Commission, and make generally available
to its security holders, as soon as reasonably practicable after the effective
date of the registration statement, an earnings statement (which need not be
audited) covering the period of at least twelve consecutive months beginning
with the first day of the Company's first calendar quarter after the effective
date of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(g) (i) cause all such Merger Shares covered by such registration
statement to be listed or qualified on the principal securities market or
exchange on which similar securities issued by the Company are then listed (if
any), if the listing or qualification of such Merger Shares is then permitted
under the rules of such market or exchange, or (ii) if no similar securities are
then so listed, to either cause all such Merger Shares to be listed on a
national securities exchange or to secure designation of all such Merger Shares
as a Nasdaq "national market system security" within the meaning of Rule 11Aa2-1
of the Commission or, failing that, secure Nasdaq authorization for such shares
and, without limiting the generality of the foregoing, take all actions that may
be required by the Company as the issuer of such Merger Shares in order to
facilitate the managing underwriter's arranging for the registration of at least
two market makers as such with respect to such shares with the National
Association of Securities Dealers, Inc. (the "NASD");
(h) provide and cause to be maintained a transfer agent and registrar
for all such Merger Shares covered by such registration statement not later than
the effective date of such registration statement;
(i) if required, obtain an opinion from the Company's counsel and a
"cold comfort" letter from the Company's independent public accountants in
customary form and covering such matters as are customarily covered by such
opinions and "cold comfort" letters, which opinion and letter shall be
reasonably satisfactory to the Shareholder Counsel;
(j) deliver promptly to the Shareholder Counsel copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the registration statement, and, upon receipt of such confidentiality
agreements as the Company may reasonably request, make reasonably available for
inspection by any seller of such Merger Shares covered by such registration
statement participating in any disposition to be effected pursuant to such
registration statement and by any attorney, accountant or other agent retained
by any such seller, all pertinent financial and other records, pertinent
corporate documents and properties of the Company, and cause all of
-8-
<PAGE>
the Company's officers, directors and employees to supply all information
reasonably requested by any such seller, attorney, accountant or agent in
connection with such registration statement;
(k) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of the registration statement;
(l) within a reasonable time prior to the filing of any registration
statement, any related prospectus, any amendment to such a registration
statement or amendment or supplement to such a prospectus, provide copies of
such document to the Shareholder Counsel; invite the Shareholder Counsel to
attend drafting sessions (if any) with respect to such documents, make such
reasonable changes in any such document prior to or after the filing thereof as
the Shareholder Counsel may reasonably request, provided that such changes shall
not (x) unreasonably delay the filing of such document or (y) unreasonably
interfere with the good faith judgment of the Company and its counsel with
respect to disclosures made in such documents about the Company, and make
available for discussion of such document such of the representatives of the
Company as shall be reasonably requested by the Shareholder Counsel;
(m) upon request, at least one (1) day prior to the filing of any
document which is to be incorporated by reference into the registration
statement or the prospectus (after the initial filing of such registration
statement) provide copies of such document to the Shareholder Counsel, and make
the Company's representatives reasonably available for discussion of such
document;
(n) cooperate with the selling holders of Merger Shares to facilitate
the timely preparation and delivery of certificates not bearing any restrictive
legends representing the Merger Shares to be sold, and cause such Merger Shares
to be issued in such denominations and registered in such names in accordance
with the written instructions of the selling holders of Merger Shares at least
three (3) business days prior to any sale of Merger Shares; and
(o) take all such other commercially reasonable actions the Company
deems necessary or advisable in order to expedite or facilitate the disposition
of such Merger Shares.
The Company may require as a condition precedent to the Company's
obligations under this Section 2.4 that each seller of Merger Shares as to which
any registration is being effected furnish the Company such information
regarding such seller and the distribution of such securities as required by the
Securities Act and as the Company may from time to time reasonably request
provided that such information shall be used only in connection with such
registration.
-9-
<PAGE>
Each Shareholder agrees that promptly after receipt of any notice from
the Company of the happening of any event of the kind described in clause (v) of
paragraph (e) of this Section 2.4, such Shareholder will discontinue its
disposition of Merger Shares pursuant to the registration statement covering
such Merger Shares until such Shareholder's receipt of the copies of the
supplemented or amended prospectus contemplated by paragraph (e) of this Section
2.4 and, if so directed by the Company, will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies, then in such
Shareholder's possession of the prospectus covering such Merger Shares that was
in effect at the time of receipt of such notice. In the event the Company shall
give any such notice, the applicable period mentioned in paragraph (b) of this
Section 2.4 shall be extended by the number of days during such period from and
including the date of the giving of such notice to and including the date when
each seller of any Merger Shares covered by such registration statement shall
have received the copies of the supplemented or amended prospectus contemplated
by paragraph (e) of this Section 2.4.
2.5. Registration Expenses.
----------------------
All expenses incurred by the Company in complying with this
Article 2, including, without limitation, all registration and filing fees
(including all expenses incident to filings with the Nasdaq or other exchange),
fees and expenses of complying with securities and blue sky laws, printing
expenses, fees and expenses of the Company's counsel and accountants, and the
fees and disbursements of all independent public accountants (including the
expenses of any audit and/or "cold comfort" letter) shall be paid by the
Company; provided, however, that (i) all underwriting discounts and selling
commissions applicable to the Merger Shares, shall be borne by the seller or
sellers thereof, in proportion to the number of Merger Shares sold by such
seller or sellers, and (ii) each seller of Merger Shares shall pay the
attorneys' fees and expenses of any attorney retained by such seller in
connection with the registration.
2.6. Certain Limitations on Registration Rights.
-------------------------------------------
In the case of a registration under Section 2.2 if the Company
has determined to enter into an underwriting agreement in connection therewith,
all securities to be included in such registration shall be subject to an
underwriting agreement and no Person may participate in such registration unless
such Person agrees to sell such Person's securities on the basis provided
therein and completes and executes all reasonable questionnaires and other
documents (including custody agreements and powers of attorney) which must be
executed in connection therewith, and provides such other information to the
Company or the underwriter as may be necessary to register such Person's
securities.
-10-
<PAGE>
2.7. No Required Sale.
----------------
Nothing in this Agreement shall be deemed to create an
independent obligation on the part of any Shareholder to sell any Merger Shares
pursuant to any effective registration statement.
2.8. Indemnification.
---------------
(a) In the event of any registration of any securities of the
Company under the Securities Act pursuant to this Article 2, the Company will,
and hereby does, indemnify and hold harmless, to the fullest extent permitted by
law, each seller of Merger Shares, its directors, officers, fiduciaries,
employees and shareholders or general and limited partners (and the directors,
officers, employees, shareholders and partners thereof), in the sale of such
securities, and each other Person, if any, who controls such seller within the
meaning of the Securities Act, against any and all losses, claims, damages or
liabilities, joint or several, actions or proceedings (whether commenced or
threatened) in respect thereof ("Claims") and expenses (including reasonable
fees of counsel and any amounts paid in any settlement effected with the
Company's consent, which consent shall not be unreasonably withheld) to which
each such indemnified party may become subject under the Securities Act,
Exchange Act or otherwise, insofar as such Claims or expenses arise out of or
are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any registration statement, together with the
documents incorporated by reference therein, under which such securities were
registered under the Securities Act or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary, final or summary
prospectus or any amendment or supplement thereto, together with the documents
incorporated by reference therein, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or (iii) any violation by the Company or its
affiliates of any federal, state or common law, rule or regulation applicable to
the Company or its affiliates and relating to action required of or inaction by
the Company or its affiliates in connection with any such registration, and the
Company will promptly reimburse any such indemnified party for any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such Claim as such expenses are incurred;
provided, however, that the Company shall not be liable to any such indemnified
party in any such case to the extent such Claim or expense arises out of or is
based upon any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission of a material fact made in such registration
statement or amendment thereof or supplement thereto or in any such prospectus
or any preliminary,
-11-
<PAGE>
final or summary prospectus in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such indemnified party specifically for use therein. Such indemnity and
reimbursement of expenses shall remain in full force and effect regardless of
any investigation made by as on behalf of such indemnified party and shall
survive the transfer of such securities by such seller.
(b) Each Representative Shareholder that holds Merger Shares
that are registered in a registration statement pursuant to Section 2.1 or 2.2
of this Agreement shall, severally and not jointly, indemnify and hold harmless
(in the same manner and to the same extent as set forth in paragraph (a) of this
Section 2.8) to the extent permitted by law the Company, its officers,
directors, fiduciaries, employees and shareholders, and each Person controlling
the Company within the meaning of the Securities Act and all other prospective
sellers and their directors, officers and respective controlling Persons, with
respect to any untrue statement or alleged untrue statement of any material fact
in, or omission or alleged omission of any material fact from, such registration
statement, any preliminary, final or summary prospectus contained therein, or
any amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
information furnished to the Company or its representatives by or on behalf of
such Shareholder specifically for use therein and reimburse such indemnified
party for any legal or other expenses reasonably incurred in connection with
investigating or defending any such Claim as such expenses are incurred;
provided, however, that the aggregate amount which any such seller of Merger
Shares shall be required to pay pursuant to this Section 2.8 shall in no case be
greater than the amount of the net proceeds received by such Person upon the
sale of the Merger Shares pursuant to the registration statement giving rise to
such claim. Such indemnity and reimbursement of expenses shall remain in full
force and effect regardless of any investigation made by or on behalf of such
indemnified party and shall survive the transfer of such securities by such
seller of Merger Shares.
(c) Indemnification similar to that specified in the preceding
paragraphs (a) and (b) of this Section 2.8 (with appropriate modifications)
shall be given by the Company and each seller of Merger Shares with respect to
any required registration or other qualification of securities under any state
securities and "blue sky" laws.
(d) Any Person entitled to indemnification under this Agreement
shall notify promptly the indemnifying party in writing of the commencement of
any action or proceeding with respect to which a claim for indemnification may
be made pursuant to this Section 2.8, but the failure of any indemnified party
to provide such notice shall not relieve the indemnifying party of its
obligations under the preceding paragraphs of this Section 2.8, except to the
extent the indemnifying party is materially prejudiced thereby
-12-
<PAGE>
and shall not relieve the indemnifying party from any liability which it may
have to any indemnified party otherwise than under this Article 2. In case any
action or proceeding is brought against an indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, unless in the reasonable opinion of
outside counsel to the indemnified party a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, to
assume the defense thereof jointly with any other indemnifying party similarly
notified, to the extent that it chooses, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party that it so chooses, the indemnifying party shall not be liable
to such indemnified party for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that (i) if the
indemnifying party fails to take reasonable steps necessary to defend diligently
the action or proceeding within 20 days after receiving notice from such
indemnified party that the indemnified party believes it has failed to do so; or
(ii) if such indemnified party who is a defendant in any action or proceeding
which is also brought against the indemnifying party reasonably shall have
concluded that there may be one or more legal defenses available to such
indemnified party which are not available to the indemnifying party; or (iii) if
representation of both parties by the same counsel is otherwise inappropriate
under applicable standards of professional conduct, then, in any such case, the
indemnified party shall have the right to assume or continue its own defense as
set forth above (but with no more than one firm of counsel for all indemnified
parties in each jurisdiction, except to the extent any indemnified party or
parties reasonably shall have concluded that there may be legal defenses
available to such party or parties which are not available to the other
indemnified parties or to the extent representation of all indemnified parties
by the same counsel is otherwise inappropriate under applicable standards of
professional conduct) and the indemnifying party shall be liable for any
expenses therefor. No indemnifying party shall, without the written consent of
the indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (A) includes an
unconditional release of the indemnified party from all liability arising out of
such action or claim and (B) does not include a statement as to or an admission
of fault, culpability or a failure to act, by or on behalf of any indemnified
party.
(e) If for any reason the foregoing indemnity is unavailable or
is insufficient to hold harmless an indemnified party under Sections 2.8(a), (b)
or (c), then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of any Claim in such proportion as
is appropriate to reflect
-13-
<PAGE>
the relative fault of the indemnifying party, on the one hand, and the
indemnified party, on the other hand, with respect to such offering of
securities. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. If, however, the allocation provided
in the second preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative faults but also the relative benefits of the indemnifying party and the
indemnified party as well as any other relevant equitable considerations. The
parties hereto agree that it would not be just and equitable if contributions
pursuant to this Section 2.8(e) were to be determined by pro rata allocation or
by any other method of allocation which does not take account of the equitable
considerations referred to in the preceding sentences of this Section 2.8(e).
The amount paid or payable in respect of any Claim shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such Claim. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. Notwithstanding anything in this
Section 2.8 to the contrary, no indemnifying party (other than the Company)
shall be required pursuant to this Section 2.8 to contribute any amount in
excess of the net proceeds received by such indemnifying party from the sale of
the Merger Shares in the offering to which the Claims of the indemnified parties
relate, less the amount of any indemnification payment made by such indemnifying
party pursuant to Sections 2.8(b) and (c).
(f) The indemnity agreements contained herein shall be in
addition to any other rights to indemnification or contribution which any
indemnified party may have pursuant to law or contract and shall remain
operative and in full force and effect regardless of any investigation made or
omitted by or on behalf of any indemnified party and shall survive the
disposition of Merger Shares by any Shareholder.
(g) The indemnification and contribution required by this
Section 2.8 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
3. PIGGYBACK UNDERWRITTEN OFFERINGS.
--------------------------------
In the case of a registration pursuant to Section 2.2 hereof, if the
Company shall have determined to enter into an underwriting agreement in
connection therewith, all of
-14-
<PAGE>
the Merger Shares to be included in such registration shall be subject to such
underwriting agreement. Any Shareholder participating in such registration may,
at its option, require that any or all of the representations and warranties by,
and the other agreements on the part of, the Company to and for the benefit of
such underwriters shall also be made to and for the benefit of such Shareholders
and that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement be conditions precedent to the
obligations of such Shareholders. Such underwriting agreement shall also contain
such representations and warranties by the participating Shareholders as are
customary in agreements of that type.
4. GENERAL.
--------
4.1. Recapitalizations, Exchanges, etc., Affecting Merger Shares
-----------------------------------------------------------
The provisions of this Agreement shall, to the extent reasonably
practicable, apply, to the full extent set forth herein with respect to the
Merger Shares, to any and all securities or capital stock (of the Company or any
successor to the Company and/or any other issuer thereof) which may be issued in
respect of, in exchange for, or in substitution of such Merger Shares, by reason
of, and shall be appropriately adjusted to reflect, any stock dividend, stock
split, reverse stock split, combination, recapitalization, reclassification,
merger, consolidation or otherwise. The adjustments contemplated by this
paragraph shall be made cumulative with respect to all such transactions
contemplated by this Section that occur from time to time. Any issuer of any
such securities other than the Company shall be required to assume in writing,
to the extent relevant, the Company's obligations with respect to the
registration rights granted hereunder or enter into a registration rights
agreement substantially similar to this Agreement and giving effect to the
allocations and adjustments contemplated by this Section, in connection with any
such transaction pursuant to which the Shareholders shall receive securities of
such issuer, as contemplated by this Section.
4.2. Rule 144.
--------
The Company covenants that (i) so long as it remains subject to the
reporting provisions of the Exchange Act, it will timely file the reports
required to be filed by it under the Securities Act or the Exchange Act
(including, but not limited to, the reports under Sections 13 and 15(d) of the
Exchange Act referred to in subparagraph (c)(1) of Rule 144 under the Securities
Act), and (ii) will take such further action as any Shareholder may reasonably
request, all to the extent required from time to time to enable such Shareholder
to sell Merger Shares without registration under the Securities Act within the
limitation of the exemptions provided by (A) Rules 144 and 145 under the
Securities Act, as such Rules may be amended from time to time, or (B) any
similar rule or regulation hereafter adopted by the Commission. Upon the
request of any Shareholder,
-15-
<PAGE>
the Company will deliver to such Shareholder a written statement as to whether
it has complied with such requirements.
4.3. Nominees for Beneficial Owners.
------------------------------
If Merger Shares are held by a nominee for the beneficial owner
thereof, the beneficial owner thereof may, at its option, be treated as the
holder of such Merger Shares for purposes of any request or other action by any
Shareholder pursuant to this Agreement (or any determination of any number or
percentage of shares constituting Merger Shares held by any Shareholder(s)
contemplated by this Agreement), provided that the Company shall have received
assurances reasonably satisfactory to it of such beneficial ownership.
4.4. Amendments and Waivers.
----------------------
This Agreement may be amended, modified, supplemented or waived only
upon the written agreement of the Company and the Representative Shareholders.
4.5. Notices.
-------
All notices, demands, requests or other communications that may be or
are required to be given, served or sent by any party to any other party
pursuant to this Agreement shall be in writing (and shall be deemed to have been
duly given upon receipt) and shall be mailed by first-class, overnight,
registered or certified mail, return receipt requested, postage prepaid, or
transmitted by hand delivery or facsimile transmission, addressed as follows:
(i) if to the Company:
Yurie Systems, Inc.
8301 Professional Place
Landover, Maryland 20785
Attn: John J. McDonnell, Esq.
Facsimile: 301-352-4678
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Ave., N.W.
Suite 800
Washington, D.C. 20004
Attn: Richard A. Steinwurtzel, Esq.
Facsimile: 202-639-7008
-16-
<PAGE>
(ii) if to any of the Shareholders, to the
addresses set forth on Exhibit B.
----------
with a copy to:
Tucker, Flyer & Lewis
1615 L St., N.W.
Suite 400
Washington, D.C. 20036
Attn: Jack L. Lewis, Esq.
(iii) if to the Shareholder Counsel:
Tucker, Flyer & Lewis
1615 L St., N.W.
Suite 400
Washington, D.C. 20036
Attn: Jack L. Lewis, Esq.
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request or communication that is mailed, delivered or
transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt or the affidavit of
messenger being deemed conclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
4.6. Miscellaneous.
-------------
(a) This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and the respective successors, personal
representatives and assigns of the parties hereto, whether so expressed or not;
provided, however, that the registration rights granted pursuant to this
Agreement shall not be transferred with the transfer of shares of Common Stock
held by the Shareholders unless: (i) such shares of Common Stock are Merger
Shares; (ii) the transferee of such Merger Shares agrees in writing to be bound
by the provisions of this Agreement; and (iii) for the purposes any notice
provision contained in this Agreement, notice to the Shareholder Counsel or, if
required, to the persons at the addresses listed on Exhibits A and B hereto
shall constitute any notice that such transferee may be entitled to under this
Agreement.
-17-
<PAGE>
(b) This Agreement and the Merger Agreement (with the documents
referred to herein or therein or delivered pursuant hereto or thereto) embody
the entire agreement and understanding between the parties hereto and supersede
all prior agreements and understandings relating to the subject matter hereof.
(c) This Agreement shall be construed and enforced in accordance with
and governed by the laws of the State of Delaware without giving effect to the
conflicts of law principles thereof.
(d) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof. All section
references are to this Agreement unless otherwise expressly provided.
(e) This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
(f) Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction.
(g) The parties hereto acknowledge that there would be no adequate
remedy at law if any party fails to perform any of its obligations hereunder,
and accordingly agree that each party, in addition to any other remedy to which
it may be entitled at law or in equity, shall be entitled to injunctive relief,
including specific performance, to enforce such obligations without the posting
of any bond, and, if any action should be brought in equity to enforce any of
the provisions of this Agreement, none of the parties hereto shall raise the
defense that there is an adequate remedy at law.
(h) Each party hereto shall do and perform or cause to be done and
performed all such further acts and things and shall execute and deliver all
such other agreements, certificates, instruments, and documents as any other
party hereto reasonably may request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
4.7. Prior Agreements.
----------------
Each of the Shareholders agrees that any agreement previously entered
into by it pursuant to which Data Labs granted to any Shareholder any
registration rights shall
-18-
<PAGE>
be superseded by this Agreement and each such agreement shall be null and void
and no longer in effect.
4.8. No Inconsistent Agreements.
--------------------------
Neither the Company nor any Shareholder will, on or after the date of
this Agreement, enter into any agreement with respect to its securities which is
inconsistent with the rights granted in this Agreement or may delay the
effectiveness of the Registration Statement or otherwise conflicts with the
provisions hereof. Notwithstanding the foregoing, the Company may grant
registration rights to future shareholders in future registration rights
agreements.
4.9. Third-Party Beneficiaries.
-------------------------
Nothing expressed or implied in this Agreement is intended or shall
be construed to confer upon or give any person, firm or corporation other than
the parties hereto and their permitted successors or assigns any rights or
remedies under or by reason of this Agreement, provided, however, that the
Shareholders listed on Exhibit B hereto shall be third-party beneficiaries to
---------
this Agreement.
4.10. Designation of Shareholder Counsel.
----------------------------------
Each of the Shareholders designates Tucker, Flyer & Lewis as
Shareholder Counsel for purposes of this Agreement until such later time as a
majority of the holders of the Merger Shares designate different counsel.
-19-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Registration Rights
Agreement as of the date set forth above.
YURIE SYSTEMS, INC.
By:
------------------------------
Name:
Title:
WENLI YU
-----------------------------------
EDISON VENTURE FUND III, L.P.
By: EDISON PARTNERS III, L.P.
General Partner
By:
------------------------------
BESSEMER VENTURE PARTNERS IV, L.P.
By: DEER IV & CO. LLC
General Partner
By:
------------------------------
-20-
<PAGE>
EXHIBIT A
Wenli Yu
Edison Venture Fund III, L.P.
Bessemer Venture Partners IV, L.P.
-21-
<PAGE>
EXHIBIT B
-22-
<PAGE>
EXHIBIT 5.1
January 30, 1998
(202) 639-7120
Board of Directors
Yurie Systems, Inc.
10000 Derekwood Lane
Lanham, Maryland 20706
Gentlemen:
We are acting as special counsel to Yurie Systems, Inc., a Delaware
corporation (the "Company"), in connection with the registration, pursuant to a
Registration Statement on Form S-1, of 336,966 shares of the Company's common
stock, par value $.01 per share ("Common Stock"), previously issued to the
former shareholders (the "Data Labs Shareholders") of Data Labs, Inc., a
Delaware corporation ("Data Labs"), pursuant to the Plan and Agreement of Merger
between the Company, Data Labs and Nicole Acquisition Corporation, a Delaware
corporation, dated December 1, 1997, (the "Merger Agreement"). The shares of
Common Stock issued pursuant to the Merger Agreement are referred to as the
"Shares." The Shares are being registered pursuant to the Registration Rights
Agreement between the Company and the Data Labs Shareholders, dated as of
December 1, 1997. With your permission, all assumptions and statements of
reliance herein have been made without any independent investigation or
verification on our part except to the extent expressly stated herein, and we
express no opinion with respect to the subject matter or accuracy of such
assumptions or items relied upon.
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company, (iii) examined such certificates of public officials, officers or
other representatives of the Company, and other persons, and such other
documents, and (iv) reviewed such information from officers and representatives
of the Company and others as we have deemed necessary or appropriate for the
purposes of this opinion.
<PAGE>
Board of Directors
January 30, 1998
Page 2
In all such examinations, we have assumed the legal capacity of all
natural persons executing documents (other than the capacity of officers of the
Company executing documents in such capacity), the genuineness of all signatures
on original or certified copies, and the conformity to original or certified
documents of all copies submitted to us as conformed or reproduction copies. As
to various questions of fact relevant to the opinion expressed herein, we have
relied upon, and assumed the accuracy of, certificates and oral or written
statements and other information of or from public officials, officers or other
representatives of the Company, Data Labs, and other persons.
Based upon the foregoing, and subject to the limitations set forth
herein, we are of the opinion that the Shares that may be offered by the Data
Labs Shareholders, were validly issued, and are fully paid and non-assessable.
The opinion expressed herein is limited to the General Corporation Law
of the State of Delaware. We assume no obligations to supplement this letter if
any applicable laws change after the date hereof or if we become aware of any
facts that might change the opinion expressed herein after the date hereof.
The opinion expressed herein is solely for your benefit and may not be
relied upon in any manner or for any purpose by any other person and may not be
quoted in whole or in part without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 relating to the registration of the Shares.
In giving this consent we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By:
--------------------------------------
Richard A. Steinwurtzel
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Yurie Systems, Inc.
on Form S-1 of our report dated March 7, 1997 on the financial statements and
of our report dated January 30, 1998 on the supplemental consolidated
financial statements appearing in the Prospectus, which is part of the
Registration Statement. We also consent to the references to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
Washington, D.C.
February 2, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report on
the Data Labs, Inc. 1996 and 1995 Financial Statements and to all references to
our Firm included in or made a part of this Registration Statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 30, 1998
