<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1998
REGISTRATION NO. 333-43827
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DSET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW JERSEY 7371 22-3000022
(STATE OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER)IDENTIFICATION NO.)
1011 US HIGHWAY 22
BRIDGEWATER, NEW JERSEY 08807
(908) 526-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
WILLIAM P. MCHALE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DSET CORPORATION
1011 US HIGHWAY 22
BRIDGEWATER, NEW JERSEY 08807
(908) 526-7500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
WILLIAM J. THOMAS, ESQ. WILLIAM B. ASHER, JR., ESQ.
ANDREW P. GILBERT, ESQ. MICHAEL A. CONZA, ESQ.
BUCHANAN INGERSOLL TESTA, HURWITZ & THIBEAULT, LLP
COLLEGE CENTRE HIGH STREET TOWER
500 COLLEGE ROAD EAST 125 HIGH STREET
PRINCETON, NJ 08540 BOSTON, MA 02110
(609) 987-6800 (617) 248-7000
--------------
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. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [_]
--------------
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 THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
FEBRUARY 12, 1998
3,500,000 SHARES
[DSET LOGO APPEARS HERE]
COMMON STOCK
-----------
Of the 3,500,000 shares of Common Stock ("Common Stock") offered hereby,
2,500,000 are being sold by DSET Corporation ("DSET" or the "Company") and
1,000,000 are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling
Shareholders. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $12.00 and $14.00 per share. See "Underwriting"
for the factors considered in determining the initial public offering price.
The Company's Common Stock has been approved for quotation, subject to notice
of effectiveness, on the Nasdaq National Market under the symbol "DSET."
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-----------
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.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
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Total(3)...................... $ $ $ $
</TABLE>
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting estimated expenses of $750,000, all of which will be
payable by the Company.
(3) Certain Selling Shareholders have granted the Underwriters a 30-day option
to purchase up to 525,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to the Company and
Proceeds to the Selling Shareholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.
BT ALEX. BROWN
BANCAMERICA ROBERTSON STEPHENS
SOUNDVIEW FINANCIAL GROUP, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
The Company intends to furnish its shareholders with annual reports
containing financial statements certified by its independent accountants and
make available quarterly reports containing unaudited financial information
for the first three quarters of each year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
"DSET" and the Company's logo are United States trademarks of the Company.
All other trade names, trademarks or service marks appearing in this
Prospectus are the property of their respective owners and are not the
property of the Company.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ materially from those anticipated in these forward-looking
statements as a result of certain factors including, but not limited to, those
discussed in "Risk Factors."
THE COMPANY
DSET is a leading provider of telecommunications network management
solutions, including industry-standard application development tools, custom
application development services and carrier-to-carrier network applications.
Telecommunications carriers and equipment vendors utilize the Company's tools
and development services to build applications which facilitate the remote
management of network devices, the rapid implementation of new
telecommunication services and the flow-through of information to higher level
applications, such as billing, ordering and provisioning systems. The Company's
tools are also used by the Company and by its customers to build carrier-to-
carrier applications which are designed to facilitate the flow-through of
information between carriers' networks and systems. These solutions are based
on the Telecommunications Management Network ("TMN") standard, which defines
the application programming interfaces ("APIs") and communication protocols
required to ensure interoperability within and between carrier networks that
incorporate devices deployed from multiple vendors. The Company's customers
include AT&T, BellSouth, MCI, Advanced Fibre Communications, Ciena, Fujitsu,
Hitachi, Lockheed Martin IMS, Lucent, Samsung, Tekelec and Tellabs.
Telecommunications carriers face an increasingly competitive and complex
market environment due to continued deregulation and privatization of the
global telecommunications industry. Consequently, telecommunications carriers
worldwide are investing aggressively in new technologies and equipment to
enhance access to their networks and expand systems capacity or bandwidth in
order to provision new and enhanced services. As a result, telecommunication
equipment vendors are delivering a variety of new technologies and equipment to
address the carriers' requirements, including SONET and SDH multiplexers,
wavelength division multiplexers ("WDM"), ATM switches, next generation digital
loop carrier systems, wireless local loop systems and digital subscriber line
products. The proliferation of new technologies, equipment and services, and
the pressure to deploy and provision them rapidly, has placed increased demands
on the operations, administration and management of carrier networks. In
addition, the Telecommunications Act of 1996 mandated access to carriers'
networks and operational support systems ("OSSs") in order to enable the flow-
through of information and services between competitive carriers in order to
facilitate customer choice of carriers. As a result, carriers increasingly
require TMN-compliant applications to facilitate the operation, administration
and management of their networks and systems.
The Company's highly functional and scalable TMN-based solutions (i) enable
carriers to remotely manage large and complex telecommunication networks
comprising thousands of network devices in a multi-vendor environment, (ii)
facilitate the rapid deployment of new technologies and network equipment and
the rapid provisioning of telecommunications services and (iii) expedite the
development of carrier-to-carrier applications which enable carriers to quickly
and cost-effectively enter new markets.
DSET's objective is to become the leading provider of industry standard
network management solutions for evolving telecommunications networks. Key
elements of the Company's strategy include: (i) extending its technological
leadership by continuing to invest its resources to enhance and expand its
3
<PAGE>
products and to ensure compatibility with emerging technologies such as CORBA
and Java; (ii) expanding its application development services capabilities;
(iii) delivering a suite of carrier-to-carrier applications; (iv) expanding its
sales and distribution capabilities; and (v) pursuing strategic acquisitions of
complementary businesses or technologies.
The Company markets its products and services through a direct sales
organization in North and South America and through distributors in Europe and
Asia. As of December 31, 1997, the Company's direct sales force consisted of
eight sales managers supported by nine consulting engineers based in its New
Jersey, California and Texas offices. The Company also markets its products and
services through non-exclusive distributors in China, Taiwan, South Korea and
Japan, and an exclusive distributor in Europe.
The Company was incorporated in New Jersey in 1989. The Company's executive
offices are located at 1011 US Highway 22, Bridgewater, New Jersey 08807, and
its telephone number is (908) 526-7500.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................. 2,500,000 shares
Common Stock offered by the Selling Shareholders..... 1,000,000 shares
Common Stock to be outstanding after the offering.... 9,303,092 shares(1)
Use of proceeds...................................... General corporate
purposes, working capital
and possible acquisitions
Proposed Nasdaq National Market Symbol............... DSET
</TABLE>
- --------------------
(1) Excludes 2,848,493 shares of Common Stock issuable upon the exercise of
stock options outstanding as of December 31, 1997 at a weighted average
exercise price of $2.23 per share, of which options to purchase 1,173,384
shares of Common Stock are exercisable. Also excludes 185,331 shares of
Common Stock issuable upon the exercise of warrants outstanding as of
December 31, 1997 at an exercise price of $2.18 per share, of which
warrants to purchase 46,333 shares of Common Stock are exercisable.
Includes 28,000 shares underlying outstanding options which will be
exercised and sold upon consummation of this offering. See "Risk Factors--
Shares Eligible for Future Sale," "Management--Stock Option Plans" and
"Description of Capital Stock--Warrants."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
License revenues.......................... $1,456 $2,838 $5,734 $7,005 $10,850
Service revenues.......................... 245 1,172 2,179 6,111 8,515
------ ------ ------ ------ -------
Total revenues............................. 1,701 4,010 7,913 13,116 19,365
Gross profit............................... 1,620 3,692 7,403 10,834 14,686
Operating income........................... 383 871 2,653 2,870 3,520
Net income................................. 227 572 1,705 2,013 2,469
Pro forma(1):
Net income per common share............... $ 0.37
Weighted average number of common shares
outstanding.............................. 6,610
Net income per common share assuming
dilution................................. $ 0.30
Weighted average number of common shares
and common equivalent shares
outstanding.............................. 8,109
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..... $3,206 $32,681
Working capital...................................... 6,276 35,751
Total assets......................................... 13,315 42,790
Series A preferred stock............................. 11,604 --
Total shareholders' equity (deficit)................. (3,401) 37,678
</TABLE>
- --------------------
(1) Gives effect to the automatic conversion of all issued and outstanding
shares of Series A Preferred Stock (the "Series A Stock") into 3,043,625
shares of Common Stock. See "Description of Capital Stock."
(2) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by
the Company hereby after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company. See "Use of
Proceeds" and "Capitalization."
Except as otherwise specified, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option; (ii) has been adjusted
to give effect to a three-for-one stock split of the Company's Common Stock
effected on May 24, 1996 and a three-for-two stock split of the Company's
Common Stock effected on December 31, 1997; (iii) assumes the conversion of all
outstanding Series A Stock into an aggregate of 3,043,625 shares of Common
Stock upon the consummation of this offering; and (iv) assumes the issuance of
2,500,000 shares of Common Stock offered by the Company hereby from the
treasury and the simultaneous cancellation of all remaining shares of Common
Stock held in treasury. See "Description of Capital Stock" and "Underwriting."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.
Fluctuations of Quarterly Operating Results; Seasonality. The Company's
historical operating results have varied substantially from quarter to
quarter, and the Company expects that they will continue to do so. Due to the
relatively fixed nature of certain of the Company's costs, including personnel
and facilities costs, a decline in revenue, failure to achieve expected
revenue in any fiscal quarter, or unanticipated variations in billing and
utilization rates of service personnel would result in lower profitability in
that quarter. A variety of factors, many of which are not within the Company's
control, influence the Company's quarterly operating results, including timing
and levels of hardware and software purchases by customers, the timing, size
and stage of application development projects, new product and service
introductions by the Company or its competitors, levels of market acceptance
for the Company's products and services, or the hiring of additional
personnel. In addition, the Company's revenues in any period generally have
been, and likely will continue to be in the near term, derived from a
relatively small number of sales transactions and fixed price development
projects and, therefore, any delays in closing such engagements or the failure
to accurately estimate the resources necessary to complete fixed price
contracts will have a material adverse impact on the Company's results of
operations for that period. In addition, the Company historically has
recognized a large portion of its revenues from sales in the last month of a
quarter such that the magnitude of quarterly fluctuations may not become
evident until late in, or at the end of, a particular quarter. Furthermore,
the Company's revenues are partly dependent upon run-time license fees which
may fluctuate from period to period depending upon the size and timing of
deployments by equipment vendors to telecommunications carriers of network
devices which have embedded applications built with the Company's software.
The Company believes, therefore, that past operating results and period-to-
period comparisons should not be relied upon as an indication of future
performance. Demand for the Company's products generally is higher during the
fourth quarter, primarily due to capital spending trends by telecommunications
companies. The Company anticipates that its business will continue to be
subject to such seasonal variations. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Selected Quarterly Results
of Operations."
Dependence on Rapidly Evolving Telecommunications Industry. The Company's
success will depend on continued growth in the market for advanced
telecommunications products and services. The global telecommunications market
is evolving rapidly and it is difficult to predict its potential size or
future growth rate. There can be no assurance that the global deregulation and
privatization of the worldwide telecommunication market that has resulted in
increased competition and escalating demand for new technologies and services
will continue in a manner favorable to the Company or its business strategies.
Since the Company's customers are concentrated in the telecommunications
industry, the Company's future success is dependent upon increased utilization
of its application development tools, custom application development services
and carrier-to-carrier applications by telecommunications carriers and network
equipment vendors. There can be no assurance that the Company's current or
future products or services will achieve widespread acceptance among
telecommunications carriers, network equipment vendors and other potential
customers or that such customers will not adopt alternative architectures or
technologies that are incompatible with the Company's technologies, any of
which would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that telecommunications carriers will upgrade the infrastructure of
their networks necessitating the implementation of new network devices which
require embedded applications developed with the Company's products or
services. Industry-wide network improvements driving the demand for the
Company's products or services may be delayed or prevented by a variety of
factors, including cost, regulatory obstacles, the lack or reduction of
consumer demand for advanced telecommunications services and alternative
approaches to service delivery. See "Business--Industry Background."
6
<PAGE>
Dependence on the TMN Industry Standard. Substantially all of the Company's
revenue to date has been derived from application development tools and
application development services based on TMN standards. DSET depends upon the
broad and continued adoption and deployment of TMN as the industry standard
architecture for managing complex telecommunications networks.
Telecommunications carriers have only recently widely embraced TMN solutions
as an industry standard, and to remain an industry standard, TMN must continue
to be adapted to incorporate emerging technologies, such as CORBA and Java.
DSET believes that the continued implementation of TMN solutions will also
depend, in part, upon the continued demand from telecommunications carriers
and equipment vendors to quickly and cost-effectively implement TMN solutions.
There can be no assurance that TMN will remain a standard criteria for the
management of complex telecommunications networks. The emergence of new or
more favorable industry standards, or the inability of the Company to
recognize and adapt to such standards on a timely basis, would have a material
and adverse effect on the Company's business, financial condition and results
of operations. See "Business--Industry Background."
Rapid Technological Change. The markets for telecommunications devices,
network-based applications and related services are subject to rapid
technological change, evolving industry standards, changes in end-user
requirements and frequent new product and service introductions and
enhancements that may render existing offerings obsolete or unmarketable. As a
result, the Company's position in this market could erode rapidly due to
unforeseen changes in product features and functions of competing products.
The Company's growth and future results of operations will depend in part on
its ability to respond to these changes by enhancing its existing products and
services and by developing and introducing, on a timely and cost-effective
basis, new products, features and related services to meet or exceed
technological advances in the marketplace. There can be no assurance that the
Company will be successful in identifying, developing and marketing new
products, product enhancements and related services that respond to
technological change or evolving industry standards, or adequately meet new
market demands. The failure of the Company to respond to rapidly changing
technologies could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Industry
Background" and "Business--Research and Product Development."
Management of Growth. The Company's growth has placed significant demands on
its management, administrative and operational resources. From January 1, 1996
through December 31, 1997, the Company's staff increased 172% from 46 to 125
full-time employees, including an increase in the Company's direct sales force
from four to eight sales managers during the second half of 1997. The
Company's ability to manage its growth effectively will require the Company to
continue developing and improving its operational, financial and other
internal systems, as well as its business development capabilities, and to
attract, hire, train, retain, motivate and manage its employees. The Company
must be able to allocate sufficient engineering resources to develop new
products as well as maintain and improve product quality. In addition, the
Company's future success in the application development services component of
its business will depend in large part on its ability to continue to maintain
high rates of employee utilization at profitable billing rates and to maintain
project quality, particularly if the size and scope of the Company's
development projects increase. Moreover, the majority of the Company's senior
management has not previously managed a business of the Company's size and has
limited or no experience managing a public company. There can be no assurance
that the Company's continued growth will be achieved, and if achieved, that
the Company will effectively manage its growth. Any failure to accomplish any
of the foregoing would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
Risks Associated with International Operations. International sales
constituted approximately 38% and 27% of the Company's total revenues in 1996
and 1997, respectively. The Company relies on a number of third party
distributors and agents to market and sell its products and services outside
of North America. There can be no assurance that such distributors or agents
will provide the effort and support
7
<PAGE>
necessary to service international markets effectively. The Company intends to
expand its existing international operations and enter new international
markets, which will demand significant management attention and financial
commitment. The Company's management has limited experience in international
operations, and there can be no assurance that the Company will successfully
expand its international operations. The failure by the Company to expand its
international operations could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Sales
and Marketing."
The Company's international sales currently are United States dollar-
denominated. As a result, an increase in the value of the United States dollar
relative to foreign currencies could make the Company's products and services
less competitive in international markets. Furthermore, operating in
international markets subjects the Company to additional risks, including
unexpected changes in regulatory requirements, political and economic
conditions, taxes, tariffs or other barriers, difficulties in staffing and
managing international operations, potential exchange and repatriation
controls on foreign earnings, longer sales and payment cycles and difficulty
in accounts receivable collection. For example, the recent volatility and
devaluation trends in certain Asian markets, particularly South Korea, have
resulted in delays, cancellations and increased pricing pressures on the
Company's product sales and application development activities in such
markets. Such risks may adversely affect the Company's business, financial
condition and results of operations.
Fixed Price Contracts and Other Project Risks. During 1997, over 35% of the
Company's total revenues was generated from application development projects
provided on a fixed price basis with performance and payment milestones,
rather than on a time and materials basis. The Company's failure to accurately
estimate the resources required for a fixed price project, or its failure to
complete its contractual obligations in a timely manner consistent with the
project plan upon which its fixed price contract is based, could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the past, the Company has found it necessary to
revise project plans after commencement of the project and commit
unanticipated additional resources to complete certain projects, which have
negatively affected the profitability of such projects. The Company may
experience similar situations in the future, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company may establish contract prices before the
project design specifications are finalized, which could result in fixed
prices that prove to be too low and therefore adversely affect the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Overview."
Limited Protection of Proprietary Rights; Enforcement of Rights. The
Company's success and its ability to compete effectively is dependent, in
part, upon its proprietary rights. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, as well as
confidentiality procedures and contractual restrictions, to establish and
protect its proprietary rights. Furthermore, the Company generally enters into
non-competition, non-disclosure and invention assignment agreements with its
employees and consultants, and into non-disclosure agreements with its
customers and distributors. There can be no assurance that such measures will
be adequate to protect the Company's proprietary rights. A portion of the
Company's revenues is generated from run-time license fees which generally
become due upon the deployment by equipment vendors to telecommunications
carriers of network devices which have embedded applications built with the
Company's software. Many of such customers are contractually required to
periodically report their sales to the Company. Although the Company generally
has the right to periodic audits in its contracts which provide for run-time
licenses, there can be no assurance that such customers will accurately report
such sales or that the Company will be able to effectively monitor and enforce
its contractual rights with respect to such fees. Additionally, the Company
may be subject to further risks as it enters into transactions in countries
where intellectual property laws are not well developed or are difficult to
enforce. Legal protections of the Company's
8
<PAGE>
proprietary rights may be ineffective in such countries. Litigation may be
necessary to defend and enforce the Company's proprietary rights, which could
result in substantial costs and diversion of management resources and could
have a material adverse effect on the Company's business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary rights
both in the United States and abroad, there can be no assurance that the
Company will be successful in doing so or that the steps taken by the Company
in this regard will be adequate to deter misappropriation or independent
third-party development of the Company's technology or to prevent an
unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. Any of such events could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company or its employees may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. In its
licenses and software development and distribution agreements, the Company
agrees to indemnify its customers and distributors for any expenses and
liabilities resulting from claimed infringements of patents, trademarks,
copyrights or other proprietary rights of third parties. The amount of the
Company's indemnity obligations may be greater than the revenues the Company
may have received under such agreements. There can be no assurance that third
parties will not assert infringement or misappropriation claims against the
Company, its customers or distributors in the future with respect to its
employees or current or future products or services. Any claims or litigation,
with or without merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require the Company to enter into royalty or
licensing arrangements. Such royalty or licensing arrangements, if required,
may not be available on terms acceptable to the Company, if at all, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Intellectual Property."
Competitive Market for Technical Personnel. The Company's success depends in
part on its ability to attract, hire, train, retain and motivate qualified
technical and sales personnel, with appropriate levels of managerial and
technical capabilities. The Company's complex technology generally requires a
significant level of expertise to effectively develop and market the Company's
products and services and to perform its custom application development
services. The Company has at times experienced, and continues to experience,
difficulty in recruiting qualified personnel. The Company believes that the
pool of potential applicants with such requisite expertise is limited.
Recruiting qualified personnel is an intensely competitive and time-consuming
process. The Company competes for such personnel with software companies and
telecommunications companies, many of which have greater resources than the
Company. Such competition has resulted in demands for increased compensation
from qualified applicants. Due to such competition, the Company has
experienced, and expects to continue to experience, turnover in technical
personnel. There can be no assurance that the Company will be successful in
attracting and retaining the technical personnel it requires to conduct and
expand its operations successfully. The Company's business, financial
condition and results of operations could be materially adversely affected if
the Company were unable to attract, hire, train, retain and motivate qualified
technical and sales personnel. See "Business--Strategy" and "--Employees."
Risks Associated with New Application Development Tools and Carrier-to-
Carrier Applications. As part of its strategy, the Company expects to develop
and offer to its customers new application development tools and carrier-to-
carrier applications. There can be no assurance that such new development
tools and carrier-to-carrier applications will adequately meet evolving
technological or customer requirements and emerging industry standards. The
Company's new carrier-to-carrier applications are in early stages of
development, marketing and customer acceptance, and the Company has limited
experience in developing, marketing or providing such new applications.
Accordingly, there can be no assurance that the markets for such application
development tools or carrier-to-carrier applications will develop.
Furthermore, no assurance can be given that the Company will successfully
market such application development tools and carrier-to-carrier applications
to new and existing customers, or meet customer expectations.
9
<PAGE>
The Company has, from time to time, experienced delays in the development of
new products and the enhancement of existing products, and the Company may in
the future experience delays in the development of such new application
development tools and carrier-to-carrier applications, due to resource
constraints or technological or other reasons. The inability of the Company to
develop and introduce such tools or applications in a timely manner could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Strategy," "--Products and Services" and
"--Research and Product Development."
Risks of Product Defects. Application development tools and applications
developed, licensed and sold by the Company may contain errors or failures.
There can be no assurance that errors or failures will not be found in the
Company's products or applications or, if discovered, that the Company will be
able to successfully correct such errors or failures in a timely manner or at
all. The occurrence of errors or failures in the Company's products and
applications could result in loss of or delay in market acceptance, increased
service and warranty costs or payment of compensatory or other damages. In
addition, such errors or failures may result in delays in the recognition of
revenue by the Company and diversion of the Company's engineering resources
during the period in which it is required to correct such defects. The Company
does not maintain errors and omissions insurance to cover liability associated
with its software development activities and license agreements. Although the
Company's agreements with its customers typically contain provisions intended
to limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, the Company's contracts with its customers may not
effectively protect the Company against the liabilities and expenses
associated with software errors or failures. Accordingly, errors or failures
in the Company's products or applications could have a material adverse effect
upon the Company's business, financial condition and results of operations.
See "Business--Products and Services."
Dependence on Key Personnel. The Company's success will depend in part on
the continued service of its management, key product and application
engineers, and sales and technical sales support personnel and its ability to
identify, hire and retain additional senior personnel. In particular, the loss
of one or more key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, if one or more of the Company's key personnel resigns from the
Company to join a competitor or to form a competing company, any resulting
loss of existing or potential customers to any such competitor could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event of the loss of any key personnel, there
can be no assurance that the Company would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices or procedures by such
personnel. The Company maintains, and is the beneficiary of, a key person life
insurance policy in the face amount of $1.0 million on the life of S. Daniel
Shia, the Company's founder, Chairman of the Board and Chief Technical
Officer. There can be no assurance that the proceeds from such insurance would
be sufficient to compensate the Company in the event of the death of Mr. Shia.
The Company does not maintain key person life insurance on any of its other
key personnel. Failure to attract and retain key personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Employees" and "Management."
Length of Sales Cycle. The Company believes that the period of time between
initial customer contact and execution of a license agreement or application
development services contract typically ranges from four to nine months.
Telecommunications carriers and network equipment vendors typically conduct
extensive and lengthy product evaluations before purchasing software or
application development services. The Company does not typically receive
advance notice of contemplated changes in the budgets and purchasing
priorities of its telecommunications equipment vendors and their carrier
customers. Curtailment or termination of custom application development
projects, decreases in customer budgets or reduction in the purchasing
priority assigned to application development, particularly if significant and
unanticipated by the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations. Carriers
and equipment vendors may also encounter delays in their sales cycles of
products and services which depend on the implementation of
10
<PAGE>
applications built using the Company's software, and may therefore indirectly
and adversely impact the Company's business, financial condition and results
of operations. See "Business--Sales and Marketing."
Intense Competition. Competition in DSET's markets is intense and involves
rapidly changing technologies, evolving industry standards, frequent new
product introductions and rapid changes in customer requirements. To maintain
and improve its competitive position, DSET must continue to develop and
introduce, on a timely and cost-effective basis, new products, features and
services that keep pace with the evolving needs of its customers. The
principal competitive factors affecting the market for the Company's
application development tools are product reputation, quality, performance,
price, customer support and product features such as adaptability,
scalability, ability to integrate with other products, functionality and ease
of use. The Company believes that the principal competitive factors in the
market for application development services include compliance with industry
standards, quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and
business expertise. The Company believes that the principal competitive
factors in the market for carrier-to-carrier applications includes many of the
same factors as the market for application development services as well as the
ability of such applications to facilitate the flow-through of information
between carriers' networks and systems. There can be no assurance that the
Company will be able to compete effectively based upon such competitive
factors.
The Company competes in the application development tools market with other
software tool providers. The Company's competitors in the markets for
application development services and carrier-to-carrier applications include
the in-house development staffs of telecommunications carriers, network
equipment vendors and systems integrators. Many of its competitors have longer
operating histories, greater name recognition, larger or captive customer
bases and significantly greater financial, technical, sales, customer support,
marketing and other resources. Furthermore, TMN, as an open systems
architecture, can lead to increased competition as third parties develop
competitive products and services. Competitors may be able to respond more
quickly to emerging technologies and changes in customer requirements. See
"Business--Competition."
Customer Concentration. The Company had two, one and one significant
customers which accounted for 32%, 18% and 12%, respectively, of total
revenues for the years ended December 31, 1995, 1996 and 1997, respectively.
Sales to Hitachi, Ltd. ("Hitachi") and McCaw Cellular Communications ("McCaw
Cellular") accounted for approximately 20% and 12% of total revenues,
respectively, in the year ended December 31, 1995. Sales to Hitachi accounted
for approximately 18% of total revenues in the year ended December 31, 1996.
Sales to Samsung Electronics ("Samsung") accounted for approximately 12% of
total revenues in the year ended December 31, 1997. The Company anticipates
that its results of operations in any given period will continue to depend to
a significant extent upon sales to a small number of customers. As a result of
this customer concentration, the Company's revenues from quarter to quarter
and business, financial condition and results of operations may be subject to
substantial period-to-period fluctuations. In addition, the Company's
business, financial condition and results of operations could be materially
adversely affected by the failure of customer orders to materialize as and
when anticipated, or by deferrals or cancellations of existing application
development projects. Other than certain agreements which provide for on-going
maintenance revenues or minimum fees for run-time licenses, none of the
Company's customers have entered into an agreement requiring on-going minimum
purchases from the Company. The Company's application development services
agreements generally can be terminated by the customer under certain
circumstances with limited advance notice and without significant penalty.
Many of the Company's principal customers may also be competitors of the
Company. There can be no assurance that the Company's principal customers will
continue to purchase products or services from the Company at current levels,
if at all. The loss of one or more major customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business--Customers."
11
<PAGE>
Risks Associated with Indirect Sales Channels. In order to expand the
Company's international sales efforts, the Company has utilized, and expects
to continue to utilize, third-party distributors and agents. Indirect sales
channels contributed approximately $1.9 million, or 14% of total revenues
during the year ended December 31, 1996 and approximately $5.7 million, or 30%
of total revenues during the year ended December 31, 1997. There can be no
assurance that any existing or future distributors will not become competitors
of the Company. Furthermore, selling through indirect channels may limit the
Company's information concerning the volume of products sold by the Company's
customers to end-users and impede the Company's contact with such end-users.
As a result, the Company's ability to forecast revenues accurately, evaluate
end-user satisfaction and recognize emerging end-user requirements may be
hindered. Moreover, the Company has limited experience in establishing and
maintaining indirect distribution channels and there is no assurance that it
will do so successfully. Additionally, any failure by the Company's existing
and future distributors to generate significant revenues could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business--Sales and Marketing."
Risks Associated with Year 2000 Problem. The Company generally warrants and
has represented to its customers that its products are free from Year 2000
defects. There can be no assurance that the Company's products are Year 2000
compliant, or that the Company's products or applications built with the
Company's products will not be integrated by the Company or its customers
with, or otherwise interact with, non-compliant software or other products
which may expose the Company to claims from its customers. The foregoing could
result in the loss of or delay in market acceptance of the Company's products
and services, increased service and warranty costs to the Company or payment
by the Company of compensatory or other damages. In 1997, the Company
conducted a Year 2000 compliance review of its products and determined that
versions of one component of its tool suites (versions of ASN.C sold prior to
May 1997) were unable to properly interpret four digit dates, including the
year 2000 and beyond. The Company notified all of its customers of the problem
and its correction in June 1997 and made the correction available on its
website free of charge. In addition, the Company provided annual maintenance
customers with the correction as part of the subsequent upgrade of the
product. Failure of customers to properly implement the correction, or
problems with the correction, could cause errors in customers' products which
may materially impact the functionality of those products. Additionally,
unanticipated costs incurred by the Company in connection with the remediation
of its customers' products or any disputes with customers relating to Year
2000 compliance, whether relating to such versions of ASN.C or otherwise,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Government Regulation and Legal Uncertainties. While the Company's
operations are not directly regulated, the Company's existing and potential
customers are subject to a variety of United States and foreign governmental
regulations. Such regulations may adversely affect the telecommunications
industry, limit the number of potential customers for the Company's products
and services or otherwise have a material adverse effect on the Company's
business, financial condition and results of operations. Recently enacted
legislation, including the Telecommunications Act of 1996 (the
"Telecommunications Act"), deregulating the telecommunications industry may
cause changes in the telecommunications industry, including the entrance of
new competitors and possible industry consolidation, which could in turn
reduce the Company's potential customer base, increase pricing pressures on
the Company, decrease demand for the Company's application development tools,
application development services and carrier-to-carrier applications, increase
the Company's cost of doing business or otherwise have a material adverse
effect on the Company's business, financial condition and results of
operations. Currently the Federal Communications Commission ("FCC") and state
authorities are implementing the provisions of the Telecommunications Act and
several of the decisions by the FCC and state authorities are being challenged
in court. For example, in December 1997, a Federal District Court declared
unconstitutional provisions of the Telecommunications Act restricting the
ability of the Regional Bell Operating Companies (the
12
<PAGE>
"RBOCs") to enter the long distance services market until they have opened
their networks to potential competitors. The ruling, if upheld and broadly
applied, could adversely affect the market for the Company's products,
services and carrier-to-carrier applications. Therefore, the Company cannot at
this time predict the extent to which such legislation and related litigation
will affect the Company's current and potential customers or ultimately affect
the Company's business, results of operations and financial condition. See
"Business--Industry Background."
Risks Relating to Potential Acquisitions. An element of the Company's
strategy is to review acquisition prospects that would complement its existing
product and service offerings or enhance its technological capabilities or
that may otherwise offer growth opportunities. The Company has no current
agreements or negotiations pending with respect to any such acquisitions.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's business,
financial condition and results of operations or the price of the Company's
Common Stock. Acquisitions entail numerous risks, including difficulties in
the assimilation of acquired operations, technologies and products, diversion
of management's attention to other business concerns, risks of entering
markets in which the Company has no or limited prior experience and potential
loss of key employees of acquired organizations. The Company's management has
limited experience in assimilating acquired organizations. No assurance can be
given as to the ability of the Company to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds" and "Business--Strategy."
Benefits of this Offering to Current Shareholders. The completion of this
offering will provide significant benefits to the current shareholders of the
Company, including certain of its directors and executive officers. The
Company will not receive any of the net proceeds from the sale of shares by
the Selling Shareholders which will be approximately $12.1 million. The
completion of this offering will also create a public market for the Common
Stock and thereby is likely to increase the market value of the investment by
the current shareholders in shares of the Company. Upon the closing of this
offering, the difference between the aggregate purchase price paid by the
Company's current shareholders for their shares and the aggregate market value
of such shares will be approximately $76.6 million, based upon an estimated
initial public offering price of $13.00 per share. See "Dilution," "Principal
and Selling Shareholders" and "Shares Eligible for Future Sale."
Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price. Sales of substantial amounts of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon completion of this offering, the Company will have
outstanding 9,303,092 shares of Common Stock. On the date of this Prospectus,
in addition to the 3,500,000 shares offered hereby, approximately 260,457
shares of Common Stock, which are not subject to 180-day lock-up agreements
(the "Lock-up Agreements") with the Representatives of the Underwriters, will
be eligible for immediate sale in the public market pursuant to Rule 144(k)
under the Securities Act of 1933, as amended (the "Securities Act").
Approximately 50,751 additional shares of Common Stock (including 27,118
shares of Common Stock which may be acquired upon the exercise of outstanding
options), which are not subject to the Lock-up Agreements, will be eligible
for sale in the public market in accordance with Rule 144 or Rule 701 under
the Securities Act beginning 90 days after the date of this Prospectus. Upon
expiration of the Lock-up Agreements 180 days after the date of this
Prospectus, approximately 8,497,708 additional shares of Common Stock
(including 2,978,706 shares of Common Stock which may be acquired upon the
exercise of outstanding options and warrants) will be available for sale in
the public market, subject to the provisions of Rule 144 under the Securities
Act. BT Alex. Brown may release any or all shares subject to Lock-up
Agreements at any time or from time to time without notice. Following this
offering, the Company may register an aggregate of up to 5,082,927 shares of
13
<PAGE>
Common Stock issuable under its 1993 Stock Option Plan and 1998 Stock Plan
following the 90th day after the date of this Prospectus. Holders of
approximately 8,497,708 shares of Common Stock (including 2,978,706 shares of
Common Stock that may be acquired pursuant to the exercise of options and
warrants held by them) have agreed, pursuant to the Lock-up Agreements, not to
offer to sell, contract to sell, transfer, engage in any hedging transaction
with respect to or otherwise dispose of such shares for 180 days after the
date of this Prospectus. The Company is unable to predict the effect that
sales made under Rule 144, or otherwise, may have on the then prevailing
market price of the Common Stock. The holders of approximately 2,813,780
shares of Common Stock and warrants are entitled to certain incidental and
demand registration rights with respect to such shares. By exercising their
registration rights, such holders could cause a large number of shares to be
registered and sold in the public market. Sales pursuant to Rule 144 or other
exemptions from registration, or pursuant to registration rights, may have an
adverse effect on the market price for the Common Stock and could impair the
Company's ability to raise capital through offerings of its equity securities.
See "Management--Stock Option Plans," "Description of Capital Stock--
Registration Rights of Certain Holders," "Shares Eligible for Future Sale" and
"Underwriting."
Control By Existing Shareholders. Upon completion of this offering, the
Company's executive officers, directors and affiliated entities together will
beneficially own approximately 46% of the outstanding shares of Common Stock
(41% if the Underwriters' over-allotment option is exercised in full). As a
result, these shareholders, acting together, will be able to control matters
requiring approval by the shareholders of the Company, including the election
of directors. Such a concentration of ownership may have the effect of
delaying or preventing a change in control of the Company, including
transactions in which shareholders might otherwise receive a premium for their
shares over then current market prices. See "Principal and Selling
Shareholders."
No Prior Public Market For Common Stock; Possibility of Volatility of Stock
Prices. Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering. The initial
offering price will be determined by negotiations between the Company and the
Underwriters and is not necessarily indicative of the market price at which
the Common Stock of the Company will trade after this offering. The market
prices for securities of technology companies have been highly volatile and
the market has experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Announcements
of technological innovations or new products or service offerings by the
Company or its competitors, developments concerning proprietary rights,
including patents and litigation matters, domestic or international regulatory
developments affecting the telecommunications industry, general market
conditions, any shortfall in revenues or earnings from expected levels or
other failures by the Company to meet expectations of securities analysts and
other factors, may have a significant impact on the market price of the Common
Stock. See "Underwriting."
The failure by the Company to identify and elect an additional outside
director who satisfies the Nasdaq National Market listing requirements within
90 days after the effective date of this Prospectus or its inability to meet
or maintain other criteria for continued listing will result in the delisting
of the Company's Common Stock from the Nasdaq National Market. In such event,
the liquidity and trading price of the Company's Common Stock would be
materially and negatively impacted.
Anti-Takeover Effect of Certain Charter and By-Law and Other Provisions. The
Company's Amended and Restated Certificate of Incorporation (the "Certificate
of Incorporation") authorizes the Board of Directors to issue, without
shareholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock or of rights to purchase Preferred Stock could be used to
discourage an unsolicited acquisition proposal. In addition, the possible
issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the
14
<PAGE>
future for shares of the Company's Common Stock. The Certificate of
Incorporation also provides that: (i) the Board of Directors may adopt, amend
or repeal the by-laws of the Company, and the affirmative vote of the holders
of at least 66 2/3% of the voting power of all outstanding shares of the
capital stock of the Company shall be required for shareholders to adopt,
amend or repeal any provision of the by-laws of the Company; (ii) shareholders
of the Company may not take any action by written consent; (iii) special
meetings of shareholders may be called only by the President, the Chairman of
the Board or a majority of the Board of Directors and business transacted at
any such special meeting shall be limited to matters relating to the purposes
set forth in the notice of such special meeting; (iv) the Board of Directors,
when evaluating an offer related to a business combination, merger,
consolidation, or sale of all or substantially all of the assets of the
Company, is authorized to give due consideration to any relevant factors,
including the social, legal and economic effects upon employees, suppliers,
customers, creditors, the community in which the Company conducts its
business, and the economy of the state, region and nation; (v) the affirmative
vote of the holders of at least 66 2/3% of the voting power of all outstanding
shares of the capital stock of the Company shall be required to amend the
above provisions; and (vi) the affirmative vote of the holders of at least 80%
of the voting power of all outstanding shares of the capital stock of the
Company shall be required to amend the provisions of the Company's by-laws and
Certificate of Incorporation with respect to indemnification of directors and
officers and limitation of director liability. The foregoing provisions of the
Certificate of Incorporation could have the effect of delaying, deterring or
preventing a change in control of the Company.
In addition, following this offering, the Company will be subject to certain
"anti-takeover" provisions of the New Jersey Business Corporation Act which,
subject to certain exceptions, restricts certain transactions and business
combinations between a corporation and a shareholder owning 10% or more of the
corporation's outstanding voting stock (an "interested shareholder") for a
period of five years from the date the shareholder becomes an interested
shareholder. These provisions may have the effect of delaying or preventing a
change of control of the Company without action by the shareholders and,
therefore, could adversely affect the price of the Company's Common Stock. In
the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to
provide accelerated vesting of outstanding options. See "Description of
Capital Stock--Preferred Stock," "--Anti-takeover Provisions" and "--
Limitation of Director Liability."
Broad Management Discretion in Use of Proceeds. The Company currently has no
specific plans for use of the estimated net proceeds from this offering. The
Company anticipates that such proceeds will be used for general corporate
purposes and working capital. As a consequence, the Company's management will
have the discretion to allocate the net proceeds to uses that shareholders may
not consider desirable, and there can be no assurance that the net proceeds
can or will be invested to yield a significant return. See "Use of Proceeds."
Immediate and Substantial Dilution. Purchasers of the shares of Common Stock
offered hereby will experience immediate and substantial dilution of $8.96 in
the net tangible book value per share of their investment from the initial
offering price. Additional dilution will occur upon exercise of outstanding
options and warrants. See "Dilution" and "Shares Eligible for Future Sale."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$29.5 million, assuming an initial offering price of $13.00 per share and
after deducting the estimated underwriting discounts and commissions and
offering expenses. The Company will not receive any proceeds from the sale of
shares of Common Stock offered by the Selling Shareholders hereby. See
"Principal and Selling Shareholders."
The principal purposes of this offering are to increase the Company's
capitalization and financial flexibility, to create a public market for the
Company's Common Stock, to facilitate future access by the Company to public
equity markets, to provide liquidity to existing shareholders, to provide
increased visibility and credibility in a market in which many of the
Company's current and potential customers and competitors are or will be
publicly held companies, and to enhance the ability of the Company to use its
Common Stock as consideration for acquisitions and as a means of attracting
and retaining key personnel.
The Company expects to use the net proceeds from this offering for general
corporate purposes and working capital. The Company has not yet identified
specific uses for such proceeds and will have broad discretion over their use
and investment. The proceeds of this offering may be used to acquire
businesses, technologies or products that complement the Company's business,
although the Company has no agreements or understandings with respect to any
such transactions. Pending such uses, the Company intends to invest the net
proceeds of this offering in short-term, investment-grade, interest-bearing
instruments. The Company has not and does not propose to engage in activities
in a manner or to an extent which would require it to register as an
investment company under the Investment Company Act of 1940. See "Risk
Factors--Broad Management Discretion in Use of Proceeds."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain any earnings to fund future growth and
the operation of its business and, therefore, does not anticipate paying any
cash dividends in the foreseeable future. The Company's revolving credit
facility with Manufacturers and Traders Trust Company (the "Bank") restricts
the Company's ability to pay cash dividends. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as of
December 31, 1997; and (ii) pro forma as adjusted to give effect to the
automatic conversion of all issued and outstanding shares of Series A Stock
into 3,043,625 shares of Common Stock and the sale by the Company of 2,500,000
shares of Common Stock offered hereby assuming an initial offering price of
$13.00 per share, after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company and the application
of the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
Long-term debt, less current portion................ $ 112 $ 112
----------- -----------
Redeemable convertible preferred stock:
Series A preferred stock, no par value; 750,000
shares authorized, 676,361 shares issued and
outstanding, actual; no shares authorized, issued
and outstanding, pro forma as adjusted........... 11,604 --
----------- -----------
Shareholders' equity (deficit):
Preferred stock, no par value; no shares
authorized, issued or outstanding, actual;
5,000,000 shares authorized, no shares issued and
outstanding, pro forma as adjusted............... -- --
Common stock, no par value; 40,000,000 shares
authorized, 6,775,092 shares issued and
outstanding actual and 9,303,092 shares issued
and outstanding pro forma as adjusted(1)......... 1,662 32,802
Retained earnings................................. 4,937 4,937
Treasury stock, 3,043,625 shares of common stock
at cost actual and no shares of common stock, pro
forma as adjusted................................ (10,000) --
----------- -----------
Total shareholders' equity (deficit)............. (3,401) 37,739
----------- -----------
Total capitalization............................ $ 8,315 $ 37,851
=========== ===========
</TABLE>
- ---------------------
(1) Excludes 2,848,493 shares of Common Stock issuable upon the exercise of
stock options outstanding as of December 31, 1997 at a weighted average
exercise price of $2.23 per share, of which options to purchase 1,173,384
shares of Common Stock are exercisable. Also excludes 185,331 shares of
Common Stock issuable upon the exercise of warrants outstanding as of
December 31, 1997 at an exercise price of $2.18 per share, of which
warrants to purchase 46,333 shares of Common Stock are exercisable. Pro
forma as adjusted includes 28,000 shares underlying outstanding options
which will be exercised and sold upon consummation of this offering. See
"Risk Factors--Shares Eligible for Future Sale," "Management--Stock Option
Plans" and "Description of Capital Stock--Warrants."
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31, 1997
was $8,034,991, or $1.19 per share of Common Stock. Pro forma net tangible
book value per share is determined by dividing the Company's tangible net
worth (tangible assets less liabilities), by the number of shares of Common
Stock outstanding, after giving effect to the conversion into Common Stock of
all shares of Series A Stock upon consummation of this offering. After giving
effect to the sale of the shares of Common Stock offered by the Company hereby
(at an assumed initial offering price of $13.00 per share) and after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by the Company, the pro forma net tangible book value of the Company
as of December 31, 1997 would have been $4.04 per share. This represents an
immediate increase in such pro forma net tangible book value of $2.85 per
share to existing holders and immediate dilution of $8.96 per share to new
investors purchasing shares in this offering. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share as of December
31, 1997................................................... $1.19
Increase per share attributable to this offering............ 2.85
-----
Pro forma net tangible book value per share after this
offering..................................................... 4.04
------
Dilution per share to new investors........................... $ 8.96
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the total number of shares of Common Stock purchased from the Company,
the total consideration paid and the average consideration per share paid by
existing shareholders and by new investors purchasing shares offered by the
Company hereby, at an assumed initial public offering price of $13.00 per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(2)........ 6,775,092 73.0% $11,539,639 26.2% $ 1.70
New investors........... 2,500,000 27.0% 32,500,000 73.8 $13.00
----------- ------- ----------- -----
Total................. 9,275,092 100.0% $44,039,639 100.0%
=========== ======= =========== =====
</TABLE>
- ---------------------
(1) Sales by the Selling Shareholders in this offering will reduce the number
of shares held by existing shareholders to 5,775,092, or approximately
62.3% of the total number of shares of Common Stock outstanding after this
offering (or 5,250,092 shares and approximately 56.6% if the Underwriters'
over-allotment option is exercised in full), and will increase the number
of shares held by new investors to 3,500,000, or approximately 37.7% of
the total number of shares of Common Stock outstanding after this offering
(or 4,025,000 shares and approximately 43.4% if the Underwriters' over-
allotment option is exercised in full). See "Principal and Selling
Shareholders." See Note 2.
(2) Excludes 2,848,493 shares of Common Stock issuable upon the exercise of
stock options outstanding as of December 31, 1997 at a weighted average
exercise price of $2.23 per share, of which options to purchase 1,173,384
shares of Common Stock are exercisable. Also excludes 185,331 shares of
Common Stock issuable upon the exercise of warrants outstanding as of
December 31, 1997 at an exercise price of $2.18 per share of which
warrants to purchase 46,333 shares of Common Stock are exercisable. Also
excludes 28,000 shares underlying outstanding options which will be
exercised and sold upon consummation of this offering. Additional dilution
will occur upon exercise of outstanding options and warrants. See "Risk
Factors--Shares Eligible for Future Sale," "Management--Stock Option
Plans" and "Description of Capital Stock--Warrants."
18
<PAGE>
SELECTED FINANCIAL DATA
The following data, as it relates to the years 1995, 1996 and 1997 has been
derived from annual financial statements audited by Price Waterhouse LLP,
independent accountants, including the balance sheets as of December 31, 1996
and 1997 and the related statements of income, of changes in cumulative
redeemable convertible preferred stock and shareholders' equity (deficit) and
of cash flows for the three years ended December 31, 1997 and notes thereto
appearing elsewhere herein. The selected financial data as of, and for the
period ended, December 31, 1994 has been derived from audited financial
statements not included in this Prospectus. The selected financial data as of,
and for the period ended, December 31, 1993 has been derived from unaudited
financial statements not included in this Prospectus. The unaudited financial
data includes all adjustments consisting only of normal, recurring adjustments
that the Company considers necessary for fair presentation of the financial
position and results of operations for these periods. The following should be
read in conjunction with the financial statements and notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" appearing elsewhere in this Prospectus:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
License revenues............. $1,456 $2,838 $5,734 $7,005 $10,850
Service revenues............. 245 1,172 2,179 6,111 8,515
------ ------ ------ ------ -------
Total revenues.............. 1,701 4,010 7,913 13,116 19,365
------ ------ ------ ------ -------
Cost of revenues:
License revenues............. -- 17 74 133 1,274
Service revenues............. 81 301 436 2,149 3,405
------ ------ ------ ------ -------
Total cost of revenues...... 81 318 510 2,282 4,679
------ ------ ------ ------ -------
Gross profit................. 1,620 3,692 7,403 10,834 14,686
------ ------ ------ ------ -------
Operating expenses:
Sales and marketing.......... 482 1,444 2,588 4,255 4,986
Research and product
development................. 426 517 865 1,328 3,299
General and administrative... 329 860 1,297 2,381 2,881
------ ------ ------ ------ -------
Total operating expenses.... 1,237 2,821 4,750 7,964 11,166
------ ------ ------ ------ -------
Operating income............. 383 871 2,653 2,870 3,520
------ ------ ------ ------ -------
Net income................... $ 227 $ 572 $1,705 $2,013 $ 2,469
====== ====== ====== ====== =======
Pro forma:(1)
Net income per common share.. $ 0.37
=======
Weighted average number of
common shares outstanding... 6,610
=======
Net income per common share
assuming dilution........... $ 0.30
=======
Weighted average number of
common shares and common
equivalent shares
outstanding................. 8,109
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1994 1995 1996 1997
----- ----- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities........................... $ 195 $ 312 $7,004 $1,778 $3,206
Working capital....................... 584 1,113 2,541 4,284 6,276
Total assets.......................... 1,590 2,651 10,424 7,445 13,315
Series A preferred stock.............. -- -- 9,943 10,744 11,604
Retained earnings..................... 346 918 2,117 3,328 4,937
Total shareholders' equity (deficit).. 1,069 1,641 (6,669) (5,410) (3,401)
</TABLE>
- ---------------------
(1) Gives effect to the automatic conversion of all issued and outstanding
shares of Series A Stock into 3,043,625 shares of Common Stock. See
"Description of Capital Stock."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus which could cause actual results to
differ materially from those indicated by such forward-looking statements,
including the matters set forth under the caption "Risk Factors."
GENERAL
The Company designs, develops, markets and supports an integrated suite of
object-oriented application development tools and provides custom application
development services, both of which facilitate the rapid development of TMN-
compliant network management applications for the global telecommunications
industry. The Company also offers complete carrier-to-carrier applications
which facilitate the flow of business information between carriers. From its
founding in 1989, the Company has focused on distributed concurrent object
technology and the creation of applications that could be distributed among
many processors. Additionally, the Company developed extensive knowledge of
requirements for multiple protocols and multi-vendor communications as well as
real time operating systems. In the early 1990's, the Company made a strategic
decision to focus on creating suites of tools that facilitate the development
of TMN solutions. Substantially all of the Company's revenues to date has been
derived from application development tools and services based on TMN
standards. The Company's success will depend on continued growth in the market
for advanced telecommunications products and services. In the years ended
December 31, 1996 and 1997, the Company derived approximately 53.4% and 56.0%,
respectively, of its total revenues from license revenues and approximately
46.6% and 44.0%, respectively, of its total revenues from service revenues.
In the two years ended December 31, 1997, the Company's total revenues
increased to $19.4 million, or 144.7%. In conjunction with such revenue
growth, from January 1, 1996 through December 31, 1997, the Company's staff
increased 172% from 46 to 125 full-time employees.
DSET's license revenues are derived from the sale of its application
development tools to customers under contracts which generally provide for
license fees and run-time license fees. The Company licenses its tools on both
a suite and individual component basis. Prices for development licenses of the
Company's tool suites typically range from approximately $150,000 to $250,000,
depending on the number of licensed components and development users. The
Company's license agreements also typically provide for the payment of run-
time license fees at the time of deployment by equipment vendors to
telecommunications carriers of network devices which have embedded
applications built with the Company's software. A run-time license permits an
equipment vendor to incorporate applications developed with the Company's
software tools in such vendor's telecommunications network devices. As such
equipment is deployed by the equipment vendor to an end user, the Company is
entitled to a run-time license fee. License revenues from development licenses
are recognized at the time the product is delivered to the customer. Run-time
license fees are recognized as the Company is notified of such deployment.
Notification is typically received from customers pursuant to quarterly
reports or via purchase orders for individual licenses.
The Company's service revenues are comprised of fees derived from
application development services, maintenance fees, and other revenues
generated from customer support services. The Company's application
development services projects are generally individually negotiated and
contracted for on a fixed price basis. Prices for such projects vary depending
upon the size and scope of the project and estimated time to completion.
Revenues from application development services are generally recognized on a
percentage of completion basis calculated as direct labor costs are incurred
in relation to estimated total costs at completion for each project. The
cumulative impact of revisions in percentage of completion estimates is
reflected in the period in which the revisions are made. Maintenance services,
for which the
20
<PAGE>
Company typically charges 18% annually of the total amount paid by the
customer for the products licensed, may be purchased at the customer's option.
Maintenance fees are recognized as revenue over the term of the maintenance
period, which is typically a 12-month term.
The Company had two, one and one significant customers which accounted for
32%, 18% and 12%, respectively, of total revenues for the years ended December
31, 1995, 1996 and 1997, respectively. Sales to Hitachi and McCaw Cellular
accounted for approximately 20% and 12% of total revenues, respectively, in
the year ended December 31, 1995. Sales to Hitachi accounted for approximately
18% of total revenues in the year ended December 31, 1996. Sales to Samsung
accounted for approximately 12% of total revenues in the year ended December
31, 1997. The Company anticipates that its results of operations in any given
period will continue to depend to a significant extent upon sales to a small
number of customers. As a result of this customer concentration, the Company's
revenues from quarter to quarter and business, financial condition and results
of operations may be subject to substantial period-to-period fluctuations.
The Company's costs of license revenues consist primarily of royalties paid
to third party software companies. The Company generally is not contractually
obligated to minimum royalty payments. Costs of service revenues include
primarily payroll, related benefit costs, personnel and other operating
expenses. Sales and marketing expenses consist of salaries, commissions and
bonuses paid to sales and marketing personnel, as well as travel and
promotional expenses. Research and product development expenses encompass
primarily software engineering personnel costs, costs of third-party equipment
and software utilized for development purposes. Research and product
development expenses are generally charged to operations as such costs are
incurred. The Company's research and development projects are evaluated for
technological feasibility in order to determine whether they meet
capitalization requirements. General and administrative expenses are comprised
of personnel costs and occupancy costs for administrative, executive and
finance personnel.
The Company markets and sells its products and services through a direct
sales force in the United States and directly and indirectly though
distributors in South America, Europe, Israel and Asia. Typically,
distributors receive a commission of 30% of the sale price of the Company's
products and 10% of any maintenance and training sales. Commissions are
payable only after the Company's receipt of the total revenues for such sale.
In May 1997, the Company entered into a joint venture with ATOS, S.A. to form
TMN Tools, S.A. ("TMN Tools"), which serves as the Company's exclusive sales
and marketing arm in Europe and Israel. The Company owns 49% of the
outstanding equity securities of TMN Tools.
The Company derives a large portion of its revenues from international sales
which constituted approximately 38% and 27% of the Company's total revenues in
1996 and 1997, respectively. The Company's international sales currently are
United States dollar-denominated. As a result, an increase in the value of the
United States dollar relative to foreign currencies could make the Company's
products and services less competitive in international markets. See "Risk
Factors--Risks Associated with International Operations."
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
License revenues................................... 72.5% 53.4% 56.0%
Service revenues................................... 27.5 46.6 44.0
------- ------- -------
Total revenues................................... 100.0 100.0 100.0
------- ------- -------
Cost of revenues:
License revenues................................... 0.9 1.0 6.6
Service revenues................................... 5.5 16.4 17.6
------- ------- -------
Total cost of revenues........................... 6.4 17.4 24.2
------- ------- -------
Gross profit......................................... 93.6 82.6 75.8
------- ------- -------
Operating expenses:
Sales and marketing................................ 32.7 32.4 25.7
Research and product development................... 10.9 10.1 17.0
General and administrative......................... 16.4 18.2 14.9
------- ------- -------
Total operating expenses......................... 60.0 60.7 57.6
------- ------- -------
Operating income..................................... 33.6 21.9 18.2
------- ------- -------
Net income......................................... 21.5% 15.3% 12.7%
======= ======= =======
</TABLE>
Years Ended December 31, 1997 and 1996
Revenues. Total revenues increased 47.6% to $19.4 million in 1997 from $13.1
million in 1996. License revenues increased by 54.9% to $10.9 million in 1997
from $7.0 million in 1996. This increase was primarily attributable to an
increase in market acceptance of the Company's TMN-based tools and, to a
lesser extent, distribution by the Company of the Marben OSI Stack. Service
revenues increased 39.3% to $8.5 million in 1997 from $6.1 million in 1996.
This increase was attributable primarily to the initiation of several major
projects in 1997, including a $2.5 million contract with Samsung, which
resulted in the recognition of $2.2 million in revenues in 1997. Samsung
accounted for approximately 12% of total revenues in 1997.
Gross profit. The Company's gross profit increased 35.6% to $14.7 million in
1997 from $10.8 million in 1996. Gross profit percentage decreased from 82.6%
of total revenues in 1996 to 75.8% in 1997. The decline in the gross profit
percentage for license revenues from 98.1% in 1996 to 88.3% in 1997 was due
primarily to the commencement of sales of third party software upon which
royalties must be paid. The decline in gross profit percentage for service
revenues from 64.8% of service revenues in 1996 to 60.0% in 1997 was
attributable primarily to higher personnel costs in 1997.
22
<PAGE>
Sales and marketing expenses. Sales and marketing expenses increased 17.2%
to $5.0 million in 1997 from $4.3 million in 1996, but decreased from 32.4% to
25.7% of total revenues. The increase in sales and marketing expenses in
absolute dollars was primarily attributable to increased personnel costs
partially offset by lower sales-related operating expenses.
Research and product development expenses. Research and product development
expenses increased 148.5% to $3.3 million in 1997 from $1.3 million in 1996,
and increased from 10.1% to 17.0% of total revenues. The increase in research
and product development expenses both in absolute dollars and as a percentage
of total revenues was due primarily to an increase in staffing which
approximately doubled period over period.
General and administrative expenses. General and administrative expenses
increased 21.0% to $2.9 million in 1997 from $2.4 million in 1996, but
decreased from 18.2% to 14.9% of total revenues. The increase in general and
administrative expenses in absolute dollars was due primarily to the addition
of key management personnel, the investment in additional administrative and
accounting operating systems, and the addition of support personnel.
Income taxes. The Company's effective tax rate was 32% for 1997 and 1996.
Such effective tax rates were lower than the statutory tax rates due primarily
to research and development tax credits.
Years Ended December 31, 1996 and 1995
Revenues. Total revenues increased 65.8% to $13.1 million in 1996 from $7.9
million in 1995. License revenues increased 22.2% to $7.0 million in 1996 from
$5.7 million in 1995. This increase was primarily attributable to an increased
demand for the Company's agent tools products. Service revenues increased
180.5% to $6.1 million in 1996 from $2.2 million in 1995. This increase was
attributable primarily to the establishment of a separate group within the
Company devoted to third party application development. In 1996, sales to
Hitachi accounted for approximately 18% of the Company's total revenues.
Gross profit. The Company's gross profit increased 46.3% to $10.8 million in
1996 from $7.4 million in 1995. Gross profit percentage decreased from 93.6%
in 1995 to 82.6% in 1996. The primary reason for the decrease in gross profit
percentage was the introduction of significant application development
services for the first time in 1996. The margins on development services
typically are significantly lower than the margins on product licenses.
Sales and marketing expenses. Sales and marketing expenses increased 64.4%
to $4.3 million in 1996 from $2.6 million in 1995, but remained relatively
constant at 32.7% and 32.4% of total revenues for such respective periods.
Research and product development expenses. Research and product development
expenses increased 53.5% to $1.3 million in 1996 from $865,000 in 1995, which
constituted a slight decrease from 10.9% to 10.1% of total revenues from 1995
to 1996. The increase in research and product development expenses in absolute
dollars was due primarily to expansion in the number of projects under
development and the increase in personnel.
General and administrative expenses. General and administrative expenses
increased 83.5% to $2.4 million in 1996 from $1.3 million in 1995, and
increased as a percentage of total revenues from 16.4%
23
<PAGE>
to 18.2%. The increase in general and administrative expenses was due
primarily to increased personnel costs associated with the establishment of
both human resources and legal departments as well as expansion of the finance
and accounting department to support the Company's revenue growth.
Income taxes. The Company's effective tax rate was 32% and 37% in 1996 and
1995, respectively. The decrease in the Company's effective tax rate resulted
primarily from greater utilization of research and development tax credits in
1996.
24
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly financial
information for each of the eight most recent quarters in the period ended
December 31, 1997. This information is derived from unaudited financial
statements of the Company that include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results of operations for such periods. This table should
be read in conjunction with the audited Financial Statements of the Company
and notes thereto beginning on page F-1 of this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License revenues...... $1,451 $1,400 $1,775 $2,379 $1,482 $2,524 $2,654 $4,190
Service revenues...... 1,070 1,721 1,835 1,486 1,712 2,514 2,535 1,754
------ ------ ------ ------ ------ ------ ------ ------
Total revenues...... 2,521 3,121 3,610 3,865 3,194 5,038 5,189 5,944
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
License revenues...... 77 11 33 13 70 519 375 310
Service revenues...... 365 553 622 608 689 827 1,117 772
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues........... 442 564 655 621 759 1,346 1,492 1,082
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 2,079 2,557 2,955 3,244 2,435 3,692 3,697 4,862
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing... 1,082 834 1,128 1,211 791 1,183 1,286 1,726
Research and product
development.......... 301 330 345 352 709 776 754 1,060
General and
administrative....... 464 562 569 786 649 589 707 936
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses........... 1,847 1,726 2,042 2,349 2,149 2,548 2,747 3,722
------ ------ ------ ------ ------ ------ ------ ------
Operating income........ 232 831 913 895 286 1,144 950 1,140
------ ------ ------ ------ ------ ------ ------ ------
Income before taxes..... 276 851 924 919 306 1,166 984 1,190
------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 187 $ 576 $ 626 $ 623 $ 205 $ 782 $ 660 $ 822
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
25
<PAGE>
The following table sets forth certain financial data expressed as a
percentage of total revenues:
<TABLE>
<CAPTION>
.QUARTER ENDED
-------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License revenues...... 57.6% 44.9% 49.2% 61.6% 46.4% 50.1% 51.1% 70.5%
Service revenues...... 42.4 55.1 50.8 38.4 53.6 49.9 48.9 29.5
----- ----- ----- ----- ----- ----- ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License revenues...... 3.1 0.4 0.9 0.3 2.2 10.3 7.2 5.2
Service revenues...... 14.5 17.7 17.2 15.7 21.6 16.4 21.5 13.0
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues........... 17.6 18.1 18.1 16.0 23.8 26.7 28.7 18.2
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 82.4 81.9 81.9 84.0 76.2 73.3 71.3 81.8
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing... 42.9 26.7 31.2 31.3 24.7 23.5 24.8 29.0
Research and product
development.......... 11.9 10.6 9.6 9.1 22.2 15.4 14.5 17.8
General and
administrative....... 18.4 18.0 15.8 20.3 20.3 11.7 13.6 15.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses........... 73.2 55.3 56.6 60.7 67.2 50.6 52.9 62.6
----- ----- ----- ----- ----- ----- ----- -----
Operating income........ 9.2 26.6 25.3 23.3 9.0 22.7 18.4 19.2
----- ----- ----- ----- ----- ----- ----- -----
Income before taxes..... 10.9 27.3 25.6 23.8 9.6 23.1 19.0 20.0
----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 7.4% 18.5% 17.3% 16.1% 6.4% 15.5% 12.7% 13.8%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Demand for the Company's products generally is higher during the fourth
quarter, primarily due to capital spending trends by telecommunications
companies which has resulted in higher license revenues in those periods and
lower license revenues in the first quarter. The Company anticipates that its
business will continue to be subject to such seasonal variations.
The operating results for any quarter are not necessarily indicative of
results which may be obtained for any future period. Due to the relatively
fixed nature of certain of the Company's costs, including personnel and
facilities costs, a decline in revenue, failure to achieve expected revenue in
any fiscal quarter or unanticipated variations in billing and utilization
rates of service personnel would result in lower profitability in that
quarter. The Company's quarterly results may fluctuate as a result of a
variety of factors, many of which are not within the Company's control,
including timing and levels of hardware and software purchases by customers,
the timing, size and stage of development projects, new product and service
introductions by the Company or its competitors, levels of market acceptance
for the Company's products and services, or the hiring of additional
personnel. In addition, the Company's revenues generally have been, and likely
will continue to be in the near term, derived from a relatively small number
of sales transactions and fixed price development projects and, therefore any
delays in closing such engagements or the failure to accurately estimate the
resources necessary to complete fixed price contracts will have a material
adverse impact on the Company's results of operations for that period. In
addition, the Company historically has recognized a large portion of its
revenues from sales in the last month of a quarter such that the magnitude of
quarterly fluctuations may not become evident until late in, or at the end of,
a particular quarter. Furthermore, the Company's revenues are partly dependent
upon run-time license fees which may fluctuate from period to period depending
upon the size and timing of deployments by equipment vendors to
telecommunications carriers of network devices which have embedded
applications built with the Company's software. The Company believes,
therefore, that past operating results and period-to-period comparisons should
not be relied upon as an indication of future performance.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1989, the Company has financed its operations
primarily through cash generated by operations. At December 31, 1997, the
Company's cash, cash equivalents and marketable securities aggregated
approximately $3.2 million, of which cash and cash equivalents aggregated
approximately $2.1 million. The Company's working capital was $4.3 million and
$6.3 million at December 31, 1996 and 1997, respectively.
Accounts receivable increased from $4.5 million at December 31, 1996 to $7.6
million at December 31, 1997 primarily as a result of the increase in billings
in the fourth quarter of 1997 as compared to the fourth quarter of 1996. In
addition, the Company billed $889,560 to a major customer which related to an
application development contract, all of which remained in accounts receivable
at December 31, 1997. The Company bills its maintenance contracts on an annual
basis. A significant portion of such billing occurs in the fourth quarter.
Three customers comprised an aggregate of 49% of accounts receivable at
December 31, 1996, and one customer comprised 12% of accounts receivable at
December 31, 1997.
The Company bills its customers, several of which are based in Korea and
Japan, in U.S. dollars at agreed-upon contractual terms. The Company has not
experienced any significant negative effects on its liquidity as a result of
the volatility and devaluation trends that recently have been experienced in
certain Asian markets. Accounts receivable at December 31, 1997 includes
approximately $1.5 million from customers in this region.
The Company has an unsecured revolving credit facility with the Bank
pursuant to which it may borrow up to a maximum of $3.0 million. Amounts
outstanding under such facility bear interest at the Bank's prime rate less
0.25% on aggregate principal amounts outstanding of $1.0 million or less and
at the Bank's prime rate to the extent aggregate principal amounts exceed $1.0
million. The Company also has certain LIBOR options. No borrowings under the
revolving credit facility were outstanding as of September 30, 1997. The
credit facility contains, among other provisions, a covenant which restricts
the Company's ability to pay cash dividends.
The Company's capital expenditures were approximately $708,000 and $808,000
for the years ended December 31, 1996 and 1997, respectively. Although the
Company anticipates higher levels of equipment and facilities-related
expenditures in the foreseeable future, such future expenditures are not
anticipated to be significantly higher as a percentage of total revenues as
compared to prior periods.
The Company has been notified by the Internal Revenue Service that the
Company is being audited for the fiscal year ended December 31, 1995. Although
the Company does not believe that it will have any additional tax liability
for such period, the audit is in its early stages and the Company is unable to
determine the impact, if any, of such audit.
The Company believes that its existing available cash, credit facility and
the cash flow expected to be generated from operations, together with the
proceeds of this offering, will be adequate to satisfy its current and planned
operations for at least the next 12 months. There can be no assurance,
however, that the Company will not require additional financing prior to such
time to fund its operations or possible acquisitions.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" was issued in February 1997 and replaces Accounting Principles Board
("APB") Opinion No. 15. The new statement simplifies the computations of
earnings per share ("EPS") by replacing the presentation of primary EPS with
basic EPS, which is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS under the new
27
<PAGE>
statement is computed similarly to fully diluted EPS pursuant to APB Opinion
No. 15. SFAS No. 128 is effective for financial statements for both interim
and annual periods ending after December 15, 1997. Early application was
prohibited. See Note 12 to Notes to Financial Statements.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in 1995.
This statement requires companies to measure stock compensation plans based on
the fair value method of accounting or to continue to apply APB Opinion 25,
"Accounting for Stock Issued to Employees" and provide pro forma footnote
disclosure under the fair value method. Effective in December 1996, the
Company adopted the disclosure-only provisions of SFAS No. 123 and continues
to follow APB Opinion 25 and related interpretations to account for the
Company's stock compensation plans.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 applies
to all companies and is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Management believes that the adoption of SFAS No. 130
will not have a material impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 applies to all public companies and is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires that business segment financial information be reported in the
financial statements utilizing the management approach. The management
approach is defined as the manner in which management organizes the segments
within the enterprise for making operating decisions and assessing
performance. Management believes the adoption of SFAS No. 131 will not have a
material impact on the financial statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition," which is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Statement of Position governs the recognition of
revenue by enterprises that license, sell, lease or otherwise market software,
except where software is incidental to the products or services being offered
as a whole. Application of this Statement of Position is not expected to have
a material impact on the Company's financial statements.
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BUSINESS
OVERVIEW
DSET is a leading provider of telecommunications network management
solutions, including industry-standard application development tools, custom
application development services and carrier-to-carrier network applications.
Telecommunications carriers and equipment vendors utilize the Company's tools
and development services to build applications which facilitate the remote
management of network devices, the rapid implementation of new
telecommunication services and the flow-through of information to higher level
applications, such as billing, ordering and provisioning systems. The
Company's tools are also used by the Company and by its customers to build
carrier-to-carrier applications which are designed to facilitate the flow-
through of information between carriers' networks and systems. These solutions
are based on the TMN standard, which defines the APIs and communication
protocols required to ensure interoperability within and between carrier
networks that incorporate devices deployed from multiple vendors. The
Company's customers include AT&T, BellSouth, MCI, Advanced Fibre
Communications, Ciena, Fujitsu, Hitachi, Lockheed Martin IMS, Lucent, Samsung,
Tekelec and Tellabs.
INDUSTRY BACKGROUND
Telecommunications carriers face an increasingly competitive and complex
market environment due to continued deregulation and privatization of the
global telecommunications industry. The divestiture of AT&T in 1984, and the
resulting creation of the RBOCs, led to increased competition in domestic
telephony markets. The breakup of AT&T also opened the United States market to
global telecommunications equipment vendors which were previously
disadvantaged in competing with AT&T's equipment division. In the early
1990's, further deregulation of the United States long distance market created
the need for connectivity between competitive carrier networks and
applications to facilitate customer choice of carriers. Throughout this
period, the RBOCs continued to have relative monopolies in the local telephone
service market. The Telecommunications Act mandated broader domestic
deregulation which created competition among local exchange and long distance
carriers for the right to provide local and long distance service.
Internationally, privatization of state-owned carriers and the opening of
previously closed markets have led to investment in new network
infrastructures and increased competition worldwide.
Today, domestic and international carriers must not only compete with new
entrants in the market, but also with cable companies, wireless carriers and
Internet service providers for traditional and enhanced voice services, data
services, Internet access and emerging video services. This increase in
competition is forcing carriers to provide a broad range of services in order
to differentiate themselves among their competitors.
In response to these dramatic industry changes, carriers are investing
aggressively in new technologies and equipment to enhance access to their
networks and expand systems capacity, or bandwidth. As a result,
telecommunications equipment vendors are integrating new technologies into
their products that improve network access and increase network bandwidth,
enabling carriers to deliver new services at enhanced performance levels.
Examples of such new products include next generation digital loop carrier
systems, wireless local loop systems, SONET/SDH multiplexers, WDMs, ATM
switches and digital subscriber line products. Equipment vendors and carriers
are also implementing new applications for the deployment of advanced voice
and data services across the Advanced Intelligent Network, a supplementary
network that operates in conjunction with the carriers' current telephone
networks.
Carriers rely on network management systems ("NMS") and OSSs to manage their
telecommunications networks and to deploy services. These software systems,
among other functions, automate service provisioning and enable the remote
monitoring and maintenance of thousands of
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network devices and millions of network components. The proliferation of new
communication technologies, products and services, and pressure to provision
them quickly and cost-effectively, has placed increased demands on the
operations, administration and management of carrier networks. In addition,
the Telecommunications Act of 1996 mandated access to carriers' OSSs in order
to enable the flow-through provisioning of services between the incumbent and
new local carriers. For example, a new carrier-to carrier application is local
number portability ("LNP"), which enables a customer to move from one local
exchange carrier to another without a change in telephone number. LNP and
other carrier-to-carrier applications require a significant amount of
information to be exchanged electronically between the carriers' NMSs and
OSSs, which may utilize various messaging, management and communication
protocols. This information exchange requires an industry standard
architecture to ensure interoperability between carriers' networks and
systems.
As a result, carriers increasingly require that network management solutions
comply with TMN, an industry standard architecture developed by the
International Telecommunications Union. TMN defines the APIs and communication
protocols necessary to enable interoperability within and between carrier
networks that incorporate devices deployed from multiple vendors. Even with
the benefits of a standards-based approach, the task of developing TMN-
compliant applications typically is complex, costly and time consuming. Such
complexity has resulted in increased time-to-market pressures (i) for the
equipment vendors which must provide new TMN-compliant devices to their
carrier customers and (ii) for the carriers which must deliver new service
offerings to their business and residential consumers. In addition, the
complex development process is complicated by a shortage of experienced TMN
software developers. Consequently, carriers and equipment vendors are
increasingly relying upon TMN-based application development tools to simplify
the internal development of TMN-compliant applications as well as outsourcing
complex TMN development projects.
THE DSET SOLUTION
DSET provides TMN-compliant application development tools, custom
application development services and carrier-to-carrier applications.
Telecommunications carriers and equipment vendors utilize the Company's tools
and development services to build a full range of TMN agent and manager
applications. Agent applications built with DSET tools are incorporated in
network devices and enable the remote management of such devices and the rapid
implementation of new telecommunications services. Manager applications built
with DSET tools interact with the agent applications to direct the flow-
through of information to higher level applications, such as billing, ordering
and provisioning systems. The Company's tools are also used by the Company and
its customers to build carrier-to-carrier applications which facilitate the
flow-through of information between carriers' networks and systems.
The Company's highly functional, flexible and scalable TMN-compliant
application development tools and application development capabilities (i)
enable the management of large and complex telecommunication networks by
allowing carriers to remotely manage thousands of network devices in a multi-
vendor environment, (ii) facilitate the rapid provisioning of new and enhanced
services such as Internet access, video conferencing and advanced voice
capabilities and (iii) expedite the development of carrier-to-carrier
applications, allowing carriers to quickly and cost effectively enter new
markets.
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STRATEGY
The Company's objective is to become the leading provider of industry-
standard network management solutions for evolving telecommunications
networks. The Company's strategy involves the following key elements:
. Extend Technological Leadership. The Company has extensive technical
experience in TMN-compliant technologies and intends to continue to
invest its resources to improve and expand its products and application
development services to ensure compatibility with existing and emerging
technologies. The Company's product development engineering staff has
focused on the TMN requirements for multiple protocols, multi-vendor
communications, distributed processing and real-time operating systems
and is building new products based on CORBA and the C++ APIs endorsed by
the Network Management Forum ("NMF"). DSET's development efforts are
also focused on simplifying the use of the key technologies underlying
TMN, such as Guideline for the Definition of Managed Objects ("GDMO"),
Abstract Syntax Notation 1 ("ASN.1"), Common Management Information
Protocol ("CMIP"), and Open Systems Interconnection ("OSI"), as well as
evaluating emerging technologies such as Java.
. Expand Application Development Services. The Company intends to increase
the number, size and scope of its application development projects by
expanding its application development staff and broadening its
technological competence. DSET has assembled a team of application
development engineers with TMN expertise to provide application
development services to telecommunications equipment vendors and
carriers worldwide. The Company intends to continue to expand its
service offerings, which currently include system design, information
modeling, complete "end-to-end" development, integrated testing and test
plan simulations and design optimization services for rapid solution
deployment.
. Deliver a Suite of Carrier-to-Carrier Applications. The Company intends
to continue to utilize its application development tools and leverage
the experience of its application development staff to deliver new
carrier-to-carrier applications. For example, the Company is utilizing
the experience gained from building a local service management system
("LSMS") for the emerging LNP market to develop additional LNP
applications such as service order activation ("SOA") systems. In
addition, the Company intends to expand its offerings by developing
carrier-to-carrier gateway products.
. Expand Sales and Distribution Capabilities. The Company intends to
continue expanding its sales, marketing and distribution capabilities in
order to capitalize on opportunities in the global market. During 1997,
the Company increased its direct sales force from four to eight sales
managers who focus their efforts on potential opportunities in North and
South America. The Company utilizes multiple non-exclusive international
distributors and agents in Asia and the Pacific Rim. In 1997, the
Company established a joint venture with ATOS, S.A. for exclusive
distribution of its products and services in Europe and Israel. In
addition, the Company is targeting telecommunications equipment vendors
and systems integrators to resell the Company's carrier-to-carrier
applications.
. Pursue Strategic Acquisitions. The Company intends to pursue
acquisitions of complementary businesses or technologies in order to
expand its products and services offerings, to add technical or sales
personnel or to obtain additional customer relationships. As part of its
strategy, in May 1997, the Company acquired the assets of Marben
Products, Inc. and the exclusive distribution rights in the Americas and
Asia for complementary telecommunications products, including the Marben
OSI Stack.
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PRODUCTS AND SERVICES
The Company designs, develops, markets and supports an integrated suite of
object-oriented application development tools and provides custom application
development services, both of which facilitate the rapid development of
network management applications for the global telecommunications industry.
The Company also offers complete carrier-to-carrier applications which
facilitate the flow of business information between carriers.
Telecommunications carriers and equipment vendors utilize the Company's tools
and development services to build a full range of TMN agent and manager
applications.
APPLICATION DEVELOPMENT TOOLS
DSET's application development tools enable its customers to rapidly create
scalable solutions for the management of network devices within wireline or
wireless telecommunications networks. The Company offers two suites of TMN-
compliant application development tools, the TMN Agent Tool Suite and the TMN
Manager Tool Suite. Telecommunications equipment vendors utilize the Company's
TMN Agent Tool Suite to build agent applications that are embedded in their
network devices and subsequently sold to and deployed by carriers. Such
network devices include SONET multiplexers, WDMs, digital loop carrier
systems, wireless base station controllers and ATM switches. Carriers utilize
the TMN Manager Tool Suite to build element management systems that assist in
remotely managing network devices from a specific vendor and facilitate the
flow-through of information to higher level applications within the network
management infrastructure. The Company's application development tools are
used by its customers, as well as the Company's applications developers, to
build carrier-to-carrier applications.
TMN Agent Tool Suite
TMN agent applications built with DSET tools are incorporated in network
devices and enable the remote management of the devices and the implementation
of new services, such as Internet access, video conferencing and advanced
voice capabilities. This suite of agent tools includes:
Visual Agent Builder GDMO Agent Toolkit
Visual Agent Tester CMIP Translator
CMIS/ROSE OODB Interfaces
Distributed Systems Generator Information Modeling Tools
ASN.C Compiler Cross Development Kits
GDMO Compiler OSI, RFC 1006, GR-303 Protocol Stacks
TMN Manager Tool Suite
TMN manager applications built with DSET tools generally reside on UNIX or
Windows NT workstations and interact with the agent applications to facilitate
the monitoring of network devices and to direct the flow-through of
information to higher level applications, such as billing, ordering and
provisioning systems, within the network management infrastructure. This suite
of manager tools, which incorporates certain components of the TMN Agent Tool
Suite, includes:
Manager Code Generator ASN.C Compiler
Manager Tester GDMO Compiler
CMIS/ROSE OSI, RFC 1006, GR-303 Protocol Stacks
Distributed Systems Generator
The OSI Stack and Information Modeling Tools are distributed by the Company
pursuant to distribution arrangements with ATOS, S.A. and Erisoft AB,
respectively. The Company's tools share a common software architecture
enabling a wide range of platform, operating system and communication protocol
independence. The development tools operate in UNIX and Windows NT operating
systems and are supported on platforms from Sun Microsystems, Hewlett Packard,
IBM and Digital Equipment Corporation. The Company also provides cross-
platform toolkits so that the agent applications can be ported to run under
real time operating systems. The Company's products operate with leading real
time operating systems, including pSOS, VxWorks and VRTX, and also support a
variety of communication protocols, including OSI, RFC 1006, TCP/IP and GR-
303. This cross-platform support enables DSET's customers, when switching
platform vendors, to preserve their investment in applications built with
DSET's tools.
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The Company licenses its tools on both a suite and individual component
basis. Prices for development licenses of the tool suites typically range from
approximately $150,000 to $250,000, depending on the number of licensed
components and development users. The Company's license agreements also
typically provide for the payment of run-time license fees for applications
built with DSET tools when such applications are shipped to end-users by the
licensee.
APPLICATION DEVELOPMENT SERVICES
DSET's professional services organization offers a broad range of value-
added application development services to its customers. DSET currently offers
system design, information modeling, complete "end-to-end" development,
integrated testing and test plan simulations, and design optimization services
for rapid solution deployment. The Company has assembled a team of application
engineers with expertise in GDMO, ASN.1, CMIP, OSI, TCP/IP and GR-303, the key
technologies underlying TMN, as well as PCS and GSM, to provide application
development services to telecommunications equipment vendors and carriers
worldwide. The organization utilizes DSET's tools and TMN expertise to develop
agent, manager and carrier-to-carrier applications. The Company generally
retains the right to rebuild similar applications for other customers.
The Company's application development services projects are generally
individually negotiated and contracted for on a fixed price basis with
performance and payment milestones. Prices for such projects vary depending
upon the size and scope of the project and estimated time to completion. There
can be no assurance that the Company will be able to accurately estimate the
resources required for its fixed price projects or complete its contractual
obligations in a timely manner consistent with the project plans upon which
such fixed price projects are based. See "Risk Factors--Fixed Price Contracts
and Other Project Risks."
CARRIER-TO-CARRIER APPLICATIONS
The Company intends to continue to utilize its application development tools
and leverage the experience of its application development staff to deliver
new carrier-to-carrier applications. The first of DSET's carrier-to-carrier
applications addresses LNP applications. As a result of the Telecommunications
Act of 1996, the FCC mandated local exchange carriers to provide LNP services
to its customers enabling customers to move from one local exchange carrier to
another without a change in telephone number. LNP and other carrier-to-carrier
applications require a significant amount of information to be exchanged
electronically between carriers' NMSs and OSSs, which may utilize various
messaging, management and communication protocols.
DSET builds LSMS and SOA applications, which are utilized by carriers
deploying network facilities for local telephone service. The Company was
selected by Lockheed Martin IMS to help provide the required TMN interface
between the telephone companies and the nation's first Number Portability
Administration Center. Additionally, the Company entered into an agreement
with Tekelec Incorporated ("Tekelec") to build a customized LSMS and has
retained the right to build and sell similar LSMS applications to other
customers. The Company leveraged its experience gained in such project to
build and sell a series of additional applications which accelerate
development of LSMSs. In addition, the Company is developing a local SOA
system and intends to begin marketing this application in conjunction with the
LSMS during 1998.
As new local exchange carriers are emerging, they also need to access the
incumbent local exchange carriers' pre-ordering, ordering, billing, trouble
administration and primary interexchange carrier applications. This
interaction between carriers requires electronic gateways, which in turn may
require new applications. No assurance can be given that the Company's
carrier-to-carrier applications will achieve market acceptance. See "Risk
Factors--Risks Associated with New Application Development Tools and Carrier-
to-Carrier Applications."
CUSTOMER SUPPORT SERVICES
The Company believes that its ability to provide a high level of customer
support is critical to achieving long term customer satisfaction. Accordingly,
the Company has increased its customer support staff and expanded its services
offerings.
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Maintenance. The Company's maintenance services include problem
identification and notification, work-around solutions, temporary software
patches and bug fixes. Depending upon the complexity of the problem, the
Company provides technical support solutions via electronic mail, website
access, telephone or on-site support. Such services are offered to all
licensees of the Company's application development tools under maintenance
contracts, for which the Company typically charges 18% annually of the total
amount paid by the customer for the products licensed. The Company utilizes a
number of procedures to ensure prompt service, including tracking all
technical support issues in a computerized system to ensure same-day
acknowledgment of the customer report. Domestically, technical support is
provided directly by the Company's technical support engineers.
Internationally, local distributors, supported by the Company's regional
offices, provide first line technical support services. The Company's products
generally are covered by a 90-day warranty which covers defects in the media
provided to the customer, as well as a warranty for Year 2000 compliance. In
certain circumstances, the Company has provided a warranty that its products,
as delivered, will meet customer specifications.
Software Upgrades. The Company provides its annual maintenance customers
with the option to receive product upgrades, including new releases and
product patches, for no additional fee. Software patches may be downloaded by
customers from the Company's website. Software upgrades may be purchased for
an additional fee by customers which have not contracted for annual
maintenance services.
Consulting Services. The Company provides a variety of consulting services
to its customers. Such consulting services include architectural reviews,
debugging customer applications, performance tuning, product porting and other
related services. The provision of consulting services often leads to sales of
application development tools.
Training. DSET provides a variety of training courses which educate software
developers on the use of its tools. The courses are offered on a fee basis at
the Company's headquarters and at customer sites. The courses range from basic
tool training to highly advanced telecommunications standards and software
topics. In addition, the Company offers customized training to meet specific
customer requests.
TECHNOLOGY
From its founding in 1989, the Company has focused on distributed concurrent
object technology and the creation of applications that could be distributed
among many processors. Additionally, the Company has developed extensive
knowledge of requirements for multi-protocol and multi-vendor communications
as well as real time operating systems. In the early 1990's, the Company made
a strategic decision to focus on creating suites of tools to facilitate the
development of TMN solutions. Through these efforts, the Company's engineers
broadened their expertise in GDMO, CMIP, ASN.1 and OSI, the key technologies
underlying TMN, as well as a variety of other emerging technologies.
The Company has leveraged its experience in distributed technologies to add
value to the TMN-based technologies and to differentiate its application
development tools from those of its competitors. The Company's distributed
technologies allow for concurrency, or multi-threading, and scalability for
the processing of management information. The Company believes that the multi-
threading and scalability capabilities of its application development tools
are competitive advantages. Many competitive alternatives utilize sequential
processing which cannot take full advantage of the multi-processing
capabilities of high performance computing platforms.
The Company's innovative software technologies include sub-agent
capabilities, which, in conjunction with the Company's virtual management
information tree capability, enable the management of millions of objects. In
addition, DSET's products can support simultaneous synchronous/asynchronous
and connection-oriented/connection-less inter-process communications. This
capability, in addition to ensuring the high performance of applications, also
facilitates integration with third-party products. DSET has simplified the
process of using these complex technologies by developing high level APIs and
GUIs.
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CUSTOMERS
The Company's customers are primarily telecommunications equipment vendors
and carriers. The following is a partial list of customers who have purchased
products or services during 1997.
ACT Networks
ADC Telecommunications Fujitsu
Advanced Fibre Communications Hitachi
AT&T Lockheed Martin IMS
Lucent Technologies
Bell Communications Research, MCI
Inc. (Bellcore) NEC America
BellSouth Applied Technologies Samsung
Seiscor Technologies
Cabletron Systems
Ciena Corporation Tekelec
Tellabs
DSC Technologies
Ericsson Hewlett-Packard (EHPT)
The Company had two, one and one significant customers which accounted for
32%, 18% and 12%, respectively, of total revenues for the years ended December
31, 1995, 1996 and 1997, respectively. Sales to Hitachi and McCaw Cellular
accounted for approximately 20% and 12% of total revenues, respectively, in the
year ended December 31, 1995. Sales to Hitachi accounted for approximately 18%
of total revenues in the year ended December 31, 1996. Sales to Samsung
accounted for approximately 12% of total revenues in the year ended December
31, 1997. The Company anticipates that its results of operations in any given
period will continue to depend to a significant extent upon sales to a small
number of customers. Other than customer agreements which provide for minimum
royalties for run-time licenses, none of the Company's customers has entered
into an agreement requiring minimum purchases from the Company. The Company's
software development services agreements with its customers generally can be
terminated by either party with limited or no advance notice, and without
significant penalty. Many of the Company's customers may also be competitors of
the Company. See "Risk Factors--Customer Concentration."
CASE STUDIES
The following case studies illustrate some of the business needs of DSET's
customers and solutions the Company has provided.
APPLICATION DEVELOPMENT TOOLS
Ciena Corporation: Ciena, a leading telecommunications equipment vendor,
utilized the Company's application development tools for the internal
development of an agent application for its WDM.
Ciena entered the competitive WDM equipment business by securing a
significant contract with a major long distance carrier which was committed to
open network management interfaces based on the TMN standard. Such carrier
required the rapid deployment of TMN-compliant WDM equipment in order to
accelerate the offering of enhanced services to its customers. Ciena selected
the DSET TMN Agent Tool Suite to develop TMN-compliant applications for
integration into its WDM. DSET also provided consulting services to support
Ciena's development efforts. Using the DSET tools, Ciena met its development
time schedule.
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APPLICATION DEVELOPMENT SERVICES
Samsung: Samsung, a leading international telecommunications equipment
vendor, engaged the Company to develop custom applications for PCS network
devices.
The Company developed a TMN agent application for three different PCS
network devices consisting of a wireless telephone switch, base station system
and home location register. The application enabled Samsung's PCS network
elements to be managed by multiple vendors' network management systems for the
purpose of configuration management, performance management and fault
management.
CARRIER-TO-CARRIER APPLICATIONS
Tekelec: Tekelec, a leading telecommunications equipment vendor, engaged the
Company to develop LNP applications, including an LSMS, for its customers.
Tekelec needed to provide TMN-compliant solutions which ensured
interoperability, were competitive on price, and could be delivered within
strict timeframes. Tekelec engaged DSET because of its application development
tools and the technical capabilities of its professional services organization
to build the LSMS. The project was delivered on time and within budget.
SALES AND MARKETING
The Company markets its products and services through its direct sales
organization in North and South America and international distributors in
Europe and Asia. As of December 31, 1997, the Company's direct field sales
force consisted of eight sales managers supported by nine consulting engineers
based in its New Jersey, California and Texas offices.
The Company also markets its products and services through non-exclusive
distributors in China, Taiwan, South Korea and Japan. Sales, marketing and
technical support is provided to the international distributors by DSET
personnel in the United States. The Company utilizes TMN Tools, S.A., its
joint venture created in May 1997 with ATOS, S.A., to distribute DSET's
products and services in Europe and Israel. TMN Tools has exclusive rights to
sell the Company's products pursuant to a two-year contract ending in May
1999. In addition, the Company is targeting telecommunications equipment
vendors and systems integrators to resell the Company's carrier-to-carrier
applications.
In general, the non-exclusive distributor agreements require distributors to
use their best efforts to promote and solicit orders for the Company's
products and allow distributors to use the Company's trademarks and trade
names in advertising and promoting Company products. Typically, distributors
receive a commission of 30% of the sale price of the Company's products and
10% of any maintenance and training sales. Commissions are payable only after
the Company's receipt of the total revenues for such sale. Customers
purchasing products through non-exclusive distributors are required to enter
into license agreements with the Company.
The Company has a lengthy sales cycle and believes that the period of time
between initial customer contact and execution of a license agreement or
development services contract typically ranges from four to nine months.
Telecommunications carriers and network equipment vendors typically conduct
extensive and lengthy product evaluations before purchasing software or
application development services. See "Risk Factors--Length of Sales Cycle."
The Company has implemented marketing initiatives to support the sales and
distribution of its products and services. The objective of these efforts is
to inform customers of the capabilities and benefits of the Company's products
and services. Marketing programs include on-site customer seminars,
participation in industry trade shows and forums, distribution of marketing
materials, and dissemination of information concerning products and services
through the Company's website.
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RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its future success depends on its ability to
develop and introduce products that embrace new technologies evolving industry
standards and technologies and meet the rapidly changing demands of customers
and the marketplace. The Company's research and product development objectives
focus on compatibility with new technologies and enhancement of products and
services in response to customer needs and industry and market trends. While
the Company expects that new products will continue to be developed
internally, the Company may, based on timing and cost considerations, acquire
or license technologies, products or applications from third parties.
The Company is pursuing several product development projects and allocates
its research and product development resources in response both to market
research and customer demands for additional features and products. The
Company's product development strategy involves rolling out initial versions
of its products and adding features over time. The Company regularly
incorporates product feedback received from customers into its product
development process. The Company's research and product development efforts
are principally focused on (i) the enhancement of existing products to support
new features, (ii) the development of new products capable of enabling
customers to build applications based on new technologies, and (iii) creation
of carrier-to-carrier applications. The Company is currently developing
several products that will support C++ APIs endorsed by the NMF and is
investing in the development of new tools utilizing other technologies, such
as CORBA. DSET's development efforts are also focused on simplifying the use
of the key technologies underlying TMN, such as GDMO, ASN.1, CMIP, and OSI, as
well as evaluating emerging technologies such as Java.
The Company employs highly qualified engineers and utilizes its in-house
development capabilities to efficiently manage design processes and to shorten
product introduction lead times. The Company seeks to maximize the use of
existing technology to minimize time to market of its products and
applications. Most of the Company's research and development personnel hold
engineering and other advanced technical degrees. The Company's research and
development team consists of 47 engineers and support personnel as of December
31, 1997. The Company's research and development expenditures were
approximately $865,000, $1.3 million and $3.3 million in 1995, 1996 and 1997,
respectively.
COMPETITION
Competition in DSET's markets is intense and involves rapidly changing
technologies, evolving industry standards, frequent new product introductions
and rapid changes in customer requirements. To maintain and improve its
competitive position, DSET must continue to develop and introduce, on a timely
and cost-effective basis, new products, features and services that keep pace
with the evolving needs of its customers. The principal competitive factors
affecting the market for the Company's software tools are product reputation,
quality, performance, price, customer support and product features such as
adaptability, scalability, ability to integrate with other products,
functionality and ease of use. The Company believes that the principal
competitive factors in the market for application development services include
compliance with industry standards, quality of service and deliverables, speed
of development and implementation, price, project management capability and
technical and business expertise. The Company believes that the principal
competitive factors in the market for carrier-to-carrier applications includes
many of the same factors as the market for application development services as
well as the ability of such applications to facilitate the flow-through of
information between carriers' networks and systems. While there can be no
assurance that the Company will be able to compete effectively based upon such
competitive factors, DSET believes that its capabilities in TMN applications
differentiates its products and services in the marketplace.
The Company competes in the application development tools market with a
small group of software tool providers. The Company's competitors in the
markets for application development services and carrier-to-carrier
applications include the in-house development staffs of telecommunications
carriers and
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network equipment vendors and systems integrators. Many of its competitors
have longer operating histories, greater name recognition, larger or captive
customer bases and significantly greater financial, technical, sales, customer
support, marketing and other resources. Furthermore, TMN, as an open systems
architecture, can lead to increased competition as third parties develop
competitive products and services. Competitors may be able to respond more
quickly to emerging technologies and changes in customer requirements.
INTELLECTUAL PROPERTY
The Company's success and its ability to compete effectively is dependent,
in part, upon its proprietary rights. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, as well as
confidentiality procedures and contractual restrictions, to establish and
protect its proprietary rights. Furthermore, the Company generally enters into
non-competition, non-disclosure and invention assignment agreements with its
employees and consultants, and into non-disclosure agreements with its
customers and distributors. There can be no assurance that such measures will
be adequate to protect the Company's proprietary rights. A portion of the
Company's revenues is generated from run-time license fees which generally
become due upon the deployment by equipment vendors to telecommunications
carriers of network devices which have embedded applications built with the
Company's software. Many of such customers are contractually required to
periodically report their sales to the Company. There can be no assurance that
such customers will accurately report such sales or that the Company will be
able to effectively monitor and enforce its contractual rights with respect to
such fees. Additionally, the Company may be subject to further risks as it
enters into transactions in countries where intellectual property laws are not
well developed or are difficult to enforce. Legal protections of the Company's
proprietary rights may be ineffective in such countries. Litigation may be
necessary to defend and enforce the Company's proprietary rights, which could
result in substantial costs and diversion of management resources and could
have a material adverse effect on the Company's business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary rights
both in the United States and abroad, there can be no assurance that the
Company will be successful in doing so or that the steps taken by the Company
in this regard will be adequate to deter misappropriation or independent
third-party development of the Company's technology or to prevent an
unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. Any of such events could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company or its employees may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. In its
licenses and software development and distribution agreements, the Company
agrees to indemnify its customers and distributors for any expenses and
liabilities resulting from claimed infringements of patents, trademarks,
copyrights or other proprietary rights of third parties. The amount of the
Company's indemnity obligations may be greater than the revenues the Company
may have received under such agreements. There can be no assurance that third
parties will not assert infringement or misappropriation claims against the
Company, its customers or distributors in the future with respect to its
employees or current or future products or services. Any claims or litigation,
with or without merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require the Company to enter into royalty or
licensing arrangements. Such royalty or licensing arrangements, if required,
may not be available on terms acceptable to the Company, if at all, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
38
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had a total of 125 employees. Of the
total, 47 were in engineering and product development, 36 were in professional
services, 17 were in sales and sales support, 11 were in administration,
finance and operations, eight were in customer service, and six were in
marketing. The Company's future performance depends in significant part upon
the continued service of its management, key product and application
engineers, and sales and technical sales support personnel. Competition for
such personnel is intense and there can be no assurance that the Company will
be successful in attracting or retaining such personnel in the future. None of
the Company's employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
FACILITIES
The Company's executive offices, research and product development, and
primary production operations are located in Bridgewater, New Jersey, where
the Company occupies approximately 19,755 square feet pursuant to a lease
expiring in 1999. The annual rent and maintenance for the facility is
approximately $328,000.
In addition, the Company leases 5,465 square feet of office space for a
professional services office in Richardson, Texas. The Company also leases
facilities in San Jose, California and Fremont, California, occupying 2,797
square feet and 3,275 square feet, respectively. See Note 10 of Notes to
Financial Statements for information regarding the Company's obligations under
such leases. The Company believes that suitable additional or alternative
space will be available as needed on commercially reasonable terms.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William P. McHale, Jr... 48 President, Chief Executive Officer and Director
S. Daniel Shia(1)....... 46 Chairman of the Board, Chief Technical Officer and Director
Paul A. Lipari.......... 50 Chief Financial Officer, Treasurer and Secretary
Paul R. Smith........... 51 Senior Vice President Worldwide Sales and Marketing
Victor W. Mak........... 37 Vice President, Engineering
Vincent J. Sheu......... 45 Vice President, Professional Services
Hui-Yun Rosanna Yuan.... 45 Director
Elizabeth K. 47 Director
Adams(2)(3)............
Bruce R. Evans(1)(3).... 38 Director
</TABLE>
- ---------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Option Committee.
Within 90 days after the effective date of this Prospectus and pursuant to
Nasdaq National Market listing requirements, the Company intends to identify
and elect at least one new director who will be an independent, unaffiliated
director. The failure by the Company to identify and elect such new director
who satisfies such listing requirements within the requisite timeframe will
result in the delisting of the Company's Common Stock from the Nasdaq National
Market. See "Risk Factors--No Prior Public Market for Common Stock;
Possibility of Volatility of Stock Prices."
All directors hold office until the next annual meeting of shareholders and
until their successors shall have been duly elected and qualified. All
executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Other than Mr. Shia and Ms. Yuan, who are husband and wife, there are no
family relationships among any of the directors and executive officers of the
Company.
Mr. McHale joined the Company in January 1997 as President and Chief
Operating Officer and was elected to the Board of Directors in January 1997.
In July 1997, he became Chief Executive Officer. Mr. McHale also serves on the
Board of Directors of TMN Tools, S.A., the Company's European joint venture.
Prior to joining the Company, Mr. McHale was Vice President of Sales and
Marketing at F3 Software Corporation from January 1995 to December 1996. From
February 1991 to December 1994, Mr. McHale owned and operated a private firm
where he periodically provided senior management or consulting services. Mr.
McHale also served as President and Chief Executive Officer of each of
Mitchell Management Systems from November 1989 to January 1991, and Component
Software Corporation from July 1992 to July 1994. Prior to that, Mr. McHale
held various sales and marketing positions at IBM, Wang Laboratories and
Digital Equipment Corporation.
Mr. Shia founded the Company and currently serves as its Chairman of the
Board and Chief Technical Officer. Mr. Shia served as President from the
Company's founding in 1989 until January 1997. Mr. Shia also served as Chief
Executive Officer from 1989 until July 1997. Prior to founding the Company,
Mr. Shia served as a consultant to Bellcore from October 1985 to January 1989
where he developed OSI protocols and a distributed network management system
for a high performance metropolitan area network. From 1983 to October 1985,
Mr. Shia was a consultant to AT&T Bell Laboratories.
40
<PAGE>
Mr. Lipari joined the Company in September 1996 as Chief Financial Officer
and Secretary. In December 1997, he also became Treasurer of the Company. Mr.
Lipari also serves on the Board of Directors of TMN Tools, S. A. Prior to
joining the Company, Mr. Lipari served as Vice President of Finance and Chief
Financial Officer for Chamberlain Phipps North America, Inc. from 1995 to
1996, Vice President of Finance and Operations and Chief Financial Officer for
Netlink, Incorporated from 1993 to 1995, and as Chief Financial Officer of
Moscom Corporation, from 1983 to 1993. Mr. Lipari is a certified public
accountant.
Mr. Smith joined the Company in September 1992, and currently serves as
Senior Vice President Worldwide Sales and Marketing. Prior to joining the
Company, from 1987 to 1992, Mr. Smith founded and directed The Center for
Strategic Communications, a marketing consulting firm serving the
telecommunications, health-care and computer industries. Prior to that Mr.
Smith served in various engineering, marketing, sales, product management,
strategic planning and business development positions with AT&T Bell
Laboratories and AT&T Network Systems from 1968 to 1987.
Mr. Mak joined the Company in April 1994, and currently serves as Vice
President of Engineering. Mr. Mak served the Company as an Engineering Manager
from April 1994 to April 1996, and as Director of Engineering from April 1996
to April 1997. Mr. Mak was promoted to Vice President of Engineering in April
1997. Prior to joining the Company, Mr. Mak worked as a research scientist for
Bellcore from 1987 to 1994.
Mr. Sheu joined the Company in August 1995, and currently serves as Vice
President of Professional Services. Mr. Sheu served as the Company's Director
of Professional Services from August 1995 to April 1997. Mr. Sheu was promoted
to Vice President of Professional Services in April 1997. Prior to joining the
Company, Mr. Sheu served as a senior manager for DSC Telecom L.P. from January
1992 to August 1995.
Ms. Yuan has been a director of the Company since 1995 and served as the
Company's Controller from 1990 to December 1997 and Treasurer from September
1993 to December 1997. Prior to joining the Company, Ms. Yuan served as a
computer software consultant to the Company, Bellcore, AT&T and Bell
Laboratories from 1981 to 1993.
Ms. Adams has been a director of the Company since July 1997. Since 1990,
Ms. Adams has served as President of Rational Management Group, Inc., a
consulting firm. Ms. Adams also serves as Managing Director of the Network
Management Forum, an international consortium of telecommunications carriers
and equipment vendors. Prior to joining Rational Management Group, Inc., Ms.
Adams held a variety of positions with AT&T and Bell System companies.
Mr. Evans has been a director of the Company since December 1995. Since
1991, Mr. Evans has been a general partner with Summit Partners, a venture
capital firm, where he has been employed since 1986. Mr. Evans serves as a
director of Pediatrix Medical Group, Inc., Omtool Ltd. and several privately-
held companies. See "Principal and Selling Shareholders."
The Board of Directors has a Compensation Committee, which approves salaries
and incentive compensation for executive officers of the Company, an Option
Committee which administers the Company's stock option plans, and an Audit
Committee, which reviews the results and scope of the audit and other services
provided by the Company's independent accountants.
DIRECTORS' COMPENSATION
Directors who are not employees or affiliates of the Company or its
subsidiaries, who currently consist of Ms. Adams, receive a retainer of $500
per meeting for attending regular meetings of the Board of Directors. All
Directors are reimbursed for reasonable expenses incurred in attending Board
meetings.
The Company granted to Elizabeth Adams options to purchase 21,000 shares of
Common Stock on July 25, 1997 at an exercise price of $4.00 per share. The
options vest to the extent of one-third of the shares on each of July 25,
1998, 1999 and 2000.
41
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
for services in all capacities awarded to, earned by or paid to the Company's
chief executive officer and the other four most highly paid executive officers
of the Company whose aggregate compensation exceeded $100,000 during the year
ended December 31, 1997 (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
----------------------------- ------------
NUMBER
OF
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------------------ -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
William P. McHale,
Jr.(1).................. $157,500 $ -- $ -- 364,950 $45,171(2)
President and Chief
Executive Officer
S. Daniel Shia........... 198,462 70,165 5,800(3) 12,100 6,805(4)
Chairman of the Board
and Chief Technical
Officer
Paul A. Lipari........... 133,416 24,067 -- 64,143 36,496(5)
Chief Financial Officer,
Treasurer, and
Secretary
Paul R. Smith............ 120,412 89,521 4,100(3) 20,808 6,660(6)
Senior Vice President,
Worldwide Sales and
Marketing
Vincent J. Sheu.......... 123,707 16,978 -- 28,151 4,412(7)
Vice President,
Professional Services
</TABLE>
- ---------------------
(1) Mr. McHale joined the Company in January 1997.
(2) Includes relocation allowance of $44,446 and compensation relating to life
insurance premiums paid on his behalf of $725.
(3) Represents automobile allowance.
(4) Includes contributions by the Company under the 401(k) Plan of $5,700 and
compensation relating to life insurance premiums paid on his behalf of
$1,105.
(5) Includes relocation allowance of $31,151, contributions by the Company
under the 401(k) Plan of $4,724 and compensation relating to life
insurance premiums paid on his behalf of $621.
(6) Includes contributions by the Company under the 401(k) Plan of $5,700 and
compensation relating to life insurance premiums paid on his behalf of
$960.
(7) Includes contributions by the Company under the 401(k) Plan of $4,080 and
compensation relating to life insurance premiums paid on his behalf of
$332.
OPTION GRANTS IN 1997
The following table sets forth information concerning individual grants of
stock options to each of the Named Executives during 1997. The Company has
never granted any stock appreciation rights.
42
<PAGE>
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
--------------------------------------------- -----------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (1) YEAR(2) PER SHARE(3) DATE 5% 10%
- ---- ---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William P. McHale, Jr... 225,000 18.4% $3.29 1/31/07 $ 465,068 $1,178,573
139,950 11.5 4.00 7/31/07 352,055 892,177
S. Daniel Shia.......... 7,100 0.6 3.29 4/1/02 6,447 14,246
5,000 0.4 4.00 10/01/02 5,526 12,210
Paul A. Lipari.......... 58,500 4.8 3.29 2/24/07 120,918 306,429
2,343 0.2 3.29 4/1/02 2,128 4,701
3,300 0.3 4.00 10/1/02 3,647 8,059
Paul R. Smith........... 15,000 1.2 3.29 4/1/07 31,005 78,572
3,408 0.3 3.29 4/1/02 3,095 6,838
2,400 0.2 4.00 10/1/02 2,652 5,861
Vincent J. Sheu......... 2,846 0.2 3.29 4/1/02 2,584 5,711
22,500 1.8 3.29 4/1/07 46,554 117,977
2,805 0.2 4.00 10/1/02 3,100 6,850
</TABLE>
- ---------------------
(1) Options granted during 1997 were granted pursuant to and in accordance
with the Company's 1993 Stock Option Plan. See "--Stock Option Plans."
(2) Based on an aggregate of 1,219,695 options granted to employees in 1997,
including options granted to Named Executives.
(3) The exercise price per share equaled the fair market value of the Common
Stock on the date of grant, as determined by the Company's Board of
Directors.
(4) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. The assumed 5% and 10% annual rates of
appreciation (compounded annually) over the term of the option are set
forth in accordance with the rules and regulations adopted by the
Securities and Exchange Commission, do not represent the Company's
estimate of stock price appreciation and do not take into account any
other appreciation in the Common Stock from the date of grant to the date
hereof.
The following table sets forth information concerning each exercise of
options during 1997 by each of the Named Executives and the fiscal year-end
value of unexercised in-the-money options.
AGGREGATE OPTION EXERCISES IN 1997
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NUMBER OF FISCAL FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- -------- --------------- ---------------------
<S> <C> <C> <C> <C>
William P. McHale, Jr... -- -- --/364,950 --/$3,445,050
S. Daniel Shia.......... 45,000 $138,300(2) 737,109/315,947 $8,954,439/$3,436,835
Paul A. Lipari.......... -- -- 20,250/124,893 $219,105/$1,278,003
Paul R. Smith........... -- -- 61,335/47,162 $729,612/$461,923
Vincent J. Sheu......... 13,824 $ 39,199(2) 1,875/47,600 $20,288/$480,780
</TABLE>
- ---------------------
(1) Based on the fair market value of the Common Stock at the end of 1997 as
determined by the Company's Board of Directors, or $13.00 per share, less
the exercise price payable for such shares.
(2) Based on the fair market value of the Common Stock on the date of exercise
as determined by the Company's Board of Directors, or $4.00 per share,
less the exercise price payable for such shares.
43
<PAGE>
STOCK OPTION PLANS
1993 Stock Option Plan
The 1993 Stock Option Plan (the "1993 Plan") was adopted by the Board of
Directors and became effective on September 15, 1993. The 1993 Plan was
approved by the shareholders of the Company on September 10, 1994. As of
December 31, 1997, a total of 3,310,927 shares are reserved for issuance upon
the exercise of options granted under the 1993 Plan, of which options to
purchase 2,848,493 shares have been granted and are currently outstanding.
Those eligible to receive stock option grants under the 1993 Plan include
employees, officers, directors and consultants. The 1993 Plan is administered
by the Option Committee of the Board of Directors of the Company. Upon
effectiveness of the Company's 1998 Stock Plan, no further grants shall be
made under the 1993 Plan.
Subject to the provisions of the 1993 Plan, the administrator of the 1993
Plan has the discretion to determine the optionees, the type of options to be
granted (incentive stock options or non-qualified stock options), the vesting
provisions, the terms of the grants and such other related provisions as are
consistent with the 1993 Plan. The exercise price of an option may not be less
than the fair market value per share of the Common Stock on the date of grant
or, in the case of any optionee who owns 10% or more of the total combined
voting power of all classes of stock of the Company, not less than 110% of the
fair market value per share on the date of grant. Fair market value is
determined by the Board of Directors from time to time in good faith. However,
the 1993 Plan provides that upon listing on the Nasdaq National Market, the
fair market value shall be the average of the closing price for Common Stock
of the Company on the last trading day prior to the grant date.
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the total combined voting
power of all classes of stock of the Company may be no longer than five years.
Generally, options under the 1993 Plan vest over four years from the date of
grant. Options are not assignable or otherwise transferable except by will or
by the laws of descent and distribution. In the event of a dissolution or
liquidation of the Company, a merger in which the Company is not the surviving
corporation, or the sale of all or substantially all of the Company's assets
in which the successor corporation does not assume outstanding options or
issue substantially equivalent options, all outstanding options accelerate and
become exercisable in full for a period of at least ten days.
At the Board of Directors' discretion, the Company (or the Company's
assignees) may reserve a right of first refusal to purchase any shares of
stock that may be purchased upon the exercise of options granted under the
1993 Plan that an optionee may propose to transfer to a third party. In
addition, the Company may reserve a right to repurchase all shares held by an
optionee upon the optionee's termination of employment or service with the
Company, for any reason, within a specified time as determined by the Board of
Directors at the time of grant. The Company may repurchase such terminated
optionee's shares at (i) the optionee's original purchase price (provided that
the right to repurchase at such price shall lapse at the rate of 20% per year
from the date of grant), (ii) the fair market value of such shares as
determined by the Board of Directors in good faith or (iii) a price determined
by formula or other provision set forth in the grant of stock options.
1998 Stock Plan
The 1998 Stock Plan was adopted by the Board of Directors on December 31,
1997 and was approved by the shareholders of the Company in February 1998. The
1998 Stock Plan shall be effective on the date of the consummation of this
offering and shall terminate ten years from such date. Upon effectiveness of
the 1998 Stock Plan, a total of 1,800,000 shares shall be reserved for
issuance upon the exercise of options and/or stock purchase rights granted
thereunder. Those eligible to receive stock option grants or stock purchase
rights under the 1998 Stock Plan shall include employees, non-employee
directors and consultants. The 1998 Stock Plan shall be administered by the
Option Committee of the Board of Directors of the Company, which is comprised
solely of outside directors.
44
<PAGE>
Subject to the provisions of the 1998 Stock Plan, the administrator of the
1998 Stock Plan shall have the discretion to determine the optionees and/or
grantees, the type of options to be granted (incentive stock options ("ISOs")
or non-qualified stock options ("NQSOs")), the vesting provisions, the terms
of the grants and such other related provisions as are consistent with the
1998 Stock Plan. The exercise price of an ISO may not be less than the fair
market value per share of the Common Stock on the date of grant or, in the
case of an optionee who beneficially owns 10% or more of the outstanding
capital stock of the Company, not less than 110% of the fair market value per
share on the date of grant. The exercise price of a NQSO may not be less than
85% of the fair market value per share of the Common Stock on the date of
grant or, in the case of an optionee who beneficially owns 10% or more of the
outstanding capital stock of the Company, not less than 110% of the fair
market value per share on the date of grant. The purchase price of shares
issued pursuant to stock purchase rights may not be less than 50% of the fair
market value of such shares as of the offer date of such rights.
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the outstanding shares of
capital stock may be no longer than five years. The Company anticipates that
options granted under the 1998 Stock Plan will vest over four years from the
date of grant. Options are not assignable or otherwise transferable except by
will or the laws of descent and distribution. In the event of a merger or
consolidation of the Company with or into another corporation or the sale of
all or substantially all of the Company's assets in which the successor
corporation does not assume outstanding options or issue equivalent options,
the Board of Directors of the Company is required to provide accelerated
vesting of outstanding options.
401(K) PLAN
The Company currently maintains a 401(k) salary reduction plan (the "401(k)
Plan") which is intended to qualify under Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986. Generally, all employees are eligible to
participate in the 401(k) Plan after they complete three months of service.
All eligible executive officers, other than Mr. McHale, have elected to
participate in the 401(k) Plan.
Eligible employees electing to participate in the 401(k) Plan may defer a
portion of their compensation on a pre-tax basis, by contributing a percentage
thereof to the 401(k) Plan. The maximum contribution is prescribed in Section
401(k) of the Internal Revenue Code of 1986. The contribution limit for 1997
was $9,500. The Company made matching contributions ranging up to three
percent of the employee's gross earnings in 1997, subject to the foregoing
limit. Eligible employees who elect to participate in the 401(k) Plan are
generally vested in the Company's matching contribution according to the
following schedule: less than one year of service-0%; one year of service-20%;
two years of service-40%; three years of service-60%; four years of service-
80%; and five years of service-100%.
EMPLOYMENT AGREEMENTS, INDEMNIFICATION AGREEMENTS, NON-COMPETITION, NON-
DISCLOSURE AND INVENTION ASSIGNMENT AGREEMENTS
William P. McHale, Jr. entered into an agreement with the Company in January
1997. He currently receives an annual salary of $175,000 and is eligible for
an annual bonus of up to $72,500, the amount and payment of which is within
the discretion of the Compensation Committee of the Board of Directors. The
Company also has agreed, subject to certain restrictions, to pay Mr. McHale
the equivalent of six months salary in the event that Mr. McHale is terminated
without cause, and the equivalent of 6 months salary and the acceleration of
all options in the event Mr. McHale is terminated without cause in connection
with a change in control of the Company. In July 1997, the Company also
granted Mr. McHale options to purchase 93,300 shares of Common Stock at an
exercise price of $4.00 per share. Such options vest upon the earlier of July
30, 2007 or the date upon which it is determined that the Company has achieved
certain levels of net income per share in two consecutive years commencing
with the year ended December 31, 1998.
45
<PAGE>
S. Daniel Shia entered into a five-year employment agreement with the
Company commencing October 1, 1996. Under such agreement, he is currently
entitled to an annual salary of $200,000. Mr. Shia is eligible for an annual
bonus, the amount and payment of which is within the discretion of the
Compensation Committee of the Board of Directors provided that Mr. Shia shall
receive a minimum bonus equal to 50% of his annual salary multiplied by a
percentage equal to the Company's actual pre-tax profit divided by the
budgeted pre-tax profit for the applicable year. The Company also has agreed,
subject to certain restrictions, to pay Mr. Shia the equivalent of two years
salary in the event Mr. Shia is terminated without cause.
Paul A. Lipari entered into an agreement with the Company in September 1996
and amended in April 1997. Mr. Lipari currently is entitled to an annual
salary of $140,000. Mr. Lipari is eligible for an annual bonus, the amount and
payment of which is within the discretion of the Compensation Committee of the
Board of Directors. The Company also has agreed, subject to certain
restrictions, to pay Mr. Lipari the equivalent of six months salary in the
event Mr. Lipari is terminated without cause, and the equivalent of 12 months
salary and the acceleration of all options in the event Mr. Lipari is
terminated without cause in connection with a change in control of the
Company. See "Certain Transactions" for a loan transaction between the Company
and Mr. Lipari.
Each of the Company's executive officers has agreed to maintain the
confidentiality of Company information and, for a period of time following the
termination of employment, not to solicit the Company's customers or
employees. In addition, each of Messrs. McHale and Shia has agreed that during
the term of his employment and thereafter for a period of two years, with
respect to Mr. Shia, and one year, with respect to Mr. McHale, such person
will not compete with the Company in any state or territory of the United
States, or any other country, where the Company does business by engaging in
any capacity in any business which is competitive with the business of the
Company.
The Company has executed indemnification agreements with each of its
executive officers and directors pursuant to which the Company has agreed to
indemnify such party to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
The Company generally requires its employees to maintain the confidentiality
of Company information and to assign inventions to the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Mr. Shia and Mr. Evans.
Within 90 days after the effective date of this Prospectus, the Company
intends to identify and elect an additional independent unaffiliated director
who will serve as a member of the Compensation Committee. There are no
Compensation Committee Interlocks.
Mr. Evans was appointed to the Board of Directors as the designee of Summit
Ventures IV, L.P. and Summit Investors II, L.P. (collectively, "Summit"). See
"Certain Transactions."
KEY PERSON INSURANCE
The Company maintains and is the beneficiary of, a life insurance policy on
the life of S. Daniel Shia, the Company's founder, Chairman of the Board and
Chief Technical Officer. The face amount of such policy is $1.0 million. The
Company does not maintain key person life insurance on any of its other key
personnel.
46
<PAGE>
CERTAIN TRANSACTIONS
On July 22, 1997, the Company loaned $100,000 to Paul A. Lipari, the
Company's Chief Financial Officer, Treasurer and Secretary, on an unsecured
basis, at an adjustable interest rate (initially 5.37% per annum). Such loan
is due and payable on July 22, 2002. Mr. Lipari has agreed to pay the
outstanding balance of such loan from the net proceeds received by Mr. Lipari,
as a Selling Shareholder, upon the consummation of this offering. For a
discussion of agreements with members of management, see "Management--
Employment Agreements, Indemnification Agreements, Non-Competition, Non-
Disclosure and Invention Assignment Agreements."
In December 1995, the Company sold an aggregate of 676,361 shares of Series
A Stock at an aggregate purchase price of $10.0 million to Summit. The
Company, pursuant to the Preferred Stock purchase agreement with Summit (the
"Summit Agreement"), repurchased an aggregate of 3,043,625 shares of Common
Stock from certain existing shareholders of the Company for an aggregate of
$10.0 million. Among such shareholders, the Company repurchased from Mr. Shia
and certain of his relatives an aggregate of 1,031,472 shares of Common Stock.
All shares of Series A Stock outstanding as of the consummation of this
offering will be automatically converted into an aggregate of 3,043,625 shares
of Common Stock. In connection with such Series A Stock transaction, Bruce R.
Evans, a general partner of Summit Partners, was elected to the Company's
Board of Directors as Summit's designee. In September 1996, the Company,
pursuant to certain convenants in the Summit Agreement, issued to Summit, for
no additional consideration, warrants (the "Summit Warrants") to purchase up
to a maximum of 185,331 shares of Common Stock. See "Description of Capital
Stock--Warrants."
The shares of Common Stock issuable upon conversion of the Series A Stock
and the shares of Common Stock issuable upon the exercise of the Summit
Warrants are entitled to certain registration rights. See "Description of
Capital Stock--Registration Rights of Certain Holders."
The Board of Directors of the Company has adopted a policy requiring that
any future transactions between the Company and its officers, directors,
principal shareholders and their affiliates be on terms no less favorable to
the Company than could be obtained from unrelated third parties and that any
such transactions be approved by a majority of the disinterested members of
the Company's Board of Directors.
47
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997, and as
adjusted to reflect the sale by the Company and the Selling Shareholders of
the shares of Common Stock offered hereby, by (i) each person (or group of
affiliated persons) who is known to the Company to own beneficially more than
5% of the outstanding shares of Common Stock, (ii) each of the Company's
directors and Named Executives, (iii) the Selling Shareholders, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(2) BEING OFFERED NUMBER PERCENT(2)
- ------------------------ --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE
OFFICERS AND
FIVE PERCENT
SHAREHOLDERS:(3)
Summit Partners(4)...... 3,089,958 45.3% 415,176 2,674,782 28.6%
S. Daniel Shia(5)(15)... 1,705,832 22.7 41,339 1,520,493 15.1
Hui-Yun R. Yuan(5)(15).. 1,705,832 22.7 -- 1,520,493 15.1
David Wu(6)............. 343,629 5.1 188,996 154,633 1.7
William P. McHale,
Jr.(7)................. 56,250 * -- 56,250 *
Paul A. Lipari(8)....... 60,375 * 28,000 32,375 *
Paul R. Smith(9)........ 285,584 4.2 -- 285,584 3.0
Victor W. Mak(10)....... 133,392 1.9 -- 133,392 1.4
Vincent J. Sheu(11)..... 20,199 * -- 20,199 *
Elizabeth K. Adams...... -- -- -- -- --
Bruce R. Evans(4)(12)... 3,089,958 45.3 -- 2,674,782 28.6
All directors and
executive officers as a
group(13) (9 persons).. 5,351,590 68.6 69,339 4,723,075 45.9
OTHER SELLING
SHAREHOLDERS:
Yi Chang................ 326,700 4.8 32,670 294,030 3.2
Loretta Yang............ 326,700 4.8 32,670 294,030 3.2
Hai-Perng Kuo........... 241,766 3.6 51,195 190,571 2.0
James K. Chang.......... 217,661 3.2 21,766 195,895 2.1
James Jen and Lorine
Jen(14)................ 203,120 2.2 4,907 51,198 *
Lorine Jen, custodian
for Wenchung Jonathan
Shia(15)............... 144,000 2.1 144,000 -- *
Ying-Tsai (Allen) Yang.. 82,269 1.2 8,227 74,042 *
Lan-Yuan Hsia(16)....... 67,733 * 9,077 58,656 *
Wei-Ying Hu............. 45,000 * 4,500 40,500 *
So-Kong Shia & Jenny
Lin(17)................ 34,234 * 4,587 29,647 *
Gary Tsai............... 30,000 * 4,020 25,980 *
Lorine Jen, custodian
for Alexander Jen 22,500 * 3,015 19,485 *
Shou-Chang Hsia......... 22,500 * 3,015 19,485 *
Nicole Kuo.............. 15,000 * 1,500 13,500 *
Antony Yuan and H. H.
Yuan................... 9,999 * 1,340 8,659 *
</TABLE>
- ---------------------
*Less than one percent.
(1) The number of shares beneficially owned by each shareholder is determined
under rules promulgated by the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual or entity has sole or shared voting
power or investment power and also any shares which the individual or
entity has a right to acquire within 60 days of December 31, 1997 through
the exercise of any stock option, warrant or other right. The
48
<PAGE>
inclusion herein of such shares, however, does not constitute an admission
that the named shareholder is a direct or indirect beneficial owner of
such shares. Unless otherwise indicated, each person or entity named in
the table has sole voting power and investment power (or shares such power
with his or her spouse) with respect to all shares of capital stock listed
as owned by such person or entity.
(2) Applicable percentage of ownership is based on 6,775,092 shares of Common
Stock outstanding on December 31, 1997 and 9,303,092 shares of Common
Stock outstanding after the completion of this offering.
(3) Unless otherwise specified, the address of all persons who are executive
officers or directors of the Company is in care of the Company, 1011
Route 22 West, Bridgewater, New Jersey 08807.
(4) Includes 2,914,893 shares held by Summit Ventures IV, L.P. and 128,732
shares held by Summit Investors II, L.P. Also includes 44,373 shares and
1,960 shares purchasable upon exercise of warrants exercisable as of
December 31, 1997 or sixty days thereafter held by Summit Ventures IV,
L.P. and Summit Investors II, L.P., respectively. Excludes an aggregate
of 138,998 shares underlying warrants exercisable thereafter. The address
of both entities is 600 Atlantic Avenue, Suite 2800, Boston,
Massachusetts 02210. The respective general partners of these entities
exercise sole voting and investment power with respect to the shares
owned by such parties. The number of shares being offered by such holders
does not include an aggregate of 412,773 shares to be sold in the event
the Underwriters' over-allotment option is exercised in full.
(5) Mr. Shia and Ms. Yuan are husband and wife. Consists of 672,899 shares
held by Mr. Shia and 737,109 shares purchasable upon the exercise of
options held by Mr. Shia which are exercisable as of December 31, 1997 or
sixty days thereafter and excludes 315,948 shares underlying options
exercisable thereafter. Also includes 151,824 shares held by Ms. Yuan and
144,000 shares held by Ms. Yuan's sister, Lorine Jen, as custodian for
Mr. Shia's and Ms. Yuan's minor child which are being offered hereby. The
number of shares being offered by such holders does not include 16,839
shares to be sold by Ms. Yuan in the event the Underwriters' over-
allotment option is exercised in full.
(6) Mr. Wu's address is 2/F, 87A Waterloo Road, Kowloon, Hong Kong SAR,
China.
(7) Represents 56,250 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 308,700 shares underlying options exercisable
thereafter. The number of shares being offered by such holder does not
include 36,495 shares underlying options which will be exercised and sold
in the event the Underwriters' over-allotment option is exercised in
full.
(8) Includes 34,875 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 110,268 shares underlying options exercisable
thereafter. The number of shares being offered by such holder represents
shares underlying options which will be exercised and sold upon
consummation of this offering.
(9) Includes 61,335 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 47,162 shares underlying options exercisable
thereafter. The number of shares being offered by such holder does not
include 33,275 shares to be sold in the event the Underwriters' over-
allotment option is exercised in full.
(10) Includes 83,892 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 54,995 shares underlying options exercisable
thereafter. The number of shares being offered by such holder does not
include 18,838 shares to be sold in the event the Underwriters' over-
allotment option is exercised in full.
(11) Includes 1,875 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 47,600 shares underlying options exercisable
thereafter. The number of shares being offered by such holder does not
include 6,780 shares to be sold in the event the Underwriters' over-
allotment option is exercised in full.
(12) Represents the shares beneficially owned by Summit Ventures IV, L.P. and
Summit Investors II, L.P. See Note 4 above. Mr. Evans is a general
partner of Summit Investors II, L.P. and is a general partner
49
<PAGE>
of Stamps, Woodsum & Co. IV, which is the general partner of Summit
Partners IV, L.P., which is the general partner of Summit Ventures IV,
L.P. Mr. Evans may be deemed to share voting and investment power with
respect to all shares held by the partnerships. Mr. Evans expressly
disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest therein.
(13) See Note 5 and Notes 7 through 12.
(14) Includes 28,500 shares held jointly by such holders and 8,120 shares held
by Lorine Jen. Also includes an aggregate of 166,500 shares held by
Lorine Jen as custodian for minor children. See Notes 5 and 15. The
number of shares being offered includes 3,819 shares held jointly by
James and Lorine Jen and 1,088 shares held individually by Lorine Jen.
(15) Wenchung Jonathan Shia is the minor child of S. Daniel Shia and Hui-Yun
R. Yuan.
(16) Includes 33,750 shares held as custodian for David Tsai. The number of
shares being offered includes 4,554 held of record by Ms. Hsia and 4,523
shares held as custodian.
(17) Includes 7,519 shares of Common Stock purchasable by Mr. Shia upon the
exercise of options which are exercisable as of December 31, 1997 or
sixty days thereafter.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, the Company's authorized capital stock
will consist of 40,000,000 shares of Common Stock and 5,000,000 shares of
undesignated Preferred Stock, without par value (the "Preferred Stock").
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company.
Holders of shares of Common Stock will be entitled to receive dividends,
subject to the senior rights of preferred shareholders, if any, when, as and
if declared by the Board of Directors (see "Dividend Policy") and to share
ratably in the assets of the Company legally available for distribution to its
shareholders in the event of the liquidation, dissolution or winding-up of the
Company. Holders of Common Stock have no preemptive, subscription, redemption
or conversion rights. All of the issued and outstanding shares of Common Stock
are, and all shares of Common Stock to be sold in this offering will be, duly
authorized, validly issued, fully paid and nonassessable.
At December 31, 1997, there were 3,731,467 shares of Common Stock issued and
outstanding and held of record by 50 shareholders and options to purchase an
aggregate of 2,848,493 shares of Common Stock were outstanding. In addition,
warrants to purchase 185,331 shares of Common Stock were outstanding at
December 31, 1997. See "--Warrants" and "Management--Stock Options Plans."
PREFERRED STOCK
The Company's Board of Directors may without further action by the Company's
shareholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of Preferred Stock
would normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the Common Stock. The Company does not presently intend
to issue any series of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that
this ability has this effect, removal of the Company's incumbent Board of
Directors and management may be rendered more difficult. Further, this may
have an adverse impact on the ability of shareholders of the Company to
participate in a tender or exchange offer for the Common Stock and in so doing
diminish the market value of the Common Stock. See "Risk Factors--Control by
Existing Shareholders; Anti-takeover Effect of Certain Charter and By-law and
Other Provisions."
At December 31, 1997, there were 676,361 shares of Series A Stock issued and
outstanding. Simultaneously with the closing of the offering contemplated
hereby, all outstanding shares of Series A Stock automatically shall be
converted into shares of Common Stock on the basis of four and one-half shares
of Common Stock for each share of Series A Stock. Upon the automatic
conversion of such shares of the Series A Stock as described above, all such
Series A Stock shall be canceled, retired and eliminated. There are no other
classes of Preferred Stock designated and no other shares of Preferred Stock
outstanding.
WARRANTS
In September 1996, pursuant to the Summit Agreement, the Company issued the
Summit Warrants to Summit for no additional consideration. Such warrants
enable Summit to purchase at $2.18 per share, up to a maximum of 185,331
shares of Common Stock of the Company. The Summit Warrants are, or shall
become, exercisable to the extent of 25% on each of September 13, 1997, 1998,
1999 and 2000. The holders of the shares of Common Stock issuable upon the
exercise of the Summit Warrants are entitled to certain registration rights.
See "--Registration Rights of Certain Holders."
51
<PAGE>
REGISTRATION RIGHTS OF CERTAIN HOLDERS
In December 1995, the Company, in connection with the issuance and sale by
the Company to Summit of the Series A Stock, entered into the Summit Agreement
pursuant to which the Company has granted certain registration rights to such
shareholders. Pursuant to the Summit Agreement, at any time, the holders of at
least 25% of the aggregate of the Common Stock issued upon the conversion of
the Series A Stock and the Common Stock otherwise held by Summit (including
the shares issuable upon the exercise of the Summit Warrants) (the
"Registrable Securities") have the right, subject to certain restrictions set
forth in the Summit Agreement, to require that the Company register the
Registrable Securities requested by such holders at the Company's expense (on
no more than two occasions) under the Securities Act. The Company is not,
however, required to register any Registrable Securities unless such shares
represent at least 25% of the Registrable Securities, or, if less than 25%, if
the anticipated aggregate offering price exceeds $5.0 million.
After the Company has qualified for the use of Form S-3 under the Securities
Act, the holders of Registrable Securities have the right to an unlimited
number of registrations on such Form. Also pursuant to the Summit Agreement,
if, at any time, the Company proposes to register any of its Common Stock
under the Securities Act for sale to the public, the holders of the
Registrable Securities have unlimited piggyback registration rights at the
Company's expense, subject to certain restrictions set forth in the Summit
Agreement.
LIMITATION OF DIRECTOR LIABILITY
The Amended and Restated Certificate of Incorporation of the Company limits
the liability of directors and officers of the Company to the Company or its
shareholders to the fullest extent permitted by New Jersey law. Specifically,
directors and officers of the Company will not be personally liable for money
damages for breach of a duty as a director or an officer, except for liability
(i) for any breach of the director's or officers duty of loyalty to the
Company or its shareholders, (ii) for acts or omissions not in good faith or
which involve a knowing violation of the law, (iii) as to directors only,
under section 14a:6-12(1) of the New Jersey Business Corporation Act, which
relates to unlawful declarations of dividends or other distributions of assets
to shareholders or the unlawful purchase of shares of the corporation, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit.
ANTI-TAKEOVER PROVISIONS
New Jersey Statute
The Company is governed by the provisions of Section 14A:10A-1 et seq., the
New Jersey Shareholders Protection Act (the "New Jersey Act"), of the New
Jersey Business Corporation Act, an anti-takeover law. In general, the statute
prohibits a publicly-held New Jersey corporation from engaging in a "business
combination" with an "interested shareholder" for a period of five years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested shareholder.
An "interested shareholder" is a person who, together with affiliates and
associates, owns (or within five years, did own) 10% or more of the
corporation's voting stock. After the five-year waiting period has elapsed, a
business combination between a corporation and an interested shareholder will
be prohibited unless the business combination is approved by the holders of at
least two-thirds of the voting stock not beneficially owned by the interested
shareholder, or unless the business combination satisfies the New Jersey Act.
The New Jersey Act's fair price provision is intended to provide that all
shareholders (other than the interested shareholders) receive a fair price for
their shares.
Charter and By-laws Provisions
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without shareholder approval, 5,000,000 shares
52
<PAGE>
of Preferred Stock with voting, conversion and other rights and preferences
that could adversely affect the voting power or other rights of the holders of
Common Stock. The issuance of Preferred Stock or of rights to purchase
Preferred Stock could be used to discourage an unsolicited acquisition
proposal. In addition, the possible issuance of Preferred Stock could
discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. The Certificate of Incorporation also provides that: (i) the
Board of Directors may adopt, amend or repeal the by-laws of the Company, and
the affirmative vote of the holders of at least 66 2/3% of the voting power of
all outstanding shares of the capital stock of the Company shall be required
to adopt, amend or repeal any provision of the by-laws of the Company; (ii)
shareholders of the Company may not take any action by written consent; (iii)
special meetings of shareholders may be called only by the President, the
Chairman of the Board or a majority of the Board of Directors and business
transacted at any such special meeting shall be limited to matters relating to
the purposes set forth in the notice of such special meeting; (iv) the Board
of Directors, when evaluating an offer related to a business combination,
merger, consolidation, or sale of all or substantially all of the assets of
the Company, is authorized to give due consideration to any relevant factors,
including the social, legal and economic effects upon employees, suppliers,
customers, creditors, the community in which the Company conducts its
business, and the economy of the state, region and nation; (v) the affirmative
vote of the holders of at least 66 2/3% of the voting power of all outstanding
shares of the capital stock of the Company shall be required to amend the
above provisions; and (vi) the affirmative vote of the holders of at least 80%
of the voting power of all outstanding shares of the capital stock of the
Company shall be required to amend the provisions of the Company's by-laws and
Certificate of Incorporation with respect to indemnification of directors and
officers and limitation on director liability. The foregoing provisions of the
Certificate of Incorporation could have the effect of delaying, deterring or
preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the securities
of the Company. Upon completion of this offering, based upon the number of
shares outstanding at December 31, 1997, there will be 9,303,092 shares of
Common Stock of the Company outstanding (assuming no exercise of the
Underwriters' over-allotment option or outstanding warrants or options of the
Company other than the exercise of options to purchase 28,000 shares to be
sold by a Selling Shareholder). Of these shares, the 3,500,000 shares sold in
this offering will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 5,803,092 shares of Common Stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, approximately
260,457 shares of Common Stock, which are not subject to the 180-day Lock-up
Agreements with the Representatives of the Underwriters, will be eligible for
immediate sale in the public market pursuant to Rule 144(k) under the
Securities Act. Approximately 50,751 additional shares of Common Stock
(including 27,118 shares of Common Stock that may be acquired pursuant to the
exercise of outstanding options), which are not subject to Lock-up Agreements,
will be eligible for sale in the public market in accordance with Rule 144 or
Rule 701 under the Securities Act beginning 90 days after the date of this
Prospectus. Upon expiration of the Lock-up Agreements 180 days after the date
of this Prospectus, approximately 8,497,708 additional shares of Common Stock
(including 2,978,706 shares of Common Stock that may be acquired pursuant to
the exercise of outstanding options and warrants) will be available for sale
in the public market, subject to the provisions of Rule 144 under the
Securities Act.
53
<PAGE>
The executive officers and directors of the Company, and affiliated entities
holding in the aggregate approximately 5,767,746 shares of Common Stock
(including 2,038,340 shares of Common Stock that may be acquired pursuant to
the exercise of options or warrants held by them but after giving effect to
sales by such holders in this offering) on the date of this Prospectus, have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not offer to sell, contract to sell, transfer, engage in any hedging
transaction with respect to, or otherwise dispose of any shares of Common
Stock, or any shares convertible into or exchangeable for shares of Common
Stock, owned directly by such persons or with respect to which they have the
power of disposition, without the prior written consent of BT Alex. Brown,
which may be given at any time or from time to time as to any or all such
shares without notice. The holders of 2,813,780 shares of Common Stock,
including the shares issuable upon exercise of the Summit Warrants, have the
right in certain circumstances to require the Company to register their shares
under the Securities Act for resale to the public.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a shareholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least
one year from the later of the date such securities were acquired from the
Company or (if applicable) the date they were acquired from an Affiliate is
entitled to sell, within any three-month period, a number of such shares that
does not exceed the greater of one percent of the then outstanding shares of
Common Stock (approximately 93,030 shares immediately after this offering) or
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the date on which notice of such sale was filed under Rule
144, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition,
under Rule 144(k), if a period of at least two years has elapsed between the
later of the date restricted securities were acquired from the Company or (if
applicable) the date they were acquired from an Affiliate of the Company, a
shareholder who is not an Affiliate of the Company at the time of sale and has
not been an Affiliate of the Company for at least three months prior to the
sale is entitled to sell the shares immediately without compliance with the
foregoing requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
acquired pursuant to the exercise of certain options granted under the
Company's stock option plans) are also restricted securities and, beginning 90
days after the effective date of the Registration Statement of which this
Prospectus is a part, may be sold by shareholders other than Affiliates of the
Company subject only to the manner of sale provisions of Rule 144 and by
Affiliates under Rule 144 without compliance with its one-year holding period
requirement.
OPTIONS
The Company may file registration statements on Form S-8 under the
Securities Act to register all shares of Common Stock issuable under the 1993
Stock Option Plan and the 1998 Plan following the 90th day after the date of
this Prospectus. Shares issued upon the exercise of stock options after the
effective date of the Form S-8 registration statements will be eligible for
resale in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-up Agreements noted above,
if applicable.
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of the Common Stock in
the public market could adversely affect the market price of the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
BT Alex. Brown Incorporated, BancAmerica Robertson Stephens and SoundView
Financial Group, Inc., have severally agreed to purchase from the Company and
the Selling Shareholders the following respective numbers of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
BT Alex. Brown Incorporated...............................
BancAmerica Robertson Stephens............................
SoundView Financial Group, Inc............................
---------
Total................................................... 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering, the public
offering price and other selling terms may be changed by the Representatives
of the Underwriters.
Certain Selling Shareholders have granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 525,000 additional shares of Common Stock at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise such option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 3,500,000, and such Selling
Shareholders will be obligated, pursuant to the option, to sell such shares to
the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 3,500,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.
The Company, each of its officers and directors, and certain of its
shareholders, including all of the Selling Shareholders, have agreed, subject
to certain exceptions, not to offer to sell, contract to sell, transfer,
engage in any hedging transaction with respect to or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of BT Alex. Brown. BT Alex.
Brown, on behalf of the Representatives, may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to Lock-up Agreements. See "Shares Eligible for Future Sale."
55
<PAGE>
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
In connection with this offering, the Underwriters and other persons
participating in this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriters may over-allot in connection with this offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to
an Underwriter or a dealer for distributing Common Stock in this offering, if
the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short position, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of
Common Stock in market making transactions. These activities may stabilize or
maintain the market price of the Common Stock above market levels that may
otherwise prevail. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors considered in such
negotiations were prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalization and stages of
development of other companies which the Company and the Representatives of
the Underwriters believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Buchanan Ingersoll, Princeton, New Jersey.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 1997 and 1996 and for each of
the three years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
56
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the shares of Common
Stock offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules filed therewith. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement and to such exhibits
and schedules filed therewith. Statements contained herein as to the content
of any contract or other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, and each such statement
shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits and schedules thereto may be
inspected without charge at the principal office of the Commission at the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington D.C. 20549, and at the regional offices of the Commission
located at Seven World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such documents may be obtained from the Public Reference
Section of the Commission, at prescribed rates. Such material also may be
accessed electronically by means of the Commission's website on the Internet
at http://www.sec.gov.
57
<PAGE>
DSET CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance sheets as of December 31, 1996 and 1997 and pro forma December 31,
1997 (unaudited)......................................................... F-3
Statements of income for the years ended December 31, 1995, 1996 and
1997..................................................................... F-4
Statements of changes in cumulative redeemable convertible preferred stock
and shareholders' equity (deficit) for the years ended December 31, 1995,
1996 and 1997 and pro forma December 31, 1997 (unaudited)................ F-5
Statements of cash flows for the years ended December 31, 1995, 1996 and
1997..................................................................... F-6
Notes to financial statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
DSET Corporation
In our opinion, the accompanying balance sheets and the related statements
of income, of changes in cumulative redeemable convertible preferred stock and
shareholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of DSET Corporation at December 31,
1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Morristown, New Jersey
February 2, 1998
F-2
<PAGE>
DSET CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY
----------------------- DECEMBER 31,
1996 1997 1997
---------- ----------- -------------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 784,086 $ 2,081,846
Marketable securities......... 993,920 1,123,795
Accounts receivable, net of
allowance for doubtful
accounts of $12,000 and
$125,504 .................... 4,465,519 7,564,442
Deferred income taxes......... 24,216 158,681
Prepaid expenses and other
current assets............... 33,914 243,883
---------- -----------
Total current assets.......... 6,301,655 11,172,647
Capitalized software
development costs, less
accumulated amortization of
$646,718 and $746,322......... 99,604 --
Fixed assets, net.............. 1,017,406 1,560,948
Goodwill, net.................. -- 167,873
Other assets................... 26,037 413,760
---------- -----------
Total assets.................. $7,444,702 $13,315,228
========== ===========
LIABILITIES, CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses..................... $1,054,089 $ 2,779,954
Income taxes payable.......... 35,153 --
Deferred revenues............. 928,625 1,897,039
Note payable.................. -- 220,000
---------- -----------
Total current liabilities..... 2,017,867 4,896,993
Deferred income taxes.......... 92,731 103,714
Note payable................... -- 111,657
---------- -----------
Total liabilities............. 2,110,598 5,112,364
---------- -----------
Commitments (Notes 4 and 10)...
Series A cumulative redeemable
convertible preferred stock,
no par value; 750,000 shares
authorized, 676,361 shares
issued and outstanding at
December 31, 1996 and 1997;
cumulative accrued and
undeclared dividends of
$821,304 and $1,680,859 at
December 31, 1996 and 1997,
respectively; no shares issued
or outstanding on a pro forma
basis......................... 10,744,441 11,603,996 --
---------- ----------- ----------
Shareholders' equity (deficit):
Preferred stock, no par value;
no shares authorized, issued
or outstanding at December 31,
1996 and 1997; 5,000,000
shares authorized, no shares
issued and outstanding on a
pro forma basis............... -- -- --
Common stock, no par value;
authorized 40,000,000 shares,
issued 6,390,360, 6,775,092
and 9,818,717 shares at
December 31, 1996 and 1997 and
pro forma at December 31,
1997, respectively............ 1,261,817 1,661,971 13,265,967
Retained earnings.............. 3,327,843 4,936,894 4,936,894
Treasury stock, 3,043,625
shares of common stock at
cost.......................... (9,999,997) (9,999,997) (9,999,997)
---------- ----------- ----------
Total shareholders' equity
(deficit).................... (5,410,337) (3,401,132) $8,202,864
---------- ----------- ==========
Total liabilities, cumulative
redeemable convertible
preferred stock and
shareholders' equity
(deficit).................... $7,444,702 $13,315,228
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DSET CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
License revenues........................... $5,734,122 $7,005,313 $10,850,275
Service revenues........................... 2,179,052 6,111,227 8,514,512
---------- ---------- -----------
Total revenues.......................... 7,913,174 13,116,540 19,364,787
---------- ---------- -----------
Cost of revenues:
License revenues........................... 74,180 133,209 1,274,355
Service revenues........................... 435,962 2,149,036 3,404,484
---------- ---------- -----------
Total cost of revenues.................. 510,142 2,282,245 4,678,839
---------- ---------- -----------
Gross profit.............................. 7,403,032 10,834,295 14,685,948
---------- ---------- -----------
Operating expenses:
Sales and marketing........................ 2,588,231 4,255,455 4,986,286
Research and product development........... 865,135 1,327,682 3,299,337
General and administrative................. 1,297,116 2,380,679 2,880,804
---------- ---------- -----------
Total operating expenses................ 4,750,482 7,963,816 11,166,427
---------- ---------- -----------
Operating income.......................... 2,652,550 2,870,479 3,519,521
Amortization of goodwill.................... -- -- (22,172)
Interest and other expense.................. -- -- (12,194)
Interest and other income................... 50,441 99,004 160,847
---------- ---------- -----------
Income before income taxes.................. 2,702,991 2,969,483 3,646,002
Provision for income taxes.................. 997,631 956,889 1,177,396
---------- ---------- -----------
Net income.................................. 1,705,360 2,012,594 2,468,606
Less: accrued preferred stock dividends..... 19,726 801,578 859,555
---------- ---------- -----------
Net income applicable to common shares...... $1,685,634 $1,211,016 $ 1,609,051
========== ========== ===========
Pro Forma (Note 2):
Net income per common share................ $ 0.37
===========
Weighted average number of common shares
outstanding............................... 6,610,389
===========
Net income per common share assuming
dilution.................................. $ 0.30
===========
Weighted average number of common shares
and common equivalent shares outstanding.. 8,109,398
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DSET CORPORATION
STATEMENTS OF CHANGES IN CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------- ---------------------
NUMBER OF NUMBER RETAINED TREASURY
SHARES AMOUNT OF SHARES AMOUNT EARNINGS STOCK TOTAL
--------- ----------- --------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... -- $ -- 5,760,000 $ 723,471 $ 917,604 $ -- $ 1,641,075
Common Stock--10% stock
dividend.............. -- -- 576,013 486,411 (486,411) -- --
Issuance of Series A
cumulative redeemable
convertible preferred
stock, net of issuance
costs................. 676,361 9,923,137 -- -- -- -- --
Purchase of common
stock................. -- -- -- -- -- (9,999,997) (9,999,997)
Exercise of stock
options............... -- -- 3,533 4,734 -- -- 4,734
Accrued dividends on
redeemable convertible
preferred stock....... -- 19,726 -- -- (19,726) -- (19,726)
Net income............. -- -- -- -- 1,705,360 -- 1,705,360
-------- ----------- --------- ----------- ---------- ----------- -----------
Balance at December 31,
1995................... 676,361 9,942,863 6,339,546 1,214,616 2,116,827 (9,999,997) (6,668,554)
Exercise of stock
options............... -- -- 50,814 47,201 -- -- 47,201
Accrued dividends on
redeemable convertible
preferred stock....... -- 801,578 -- -- (801,578) -- (801,578)
Net income............. -- -- -- -- 2,012,594 -- 2,012,594
-------- ----------- --------- ----------- ---------- ----------- -----------
Balance at December 31,
1996................... 676,361 10,744,441 6,390,360 1,261,817 3,327,843 (9,999,997) (5,410,337)
Exercise of stock
options............... -- -- 384,732 275,813 -- -- 275,813
Tax benefit from
exercise of stock
options............... -- -- -- 124,341 -- -- 124,341
Accrued dividends on
redeemable convertible
preferred stock....... -- 859,555 -- -- (859,555) -- (859,555)
Net income............. -- -- -- -- 2,468,606 -- 2,468,606
-------- ----------- --------- ----------- ---------- ----------- -----------
Balance at December 31,
1997................... 676,361 11,603,996 6,775,092 1,661,971 4,936,894 (9,999,997) (3,401,132)
Pro forma conversion of
Series A cumulative
redeemable convertible
preferred stock
(unaudited)........... (676,361) (11,603,996) 3,043,625 11,603,996 -- -- 11,603,996
-------- ----------- --------- ----------- ---------- ----------- -----------
Pro forma balance at
December 31, 1997
(unaudited)............ -- $ -- 9,818,717 $13,265,967 $4,936,894 $(9,999,997) $ 8,202,864
======== =========== ========= =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DSET CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 1,705,360 $ 2,012,594 $ 2,468,606
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred income taxes.................. (39,778) (47,300) (123,482)
Tax benefit from exercise of stock
options............................... -- -- 124,341
Depreciation........................... 114,402 257,815 399,035
Amortization........................... 149,170 149,170 121,776
Earnings from joint venture............ -- -- (26,131)
Changes in assets and liabilities:
Accounts receivable................... (1,021,278) (1,916,125) (3,014,841)
Other assets.......................... (28,003) (16,379) (94,759)
Accounts payable and accrued
expenses............................. 87,471 604,778 1,631,892
Income taxes payable.................. 505,042 (682,609) (108,468)
Deferred revenues..................... 506,632 166,914 887,386
----------- ----------- -----------
Net cash provided by operating
activities.......................... 1,979,018 528,858 2,265,355
----------- ----------- -----------
Cash flows from investing activities:
(Loans to) repayment by officers and
shareholders.......................... 78,000 -- (150,000)
Purchases of marketable securities..... (1,004,614) (1,829,932) (1,080,768)
Redemption of marketable securities.... 200,000 1,640,626 1,150,000
Acquisition of fixed assets............ (387,536) (707,750) (807,640)
Loan repayments........................ -- -- (110,000)
Investment in joint venture............ -- -- (245,000)
----------- ----------- -----------
Net cash used in investing
activities.......................... (1,114,150) (897,056) (1,243,408)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from the issuance of
Series A preferred stock.............. 9,923,137 -- --
Purchases of treasury stock............ (4,905,989) (5,094,008) --
Proceeds from the exercise of stock
options............................... 4,734 47,201 275,813
----------- ----------- -----------
Net cash provided by (used in)
financing activities................ 5,021,882 (5,046,807) 275,813
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 5,886,750 (5,415,005) 1,297,760
Cash and cash equivalents, beginning of
period................................. 312,341 6,199,091 784,086
----------- ----------- -----------
Cash and cash equivalents, end of
period................................. $ 6,199,091 $ 784,086 $ 2,081,846
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes................................. $ 442,343 $ 1,678,798 $ 1,157,868
Cash paid during the period for
interest.............................. -- -- 12,194
Non-cash financing activities:
Issuance of common stock dividend...... $ 486,411 $ -- $ --
Accrued dividends on Series A preferred
stock................................. 19,726 801,578 859,555
Note issued for purchase of net assets
of Marben Products Inc. .............. -- -- 441,657
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
DSET Corporation (the "Company"), which was founded in 1989, designs,
develops, markets and supports an integrated suite of object-oriented
application development tools and provides custom application development
services. The Company also offers carrier-to-carrier applications. In
addition, the Company provides its customers with consulting, training and
technical services. Headquartered in Bridgewater, New Jersey, the Company
serves customers worldwide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Marketable Securities
The marketable securities portfolio held by the Company consists primarily
of money market funds which are considered to be available-for-sale securities
and are reported at fair value. Unrealized holding gains and losses were not
significant at December 31, 1996 and 1997.
Capitalized Software Development Costs
Capitalization of costs begins on establishment of technological
feasibility. Costs incurred prior to establishment of technological
feasibility are charged to research and product development expense. The
ongoing assessment of recoverability of capitalized costs requires
considerable judgment by management with respect to certain factors including
the anticipated future gross revenue, estimated economic life and changes in
technology. These factors are considered on a product-by-product basis.
Amortization of capitalized software costs is calculated using a straight-
line method over the estimated useful life of the respective product (five
years). Amortization expense related to capitalized software costs was
approximately $149,000 for each of the years 1995 and 1996 and approximately
$100,000 for 1997.
Fixed Assets
Equipment, furniture and purchased software are stated at cost less
accumulated depreciation. Depreciation is calculated using a straight-line
method over estimated useful lives ranging from three to seven years.
Goodwill
The Company amortizes goodwill using a straight-line method over its
estimated useful life of five years. The Company periodically assesses the
realizability of the asset based on estimated future cash flows.
Revenue Recognition
License revenues are recorded when the software has been delivered to the
Company's licensees and all significant obligations have been satisfied.
Revenues from run-time licenses are recognized as equipment using the
Company's software is deployed by the Company's customers. Service revenues
are recognized over the period in which the service is performed based on the
percentage of direct labor
F-7
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
costs incurred to the total costs estimated. Revenues from maintenance
contracts are deferred and recognized over the term of the respective
contracts (typically twelve months).
Income Taxes
The Company utilizes an asset and liability approach to financial reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to the period in
which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce the deferred tax assets
to the amount expected to be realized.
Fair Value of Financial Instruments
The carrying amounts in the financial statements for cash and cash
equivalents, marketable securities, accounts receivable, and accounts payable
and accrued expenses approximate their market value because of the short
maturity of those instruments.
Use of Estimates in the Preparation of Financial Statements
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Pro Forma Presentation
Under the terms of the Company's agreement with the holders of the
cumulative redeemable convertible preferred stock (see Note 4), all of such
preferred stock will be converted automatically into shares of common stock
upon the closing of a Qualified Public Offering, as defined in the Company's
Preferred Stock Purchase Agreement with Summit Ventures IV, L.P. and Summit
Investors II, L.P. (the "Agreement"). The unaudited pro forma shareholders'
equity as of December 31, 1997 reflects the conversion of such preferred stock
into 3,043,625 shares of common stock as if the conversion occurred on
December 31, 1997.
Pro Forma Basic and Diluted Net Income per Common and Common Equivalent
Shares (Unaudited)
Unaudited pro forma basic net income per common share for the year ended
December 31, 1997 is based on the weighted average number of common shares
outstanding during the period. Unaudited pro forma net income per common share
assuming dilution for the year ended December 31, 1997 is based on the
weighted average number of common and common equivalent shares outstanding
during the period, computed in accordance with the treasury stock method. The
unaudited pro forma weighted average number of common shares assumes that the
cumulative redeemable convertible preferred stock had been converted to common
stock as of the original issuance date and includes shares issuable upon
exercise of stock options and warrants. Historical net income per share data
have not been presented, as such information is not considered to be relevant
or meaningful given the change in capital structure that will occur in
connection with the proposed public offering.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 applies to
entities with publicly held common stock or potential
F-8
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
common stock and is effective for financial statements issued for periods
ending after December 15, 1997. Accordingly, the Company implemented SFAS No.
128 for the year ended December 31, 1997 (see Note 12).
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The adoption of this standard had no material effect on the Company's
financial statements. In October 1995, SFAS No. 123, "Accounting for Stock-
Based Compensation," was issued. The Company has adopted this standard
effective January 1, 1996 by means of disclosure of the pro forma effect of the
compensation components of stock-based compensation (see Note 6).
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 applies to
all companies and is effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Management believes that the adoption of SFAS No. 130
will not have a material impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 applies to all public companies and is effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that
business segment financial information be reported in the financial statements
utilizing the management approach. The management approach is defined as the
manner in which management organizes the segments within the enterprise for
making operating decisions and assessing performance. Management believes the
adoption of SFAS No. 131 will not have a material impact on the financial
statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition," which is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Statement of Position governs the recognition of revenue
by enterprises that license, sell, lease or otherwise market software, except
where software is incidental to the products or services being offered as a
whole. Application of this Statement of Position is not expected to have a
material impact on the financial statements.
F-9
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Computer equipment................................... $ 953,436 $1,574,171
Purchased software................................... 312,013 540,315
Furniture, fixtures and office equipment............. 156,480 304,678
Transportation equipment............................. 45,788 41,242
Leasehold improvements............................... 11,863 32,692
---------- ----------
1,479,580 2,493,098
Less: accumulated depreciation....................... (462,174) (932,150)
---------- ----------
$1,017,406 $1,560,948
========== ==========
</TABLE>
4. CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK
During December 1995, the Company issued 676,361 shares of cumulative,
convertible Series A Preferred Stock in exchange for $10,000,000. As an
integral part of the Agreement, the Company was required to use the proceeds
received upon the sale of the preferred stock to repurchase, on or before
January 31, 1996, an aggregate of 3,043,625 shares of common stock. As of
December 31, 1995, 1,493,190 shares were repurchased at an aggregate purchase
price of $4,905,989 with the balance of 1,550,435 shares repurchased by the
Company during January 1996 for $5,094,008. Of the total shares repurchased by
the Company, an aggregate of 1,031,472 shares were repurchased from the
individual then serving as the Company's President and members of his family.
In addition, the Company is required at all times to keep available out of its
authorized but unissued shares of common stock a sufficient number of shares
to effect the conversion of all of the then outstanding shares of the Series A
Preferred Stock.
Voting Rights
Shareholders of Series A Preferred Stock are entitled to votes equal to the
number of common shares into which the shares of preferred stock are
convertible.
Dividends
The Series A Preferred shareholders are entitled to receive cumulative
annual dividends equal to the "Applicable Percentage Rate" of 8%, as defined
in the Agreement, of the original purchase price paid per share. Such
dividends accrue and are cumulative whether or not they are earned or declared
by the Company. If cumulative dividends have not been declared or paid, the
deficiency will first be fully paid before any dividend can be declared or
paid on any other class of the Company's common stock. In the event of
conversion of the preferred stock to common stock, however, all accumulated
and unpaid dividends on the preferred stock shall be deemed forgiven.
Conversion
The holders of the Series A Preferred Stock have the option to convert, at
any time, their shares into fully-paid and nonassessable shares of common
stock at the "Applicable Conversion Rate," which is four and one-half shares
of common stock for each share of Series A Preferred Stock converted. The
Series A Preferred Stock will be automatically converted into common stock
upon the closing of an initial public offering in which net proceeds to the
Company equals or exceeds $15,000,000 and the price paid by the public for
such shares shall be at least three times the then conversion value per share
(currently $3.29 per share) as defined by the Agreement.
F-10
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Redemption
The holders of the Series A Preferred Stock have the option to sell their
shares to the Company in the event that an "Exercise Event," as described in
the Agreement, occurs prior to the Company consummating a Qualified Public
Offering, also described in the Agreement. In the event that the shareholders
exercise this option, the price paid by the Company for the Shares to be sold
under the Option shall be the fair market value as of the date of such
proposed repurchase as agreed upon in good faith by the Company and the Series
A Preferred Shareholders' Representative. In no event, however, shall the
aggregate purchase price paid for such shares being redeemed be less than the
original purchase price paid plus unpaid accrued dividends. In addition, the
holders of at least 51% of the then outstanding shares of Series A Preferred
Stock have the option (the "Optional Redemption by Holders") to elect the
Company to redeem, from all holders of Series A Preferred Stock, one-fourth of
their Series A Preferred Stock outstanding on December 31, 1999 on January 1,
of 2000, 2001, 2002 and 2003 (the "Final Redemption Date").
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the affairs of
the Company, the Series A Preferred Shareholders are entitled to receive prior
to and in preference to the common shareholders an amount equal to the greater
of (i) $14.785 per share plus all accrued and unpaid dividends thereon,
whether or not declared or (ii) such amount per share as would have been
payable had each share of Series A Preferred Stock been converted into common
stock immediately prior to such liquidation, dissolution or winding up. Any
remaining assets of the Company shall be distributed ratably to all other
shareholders.
Warrants
In the event of the issuance of stock options to two specified executives
(one of which is no longer with the Company), the Series A Preferred
Shareholders are entitled to receive warrants to purchase a proportionate
number of shares with an identical exercise price per share. In September
1996, warrants to purchase 185,331 shares with an exercise price of $2.18 per
share were issued for no consideration. Such warrants are or will be
exercisable to the extent of 25% on each of September 13, 1997, 1998, 1999 and
2000.
5. COMMON STOCK
Effective May 24, 1996, the Company declared a three-for-one stock split.
All shares of common stock and common stock options included in these
financial statements have been restated to give retroactive effect to the
stock split for all periods presented.
On December 29, 1997, the Company amended its Certificate of Incorporation
to increase the number of authorized shares of Common Stock to 40,000,000
shares. On December 31, 1997, the Company effected a three-for-two stock split
of the Company's common stock. All references to common share amounts, shares,
per share data, and preferred stock conversion rights included in the
financial statements and notes have been adjusted to give retroactive effect
to the stock split for all periods presented. On December 31, 1997, the
Company's Board of Directors authorized the officers of the Company to amend
and restate the Company's Certificate of Incorporation to reflect, among other
things, the authorization of 5,000,000 shares of a new class of undesignated
preferred stock. Such amendment and restatement to the Certificate of
Incorporation shall be effective upon the effectiveness of the Company's
registration statement filed in connection with the Company's proposed initial
public offering of its common stock.
F-11
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK OPTIONS
The Company maintains a stock option plan (the "1993 Plan") covering
officers, employees, directors and consultants, pursuant to which options may
be granted to purchase shares of the Company's common stock. At December 31,
1997, options to purchase 1,173,384 shares of common stock were exercisable at
a weighted average exercise price per share of $1.96. Options granted under
this 1993 Plan may be either incentive stock options or nonqualified stock
options, as designated at the time of grant and vest over a period not to
exceed four years.
The 1993 Plan provides that the option price shall not be less than the fair
market value of the shares at date of grant (as determined by the 1993 Plan's
administrators), except for a more than 10% voting shareholder, in which case
it will not be less than 110% of the fair market value at date of grant.
Incentive stock options are exercisable for ten years from the date of grant
("10 Year Options"), except for a more than 10% voting shareholder, in which
case the option is exercisable for five years ("5 Year Options"). Nonqualified
stock options are exercisable for five years from the date of grant.
1998 Stock Plan
The 1998 Stock Plan was adopted by the Board of Directors on December 31,
1997. The 1998 Stock Plan shall be effective on the date of the consummation
of this offering and terminates ten years from such date. Upon effectiveness
of the 1998 Stock Plan, a total of 1,800,000 shares shall be reserved for
issuance upon the exercise of option and/or stock purchase rights granted
thereunder. Those eligible to receive stock option grants or stock purchase
rights under the 1998 Stock Plan shall include employees, non-employee
directors and consultants. The 1998 Stock Plan shall be administered by the
Option Committee of the Board of Directors of the Company, which is comprised
solely of outside directors.
A summary of option transactions during 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE
------------------------------- EXERCISE
10 YEAR 5 YEAR PRICE PER
OPTIONS OPTIONS TOTAL SHARE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995.. 276,750 630,000 906,750 $0.54
Granted......................... 67,500 487,557 555,057 $0.89
Exercised....................... -- (3,533) (3,533) $0.85
--------- --------- ---------
Outstanding December 31,
1995......................... 344,250 1,114,024 1,458,274 $0.67
Granted......................... 633,000 202,886 835,886 $2.19
Forfeited....................... -- (4,482) (4,482) $0.85
Exercised....................... -- (50,814) (50,814) $0.93
--------- --------- ---------
Outstanding December 31,
1996......................... 977,250 1,261,614 2,238,864 $1.23
Granted......................... 827,400 392,359 1,219,759 $3.67
Forfeited ...................... (141,000) (84,398) (225,398) $2.67
Exercised....................... (157,500) (227,232) (384,732) $0.72
--------- --------- ---------
Outstanding December 31, 1997
............................. 1,506,150 1,342,343 2,848,493 $2.23
========= ========= =========
</TABLE>
F-12
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes financial
accounting and reporting standards for stock-based employee compensation
plans. The statement defines a fair value based method of accounting for
employee stock options and similar equity instruments and encourages the use
of that method of accounting for all employee stock compensation plans.
However, SFAS No. 123 also permits the measurement of compensation costs using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to account for its employee stock
compensation plans under the guidance prescribed by APB Opinion No. 25 and has
made the required pro forma disclosures of net income and net income per share
as if the fair value based method of accounting defined in SFAS No. 123 had
been applied as indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME:
As reported............................. $1,705,360 $2,012,594 $2,468,606
Pro forma effect of applying SFAS No.
123.................................... 1,626,428 1,891,219 1,810,148
NET INCOME PER COMMON SHARE:
As reported............................. $ 0.37
Pro forma effect of applying SFAS No.
123.................................... $ 0.27
NET INCOME PER COMMON SHARE ASSUMING
DILUTION:
As reported............................. $ 0.30
Pro forma effect of applying SFAS No.
123.................................... $ 0.22
</TABLE>
The fair value for these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended December 31, 1995, 1996 and 1997: expected
volatility of 0%; risk-free interest rates of 5.3% to 7.28%; expected life of
5 to 10 years and dividend yields of 0.0%. The Black-Scholes option-pricing
model requires the input of highly subjective assumptions including the
expected stock price volatility. Changes in the subjective input assumptions
can materially affect the fair value estimate. In management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
F-13
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The provision (benefit) for federal, state and local and foreign taxes
consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT:
Federal................................ $ 810,747 $ 714,202 $1,079,038
State and local........................ 138,659 90,189 149,584
Foreign................................ 88,003 199,798 72,256
---------- ---------- ----------
1,037,409 1,004,189 1,300,878
---------- ---------- ----------
DEFERRED:
Federal................................ (35,312) (40,476) (111,830)
State and local........................ (4,466) (6,824) (11,652)
---------- ---------- ----------
(39,778) (47,300) (123,482)
---------- ---------- ----------
Provision for income taxes............... $ 997,631 $ 956,889 $1,177,396
========== ========== ==========
</TABLE>
The tax provision reconciles to the amount computed by multiplying income
before income taxes by the United States federal statutory rate of 34% as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Provision of statutory rate................................ 34.0% 34.0% 34.0%
State taxes net of federal benefit......................... 3.3 1.9 2.5
Research and development tax credits....................... (0.5) (3.8) (4.2)
Other...................................................... 0.1 0.1 --
---- ---- ----
36.9% 32.2% 32.3%
==== ==== ====
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- ---------
<S> <C> <C>
CURRENT:
Accrued vacation..................................... $ 24,216 $ 82,971
Bad debt reserve..................................... -- 47,390
Accrued bonus........................................ -- 28,320
-------- ---------
Total.............................................. $ 24,216 $ 158,681
======== =========
NON-CURRENT:
Capitalized software costs........................... $(37,222) $ --
Fixed assets......................................... (55,509) (103,714)
-------- ---------
Total.............................................. $(92,731) $(103,714)
======== =========
</TABLE>
F-14
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. REVENUE AND RECEIVABLE CONCENTRATION
The Company had two, one and one significant customers which accounted for
approximately 32%, 18% and 12%, respectively, of total revenues for 1995, 1996
and 1997. No other customer accounted for more than 10% of total revenues in
any of the three years ended December 31, 1997. Revenues from customers in the
following geographic regions as a percentage of total revenues are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
North America................................................ 61% 62% 73%
Asia/Pacific Rim............................................. 36 35 22
Europe....................................................... 3 3 5
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
At December 31, 1996 and 1997, three and one customer(s), respectively,
accounted for approximately 49% and 12%, respectively, of accounts receivable.
9. EMPLOYEE BENEFIT PLAN
During 1994, the Company instituted a savings plan pursuant to Section
401(k) of the Internal Revenue Code (the "Code") covering all employees
meeting eligibility requirements. Subject to certain limits set forth in the
Code, employees are permitted to make contributions to the plan on a pre-tax
salary reduction basis, and the Company may make voluntary contributions of up
to 60% of employee contributions. The Company made contributions approximating
$35,000, $64,000 and $164,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
10. COMMITMENTS
a) Leases
The Company has operating leases for its offices and certain equipment.
Generally, the leases carry renewal provisions and require the payment of
maintenance costs. Rental expense charged to operations for the years ended
December 31, 1995, 1996 and 1997 was approximately $169,000, $277,000 and
$402,000, respectively.
The future minimum rental payments under noncancellable operating leases
approximate the following:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.............................................................. $311,000
1999.............................................................. 148,000
--------
Total............................................................. $459,000
========
</TABLE>
b) Lines of Credit
In August 1997, the Company obtained an unsecured revolving credit facility
with a bank totaling $3 million. Borrowings under this line of credit bear
interest at the bank's prime rate less 0.25% on amounts outstanding of less
than $1 million and at the bank's prime rate for aggregate principal amounts
exceeding $1 million. No borrowings under this line were outstanding as of
December 31, 1997. This credit facility contains, among other provisions, a
covenant which restricts the Company's ability to pay cash dividends.
F-15
<PAGE>
DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. ACQUISITION OF MARBEN PRODUCTS, INC.
In March 1997, the Company acquired the net assets of Marben Products, Inc.,
("MPI") a software distribution company located in California. The purchase
price was $190,045. Included in the net assets acquired was a note payable of
$441,657 to MPI's parent company. The note bears interest at 5% per annum and
requires quarterly payment of interest and $55,000 of principal. The Company
has accounted for the acquisition using the purchase method, and the results
of operations of the acquired business are included in the Company's
operations since acquisition.
The following is a summary of the purchase price allocation:
<TABLE>
<S> <C>
Current assets and other tangible assets.......................... $ 426,615
Current liabilities assumed....................................... (175,003)
Note issued in acquisition........................................ (441,657)
Goodwill.......................................................... 190,045
</TABLE>
The following unaudited pro forma summary represents the results of
operations of the Company as if the acquisition of the net assets of MPI had
occurred at the beginning of the period presented and does not purport to be
indicative of what would have occurred had the acquisition been made as of
those dates or the results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Pro forma net revenues.............................. $16,773,775 $19,742,634
Pro forma net income................................ 1,671,252 2,151,482
Pro forma net income per share...................... $ 0.33
Pro forma net income per share assuming dilution.... $ 0.27
</TABLE>
The unaudited pro forma results include the historical operations of the
Company and MPI, adjusted to reflect the amortization of goodwill and interest
on the note payable assumed.
12. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" (EPS),
which specifies the computation, presentation and disclosure requirements for
earnings per share of entities with publicly held common stock or potential
common stock. The statement defines two earnings per share calculations, basic
and diluted. The objective of basic EPS is to measure the performance of an
entity over the reporting period by dividing income available to common stock
by the weighted average shares outstanding. The objective of diluted EPS is
consistent with that of basic EPS, that is to measure the performance of an
entity over the reporting period, while giving effect to all dilutive
potential common shares that were outstanding during the period. The
calculation of diluted EPS is similar to basic EPS except both the numerator
and denominator are increased for the conversion of potential common shares.
The following table is a reconciliation of the numerator and denominator under
each method:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31, 1997
------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
PRO FORMA (SEE NOTE 2):
BASIC EPS:
Net income applicable to common shares....... $2,468,606 6,610,389 $0.37
ASSUMING DILUTION:
Net income applicable to common shares
Stock options.............................. -- 1,415,216
Warrants................................... -- 83,793
---------- ---------
Net income applicable to common shares....... $2,468,606 8,109,398 $0.30
========== =========
</TABLE>
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 20
Business................................................................. 29
Management............................................................... 40
Certain Transactions..................................................... 47
Principal and Selling Shareholders....................................... 48
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 57
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
[DSET LOGO APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
BT ALEX. BROWN
BANCAMERICA ROBERTSON STEPHENS
SOUNDVIEW FINANCIAL GROUP, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized estimate of fees and expenses
payable by the registrant in connection with the offering described in this
registration statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee............................................ $ 16,623.25
NASD filing fee................................................. 6,135.00
Nasdaq/NNM listing fee.......................................... 40,758.00
Counsel fees and expenses....................................... 300,000.00
Accounting fees and expenses.................................... 250,000.00
Blue sky fees and expenses...................................... 15,000.00
Printing expenses............................................... 100,000.00
Transfer agent and registrar fees............................... 3,500.00
Miscellaneous................................................... 17,983.75
-----------
Total..................................................... $750,000.00
===========
</TABLE>
All of the above expenses will be paid by the registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees
and agents against expenses and liabilities in connection with any proceeding
involving such persons by reason of his serving or having served in such
capacities or for each such person's acts taken in his capacity as a director,
officer, employee or agent of the corporation if such actions were taken in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal proceeding, if he had no reasonable cause to believe his conduct was
unlawful, provided that any such proceeding is not by or in the right of the
corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability (i) for any breach of the director's or officer's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve a knowing violation of law, (iii) as to directors only,
under Section 14A:6-12(1) of the New Jersey Business Corporation Act, which
relates to unlawful declarations of dividends or other distributions of assets
to shareholders or the unlawful purchase of shares of the corporation, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit.
The registrant's Amended and Restated Certificate of Incorporation limits
the liability of its directors and officers as authorized by Section 14A:2-
7(3).
Article XI of the registrant's Amended and Restated By-laws specifies that
the registrant shall indemnify its directors, officers, employees and agents
to the extent such parties are a party to any action because he was a
director, officer, employee or agent of the Company. This provision of the By-
laws is deemed to be a contract between the registrant and each director and
officer who serves in such capacity at any time while such provision and the
relevant provisions of the New Jersey Business Corporation Act are in effect,
and any repeal or modification thereof shall not offset any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole or
in part upon any such state of facts. The affirmative vote of the holders of
at least 80% of the voting power of all outstanding shares of capital stock of
the Company is required to adopt, amend or repeal such provisions of the By-
laws.
II-1
<PAGE>
The registrant has executed indemnification agreements with each of its
officers and directors pursuant to which the registrant has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
The registrant intends to obtain liability insurance for the benefit of its
directors and officers which will provide coverage for losses of directors and
officers for liabilities arising out of claims against such persons acting as
directors or officers of the registrant (or any subsidiary thereof) due to any
breach of duty, neglect, error, misstatement, misleading statement, omission
or act done by such directors and officers, except as prohibited by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the registrant as to which indemnification is being
sought nor is the registrant aware of any threatened litigation that may
result in claims for indemnification by any director or officer.
Reference is made to Section 8 of the Underwriting Agreement, the proposed
form of which is filed as Exhibit One, in which the Underwriters agree to
indemnify the directors and officers of the registrant and certain other
persons, against civil liabilities, including certain liabilities under the
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the registrant issued and sold unregistered
securities in the following transactions:
1. In December 1995, the Company sold an aggregate of 676,361 shares of
Series A Stock at an aggregate purchase price of $10.0 million to Summit.
In connection therewith, the Company repurchased an aggregate of 3,043,624
shares of Common Stock from certain existing shareholders of the Company
for an aggregate of $10.0 million. See "Certain Transactions."
2. In September 1996, the Company, pursuant to certain convenants in the
Summit Agreement, issued to Summit, for no additional consideration,
warrants to purchase up to a maximum of 185,331 shares of Common Stock. See
"Description of Capital Stock--Warrants."
3. The registrant from time to time has granted stock options to
employees, directors and consultants. The following table sets forth
certain information (on a post stock split recapitalization basis)
regarding such grants:
<TABLE>
<S> <C> <C>
RANGE OF
NO. OF SHARES EXERCISE PRICES
------------- ---------------
1995........................................... 555,057 $ 0.85-0.93
1996........................................... 835,886 2.01-2.78
1997........................................... 1,219,759 2.78-8.00
</TABLE>
4. The registrant from time to time has issued stock to employees,
directors and consultants pursuant to the exercise of stock options. The
following table sets forth certain information (on a post stock split
recapitalization basis) regarding such issuances:
<TABLE>
<S> <C> <C>
RANGE OF
NO. OF SHARES EXERCISE PRICES
------------- ---------------
1995........................................... 3,533 $ 0.85
1996........................................... 50,814 0.93
1997........................................... 384,726 0.45-2.41
</TABLE>
No underwriter was employed by the registrant in connection with the
issuance and sale of the securities described above. The registrant claims
that the issuance and sale of all of the foregoing securities were exempt from
registration pursuant to either (i) Section 4(2) of the Act as transactions
not involving any public offering or (ii) Rule 701 under the Act as
transactions made pursuant to a written compensatory plan or pursuant to a
written contract relating to compensation. No public offering was involved and
the securities were acquired for investment and not with a view to
distribution. All recipients had adequate access to information about the
registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation, to be filed with
the Secretary of State of New Jersey upon the effectiveness of this
Offering.
3.2 Amended and Restated Bylaws.
4.1* 1993 Stock Option Plan of the Company, as amended to date.
4.2* 1998 Stock Plan of the Company.
4.3* Form of Warrant Agreement, dated as of September 13, 1996 between the
Company and Summit Ventures IV, L.P. and Summit Investors II, L.P.
4.4* Registration Rights Provisions granted to Summit Ventures IV, L.P. and
Summit Investors II, L.P.
5* Opinion of Buchanan Ingersoll as to validity of Common Stock.
10.1* Corporate Revolving and Term Loan Agreement between Manufacturers and
Traders Trust Company and the Company dated August 5, 1997.
10.2* Joint Venture Agreement dated as of May 21, 1997 between ATOS, S.A.
(formerly Sligos/Marben S.A.) and the Company.
10.3* Lease dated November 20, 1995 between Hocroft Associates and the
Company, as amended August 16, 1996 and April 7, 1997.
10.4 Form of Indemnification Agreement executed by each of the Company's
directors and executive officers.
10.5* Employment Agreement dated October 1, 1996 between the Company and S.
Daniel Shia.
10.6* Amendment No. 1 to Employment Agreement effective January 10, 1998
between the Company and S. Daniel Shia.
10.7 Letter agreements dated September 9, 1996 and April 28, 1997 between
the Company and Paul A. Lipari.
10.8* Letter agreement dated January 3, 1997 between the Company and William
P. McHale, Jr.
23.1* Consent of Price Waterhouse LLP.
23.2* Consent of Buchanan Ingersoll (contained in the opinion filed as
Exhibit 5 to the Registration Statement).
24 Powers of Attorney of certain officers and directors of the Company
(contained on the signature page of this Registration Statement).
27* Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information is not
required, or is otherwise included in the financial statements or the notes
thereto.
- --------------------
* Filed herewith. All other exhibits previously filed.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, 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.
(2) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Act each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(4) At the closing specified in the underwriting agreement, registrant
shall provide the Underwriters certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF
BRIDGEWATER, STATE OF NEW JERSEY, ON FEBRUARY 12, 1998.
DSET Corporation
/s/ William P. McHale, Jr.
By: _________________________________
WILLIAM P. MCHALE, JR.,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURE TITLE DATE
/s/ William P. McHale, Jr. President, Chief February 12,
- ------------------------------------ Executive Officer 1998
WILLIAM P. MCHALE, JR. and Director
(Principal
Executive Officer)
* Chairman of the February 12,
- ------------------------------------ Board, Chief 1998
S. DANIEL SHIA Technical Officer
and Director
/s/ Paul A. Lipari Chief Financial February 12,
- ------------------------------------ Officer, Treasurer 1998
PAUL A. LIPARI and Secretary
(Principal
Financial and
Accounting
Officer)
* Director February 12,
- ------------------------------------ 1998
HUI-YUN ROSANNA YUAN
* Director February 12,
- ------------------------------------ 1998
ELIZABETH K. ADAMS
* Director February 12,
- ------------------------------------ 1998
BRUCE R. EVANS
- --------------------
</TABLE>
* By his signature set forth below the undersigned, pursuant to duly authorized
powers of attorney filed with the Securities and Exchange Commission, has
signed this Amendment to the Registration Statement on behalf of the persons
indicated.
/s/ Paul A. Lipari
By: ___________________________
Paul A. Lipari (Attorney-in-fact)
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation, to be filed with
the Secretary of State of New Jersey upon the effectiveness of this
Offering.
3.2 Amended and Restated Bylaws.
4.1* 1993 Stock Option Plan of the Company, as amended to date.
4.2* 1998 Stock Plan of the Company.
4.3* Form of Warrant Agreement, dated as of September 13, 1996 between the
Company and Summit Ventures IV, L.P. and Summit Investors II, L.P.
4.4* Registration Rights Provisions granted to Summit Ventures IV, L.P. and
Summit Investors II, L.P.
5* Opinion of Buchanan Ingersoll as to validity of Common Stock.
10.1* Corporate Revolving and Term Loan Agreement between Manufacturers and
Traders Trust Company and the Company dated August 5, 1997.
10.2* Joint Venture Agreement dated as of May 21, 1997 between ATOS, S.A.
(formerly Sligos/Marben S.A.) and the Company.
10.3* Lease dated November 20, 1995 between Hocroft Associates and the
Company, as amended August 16, 1996 and April 7, 1997.
10.4 Form of Indemnification Agreement executed by each of the Company's
directors and executive officers.
10.5* Employment Agreement dated October 1, 1996 between the Company and S.
Daniel Shia.
10.6* Amendment No. 1 to Employment Agreement effective January 10, 1998
between the Company and S. Daniel Shia.
10.7 Letter agreements dated September 9, 1996 and April 28, 1997 between
the Company and Paul A. Lipari.
10.8* Letter agreement dated January 3, 1997 between the Company and William
P. McHale, Jr.
23.1* Consent of Price Waterhouse LLP.
23.2* Consent of Buchanan Ingersoll (contained in the opinion filed as
Exhibit 5 to the Registration Statement).
24 Powers of Attorney of certain officers and directors of the Company
(contained on the signature page of this Registration Statement).
27* Financial Data Schedule.
</TABLE>
- ---------------------
* Filed herewith. All other exhibits previously filed.
<PAGE>
Draft dated 2/4/98
EXHIBIT 1
3,500,000 Shares
DSET CORPORATION
Common Stock
(No Par Value)
UNDERWRITING AGREEMENT
----------------------
March __, 1998
BT Alex. Brown
BancAmerica Robertson Stephens
SoundView Financial Group, Inc.
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Gentlemen:
DSET Corporation, a New Jersey corporation (the "Company"), and certain
shareholders of the Company (the "Selling Shareholders") propose to sell to the
several underwriters (the "Underwriters") named in Schedule I hereto for whom
you are acting as representatives (the "Representatives") an aggregate of
3,500,000 shares of the Company's Common Stock, no par value (the "Firm
Shares"), of which 2,500,000 shares will be sold by the Company and 1,000,000
shares will be sold by certain of the Selling Shareholders. The respective
amounts of the Firm Shares to be so purchased by the several Underwriters are
set forth opposite their names in Schedule I hereto, and the respective amounts
to be sold by the Selling Shareholders are set forth opposite their names in
Schedule II hereto. The Selling Shareholders are sometimes referred to herein
collectively as the "Sellers." Certain Selling Shareholders also propose to
sell at the Underwriters' option an aggregate of up to 525,000 additional shares
of the Company's Common Stock (the "Option Shares") as set forth below.
<PAGE>
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part for the accounts of the several Underwriters. The Firm Shares and
the Option Shares (to the extent the aforementioned option is exercised) are
herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Shareholders.
------------
(a) The Company represents and warrants to each of the Underwriters as
follows:
(i) A registration statement on Form S-1 (File No. 333-43827)
with respect to the Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"),
and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission. The Company has complied with the conditions
for the use of Form S-1. Copies of such registration statement, including
any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you and to the
extent applicable, were identical to the electronically transmitted copies
thereof filed with the Commission pursuant to the Commission's Electronic
Data Gathering, Analysis and Retrieval System ("EDGAR"), except to the
extent permitted by Regulation S-T. Such registration statement, together
with any registration statement filed by the Company pursuant to Rule 462
(b) of the Act, herein referred to as the "Registration Statement," which
shall be deemed to include all information omitted therefrom in reliance
upon Rule 430A and contained in the Prospectus referred to below, has become
effective under the Act and no post-effective amendment to the Registration
Statement has been filed as of the date of this Agreement. "Prospectus"
means (a) the form of prospectus first filed with the Commission pursuant to
Rule 424(b). Each preliminary prospectus included in the Registration
Statement prior to the time it becomes effective is herein referred to as a
"Preliminary Prospectus." Any reference herein to the Registration
Statement, any Preliminary Prospectus or to the Prospectus shall be deemed
to refer to and include any supplements or amendments thereto, filed with
the Commission after the date of filing of the Prospectus under Rules 424(b)
or 430A, and prior to the termination of the offering of the Shares by the
Underwriters. For purposes of this Agreement, all references to the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement
2
<PAGE>
to any of the foregoing, shall be deemed to include the respective copies
thereof filed with the Commission pursuant to EDGAR.
(ii) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of New Jersey,
with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement. The Company
has no subsidiaries. The Company is duly qualified to transact business in
all jurisdictions in which the conduct of their business requires such
qualification.
(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the
issued shares of Common Stock of the Company held by the Company as treasury
stock, including all shares to be sold by the Company, have been duly
authorized and validly issued; the portion of the Shares to be sold by the
Company from its treasury stock, when paid for as contemplated herein, will
be validly issued, fully paid and non-assessable; the portion of the Shares
to be sold by the Selling Shareholders after exercise of options to purchase
such Common Stock have been duly authorized and when issued and paid for in
accordance with the terms of such options, will be validly issued, fully
paid and non-assessable; the portion of the Shares to be sold by the Selling
Shareholders after conversion of Preferred Stock into such Common Stock have
been duly authorized and when issued in accordance with the terms of such
Preferred Stock, will be validly issued, fully paid and non-assessable; and
no preemptive rights of stockholders exist with respect to any of the Shares
or the issue and sale thereof. Neither the filing of the Registration
Statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any shares of Common
Stock.
(iv) The information set forth under the caption "Capitalization"
in the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(v) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of
the Shares nor instituted proceedings for that purpose. The Registration
Statement contains, and the Prospectus and any amendments or supplements
thereto will contain, all statements which are required to be stated therein
by, and will conform to, the requirements of the Act and the Rules and
Regulations. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact and
do not omit, and will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
The Prospectus and any amendments and supplements thereto do not contain,
and will not contain, any untrue statement of material fact; and do
3
<PAGE>
not omit, and will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on
behalf of any Underwriter through the Representatives, specifically for use
in the preparation thereof.
(vi) The financial statements of the Company, together with
related notes as set forth in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the
Company, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data included in the
Registration Statement presents fairly the information shown therein and
such data has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company. The
pro forma financial statements and other pro forma financial information
included in the Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(vii) Price Waterhouse LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(viii) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company before any
court or administrative agency or otherwise which if determined adversely to
the Company might result in any material adverse change in the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company or to prevent the
consummation of the transactions contemplated hereby.
(ix) The Company has good and marketable title to all of the
properties and assets reflected in the financial statements (or as described
in the Registration Statement) hereinabove described, subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration Statement)
or which are not material in amount. The Company occupies its
4
<PAGE>
leased properties under valid and binding leases conforming in all material
respects to the description thereof set forth in the Registration Statement.
(x) The Company has filed all Federal, State, local and foreign
income tax returns which have been required to be filed and have paid all
taxes indicated by said returns and all assessments received by it to the
extent that such taxes have become due. All tax liabilities have been
adequately provided for in the financial statements of the Company, and the
Company does not know of any actual or proposed additional material tax
assessments.
(xi) Since the respective dates as of which information is given
in the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development that could
reasonably be expected to result in a material adverse change in or
affecting the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise), or prospects of the Company,
whether or not occurring in the ordinary course of business, and there has
not been any material transaction entered into or any material transaction
that is reasonably probable of being entered into by the Company, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or
supplemented. The Company has no material contingent obligations which are
not disclosed in the Company's financial statements which are included in
the Registration Statement.
(xii) The Company is not, nor with the giving of notice or lapse of
time or both, will be, in violation of or in default under its Amended and
Restated Certificate of Incorporation (the "Charter") or By-Laws or under
any agreement, lease, contract, indenture or other instrument or obligation
to which it is a party or by which it, or any of its properties, is bound
and which default is of material significance in respect of the condition,
financial or otherwise of the Company or the business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company. The execution and delivery of this Agreement
and the consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a breach
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which
the Company is a party, or of the Charter or By-laws of the Company or any
order, rule or regulation applicable to the Company of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by
the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for
5
<PAGE>
public offering by the Underwriters under state securities or Blue Sky laws)
has been obtained or made and is in full force and effect.
(xiv) The Company owns or possesses adequate licenses or other
rights to use all patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names,
copyrights, manufacturing processes, formulae, trade secrets and know-how or
other information or intellectual property rights (collectively,
"Intellectual Property") described in the Prospectus as owned by or used by
the Company or which is necessary to the conduct of its business as now
conducted by the Company as described in the Prospectus. The Company is not
aware of any infringement of or conflict with the rights or claims of others
with respect to any of the products or Intellectual Property of the Company
which could have a material adverse effect on the business or financial
condition of the Company. The Company is not aware of any ongoing
infringement of any of the Intellectual Property rights of the Company by
any third party which could have a material adverse effect on the business
or financial condition of the Company or the Subsidiaries.
(xv) Neither the Company, nor to the Company's knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares.
(xvi) The Company holds all material licenses, certificates and
permits from governmental authorities which are necessary to the conduct of
their businesses.
(xvii) The Company is not an "investment company" within the meaning
of such term under the Investment Company Act of 1940 (the "1940 Act") and
the rules and regulations of the Commission thereunder.
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xix) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of its
business and the value of its properties and as is customary for companies
engaged in similar industries.
6
<PAGE>
(xx) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA)
for which the Company would have any liability; the Company has not incurred
and does not expect to incur liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(xxi) To the Company's knowledge, there are no affiliations or
associations between any member of the NASD and any of the Company's
officers, directors or 5% or greater securityholders.
(b) Each of the Selling Shareholders severally and not jointly
represents and warrants as follows:
(i) Such Selling Shareholder now has and at the Closing Date and
the Option Closing Date, as the case may be (as such dates are hereinafter
defined) will have good and marketable title to the Firm Shares and the
Option Shares to be sold by such Selling Shareholder, free and clear of any
liens, encumbrances, equities and claims, and full right, power and
authority to effect the sale and delivery of such Firm Shares and Option
Shares; and upon the delivery of, against payment for, such Firm Shares and
Option Shares pursuant to this Agreement, the Underwriters will acquire good
and marketable title thereto, free and clear of any liens, encumbrances,
equities and claims.
(ii) Such Selling Shareholder has full right, power and authority
to execute and deliver this Agreement, the Power of Attorney and Custody
Agreement referred to below and to perform its obligations under such
Agreements. The execution and delivery of this Agreement and the
consummation by such Selling Shareholder of the transactions herein
contemplated and the fulfillment by such Selling Shareholder of the terms
hereof will not require any consent, approval, authorization, or other order
of any court, regulatory body, administrative agency or other governmental
body (except as may be required under the Act, state securities laws or Blue
Sky laws) and will not result in a breach of any of the terms and provisions
of, or constitute a default under, organizational documents of such Selling
Shareholder, if not an individual, or any indenture, mortgage, deed of trust
or other agreement or instrument to which such Selling Shareholder is a
party, or of any order, rule or regulation applicable to such Selling
Shareholder of any court or of any regulatory body or administrative agency
or other governmental body having jurisdiction.
7
<PAGE>
(iii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted, or
which might reasonably be expected to cause or result in the stabilization
or manipulation of the price of the Common Stock of the Company and, other
than as permitted by the Act, the Selling Shareholder will not distribute
any prospectus or other offering material in connection with the offering of
the Shares.
(iv) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties of the
Company contained herein or the information contained in the Registration
Statement, such Selling Shareholder has no reason to believe that the
representations and warranties of the Company contained in this Section 1
are not true and correct, is familiar with the Registration Statement and
has no knowledge of any material fact, condition or information not
disclosed in the Registration Statement which has adversely affected or may
adversely affect the business of the Company; and the sale of the Firm
Shares and the Option Shares by such Selling Shareholder pursuant hereto is
not prompted by any information concerning the Company which is not set
forth in the Registration Statement. The information pertaining to such
Selling Shareholder under the caption "Principal and Selling Shareholders"
in the Prospectus is complete and accurate in all material respects.
2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Sellers agree to
sell to the Underwriters and each Underwriter agrees, severally and not jointly,
to purchase, at a price of $_____ [NET PRICE] per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof. The number of Firm
Shares to be purchased by each Underwriter from each Seller shall be as nearly
as practicable in the same proportion to the total number of Firm Shares being
sold by each Seller as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares to be sold hereunder. The
obligations of the Company and of each of the Selling Shareholders shall be
several and not joint.
(b) Certificates in negotiable form for the total number of the Shares to
be sold hereunder by the Selling Shareholders have been placed in custody with
Buchanan Ingersoll as custodian (the "Custodian") pursuant to the Power of
Attorney and Custody Agreement executed by each Selling Shareholder for delivery
of all Firm Shares and any Option Shares to be sold hereunder by the Selling
Shareholders. Each of the Selling Shareholders specifically agrees that the Firm
Shares and any Option Shares represented by the certificates held in custody for
the Selling Shareholders under the Power of Attorney and Custody Agreement are
subject to the interests of the Underwriters hereunder, that the arrangements
made by the Selling Shareholders for such custody are to that extent
irrevocable, and that the obligations of the Selling Shareholders hereunder
8
<PAGE>
shall not be terminable by any act or deed of the Selling Shareholders (or by
any other person, firm or corporation including the Company, the Custodian or
the Underwriters) or by operation of law (including the death of an individual
Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by
the occurrence of any other event or events, except as set forth in the
Custodian Agreement. If any such event should occur prior to the delivery to the
Underwriters of the Firm Shares or the Option Shares hereunder, certificates for
the Firm Shares or the Options Shares, as the case may be, shall be delivered by
the Custodian in accordance with the terms and conditions of this Agreement as
if such event has not occurred. The Custodian is authorized to receive and
acknowledge receipt of the proceeds of sale of the Shares held by it against
delivery of such Shares or arrange for and confirm direct wire transfers by the
Underwriters to the accounts specified pursuant to instructions provided by or
on behalf of each such Selling Shareholder.
(c) Payment for the Firm Shares to be sold hereunder is to be made in
Federal (same day) Funds to an account designated by the Company for the shares
to be sold by it and to an account designated by the Custodian for the shares to
be sold by the Selling Shareholders, in each case against delivery of
certificates therefor through the facilities of the Depository Trust Company,
New York, New York. Such payment and delivery are to be made through the
facilities of the Depository Trust Company at 10:00 a.m., New York time, on the
third business day after the date of this Agreement or at such other time and
date not later than five business days thereafter as you and the Company shall
agree upon, such time and date being herein referred to as the "Closing Date."
(As used herein, "business day" means a day on which the New York Stock Exchange
is open for trading and on which banks in New York are open for business and not
permitted by law or executive order to be closed.)
(d) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, certain
Selling Shareholders listed on Schedule III hereto hereby grant an option to the
several Underwriters to purchase the Option Shares at the price per share as set
forth in the first paragraph of this Section 2. The maximum number of Option
Shares to be sold by the Selling Shareholders is set forth opposite their
respective names on Schedule III hereto. The option granted hereby may be
exercised in whole or in part by giving written notice (i) at any time before
the Closing Date and (ii) only once thereafter within 30 days after the date of
this Agreement, by you, as Representatives of the several Underwriters, to the
Attorney-in-Fact and the Custodian setting forth the number of Option Shares as
to which the several Underwriters are exercising the option, the names and
denominations in which the Option Shares are to be registered and the time and
date at which such certificates are to be delivered. If the option granted
hereby is exercised in part, the respective number of Option Shares to be sold
by each of the Selling Shareholders listed in Schedule III hereto shall be
determined on a pro rata basis in accordance with the percentages set forth
opposite their names on Schedule II hereto, adjusted by you in such manner as to
avoid fractional shares. The time and date at which certificates for Option
Shares are to be
9
<PAGE>
delivered shall be determined by the Representatives but shall not be earlier
than three nor later than 10 full business days after the exercise of such
option, nor in any event prior to the Closing Date (such time and date being
herein referred to as the "Option Closing Date"). If the date of exercise of the
option is three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The number of Option
Shares to be purchased by each Underwriter shall be in the same proportion to
the total number of Option Shares being purchased as the number of Firm Shares
being purchased by such Underwriter bears to the total number of Firm Shares,
adjusted by you in such manner as to avoid fractional shares. The option with
respect to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any time
prior to its expiration by giving written notice of such cancellation to the
Attorney-in-Fact. To the extent, if any, that the option is exercised, payment
for the Option Shares shall be made on the Option Closing Date in Federal (same
day) funds to an account or accounts designated by the Custodian for the Option
Shares to be sold by the Selling Shareholders against delivery of certificates
therefor through the facilities of the Depository Trust Company, New York, New
York.
(e) If on the Closing Date or Option Closing Date, as the case may be, any
Selling Shareholder fails to sell the Firm Shares or Option Shares which such
Selling Shareholder has agreed to sell on such date as set forth in Schedule II
-----------
or Schedule III hereto, the Company agrees that it will sell or arrange for the
------------
sale of that number of shares of Common Stock to the Underwriters which
represents Firm Shares or the Option Shares which such Selling Shareholder has
failed to so sell, as set forth in Schedule II or Schedule III hereto, or such
----------- -- ------------
lesser number as may be requested by the Representatives.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public offering
of the Firm Shares as soon as the Representatives deem it advisable to do so.
The Firm Shares are to be initially offered to the public at the initial public
offering price set forth in the Prospectus. The Representatives may from time to
time thereafter change the public offering price and other selling terms. To the
extent, if at all, that any Option Shares are purchased pursuant to Section 2
hereof, the Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
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4. Covenants of the Company and the Selling Shareholders.
-----------------------------------------------------
(a) The Company covenants and agrees with the several Underwriters that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A
of the Rules and Regulations is followed, to prepare and timely file with
the Commission under Rule 424(b) of the Rules and Regulations a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A of the Rules and Regulations and (B) not file any
amendment to the Registration Statement or supplement to the Prospectus of
which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations. To the extent applicable, the copies of the Registration
Statement and each amendment thereto (including all exhibits filed
therewith), any Preliminary Prospectus or Prospectus (in each case, as
amended or supplemented) furnished to the Underwriters will be identical to
the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) The Company will advise the Representatives promptly (A) when
the Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop
order preventing or suspending the use of the Prospectus and to obtain as
soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it is
not now so qualified or required to file such a consent. The Company will,
from time to time, prepare and file such statements, reports, and other
documents, as are or may be required to continue such qualifications in
effect for so long a period as the Representatives may reasonably request
for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may
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<PAGE>
reasonably request. The Company will deliver to, or upon the order of, the
Representatives during the period when delivery of a Prospectus is required
under the Act, as many copies of the Prospectus in final form, or as
thereafter amended or supplemented, as the Representatives may reasonably
request. The Company will deliver to the Representatives at or before the
Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver
to the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the
Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder,
so as to permit the completion of the distribution of the Shares as
contemplated in this Agreement and the Prospectus. If during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, any event shall occur as a result of which, in the judgment of the
Company or in the reasonable opinion of the Underwriters, it becomes
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time
the Prospectus is delivered to a purchaser, not misleading, or, if it is
necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in
the light of the circumstances when it is so delivered, be misleading, or so
that the Prospectus will comply with the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail, covering
a period of at least 12 consecutive months beginning after the effective
date of the Registration Statement, which earning statement shall satisfy
the requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(vii) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared by or are available to the
Company, a copy of any unaudited interim financial statements of the Company
for any period subsequent to the period covered by the most recent financial
statements appearing in the Registration Statement and the Prospectus.
(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such)
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<PAGE>
will be made for a period of 180 days after the date of this Agreement,
directly or indirectly, by the Company otherwise than hereunder or with the
prior written consent of BT Alex. Brown, except that the Company may,
without such consent, (A) issue shares upon exercise of (1) options
outstanding on the date of this Agreement issued pursuant to the Company's
1993 Stock Option and 1998 Stock Plan and (2) warrants outstanding on the
date of this Agreement, and (B) grant options, offer to sell and sell shares
of its Common Stock to its employees, directors and consultants pursuant to
the 1998 Stock Plan.
(ix) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on The NASDAQ National Stock Market.
(x) The Company has caused each officer and director and
shareholders holding [A MINIMUM OF ___%/IN THE AGGREGATE ___%] OF THE COMMON
STOCK (INCLUDING ANY CAPITAL STOCK CONVERTIBLE INTO COMMON STOCK) of the
Company to furnish to you, on or prior to the date of this agreement, a
letter or letters (a "Lockup Agreement"), in form and substance satisfactory
to the Underwriters, pursuant to which each such person has agreed for a
period expiring 180 days after the date of the Prospectus not to (A) offer
to sell, contract to sell, transfer or otherwise dispose of, directly or
indirectly, any shares of capital stock of the Company, including shares of
common stock of any series or class, any options, rights or warrants to
purchase any shares of capital stock of the Company (including any stock
appreciation right, or similar right with an exercise or conversion
privilege at a price related to, or derived from, the market price of the
capital stock of the Company) or any securities convertible into or
exchangeable for shares of capital stock of the Company owned directly by
the undersigned or with respect to which the undersigned has the power of
disposition (including, without limitation, shares of capital stock of the
Company which the undersigned may be deemed to beneficially own in
accordance with the rules and regulations promulgated under the Exchange
Act; provided, however, that each such person may transfer shares of Common
Stock or options to purchase shares of Common Stock pursuant to a bona fide
gift to such person's immediate family members, trusts for the benefit of
such immediate family members and partnerships in which such immediate
family members are the only partners if such transferee executes and
delivers to BT Alex. Brown Incorporated a Lockup Agreement in the same form
and content, and with the same expiration date, as the Lockup Agreement
signed by such person, or (B) engage in any hedging transactions (including
short sales, put and call options, cashless collar transactions or other
forms of derivative security transactions) with respect to the Common Stock
that may have an impact on the market price of the Common Stock.
(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall include such information
with respect thereto in such reports filed with the Commission as may be
required in accordance with Rule 463 under the Act.
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<PAGE>
(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company to register as an investment company under the
1940 Act.
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price of
any securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees with the several
Underwriters that:
(i) such Selling Shareholder shall not for the period beginning
on the date hereof and expiring 180 days after the date of the Prospectus
offer to sell, contract to sell, transfer or otherwise dispose of, directly
or indirectly, any shares of capital stock of the Company, including shares
of common stock of any series or class, any options, rights or warrants to
purchase any shares of capital stock of the Company (including any stock
appreciation right, or similar right with an exercise or conversion
privilege at a price related to, or derived from, the market price of the
capital stock of the Company) or any securities convertible into or
exchangeable for shares of capital stock of the Company owned directly by
such person or with respect to which such person has the power of
disposition (including, without limitation, shares of capital stock of the
Company which such person may be deemed to beneficially own in accordance
with the rules and regulations promulgated under the Exchange Act; provided,
however, that each such person may transfer shares of Common Stock or
options to purchase shares of Common Stock pursuant to a bona fide gift to
such person's immediate family members, trusts for the benefit of such
immediate family members and partnerships in which such immediate family
members are the only partners if such transferee executes and delivers to BT
Alex. Brown Incorporated a Lockup Agreement in the same form and content,
and with the same expiration date, as the Lockup Agreements referred to in
Section 4(a)(x) hereof; or
(ii) such Selling Shareholder shall not for the period beginning
on the date hereof and expiring 180 days after the date of the Prospectus
engage in any hedging transactions (including short sales, put and call
options, cashless collar transactions or other forms of derivative security
transactions) with respect to the Common Stock that may have an impact on
the market price of the Common Stock.
(iii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the
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Interest and Dividend Tax Compliance Act of 1983 with respect to the
transactions herein contemplated, each of the Selling Shareholders agrees to
deliver to you prior to or at the Closing Date a properly completed and
executed United States Treasury Department Form W-9 and Form-8(or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(iv) Such Selling Shareholder shall not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the stabilization
or manipulation of the price of any securities of the Company.
5. Costs and Expenses.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company and the
Selling Shareholders; the cost of printing and delivering to, or as requested
by, the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' Invitation
Letter, the Listing Application, the Blue Sky Survey and any supplements or
amendments thereto; the filing fees of the Commission; the filing fees and
expenses (including legal fees and disbursements) incident to securing any
required review by the NASD) of the terms of the sale of the Shares; the Listing
Fee of The NASDAQ Stock Market; and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. To the
extent, if at all, that any of the Selling Shareholders engage special legal
counsel to represent them in connection with this offering, the fees and
expenses of such counsel shall be borne by such Selling Shareholder. Any
transfer taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Company. The Company agrees to pay all costs and expenses of
the Underwriters (including the fees and disbursements of counsel for the
Underwriters) incident to the offer and sale of directed shares of the Common
Stock by the Underwriters to employees and persons having business relationships
with the Company. The Company shall not, however, be required to pay for any of
the Underwriters' expenses (other than those related to qualification under NASD
regulation and State securities or Blue Sky laws) except that, if this Agreement
shall not be consummated because the conditions in Section 6 hereof are not
satisfied, or because this Agreement is terminated by the Representatives
pursuant to Section 11 hereof, or by reason of any failure, refusal or inability
on the part of the Company or the Selling Shareholders to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on their part to be performed, unless such failure to satisfy
said condition or to comply with said terms be due to the default or omission of
any Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company and the Selling Shareholders shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
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<PAGE>
6. Conditions to Obligations of the Underwriters.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company and the
Selling Shareholders contained herein, and to the performance by the Company and
the Selling Shareholders of their covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company or the Selling Shareholders, shall be
contemplated by the Commission and no injunction, restraining order, or order of
any nature by a Federal or State court of competent jurisdiction shall have been
issued as of the Closing Date or Option Closing Date, as the case may be, which
would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Buchanan Ingersoll,
counsel for the Company and the Selling Shareholders, dated the Closing Date or
the Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the effect
that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of New Jersey,
with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; the Company
has no subsidiaries; and the Company is duly qualified to transact business
in all jurisdictions in which, to such counsel's knowledge, the conduct of
its business requires such qualification, or in which the failure to qualify
would have a materially adverse effect upon the business of the Company.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus except for
issuances or forfeitures subsequent to the date of the information provided
in such caption, if any, pursuant to the Company's 1993 Stock Option Plan,
1998 Stock Plan and warrants to purchase up to a maximum of 185,331 shares
of Common Stock; the outstanding shares of Common Stock of the Company,
including all shares to be
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<PAGE>
sold by the Selling Shareholders, have been duly authorized and validly
issued and are fully paid and non-assessable; the issued shares of Common
Stock of the Company held by the Company as treasury stock, including all
shares to be sold by the Company, have been duly authorized and validly
issued; all of the Shares conform to the description thereof contained in
the Prospectus; the certificates for the Shares, are in due and proper form;
the shares of Common Stock, including the Option Shares, if any, to be sold
by the Company pursuant to this Agreement have been duly authorized and will
be validly issued, fully paid and non-assessable when issued and paid for as
contemplated by this Agreement; the portion of the shares of Common Stock,
including the Option Shares, if any, to be sold by the Selling Shareholders
pursuant to this Agreement after exercise of options to purchase such Common
Stock and after conversion of Preferred Stock into such Common Stock have
been duly authorized and will be validly issued, fully paid and non-
assessable when issued and paid for as contemplated by this Agreement; and
no preemptive rights of Shareholders exist with respect to any of the Shares
or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of such stock; and except as described
in the Prospectus, to the knowledge of such counsel, no holder of any
securities of the Company or any other person has the right, contractual or
otherwise, which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to them, or to permit them to underwrite
the sale of, any of the Shares or the right to have any Common Stock or
other securities of the Company included in the Registration Statement or
the right, as a result of the filing of the Registration Statement, to
require registration under the Act of any shares of Common Stock or other
securities of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with the
requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial
statements and statistical information therein).
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(vi) The statements under the captions "Risk Factors -- Shares
Eligible for Future Sale and Potential Adverse Effect on Market Price",
"Risk Factors -- Anti-Takeover Effect of Certain Charter and By-Law and
Other Provisions", "Description of Capital Stock" and "Shares Eligible for
Future Sale" in the Prospectus, insofar as such statements constitute a
summary of documents referred to therein or matters of law, fairly summarize
in all material respects the information called for with respect to such
documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described
in the Registration Statement or the Prospectus which are not so filed or
described as required, and such contracts and documents as are summarized in
the Registration Statement or the Prospectus are fairly summarized in all
material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company except as set forth in
the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or By-laws of the Company, or any
agreement or instrument known to such counsel to which the Company is a
party or by which the Company may be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery
of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD or as required by
State securities and Blue Sky laws as to which such counsel need express no
opinion) except such as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Shareholders.
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<PAGE>
(xiv) Each Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by State
securities and Blue Sky laws as to which such counsel need express no
opinion), to sell, assign, transfer and deliver the portion of the Shares to
be sold by such Selling Shareholder.
(xv) The Custodian Agreement and the Power of Attorney executed
and delivered by each Selling Shareholder is valid and binding.
(xvi) The Underwriters (assuming that they are bona fide purchasers
within the meaning of the Uniform Commercial Code) have acquired good and
marketable title to the Shares being sold by each Selling Shareholder on the
Closing Date, and the Option Closing Date, as the case may be, free and
clear of all liens, encumbrances, equities and claims.
In rendering such opinion Buchanan Ingersoll may rely as to matters governed
by the laws of states other than New Jersey or Federal laws on local counsel in
such jurisdictions and as to the matters set forth in subparagraphs (xiii),
(xiv) and (xv) on opinions of other counsel representing the respective Selling
Shareholders, provided that in each case Buchanan Ingersoll shall state that
they believe that they and the Underwriters are justified in relying on such
other counsel. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that (i) the Registration Statement, at
the time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Buchanan Ingersoll may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
(c) The Representatives shall have received from Testa, Hurwitz &
Thibeault, LLP, counsel for the Underwriters, an opinion dated the Closing Date
or the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv), (ix) and (xi) of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of New Jersey. In rendering such opinion
Testa, Hurwitz & Thibeault, LLP may rely as to all matters governed other than
by the laws of the Commonwealth of Massachusetts or Federal laws on the opinion
of counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
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effect that nothing has come to the attention of such counsel which leads them
to believe that (i) the Registration Statement, or any amendment thereto, as of
the time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) as of
the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact, necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement Testa, Hurwitz & Thibeault, LLP, may state that their belief is based
upon the procedures set forth therein, but is without independent check and
verification.
(d) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date hereof,
the Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to you, of Price Waterhouse LLP confirming that they are
independent public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(e) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registrations
Statement has been issued, and no proceedings for such purpose have been
taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
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(iii) All filings required to have been made pursuant to Rules 424
or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, in his or her opinion, as of the effective date of
the Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
and since the effective date of the Registration Statement, no event has
occurred which should have been set forth in a supplement to or an amendment
of the Prospectus which has not been so set forth in such supplement or
amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company
whether or not arising in the ordinary course of business.
(f) The Company and the Selling Shareholders shall have furnished to the
Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(g) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on The NASDAQ National Market.
(h) The Lockup Agreements described in Section 4(a)(x) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be deemed to
be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Testa, Hurwitz & Thibeault,
LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and the Selling Shareholders of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be.
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In such event, the Selling Shareholders, the Company and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 5 and 8 hereof).
7. Conditions to the Obligations of the Sellers.
--------------------------------------------
The obligations of the Sellers to sell and deliver the portion of the Shares
required to be delivered as and when specified in this Agreement are subject to
the conditions that at the Closing Date or the Option Closing Date, as the case
may be, no stop order suspending the effectiveness of the Registration Statement
shall have been issued and in effect or proceedings therefor initiated or
threatened.
8. Indemnification.
---------------
(a) The Company agrees:
(i) to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages or liabilities to which such Underwriter
or any controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (A) any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, (B) 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 or (C) any act or failure to act,
or any alleged act or failure to act, by any Underwriter in connection with,
or relating in any manner to, the Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon matters covered by
clause (A) or (B) above (provided, that the Company shall not be liable
under this clause (C) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct); provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity obligation
will be in addition to any liability which the Company may otherwise have.
(ii) to reimburse each Underwriter and each controlling person
upon demand for any legal or other out-of-pocket expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim,
22
<PAGE>
damage or liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or not
such Underwriter or controlling person is a party to any action or
proceeding. In the event that it is finally judicially determined that the
Underwriters were not entitled to receive payments for legal and other
expenses pursuant to this subparagraph, the Underwriters will promptly
return all sums that had been advanced pursuant hereto.
(b) The Selling Shareholders severally and not jointly agree to indemnify
the Underwriters and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities to
which such Underwriter or controlling person may become subject under the Act or
otherwise to the same extent as indemnity is provided by the Company pursuant to
Section 8(a) above; provided, however, that each Underwriter and each person who
controls such Underwriter agrees not to assert its rights to indemnity against
any Selling Shareholder pursuant to this Section 8(b) for losses, claims,
damages or liabilities, unless and until (i) such Underwriter or controlling
person has requested indemnification and reimbursement from the Company for such
losses, claims, damages or liabilities (including any legal or other expenses
reasonably incurred) and (ii) the Company does not within 60 days of the date of
such request (A) agree in writing to indemnify such Underwriter or controlling
person and (B) reimburse in full such Underwriter or controlling person for all
such losses, claims, damages or liabilities (including legal and other expenses)
incurred. In no event, however, shall the liability of any Selling Shareholder
for indemnification under this Section 8(b) exceed the proceeds received by such
Selling Shareholder from the Underwriters in the offering. This indemnity
obligation will be in addition to any liability which the Selling Shareholders
may otherwise have.
(c) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholders, and each person, if
any, who controls the Company or the Selling Shareholders within the meaning of
the Act, against any losses, claims, damages or liabilities to which the Company
or any such director, officer, Selling Shareholder or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, Selling Shareholder or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(d) In case any proceeding (including any governmental investigation) shall
be instituted involving any person in respect of which indemnity may be sought
pursuant to this Section 8, such person (the "indemnified party") shall promptly
notify the person
23
<PAGE>
against whom such indemnity may be sought (the "indemnifying party") in writing.
No indemnification provided for in Section 8(a), (b) or (c) shall be available
to any party who shall fail to give notice as provided in this Section 8(d) if
the party to whom notice was not given was unaware of the proceeding to which
such notice would have related and was materially prejudiced by the failure to
give such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a), (b) or (c). In case any such proceeding shall be
brought against any indemnified party and it shall notify the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and (b) and by the Company and the Selling Shareholders in the case
of parties indemnified pursuant to Section 8(c). The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent of
the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(e) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under Section 8(a), (b) or
(c) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect
24
<PAGE>
thereof) referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Shareholders on the one hand and the Underwriters on
the other from the offering of the Shares. If, however, the allocation provided
by the immediately preceding sentence is not permitted by applicable law then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Shareholders on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Shareholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Shareholders on
the one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 8(e)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(e). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation, and (iii) no Selling Shareholder
shall be required to contribute any amount in excess of the proceeds received by
such Selling Shareholder from the Underwriters in the offering. The
Underwriters' obligations in this Section 8(e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
25
<PAGE>
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, or the Selling Shareholder or any director, officer of
other person controlling the Selling Shareholder, (ii) acceptance of any Shares
and payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, or to the Selling Shareholder or any
director, officer or other person controlling the Selling Shareholder shall be
entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 8.
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company or a Selling Shareholder),
you, as Representatives of the Underwriters, shall use your reasonable efforts
to procure within 36 hours thereafter one or more of the other Underwriters, or
any others, to purchase from the Company and the Selling Shareholders such
amounts as may be agreed upon and upon the terms set forth herein, the Firm
Shares or Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any others,
to purchase the Firm Shares or Option Shares, as the case may be, agreed to be
purchased by the defaulting Underwriter or Underwriters, then (a) if the
aggregate number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the other Underwriters shall be obligated, severally, in proportion to
the respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such
26
<PAGE>
defaulting Underwriter or Underwriters failed to purchase, or (b) if the
aggregate number of shares of Firm Shares or Option Shares, as the case may be,
with respect to which such default shall occur exceeds 10% of the Firm Shares or
Option Shares, as the case may be, covered hereby, the Company and the Selling
Shareholders or you as the Representatives of the Underwriters will have the
right, by written notice given within the next 36-hour period to the parties to
this Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or of the Company or of the Selling Shareholders
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine in
order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated,
One South Street, Baltimore, Maryland 21202, Attention: Mr. William Burgess;
with a copy to BT Alex. Brown, Incorporated, One Bankers Trust Plaza, 130
Liberty Street, New York, New York 10006, Attention General Counsel; if to the
Company [OR THE SELLING SHAREHOLDERS], to DSET Corporation, 1011 US Highway 22,
Bridgewater, NJ 08807, Attention: Mr. William McHale; with a copy to Buchanan
Ingersoll, College Centre, 500 College Road East, Princeton, NJ 08540,
Attention: William J. Thomas, Esq.
11. Termination.
-----------
This Agreement may be terminated as follows:
(a) by you by notice to the Sellers at any time prior to the Closing Date
if any of the following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company
whether or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration, emergency,
calamity, crisis or change on the financial markets of the United States would,
in your reasonable judgment, make it
27
<PAGE>
impracticable or inadvisable to market the Shares or to enforce contracts for
the sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree or
other promulgation of any statute, regulation, rule or order of any court or
other governmental authority which in your opinion materially and adversely
affects or may materially and adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by United States or New York
State authorities, or (vi) the taking of any action by any governmental body or
agency in respect of its monetary or fiscal affairs which in your reasonable
opinion has a material adverse effect on the securities markets in the United
States; or
(b) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. Information Provided by Underwriters.
------------------------------------
The Company, the Selling Shareholders and the Underwriters acknowledge and
agree that the only information furnished or to be furnished by any Underwriter
to the Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), legends required
by Item 502(d) of Regulation S-K under the Act and the information under the
caption "Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors, officers or by or on behalf of any Selling Shareholder or any of
their directors or officers or (c) delivery of and payment for the Shares under
this Agreement.
28
<PAGE>
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.
29
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact for a
Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
DSET CORPORATION
By:
-------------------------------------
President
Selling Shareholders listed on Schedule II
By:
-------------------------------------
William J. Thomas, Esq.
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
BancAmerica Robertson Stephens
SoundView Financial Group, Inc.
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By:
--------------------------------------
Authorized Officer
30
<PAGE>
SCHEDULE I
Schedule of Underwriters
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
<S> <C>
BT Alex. Brown
BancAmerica Robertson Stephens
SoundView Financial Group, Inc.
----------
Total 3,500,000
==========
</TABLE>
31
<PAGE>
SCHEDULE II
Schedule of Selling Shareholders
<TABLE>
<CAPTION>
Number of Firm Shares
Selling Shareholder to be Sold
--------------------- ---------------------
<S> <C>
S. Daniel Shia........................................... 41,339
Lorine Jen, as custodian for Wenchung Jonathan Shia...... 144,000
David Wu................................................. 188,996
Yi Chang................................................. 32,670
Loretta Yang............................................. 32,670
Hai-Perng Kuo............................................ 51,195
James K. Chang........................................... 21,766
James Jen and Lorine Jen................................. 4,907
Ying-Tsai (Allen) Yang................................... 8,227
Wei-Ying Hu.............................................. 4,500
So-Kong Shia & Jenny Lin................................. 4,587
Lan-Yuan Hsia............................................ 4,554
Hsia Lan-Yun Tsai, custodian for David Tsai.............. 4,523
Gary Tsai................................................ 4,020
Lorine Jen, custodian for Alexander Jen.................. 3,015
Shou-Chang Hsia.......................................... 3,015
Nicole Kuo............................................... 1,500
Anthony Yuan and H. H. Yuan.............................. 1,340
Paul A. Lipari 28, 28,000
Summit Ventures IV, L.P.................................. 397,614
Summit Investors II, L.P................................. 17,562
---------
Total 1,000,000
=========
</TABLE>
32
<PAGE>
SCHEDULE III
Schedule of Option Shares
<TABLE>
<CAPTION>
Maximum Number Percentage of
of Option Shares Total Number of
Name of Seller to be Sold Option Shares
- --------------------------------------------- ------------------------ -------------------------
<S> <C> <C>
Hui-Yun R. Yuan 16,389
Paul R. Smith 33,275
Victor W. Mak 17,338
Vincent J. Sheu 6,780
William P. McHale, Jr. 36,495
Summit Ventures IV, L.P. 396,749
Summit Investors II, L.P. 17,524
------- -----
Total 525,000 100%
======= =====
</TABLE>
33
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DSET CORPORATION
Pursuant to Section 14A:9-5 of the New Jersey Business Corporation Act (the
"Act"), the undersigned corporation hereby executes this Amended and Restated
Certificate of Incorporation.
FIRST: The name of the Corporation is DSET Corporation (the "Corporation").
SECOND: The purpose or purposes for which the Corporation is organized is to
engage in any lawful activity within the purposes for which corporations may be
organized under Title 14A of the Act.
THIRD: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is forty-five million (45,000,000)
shares. The Corporation is authorized to issue two classes of stock designated
"Common Stock" and "Preferred Stock," respectively. The total number of shares
of Common Stock authorized to be issued by the Corporation is forty million
(40,000,000), each such share of Common Stock having no par value. Effective
upon the effectiveness of the Company's initial underwritten public offering of
Common Stock, the total number of shares of Preferred Stock authorized to be
issued by the Corporation shall be five million (5,000,000), each such share of
Preferred Stock having no par value, all of which is undesignated.
The undesignated Preferred Stock may be issued from time to time in
one or more series. The Board of Directors of the Corporation is hereby
authorized, by adopting a resolution or resolutions and filing a certificate or
certificates pursuant to the applicable provisions of the Act, to establish from
time to time the number of shares to be included in each such series of
Preferred Stock, and to fix the designation, powers, preferences and rights of
the shares of each such series and the qualifications, limitations or
restrictions thereof, including but not limited to the fixing or alteration of
the dividend rights, dividend rate or rates, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences of any wholly
unissued series of shares of Preferred Stock, or any of them, and to increase or
decrease the number of shares of any series subsequent to the issuance of shares
of that series, but not below the number of shares of such series then
outstanding. In the event the number of shares of any series shall be so
decreased, the shares removed from such series by such decrease shall resume the
status which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
<PAGE>
FOURTH: The address of the registered office of the Corporation shall be 1011
US Highway 22, Suite 100, Bridgewater, New Jersey 08807. The registered agent of
the Corporation at its registered office shall be William P. McHale, Jr.
FIFTH: The number of directors constituting the current Board of Directors
is five. The names and addresses of each of such directors is as follows:
Name Address
----------------------- --------------------------------
S. Daniel Shia c/o DSET Corporation
1011 US Highway 22, Suite 100
Bridgewater, New Jersey 08807
Hui-Yun Rosanna Yuan c/o DSET Corporation
1011 US Highway 22, Suite 100
Bridgewater, New Jersey 08807
William P. McHale, Jr. c/o DSET Corporation
1011 US Highway 22, Suite 100
Bridgewater, New Jersey 08807
Elizabeth K. Adams c/o Rational Management Group. Inc.
61 Wexford Way
Basking Ridge, New Jersey 07920
Bruce R. Evans c/o Summit Partners
600 Atlantic Avenue, Suite 2800
Boston, Massachusetts 02210
SIXTH: The following provisions are included for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Board of Directors and shareholders:
(i) The Board of Directors of the Corporation is expressly authorized to
adopt, amend or repeal the Bylaws of the Corporation, subject to any
limitation thereof contained in the Bylaws. The shareholders also shall have
the power to adopt, amend or repeal the Bylaws of the Corporation; provided,
--------
however, that, except as set forth below in clause (ii), in addition to any
-------
vote of the holders of any class or series of stock of the Corporation
required by law or by this Amended and Restated Certificate of Incorporation,
the affirmative vote of the holders of at least sixty six and two-thirds
percent (66 2/3%) of the voting power of all of the then outstanding shares of
the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be
-2-
<PAGE>
required to adopt, amend or repeal any provision of the Bylaws of the
Corporation;
(ii) in addition to any vote of the holders of any class or series of
stock of the Corporation required by law or by this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
eighty percent (80%) of the voting power of all of the then outstanding shares
of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
adopt, amend or repeal any provision of ARTICLE XI of the Bylaws of the
Corporation entitled "INDEMNIFICATION AND INSURANCE."
(iii) Upon the consummation of an initial public offering of securities of
the Corporation under the Securities Act of 1933, as amended, shareholders of
the Corporation may not take any action by written consent in lieu of a
meeting.
(iv) Special meetings of shareholders may be called at any time only by
the President, the Chairman of the Board of Directors of the Corporation (if
any) or a majority of the Board of Directors of the Corporation. Business
transacted at any special meeting of shareholders shall be limited to matters
relating to the purpose or purposes set forth in the notice of such special
meeting.
(v) The Board of Directors of the Corporation, when evaluating any offer
of another party (a) to make a tender or exchange offer for any equity
security of the Corporation or (b) to effect a business combination, merger,
consolidation, or sale of all or substantially all of the assets of the
Corporation, shall, in connection with the exercise of its judgment in
determining what is in the best interests of the Corporation as a whole, be
authorized to give due consideration to any such factors as the Board of
Directors of the Corporation determines to be relevant, including, without
limitation:
(1) the short term and long term interests of the Corporation and
the Corporation's shareholders, including the possibility that these
interests might be best served by the continued independence of the
Corporation;
(2) whether the proposed transaction might violate federal or state
laws;
(3) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market price
for the capital stock of the Corporation over a period of years, the
estimated price that might be achieved in a negotiated sale of the
Corporation as a whole or in part or through orderly liquidation, the
premiums over market price for the
-3-
<PAGE>
securities of other corporations in similar transactions, current
political, economic and other factors bearing on securities prices and the
Corporation's financial condition and future prospects; and
(4) the social, legal and economic effects upon employees,
suppliers, creditors, customers and others having similar relationships
with the Corporation, upon the communities in which the Corporation
operates its business and upon the economy of the state, region and
nation.
In connection with any such evaluation, the Board of Directors of the
Corporation is authorized to conduct such investigations and engage in such
legal proceedings as the Board of Directors of the Corporation may determine.
(vi) in addition to any vote of the holders of any class or series of
stock of the Corporation required by law or by this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
sixty six and two-thirds percent (66 2/3%) of the voting power of all of the
then outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors, voting together as a single
class, shall be required to amend any provision of Article SIXTH of this
Amended and Restated Certificate of Incorporation (other than clause (ii) of
Article SIXTH) .
(vii) in addition to any vote of the holders of any class or series of
stock of the Corporation required by law or by this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
eighty percent (80%) of the voting power of all of the then outstanding shares
of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend any provision of clause (ii) of Article SIXTH or Article SEVENTH of this
Amended and Restated Certificate of Incorporation.
SEVENTH: No director or officer shall be personally liable to the Corporation
or its shareholders for damages for breach of any duty owed to the Corporation
or its shareholders, except that this provision shall not relieve a director or
officer from liability for any breach of duty based on an act or omission (a) in
breach of such person's duty of loyalty to the Corporation or its shareholders,
(b) not in good faith or involving a knowing violation of law, or (c) resulting
in receipt by such person of an improper personal benefit. No amendment to,
expiration of or repeal of this Article shall have any effect on the liability
or alleged liability of any director or officer of the Corporation for or with
respect to any acts or omissions of such director or officer occurring prior to
such amendment, expiration or repeal.
-4-
<PAGE>
IN WITNESS WHEREOF, the undersigned has signed this Amended and Restated
Certificate of Incorporation on behalf of the Corporation this 12th day of
February, 1998.
DSET CORPORATION
By: /s/ William P. McHale, Jr.
--------------------------------------
William P. McHale, Jr., President and
Chief Executive Officer
-5-
<PAGE>
EXHIBIT 4.1
DSET CORPORATION
STOCK OPTION PLAN
As Adopted September 15, 1993
As Amended August 5, 1994, September 10, 1996, January 30, 1997
1. PURPOSE. This Stock Option Plan (the "Plan") is established to provide
incentive for selected persons to promote the financial success and
progress to DSET Corporation (the "Company") by granting such persons
options to purchase shares of common stock of the Company.
2. ADOPTION AND SHAREHOLDER APPROVAL. This Plan shall be approved by the
shareholders of the Company, in any manner permitted by applicable
corporate law, within twelve (12) months before or after the date this Plan
is adopted by the Board and after the date of certain amendments to the
Plan. In addition, no later than twelve (12) months after the Company
becomes subject to Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") the Company will comply with the requirements
of Rule 16b-3 with respect to shareholder approval.
3. TYPES OF OPTIONS AND SHARES. Options granted under this Plan (the
"Options") may be either (a) incentive stock options ("ISOs") within the
meaning of Section 422 of the Internal Revenue Code of 1986 as amended (the
"Code"), or (b) nonqualified stock options ("NQSOs"), as designated at the
time of grant. The shares of stock that may be purchased upon exercise of
Options granted under this Plan (the "Shares") are shares of the common
stock of the Company.
4. NUMBER OF SHARES. The maximum number of Shares that may be issued pursuant
to Options granted under this Plan is Two Million Three Hundred Sixty
Thousand (2,360,000) Shares, subject to adjustment as provided in this
Plan. If any Option is terminated for any reason without being exercised in
whole or in part, the Shares thereby released from such Option shall be
available for purchase under other Options subsequently granted under this
Plan. At all times during the term of this Plan, the Company shall reserve
and keep available such number of Shares as shall be required to satisfy
the requirements of outstanding Options under this Plan.
5. ADMINISTRATION. This Plan may be administered by the Board of Directors of
the Company or a Committee appointed by the Board (the "Committee"). If, at
the time the Company registers under the Exchange Act, a majority of the
Board is not comprised of Disinterested Persons, the Board shall appoint a
Committee consisting of not less than three persons (who need not be
members of the Board), each of whom is a "Disinterested Person" (as defined
in Section 6(b)(iv) of the Plan). As used in this Plan, references to the
"Committee" shall mean either such Committee or the Board if no Committee
has been established. After registration of the Company under the Exchange
Act, Board members who are not Disinterested Persons may not vote on any
matters affecting the administration of this Plan or on the grant of any
Options pursuant to this Plan to any officer or director of the Company or
other person (in each case, an "Insider") whose transactions in the
Company's common stock
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are subject to Section 16(b) of the Exchange Act, but any such member may
be counted for determining the existence of a quorum at any meeting of the
Board during which action is taken with respect to Options or
administration of this Plan and may vote on the grant of any Options
pursuant to this Plan other than to Insiders. The interpretation by the
Committee of any of the provisions of this Plan or any Option granted under
this Plan shall be final and binding upon the Company and all persons
having an interest in any Option or any Shares purchased pursuant to an
Option. The Committee may delegate the authority to officers of the Company
to grant Options under this Plan to Optionees who are not Insiders of the
Company.
6. ELIGIBILITY. Options may be granted only to such employees, officers,
directors and consultants of the Company or any Parent, Subsidiary of
Affiliate of the Company (as defined below) as the Committee shall select
from time to time in its sole discretion ("Optionees"), provided that only
employees of the Company or a Parent or Subsidiary of the Company shall be
eligible to receive ISOs. An Optionee may be granted more than one Option
under this Plan.
(a) Assumption of Options. The Company may, from time to time, assume
outstanding options granted by another company, whether in connection
with an acquisition of such other company or otherwise, by either (i)
granting an option under this Plan in replacement of the option
assumed by the Company, or (ii) treating the assumed option as if it
had been granted under this Plan if the terms of such assumed option
could be applied to an option granted under this Plan. Such assumption
shall be permissible if the holder of the assumed option would have
been eligible to be granted an option hereunder if the other Company
had applied the rules of this Plan to such grant.
(b) Definitions. As used in the Plan, the following terms shall have the
following meanings:
i. "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at
the time of the granting of the Option, each of such
corporations other than the Company owns stock possessing 50% or
more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
ii. "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if,
at the time of granting of the Option, each of the corporations
other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
iii. "Affiliate" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled
by, or is under common control with another corporation, where
"control" (including the terms "controlled by" and "under common
control with") means the possession, direct or indirect, of the
power to cause the direction of the management and policies of
the corporation, whether through the ownership of voting
securities, by contract or otherwise.
iv. "Disinterested Person" shall have the meaning set forth in Rule
16b-3(d)(3) as promulgated by the Securities and Exchange
Commission ("SEC") under Section 16(b) of the Exchange Act, as
such rule is amended from time to time and as interpreted by the
SEC.
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<PAGE>
v. "Fair Market Value" shall mean the fair market value of the
Shares as determined by the Committee from time to time in good
faith. If a public market exists for the Shares, the Fair Market
Value shall be the average of the last reported bid and asked
prices for Common Stock of the Company on the last trading day
prior to the date of determination or, in the event the Common
Stock of the Company is listed on a stock exchange or the NASDAQ
National Market System, the Fair Market Value shall be the
closing price on such exchange or quotation system on the last
trading day prior to the date of determination.
7. TERMS AND CONDITIONS OF OPTIONS. The Committee shall determine whether each
Option is to be an ISO or an NQSO, the number of Shares for which the
Option shall be granted, the exercise price of the Option, the periods
during which the Option may be exercised, and all other terms and
conditions of the Option, subject to the following terms and conditions:
(a) Form of Option Grant. Each Option granted under this Plan shall be
evidenced by a written Stock Option Grant ("Grant") in such form
(which need not be the same for each Optionee) as the Committee shall
from time to time approve, which Grant shall comply with and be
subject to the terms and conditions of this Plan.
(b) Exercise Price. The exercise price of an Option shall be not less than
the Fair Market Value of the Shares, at the time that the Option is
granted. The exercise price of any Option granted to a person owning
10% or more of the total combined voting power of all classes of stock
of the Company or any Parent or subsidiary of the Company ("Ten
Percent Shareholder") shall not be less than 110% of the Fair Market
Value of the Shares at the time of the grant, as determined by the
Committee in good faith.
(c) Exercise Period. Options shall be exercisable within the times or upon
the events determined by the Committee as set forth in the Grant,
provided, however, that no Option shall be exercisable after the
expiration of ten years from the date the Option is granted, and
provided further that no Option granted to a Ten Percent Shareholder
shall be exercisable after the expiration of five years from the date
the Option is granted.
(d) Limitations on ISOs. The aggregate Fair Market Value (determined as of
the time an Option is granted) of stock with respect to which ISOs are
exercisable for the first time by an Optionee during the calendar year
(under this Plan or under any other incentive stock option plan of the
Company or any Parent or Subsidiary of the Company) shall not exceed
$100,000. If the Fair Market Value of stock with respect to which ISOs
are first exercised exceeds $100,000, the Options for the first
$100,000 worth of stock shall be ISOs and options for the amount in
excess of $100,000 shall be NQSOs.
(e) Date of Grant. The date of grant of an Option shall be the date on
which the Committee makes the determination to grant such Option
unless otherwise specified by the Committee. The Grant representing
the Option shall be delivered to the Optionee within a reasonable time
after the granting of the Option.
(f) Assumed Options. In the event the Company assumes an option granted by
another company, the terms and conditions of such option shall remain
unchanged (except the exercise price and the number and nature of
shares issuable upon exercise, which will be adjusted appropriately
pursuant to Section 424(c) of the Code). In the event the Company
elects to grant a new option rather than assuming an existing option
(as
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<PAGE>
specified in Section 6(a), such new option need not be granted at Fair
Market Value on the date of grant and may instead be granted with a
similarly adjusted exercise price.
8. EXERCISE OF OPTIONS.
(a) Notice. Options may be exercised only by delivery to the Company of a
written notice and exercise agreement in a form approved by the
Committee, stating the number of Shares being purchased, the
restrictions imposed on the Shares and such representations and
agreements regarding the Optionee's investment intent and access to
information as may be required by the Company to comply with
applicable securities laws together with payment in full of the
exercise price for the number of Shares being pur-chased.
(b) Payment. Payment for the Shares may be made (i) in cash (by check);
(ii) by surrender of shares of common stock of the Company that have
been owned by Optionee for more than six (6) months (and which have
been paid for within the meaning of SEC Rule 144 and, if such shares
were purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares) or were obtained by
the Optionee in the open public market, having a Fair Market Value
equal to the exercise price of the Option; (iii) where permitted by
applicable law and approved by the Committee in its sole discretion,
by tender of a full recourse promissory note having such terms as may
be approved by the Committee; (iv) provided that a public market for
the Company's stock exists, through a "same day sale" commitment from
the Optionee and a broker-dealer that is a member of the National
Association of Securities Dealers (a "NASD Dealer") whereby the
Optionee irrevocably elects to exercise the Option and to sell a
portion of the Shares so purchased to pay for the exercise price and
whereby the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the exercise price directly to the Company; or (v)
by any combination of the foregoing where approved by the Committee in
its sole discretion. Optionees who are not employees or directors of
the Company shall not be entitled to purchase Shares with a promissory
note unless the note is adequately secured by collateral other than
the Shares.
(c) Withholding Taxes. Prior to issuance of the Shares upon exercise of an
Option, the Optionee shall pay or make adequate provision for any
federal or state withholding obligations of the Company, if
applicable.
(d) Limitations on Exercise. Notwithstanding the exercise periods set
forth in the Grant, exercise of an Option shall always be subject to
the following limitations:
i. If an Optionee ceases to be employed by the Company or any
Parent, Subsidiary or Affiliate of the Company for any reason
except death or disability, the Optionee may exercise such
Optionee's Options to the extent (and only to the extent) that it
would have been exercisable upon the date of termination, within
three (3) months after the date of termination (or such shorter
time period as may be specified in the Grant), provided that, if
Optionee is an Insider and the Company is subject to Section
16(b) of the Exchange Act, the Optionee's Option will be
exercisable for a period of time sufficient to allow such
Optionee from having a matching purchase and sale under Section
16(b), with any extension beyond three (3) months from
termination of employment in the case of an Option constituting
an ISO being deemed to be an NQSO, and provided further that in
no event may an Option be exercisable later than the expiration
date of the Option.
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<PAGE>
ii. If an Optionee's employment with the Company or any Parent,
Subsidiary or Affiliate of the Company is terminated because of
the death of the Optionee or disability of the Optionee within
the meaning of Section 22(e)(3) of the Code, such Optionee's
Options may be exercised to the extent (and only to the extent)
that it would have been exercisable by the Optionee on the date
of termination, by the Optionee (or the Optionee's legal
representative) within twelve (12) months after the date of
termination (or such shorter time period as may be specified in
the Grant), but in any event no later than the expiration date of
the Options.
iii. The Committee shall have discretion to determine whether the
Optionee has ceased to be employed by the Company or any Parent,
Subsidiary or Affiliate of the Company and the effective date on
which such employment terminated.
iv. In the case of an Optionee who is a director, independent
consultant, contractor or advisor, the Committee will have the
discretion to determine whether the Optionee is "employed by the
Company or any Parent, Subsidiary or Affiliate of the Company"
pursuant to the foregoing Sections.
v. An Option shall not be exercisable unless such exercise is in
compliance with the Securities Act of 1933, as amended, and all
applicable state securities laws, as they are in effect on the
date of exercise.
vi. An Option shall not be exercisable if the Optionee is in default
of any obligations owed the Company or any Parent, Subsidiary or
Affiliate of the Company, whether by operation of law or pursuant
to contract.
vii. The Committee may specify a reasonable minimum number of Shares
that may be purchased on any exercise of an Option, provided that
such minimum number will not prevent the Optionee from exercising
the full number of Shares as to which the Option is then
exercisable.
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
Option shall be exercisable only by the Optionee. No Option may be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution.
10. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the rights of
a shareholder with respect to any Shares subject to an Option until the
Option has been validly exercised. No adjustment shall be made for
dividends or distributions or other rights for which the record date is
prior to the date of exercise, except as provided in this Plan. The Company
shall provide to each Optionee a copy of the annual financial statements of
the Company, at such time after the close of each fiscal year of the
Company as they are released by the Company to its shareholders.
11. ADJUSTMENT OF OPTIONS SHARES. In the event that the number of outstanding
shares of common stock of the Company is changed by a stock dividend, stock
split, reverse stock split, combination, reclassification or similar change
in the capital structure of the Company without consideration, the number
of Shares available under this Plan and the number of Shares subject to
outstanding options and the exercise price per share of such Options shall
be proportionately adjusted, subject to any required action by the Board or
shareholders of the Company and compliance with applicable securities laws;
provided, however, that no certificate or scrip representing fractional
shares shall be issued upon exercise of any Option and any resulting
fractions of a Share shall be ignored.
5
<PAGE>
12. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Option granted under
this Plan shall confer on any Optionee any right to continue in the employ
of the Company or any Parent, Subsidiary or Affiliate of the Company or
limit in any way the right of the Company or any Parent, Subsidiary or
Affiliate of the Company to terminate the Optionee's employment at any
time, with or without cause.
13. COMPLIANCE WITH LAWS. The grant of Options and the issuance of Shares upon
exercise of any Options shall be subject to and conditioned upon compliance
with all applicable requirements of law, including without limitation
compliance with the Securities Act of 1933, as amended, any required
approval by the Secretary of State of New Jersey, compliance with all other
applicable state securities laws and compliance with the requirements of
any stock exchange on which the Shares may be listed. The Company shall be
under no obligation to register the Shares with the SEC or to effect
compliance with the registration or qualification requirements of any state
securities laws or stock exchange.
14. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company
may reserve to itself or its assignee(s) in the Grant (a) a right of first
refusal to purchase any Shares that an Optionee (or a subsequent
transferee) may propose to transfer to a third party and (b) a right to
repurchase all Shares held by an Optionee upon the Optionee's termination
of employment or service with the Company or its Parent, Subsidiary or
Affiliate of the Company for any reason within a specified time as
determined by the Committee at the time of grant at (i) the Optionee's
original purchase price (provided that the right to repurchase at such
price shall lapse at the rate of at least 20% per year from the date of
grant), (ii) the Fair Market Value of such Shares as determined by the
Committee in good faith or (iii) a price determined by a formula or other
provision set forth in the Grant.
15. ASSUMPTION OF OPTIONS BY SUCCESSORS. In the event of a dissolution or
liquidation of the Company, a merger in which the Company is not the
surviving corporation, or the sale of substantially all of the assets of
the Company, any or all outstanding Options shall, notwithstanding any
contrary terms of the Grant, accelerate and become exercisable in full at
least ten days prior to (and shall expire on) the consummation of such
dissolution, liquidation, merger or sale of stock or sale of assets on such
conditions as the Committee shall determine unless the successor
corporation assumes the outstanding Options or substitutes substantially
equivalent options. The aggregate Fair Market Value (determined at the time
an Option is granted) of stock with respect to ISOs which first become
exercisable in the year of such dissolution, liquidation merger, sale of
stock or sale of assets cannot exceed $100,000. Any remaining accelerated
ISOs shall be NQSOs.
16. AMENDMENT OR TERMINATION OF PLAN. The Committee may at any time terminate
or amend this Plan in any respect (including, but not limited to, any form
of Grant, agreement or instrument to be executed pursuant to this Plan);
provided, however, that the Committee shall not, without the approval of
the holders of a majority of the outstanding voting shares of the Company,
amend this Plan in any manner that requires such shareholder approval
pursuant to the Code or the regulations promulgated thereunder as such
provisions apply to incentive stock option plans or pursuant to the
Exchange Act or Rule 16b-3 (or its successor) promulgated thereunder.
17. TERM OF PLAN. Options may be granted pursuant to this Plan from time to
time within a period of ten years from the date this Plan is adopted by the
Board of Directors.
6
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EXHIBIT 4.2
DSET CORPORATION
1998 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, non-Employee
members of the Board and Consultants of the Company and its Subsidiaries and to
promote the success of the Company's business. Options granted under the Plan
may be incentive stock options (as defined under Section 422 of the Code) or
non-statutory stock options, as determined by the Administrator at the time of
grant of an option and subject to the applicable provisions of Section 422 of
the Code, as amended, and the regulations promulgated thereunder. Stock purchase
rights may also be granted under the Plan.
2. Certain Definitions. As used herein, the following definitions shall
-------------------
apply:
(a) "Administrator" means the Board or any of its Committees
------------
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Common Stock" means the Common Stock, without par value, of the
------------
Company.
(f) "Company" means DSET Corporation, a New Jersey corporation.
-------
(g) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(h) "Continuous Status as an Employee" means the absence of any
--------------------------------
interruption or termination of the employment relationship by the Company or any
Subsidiary. Continuous Status as an Employee shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Board, provided that such leave is for a period of not
more than ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) transfers between
locations of the Company or between the Company, its Subsidiaries or its
successor.
<PAGE>
(i) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
Nasdaq National Market, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as
quoted on such system or exchange for the last market trading day prior to
the time of determination as reported in the Wall Street Journal or such
other source as the Administrator deems reliable; or
(ii) If the Common Stock is quoted on Nasdaq (but not on the
National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high and low asked prices for the
Common Stock; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the Plan.
------
(o) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(p) "Optionee" means an Employee or Consultant who receives an
--------
Option.
(q) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 1998 Stock Plan.
----
(s) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of stock purchase rights under Section 11 below.
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<PAGE>
(t) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(u) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 1,800,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock.
If an option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Administration With Respect to Directors and Officers.
-----------------------------------------------------
With respect to grants of Options or stock purchase rights to Employees who
are also officers or directors of the Company, the Plan shall be
administered by (A) the Board if the Board may administer the Plan in
compliance with Rule 16b-3 promulgated under the Exchange Act or any
successor thereto ("Rule 16b-3"), or (B) a Committee designated by the
Board to administer the Plan, which Committee shall be constituted in such
a manner as to permit the Plan to comply with Rule 16b-3. Once appointed,
such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify
thereunder.
(ii) Multiple Administrative Bodies. If permitted by Rule
------------------------------
16b-3, the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither directors
nor officers.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options or stock purchase rights to
---------
Employees who are neither directors nor officers of the Company or to
Consultants, the Plan shall be administered by (A) the Board, if the Board
may administer the Plan in compliance with Rule 16b-3, or (B) a Committee
designated by the Board, which Committee shall be constituted in such a
manner as to satisfy the legal requirements relating to the administration
of incentive stock option plans, if any, of New Jersey corporate law and
applicable securities laws and
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<PAGE>
of the Code (the "Applicable Laws"). Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies, however caused, and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the officers, Consultants and Employees to whom
Options and stock purchase rights may from time to time be granted
hereunder;
(iii) to determine whether and to what extent Options and stock
purchase rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but
not limited to, the share price and any restriction or limitation or waiver
of forfeiture restrictions regarding any Option or other award and/or the
shares of Common Stock relating thereto, based in each case on such factors
as the Administrator shall determine, in its sole discretion);
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common
Stock;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining the
amount, if any, of any deemed earnings on any deferred amount during any
deferral period);
(ix) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted; and
-4-
<PAGE>
(x) to determine the terms and restrictions applicable to
stock purchase rights and the Restricted Stock purchased by exercising such
stock purchase rights.
(c) Effect of Committee's Decision. All decisions, determinations
------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his right or the Company's right
to terminate his employment or consulting relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon the effectiveness
------------
of the Company's Registration Statement (Reg. No. 333-43827) filed with the
Securities and Exchange Commission, provided the Plan has been previously
adopted by the Board of Directors and approved by the shareholders of the
Company as described in Section 19 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 15 of the Plan.
-5-
<PAGE>
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no less
than 110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option either have been owned by the Optionee for
more than six months on the date of surrender or were not acquired, directly or
indirectly, from the Company, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, (5) authorization from the
-6-
<PAGE>
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the option is exercised, (6) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale or loan proceeds required to pay the exercise price,
(7) by delivering an irrevocable subscription agreement for the Shares which
irrevocably obligates the option holder to take and pay for the Shares not more
than twelve months after the date of delivery of the subscription agreement, (8)
any combination of the foregoing methods of payment, or (9) such other
consideration and method of payment for the issuance of Shares to the extent
permitted under Applicable Laws. In making its determination as to the type of
consideration to accept, the Administrator shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment. In the event of termination of an
-------------------------
Optionee's consulting relationship or Continuous Status as an Employee with the
Company (as the case may be), such Optionee may, but only within ninety (90)
days (or such other period of time as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option and not exceeding ninety (90) days) after the date of such
-7-
<PAGE>
termination (but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement), exercise his Option to the extent
that Optionee was entitled to exercise it at the date of such termination. To
the extent that Optionee was not entitled to exercise the Option at the date of
such termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
----------------------
Section 9(b) above, in the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee as a result of his total and
permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may,
but only within twelve (12) months from the date of such termination (but in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised, at any time within twelve (12) months following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), by the Optionee's estate or
by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent the Optionee was entitled to exercise the
Option at the date of death. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. The terms of the Option shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Optionee.
-8-
<PAGE>
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock purchase rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer stock purchase rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 50% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the stock purchase right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the Committee
may determine.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the stock purchase right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the stock purchase right is exercised, except as provided in Section 13
of the Plan.
12. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or stock purchase right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold
-9-
<PAGE>
from the Shares to be issued upon exercise of the Option, or the Shares to be
issued in connection with the stock purchase right, if any, that number of
Shares having a Fair Market Value equal to the amount required to be withheld.
The Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Right as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is subject to Rule 16b-3, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or stock purchase
right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
13. Adjustments Upon Changes in Capitalization or Merger. Subject to any
----------------------------------------------------
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason
-10-
<PAGE>
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Board shall notify the Optionee at least fifteen (15) days prior to
such proposed action. To the extent it has not been previously exercised, the
Option will terminate immediately prior to the consummation of such proposed
action. In the event of a merger or consolidation of the Company with or into
another corporation or the sale of all or substantially all of the Company's
assets (hereinafter, a "merger"), the Option shall be assumed or an equivalent
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation. In the event that such successor
corporation does not agree to assume the Option or to substitute an equivalent
option, the Board shall, in lieu of such assumption or substitution, provide for
the Optionee to have the right to exercise the Option as to all of the Optioned
Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of a merger, the Board shall notify the
Optionee that the Option shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the Option will terminate upon the
expiration of such period. For the purposes of this paragraph, the Option shall
be considered assumed if, following the merger, the Option or right confers the
right to purchase, for each Share of stock subject to the Option immediately
prior to the merger, the consideration (whether stock, cash, or other securities
or property) received in the merger by holders of Common Stock for each Share
held on the effective date of the transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger was not solely common stock of the
successor corporation or its Parent, the Board may, with the consent of the
successor corporation and the participant, provide for the consideration to be
received upon the exercise of the Option, for each Share of stock subject to the
Option, to be solely common stock of the successor corporation or its Parent
equal in Fair Market Value to the per share consideration received by holders of
Common Stock in the merger or sale of assets.
14. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law
-11-
<PAGE>
or regulation, including the requirements of the NASD or an established stock
exchange), the Company shall obtain shareholder approval of any Plan amendment
in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
18. Agreements. Options and stock purchase rights shall be evidenced by
----------
written agreements in such form as the Board shall approve from time to time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law.
-12-
<PAGE>
20. Information to Optionees. The Company shall provide to each Optionee,
------------------------
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
-13-
<PAGE>
EXHIBIT 4.3
DSET CORPORATION
WARRANT AGREEMENT
DATED AS OF SEPTEMBER 13, 1996
<PAGE>
WARRANT AGREEMENT dated as of the 13th day of September, 1996, between DSET
Corporation, a New Jersey corporation (the "Company"), and the entities listed
on Schedule 1 attached hereto (collectively, together with transferees permitted
herein, the "Holders").
The Company proposes to issue to the Holders warrants (the "Warrants") at a
purchase price per Warrant Share (as hereinafter defined) of Three and 27/100
Dollars ($3.27) to purchase an initial total of 123,554 shares (the "Warrant
Shares") of the Company's Common Stock, $.01 par value per share (the "Common
Stock"), subject to modification as herein provided.
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein set forth and for other good and valuable consideration, the parties
hereto agree as follows:
1. Issuance of Warrants; Form of Warrants. The Company has issued and is
delivering to each Holder a Warrant to purchase the initial number of shares of
Common Stock as shown on Schedule 1 attached hereto. The text of the Warrants
and of the election to purchase shares to be attached thereto shall be
substantially in the form of Exhibit A hereto. The Warrants will be executed on
behalf of the Company by the manual or facsimile signature of the Chief
Executive Officer or Vice President of the Company, under its corporate seal
affixed or in facsimile, attested by the Secretary or an Assistant Secretary of
the Company. Terms used as defined terms herein and not otherwise defined shall
have the meanings set forth in the Purchase Agreement.
2. Registration. The Warrants, together with any additional Warrants
which may be issued upon partial exercise, replacement or transfer of the
original Warrants, shall be numbered and shall be registered in a Warrant
Register as they are issued. The Company shall be entitled to treat the
registered Holder of any Warrant on the Warrant Register as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person other
than the record holder.
The Warrants may be transferred, subject to the provisions of Section 9.
Any Warrant to be transferred may be transferred or endorsed to another party by
giving notice thereof to the Company at its principal office and, if a new
Warrant is requested in connection with such transfer, by surrender thereof for
cancellation, endorsed or accompanied by a written instrument of transfer, in
form satisfactory to the Company, duly executed by the Holder thereof in person
or by its duly authorized representative, or by its agent or attorney-in-fact
duly appointed in writing. Upon receipt thereof, the Company will issue and
deliver, in the name of the transferee or transferees, a new Warrant on like
terms.
<PAGE>
4. Term of Warrants; Exercise of Warrants.
-----------------------------------------
(a) Each Warrant entitles the registered Holder to purchase from the
Company shares of Common Stock at a purchase price per share of Three and 27/100
Dollars ($3.27), subject to adjustment as herein provided (the "Exercise
Price"), at any time, on and after the date hereof and on or before 5:00 p.m.
Eastern Standard Time on September 13, 2006 (the "Expiration Date"). Except as
described in this Section 4(a), the Warrants shall not be exercisable prior to
September 13, 1998. Thereafter, each Warrant shall be exercisable with respect
to the following percentages of the Warrant Shares covered thereby:
<TABLE>
<CAPTION>
CUMULATIVE
PERCENTAGE OF WARRANT PERCENTAGE OF WARRANT
SHARES AS TO WHICH FIRST SHARES AS TO WHICH
EXERCISE DATE EXERCISABLE WARRANT EXERCISABLE
- ------------- ------------------------ ---------------------
<S> <C> <C>
On or after September 13, 1998, but
prior to September 13, 1999: 50% 50%
On or after September 13, 1999, but
prior to September 13, 2000: 25% 75%
On or after September 13, 2000:
25% 100%
</TABLE>
In the event of (i) consummation of a public offering of securities of the
Company pursuant to a registration statement filed under the Securities Act of
1933, as amended, (ii) the sale of all or substantially all of the assets of the
Company, (iii) the sale of voting securities of the Company, or the merger or
consolidation of the Company, if following such sale, merger or consolidation
those persons who held 100% of the voting securities of the Company do not have
a majority of the shares of voting stock of the Company or the surviving or
resulting entity, or (iv) the dissolution or winding up of the Company (such
events described in clauses (i)-(iv) to be referred to herein as a "Liquidation
Event"), the exercisability of the Warrants shall be accelerated, so that the
Warrants shall be exercisable in full immediately preceding such Liquidation
Event; provided, however that the Warrants shall be accelerated only to the
extent that the stock options to purchase 240,000 shares of common stock of the
Company granted to S. Daniel Shia in September 1996 are accelerated. The Company
agrees to give the holders of the Warrants 15 days prior notice of any proposed
Liquidation Event. The holder of a Warrant may exercise his Warrant conditioned
on the consummation of a Liquidity Event.
(b) The initial Exercise Price and the number of Warrant Shares shall
be adjusted as provided in Section 5 hereof.
(c) Subject to the provisions of this Agreement, the registered
Holder of each Warrant shall have the right, which may be exercised in whole or
in part to the extent the
<PAGE>
Warrant is then exercisable, to purchase from the Company (and the Company shall
issue and sell to such registered Holder of the Warrant) the number of fully
paid and non-assessable shares of Common Stock evidenced by the Warrant, upon
surrender to the Company, or its duly authorized agent, of the Warrant, with the
form of election to purchase attached thereto duly completed and signed, and
upon payment to the Company of the Exercise Price in full as described in
Section 4(e).
(d) Upon surrender of the Warrant and payment of the Exercise Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the registered Holder of the
Warrant and (subject to receipt of evidence of compliance with the Act in
accordance with the provisions of Section 9 of this Agreement) in such name or
names as such registered Holder may designate, a certificate or certificates for
the number of shares of stock so purchased upon the exercise of the Warrant.
Such certificate or certificates shall be deemed to have been issued and any
person so designated to be named therein shall be deemed to have become a holder
of record of such shares as of the date of the surrender of the Warrant and
payment of the Exercise Price as aforesaid. If, at the date of surrender of a
Warrant and payment of such Exercise Price, the transfer books for the Common
Stock, shall be closed, the certificates for the shares in respect of which the
Warrant is then exercised shall be issuable as of the date on which such books
shall next be opened (whether before, on or after the Expiration Date) and until
such date the Company shall be under no duty to deliver any certificate for such
shares; provided, however, that the transfer books shall not be closed at any
one time for a period longer than forty-eight (48) hours unless otherwise
required by law.
(e) A holder of a Warrant may, at its option, exercise such Warrant
by (i) paying the Exercise Price in cash, (ii) by delivering to the Company
shares of capital stock of the Company with a fair market value (as determined
in good faith by the Board of Directors of the Company without any attribution
of a minority ownership or illiquidity discount) equal to the Exercise Price of
the Warrant Shares as to which the Warrant is being exercised, or (iii) by
canceling the Warrant with respect to that number of Warrant Shares as have a
fair market value (as determined above) which, when multiplied by the fair
market value per share (as so determined) less the Exercise Price per share,
equals the Exercise Price of the Warrant Shares as to which the Warrant is being
exercised equal to the product of the number of Warrant Shares for which the
Warrant is being exercised times the Exercise Price.
5. Adjustment to Exercise Price. In order to prevent dilution of the
----------------------------
rights granted under the Warrant, the Exercise Price will be subject to
adjustment from time to time pursuant to this Section 5. In the event of a stock
split, stock dividend or other form of recapitalization affecting the Common
Stock, the number of Warrant Shares and the Exercise Price shall be adjusted so
as to provide the holder of a Warrant with the same benefit he or it enjoyed
immediately preceding such split, dividend or other form of recapitalization.
<PAGE>
6. Mutilated or Missing Warrant. If a Warrant is mutilated, lost, stolen
----------------------------
or destroyed, the Company shall issue and deliver in lieu of and substitution
for the Warrant so mutilated, lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence reasonably satisfactory to the Company of such mutilation, loss, theft
or destruction of such Warrant and indemnity or other security, if requested,
also reasonably satisfactory to the Company. An applicant for a substitute
Warrant shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company may prescribe.
7. Reservation of Preferred Stock, etc. The Company shall at all times
-----------------------------------
reserve as long as the Warrants remain outstanding, out of the authorized and
unissued shares of Common Stock, a number of shares sufficient to provide for
the exercise of the rights of purchase represented by each Warrant. Subject to
the provisions of this Agreement, the Warrant, when surrendered on the exercise
of the rights thereby evidenced, shall be canceled, and the form of election to
purchase attached to such canceled Warrant, as completed and signed by the
registered Holder thereof, shall constitute sufficient evidence of the number of
shares of stock which have been issued upon the exercise of the Warrant.
Subsequent to the Expiration Date, no shares of stock need be reserved in
respect of the Warrants.
8. Fractional Interests. The Company shall issue fractions of shares of
--------------------
Common Stock on the exercise of any Warrant to the extent required.
9. Absence of Registration. Neither the Warrants nor the shares of
-----------------------
Common Stock issuable upon exercise of the Warrants have been registered under
the Act. Each Holder represents and warrants to the Company that it will not
dispose of the Warrant or such shares except to an affiliate or pursuant to (i)
a registration statement filed under the Act or (ii) an opinion of counsel,
reasonably satisfactory to counsel for the Company, that such registration is
not required under the Act.
10. Certificates to Bear Legends. The Warrants and the shares of Common
----------------------------
Stock issuable upon exercise of the Warrants shall be subject to a stop transfer
order and the certificate or certificates therefor shall bear the following
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND
MAY NOT BE PLEDGED, HYPOTHECATED, TRANSFERRED, OFFERED FOR SALE OR SOLD EXCEPT
PURSUANT TO A REGISTRATION UNDER SAID ACT AND LAWS OR AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT SUCH REGISTRATION IS
NOT REQUIRED UNDER SAID ACT AND LAWS.
<PAGE>
11. Notices. Any Notice pursuant to this Agreement to be given or made
-------
by the registered Holders of the Warrants to the Company shall be sufficiently
given or made if delivered by hand, transmitted by telex or telecopy or sent by
first-class mail, postage prepaid, addressed as follows:
DSET Corporation
1011 Rt. 22 West
Bridgewater, New Jersey 08807
Attn: Chief Executive Officer
Notices or demand authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if delivered by hand,
transmitted by telex or telecopy or sent by first-class mail, postage prepaid,
to the address shown on Schedule 1, or to such other address of each Holder or
subsequent Holders as shown on the Warrant Register.
12. Binding Effect; Survival. This Agreement shall survive the exercise
------------------------
of the Warrant and shall be binding upon the Company and its successors and
assigns and shall be binding upon and inure to the benefit of each Holder of the
Warrants and each holder of shares of Preferred Stock issued upon exercise of
the Warrants.
13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New Jersey or, if different, the laws
of such other jurisdiction as may be applicable to the issuance of the Warrants.
14. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
DSET CORPORATION
By: /s/ William P. McHale, Jr.
----------------------------
Name: W.P. McHale, Jr.
Title: Pres/CEO
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.
General Partner
By: Stamps, Woodsum & Co., IV
General Partner
By: /s/ Bruce R. Evans
----------------------------
General Partner
SUMMIT INVESTORS II, L.P.
By: /s/ Bruce R. Evans
----------------------------
Authorized Signatory
<PAGE>
SCHEDULE 1
- ----------
DSET CORPORATION
List of Holders
<TABLE>
<CAPTION>
Initial Number of
Shares to be Issued on
Name and Address of Purchaser Exercise of Warrants
----------------------------- ----------------------
<S> <C>
Summit Ventures IV, L.P. 118,328
Suite 2800
600 Atlantic Avenue
Boston, MA 02210-2227
Summit Investors II, L.P. 5,226
Suite 2800 -------
600 Atlantic Avenue
Boston, MA 02210-2227
TOTAL: 123,554
=======
</TABLE>
<PAGE>
EXHIBIT A
---------
WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND
MAY NOT BE PLEDGED, HYPOTHECATED, TRANSFERRED, OFFERED FOR SALE OR SOLD EXCEPT
PURSUANT TO A REGISTRATION STATEMENT UNDER SUCH ACT AND LAWS OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND LAWS.
THE TRANSFER OR EXCHANGE OF THIS WARRANT MUST BE REGISTERED IN ACCORDANCE WITH
THE WARRANT AGREEMENT REFERRED TO HEREIN.
NO.____ Initial
Number of Shares
Subject to Purchase
Upon Exercise of
Warrant:____
DSET CORPORATION
Warrant Certificate
THIS CERTIFIES THAT for value received, [name of Holder], or its
registered assigns, is the owner of a Warrant which entitles the owner thereof
to purchase at any time on and after the date hereof and on or before 5:00 p.m.
Eastern Standard Time on September 13, 2006 (the "Expiration Date"), [initial
number of shares] fully paid and nonassessable shares of the Common Stock, $.01
par value per share (the "Common Stock"), of DSET Corporation, a New Jersey
corporation (the "Company"), at the initial purchase price per share of $3.27
(the "Exercise Price"). The number of shares issuable upon exercise of the
Warrant and the Exercise Price are subject to adjustment as provided in the
Warrant Agreement described herein. The Warrant shall be exercisable upon
presentation and surrender of this Warrant Certificate with the Form of Election
to Purchase duly executed. This Warrant may be exercised in whole or in part,
subject to the terms of this Warrant Agreement (as hereinafter defined) but
after exercise this Warrant shall be canceled as to any remaining shares as to
which it has not been exercised and a new Warrant Certificate for any remaining
shares shall be issued.
This Warrant Certificate is subject to, and entitled to the benefits
of, all of the terms, provisions and conditions of a Warrant Agreement dated as
of September 13, 1996 (the "Warrant Agreement") among the Company and the
original holder hereof, which Warrant Agreement is hereby incorporated herein by
reference and made a part hereof and to which Warrant Agreement
<PAGE>
reference is hereby made for a full description of the rights, limitation of
rights, obligations, duties and immunities hereunder of the Company and the
holder of this Warrant Certificate. Terms used as defined terms herein and not
otherwise defined shall have the meanings set forth in the Warrant Agreement.
Copies of the Warrant Agreement are on file at the principal office of the
Company.
Subject to the terms of the Warrant Agreement, this Warrant
Certificate, upon surrender at the principal office of the Company, may be
exchanged for another Warrant Certificate or Warrant Certificates of like tenor
and date evidencing Warrants entitling the holder to purchase a like aggregate
number of shares of Common Stock as the Warrants evidenced by the Warrant
Certificate or Warrant Certificates surrendered entitled such holder to
purchase.
To the extent required, fractional shares of Common Stock will be
issued upon the exercise of any Warrant evidenced hereby, as provided in the
Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock for any purpose, nor
shall anything contained in the Warrant Agreement or herein be construed to
confer upon the holder hereof, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance or otherwise), or to receive notice
of meetings, or to receive dividends or subscription rights or otherwise, until
the Warrant evidenced by this Warrant Certificate shall have been exercised and
the Common Stock purchasable upon the exercise thereof shall have become
deliverable as provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Company's Common Stock are
closed for any purpose, the Company shall not be required to make delivery of
certificates for shares purchasable upon such exercise until the date of the
reopening of said transfer books.
<PAGE>
IN WITNESS WHEREOF, DSET Corporation has caused the signature (or
facsimile signature) of its Chairman and Chief Executive Officer and Secretary
to be printed hereon and its corporate seal (or facsimile) to be printed hereon.
DSET CORPORATION
By:
------------------------------
Attest:
- ------------------------------
Secretary
<PAGE>
FORM OF ELECTION TO PURCHASE
To be executed if holder desires to exercise the Warrant Certificate.
TO DSET CORPORATION:
The undersigned hereby irrevocably elects to exercise the Warrant
represented by this Warrant Certificate to purchase ____ shares of Common Stock
of DSET Corporation issuable upon the exercise of such Warrant and requests that
certificates of such shares be issued in the name of:
______________________________
Name
______________________________
Address
______________________________
Federal Identification Number
<PAGE>
WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND
MAY NOT BE PLEDGED, HYPOTHECATED, TRANSFERRED, OFFERED FOR SALE OR SOLD EXCEPT
PURSUANT TO A REGISTRATION STATEMENT UNDER SUCH ACT AND LAWS OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND LAWS.
THE TRANSFER OR EXCHANGE OF THIS WARRANT MUST BE REGISTERED IN ACCORDANCE WITH
THE WARRANT AGREEMENT REFERRED TO HEREIN,
NO. W-1 Initial
Number of Shares
Subject to Purchase
Upon Exercise of
Warrant: 118,328
DSET CORPORATION
Warrant Certificate
THIS CERTIFIES THAT for value received, Summit Ventures IV, L.P., or its
registered assigns, is the owner of a Warrant which entitles the owner thereof
to purchase at any time on and after the date hereof and on or before 5:00 p.m.
Eastern Standard Time on September 13, 2006 (the "Expiration Date"), One Hundred
Eighteen Thousand Three Hundred Twenty-Eight (118,328) fully paid and
nonassessable shares of the Common Stock, $.01 par value per share (the "Common
Stock"), of DSET Corporation, a New Jersey corporation (the "Company"), at the
initial purchase price per share of $3.27 (the "Exercise Price"). The number of
shares issuable upon exercise of the Warrant and the Exercise Price are subject
to adjustment as provided in the Warrant Agreement described herein. The Warrant
shall be exercisable upon presentation and surrender of this Warrant Certificate
with the Form of Election to Purchase duly executed. This Warrant may be
exercised in whole or in part, subject to the terms of this Warrant Agreement
(as hereinafter defined) but after exercise this Warrant shall be canceled as to
any remaining shares as to which it has not been exercised and a new Warrant
Certificate for any remaining shares shall be issued.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of a Warrant Agreement dated as of
September 13, 1996 (the "Warrant Agreement") among the Company and the original
holder hereof, which Warrant Agreement is hereby incorporated herein by
reference and made a part hereof and to which Warrant Agreement reference is
hereby made for a full description of the rights, limitation of rights,
obligations, duties and immunities hereunder of the Company and the holder of
this Warrant Certificate. Terms used as defined terms herein and not otherwise
defined shall have the meanings set forth
<PAGE>
in the Warrant Agreement. Copies of the Warrant Agreement are on file at the
principal office of the Company.
Subject to the terms of the Warrant Agreement, this Warrant Certificate,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled such holder to purchase.
To the extent required, fractional shares of Common Stock will be issued
upon the exercise of any Warrant evidenced hereby, as provided in the Warrant
Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock for any purpose, nor shall
anything contained in the Warrant Agreement or herein be construed to confer
upon the holder hereof, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to shareholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issue of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise, until the
Warrant evidenced by this Warrant Certificate shall have been exercised and the
Common Stock purchasable upon the exercise thereof shall have become deliverable
as provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock are closed
for any purpose, the Company shall not be required to make delivery of
certificates for shares purchasable upon such exercise until the date of the
reopening of said transfer books.
2
<PAGE>
IN WITNESS WHEREOF, DSET Corporation has caused the signature (or
facsimile signature) of its Chairman and Chief Executive Officer and Secretary
to be printed hereon and its corporate seal (or facsimile) to be printed hereon.
DSET CORPORATION
By: /s/ W.P. McHale, Jr.
------------------------
W.P. McHale, Jr.
Pres/CEO
Attest:
/s/ Paul Lipari
- --------------------------
Paul Lipari
Secretary
3
<PAGE>
FORM OF ELECTION TO PURCHASE
To be executed if holder desires to exercise the Warrant Certificate.
TO DSET CORPORATION:
The undersigned hereby irrevocably elects to exercise the Warrant
represented by this Warrant Certificate to purchase 118,328 shares of Common
Stock of DSET Corporation issuable upon the exercise of such Warrant and
requests that certificates of such shares be issued in the name of:
---------------------------------
Name
---------------------------------
Address
---------------------------------
Federal Identification Number
4
<PAGE>
WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND
MAY NOT BE PLEDGED, HYPOTHECATED, TRANSFERRED, OFFERED FOR SALE OR SOLD EXCEPT
PURSUANT TO A REGISTRATION STATEMENT UNDER SUCH ACT AND LAWS OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND LAWS.
THE TRANSFER OR EXCHANGE OF THIS WARRANT MUST BE REGISTERED IN ACCORDANCE WITH
THE WARRANT AGREEMENT REFERRED TO HEREIN.
NO. W-2 Initial
Number of Shares
Subject to Purchase
Upon Exercise of
Warrant: 5,226
DSET CORPORATION
Warrant Certificate
THIS CERTIFIES THAT for value received, Summit Investors II, L.P., or
its registered assigns, is the owner of a Warrant which entitles the owner
thereof to purchase at any time on and after the date hereof and on or before
5:00 p.m. Eastern Standard Time on September 13, 2006 (the "Expiration Date"),
Five Thousand Two Hundred Twenty-Six (5,226) fully paid and nonassessable shares
of the Common Stock, $.01 par value per share (the "Common Stock"), of DSET
Corporation, a New Jersey corporation (the "Company"), at the initial purchase
price per share of $3.27 (the "Exercise Price"). The number of shares issuable
upon exercise of the Warrant and the Exercise Price are subject to adjustment as
provided in the Warrant Agreement described herein. The Warrant shall be
exercisable upon presentation and surrender of this Warrant Certificate with the
Form of Election to Purchase duly executed. This Warrant may be exercised in
whole or in part, subject to the terms of this Warrant Agreement (as hereinafter
defined) but after exercise this Warrant shall be canceled as to any remaining
shares as to which it has not been exercised and a new Warrant Certificate for
any remaining shares shall be issued.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of a Warrant Agreement dated as of
September 13, 1996 (the "Warrant Agreement") among the Company and the original
holder hereof, which Warrant Agreement is hereby incorporated herein by
reference and made a part hereof and to which Warrant Agreement reference is
hereby made for a full description of the rights, limitation of rights,
obligations, duties and immunities hereunder of the Company and the holder of
this Warrant Certificate. Terms used as defined herein and not otherwise defined
shall have the meanings set forth
<PAGE>
in the Warrant Agreement. Copies of the Warrant Agreement are on file at the
principal office of the Company.
Subject to the terms of the Warrant Agreement, this Warrant Certificate,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled such holder to purchase.
To the extent required, fractional shares of Common Stock will be issued
upon the exercise of any Warrant evidenced hereby, as provided in the Warrant
Agreement.
No holder of this Warrant Certificate shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock for any purpose, nor
shall anything contained in the Warrant Agreement or herein be construed to
confer upon the holder hereof, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance or otherwise), or to receive notice
of meetings, or to receive dividends or subscription rights or otherwise, until
the Warrant evidenced by this Warrant Certificate shall have been exercised and
the Common Stock purchasable upon the exercise thereof shall have become
deliverable as provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock are closed
for any purpose, the Company shall not be required to make delivery of
certificates for shares purchasable upon such exercise until the date of the
reopening of said transfer books.
2
<PAGE>
IN WITNESS WHEREOF, DSET Corporation has caused the signature (or
facsimile signature) of its Chairman and Chief Executive Officer and Secretary
to be printed hereon and its corporate seal (or facsimile) to be printed hereon.
DSET CORPORATION
By: /s/ W.P. McHale, Jr.
-----------------------------
W.P. McHale, Jr.
Pres/CEO
Attest:
/s/ Paul Lipari
- -------------------------
Secretary
Paul Lipari
<PAGE>
FORM OF ELECTION TO PURCHASE
To be executed if holder desires to exercise the Warrant Certificate.
TO DSET CORPORATION:
The undersigned hereby irrevocably elects to exercise the Warrant
represented by this Warrant Certificate to purchase 5,226 shares of Common Stock
of DSET Corporation issuable upon the exercise of such Warrant and requests that
certificates of such shares be issued in the name of:
---------------------------------------
Name
---------------------------------------
Address
---------------------------------------
Federal Identification Number
4
<PAGE>
EXHIBIT 4.4
ARTICLE VII
REGISTRATION RIGHTS
-------------------
7.1 Certain Definitions. As used in this Article VII, the following
-------------------
terms shall have the following respective meanings:
"Holder" means the person who is then the record holder of Registrable
Securities which have not been sold to the public.
"Initiating Holders" means any Purchaser or its assignees who in the
aggregate are holders of at least twenty-five percent (25%) of the sum of,
without duplication, (i) the Conversion Shares now owned or hereafter acquired
by the Purchasers, (ii) all other shares of Common Stock owned by the
Purchasers, and (iii) all shares of Common Stock issuable with respect to
securities of the Company convertible into or exercisable for shares of Common
Stock now or hereafter acquired by any Purchaser.
"Registrable Securities" means (i) all of the Conversion Shares owned by
the Purchasers, (ii) all other shares of Common Stock now owned or hereafter
acquired by any Purchaser; (iii) all shares of Common Stock issuable with
respect to securities of the Company convertible into or exercisable for shares
of Common Stock now owned or hereafter acquired by any Purchaser; and (iv) any
Common Stock issued in respect of the shares described in clauses (i) through
(iii) upon any stock split, stock dividend, recapitalization or other similar
event.
The term "register" means to register under the Act and applicable state
securities laws for the purpose of effecting a public sale of securities.
"Registration Expenses" means all expenses incurred by the Company in
compliance with Sections 7.2, 7.3 or 7.5 hereof, including, without limitation,
all registration and filing fees, printing expenses, transfer taxes, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and the
expenses of any special audits incident to or required by any such registration.
"Selling Expenses" means all underwriting discounts and selling commissions
applicable to the sale of Registrable Securities and the fees and disbursements
of counsel for the selling Holders and other security holders.
7.2 Requested Registrations
-----------------------
(a) If on any two occasions after the date hereof, the Company shall
receive from one or more Initiating Holders a written request (on behalf of such
Initiating Holders and their respective affiliates) that the Company effect the
registration of Registrable Securities representing at least twenty-five percent
(25%) of the Registrable Securities then outstanding or issuable (or any lesser
percentage if the reasonably anticipated aggregate price to the public of the
Registrable Securities to be included in such registration would exceed $5
million), in
<PAGE>
connection with a firm commitment underwriting managed by a nationally
recognized underwriter, the Company will:
(i) promptly give written notice of the proposed registration to all other
Holders; and
(ii) as soon as practicable, use all commercially reasonable efforts to
effect such registration as may be so requested and as would permit or
facilitate the sale and distribution of such portion of such Registrable
Securities as are specified in such request, together with such portion of the
Registrable Securities of any Holder or Holders joining in such request as are
specified in a written request given within twenty (20) days after the receipt
of such written notice from the Company. If the underwriter managing the
offering advises the Holders, including the Initiating Holders, who have
requested inclusion of their Registrable Securities in such registration that
marketing considerations require a limitation on the number of shares offered,
such limitation shall be imposed pro rata among such Holders who requested
--------
inclusion of Registrable Securities in such registration according to the number
of Registrable Securities each such Holder requested to be included in such
registration. Neither the Company nor any other shareholder may include shares
in a registration effected under this Section 7.2 without the consent of the
Holders holding a majority of the Registrable Securities sought to be included
in such registration if the inclusion of shares by the Company or the other
shareholders would limit the number of Registrable Securities sought to be
included by the Holders or reduce the offering price thereof. No registration
initiated by Initiating Holders hereunder shall count as a registration under
this Section 7.2 unless and until it shall have been declared effective.
(b) Selection of Underwriter. The underwriter of any underwriting
------------------------
requested under this Section 7.2 shall be selected by the Holders holding a
majority of the Registrable Securities included therein; provided that such
underwriter must be reasonably acceptable to the Company.
7.3 "Piggy Back" Registrations.
--------------------------
(a) If the Company shall determine to register any of its securities,
either for its own account or the account of a security holder or holders
exercising their registration rights, other than a registration relating solely
to employee benefit plans, or a registration on any registration form which does
not permit secondary sales or does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(i) Promptly give to each Holder of Registrable Securities written
notice thereof (which shall include the number of shares the Company or other
security holder proposes to register and, if known, the name of the proposed
underwriter); and
(ii) Use its best efforts to include in such registration all the
Registrable Securities specified in a written request or requests, made by any
Holder within (20) days after the date of delivery of the written notice from
the Company described in clause (i) above. If the underwriter advises the
Company that marketing considerations require a limitation on the
<PAGE>
number of shares offered pursuant to any registration statement, then the
Company may offer all of the securities it proposes to register for its own
account or the maximum amount that the underwriter considers saleable and such
limitation on any remaining securities that may, in the opinion of the
underwriter, be sold will be imposed pro rata among all the shareholders who are
--------
entitled to include shares in such registration statement according to the
number of Registrable Securities each such shareholder requested to be included
in such registration statement.
(b) The Company shall select the underwriter for an offering made
pursuant to the Section 7.3; provided that such underwriter must be reasonably
acceptable to the Holders of a majority of the Registrable Securities being
registered in such offering.
7.4 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Section 7.2, 7.3 or 7.5 shall be paid by the Company. All Selling Expenses
incurred in connection with any such registration, qualification or compliance
shall be borne by the holders of the securities registered, pro rata on the
basis of the number of their shares so registered.
7.5 Registration on Form S-3. The Company shall use its best efforts to
------------------------
qualify for registration on Form S-3 or any comparable or successor form; and to
that end the Company shall register (whether or not required by law to do so)
the Common Stock under the Securities Exchange Act of 1934 (the "Exchange Act")
in accordance with the provisions of the Exchange Act following the effective
date of the first registration of any securities of the Company on Form S-1 or
any comparable or successor form. After the Company has qualified for the use
of Form S-3, in addition to the rights contained in the foregoing provisions of
this Article VII, the Holders of Registrable Securities shall have an unlimited
right to request registrations of Registrable Securities on Form S-3 (such
requests shall be in writing and shall state the number of shares of Registrable
Securities to be disposed of and the intended methods of disposition of such
shares by such Holder or Holders).
7.6 Registration Procedures. In the case of each registration effected by
-----------------------
the Company pursuant to this Article VII, the Company will keep each Holder of
Registrable Securities included in such registration advised in writing as to
the initiation of each registration and as to the completion thereof. At its
expense, the Company will do the following for the benefit of such Holders:
(a) Keep such registration effective for a period of one hundred
twenty days or until the Holder or Holders have completed the distribution
described in he registration statement relating thereto, whichever first occurs,
and amend or supplement such registration statement and the prospectus contained
therein from time to time to the extent necessary to comply with the Act and
applicable state securities laws;
(b) Use its best efforts to register or qualify the Registrable
Securities covered by such registration under the applicable securities or "blue
sky" laws of such jurisdictions as the selling shareholders may reasonably
request; provided, that the Company shall not be obligated to qualify to do
business in any jurisdiction where it is not then so qualified or otherwise
required
<PAGE>
to be so qualified or to take any action which would subject it to the service
of process in suits other than those arising out of such registration;
(c) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request;
(d) In connection with any underwritten offering pursuant to a
registration statement filled pursuant to Section 7.2 hereof, the Company will
enter into any underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and is entered into by the Holders and
provided further that, if the underwriter so requests, the underwriting
agreement will contain customary contribution provisions on the part of the
Company;
(e) To the extent then permitted under applicable professional
guidelines and standards, use its best efforts to obtain a comfort letter from
the Company's independent public accountants in customary form and covering such
matters of the type customarily covered by comfort letters and an opinion form
the Company's counsel in customary form and covering such matters of the type
customarily covered in a public issuance of securities, in each case addressed
to the Holders, and provide copies thereof to the Holders; and
(f) Permit the counsel to the selling shareholders to inspect and
copy such corporate documents as he may reasonably request.
7.7 Indemnification.
---------------
(a) The Company will, and hereby does, indemnify each Holder, each of
its officers, directors and partners, and each person controlling such Holder
within the meaning of the Act, with respect to which registration, qualification
or compliance has been effected pursuant to this Article VII, and each
underwriter, if any, and each person who controls such underwriter within the
meaning of the Act, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any prospectus,
offering circular or other document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by the Company of the
Act or the Exchange Act or the securities act of any state or any rule or
regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Holder, each of its
officers, directors and partners, and each person controlling such Holder, each
such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or action,
whether or not resulting in any liability, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement (or
alleged untrue statement) or omission (or alleged omission) based
<PAGE>
upon written information furnished to the Company by such Holder or underwriter
and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by him are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers and each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of the Act and the rules and regulations
thereunder, each other such Holder and each of their officers, directors and
partners, and each person controlling such Holder, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and such Holder's
directors, officers, partners, persons, underwriters or control persons for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, whether or not
resulting in liability, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein; provided, however, that the obligations of each Holder hereunder shall
be limited to an amount equal to the net proceeds received by such Holder upon
sale of his securities.
(c) Each party entitled to indemnification under this Section 7.7
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual or constructive knowledge of any claim as to which indemnity may be
sought, but the failure of any Indemnifying Party to give such notice shall not
relieve the Indemnifying Party of its obligations under Section 7.7 (except and
to the extent the Indemnifying Party has been prejudiced as a consequence
thereof). The Indemnifying Party will be entitled to participate in, and to the
extent that it may elect by written notice delivered to the Indemnified Party
promptly after receiving the aforesaid notice from such Indemnified Party, at
its expense to assume, the defense of any such claim or any litigation resulting
therefrom, with counsel reasonably satisfactory to such Indemnified Party,
provided that the Indemnified Party may participate in such defense at its
expense, notwithstanding the assumption of such defense by the Indemnifying
Party, and provided, further, that if the defendants in any such action shall
include both the Indemnified Party and the Indemnifying Party and the
Indemnified Party shall have reasonably concluded that there may be legal
defenses available to it and/or other Indemnified Parties which are different
from or additional to those available to the Indemnifying Party, the Indemnified
Party or Parties shall have the right to select separate counsel to assert such
legal defenses and to otherwise participate in the defense of such action on
behalf of such Indemnified Party or Parties and the fees and expenses of such
counsel shall be paid by the Indemnifying Party. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not
<PAGE>
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall (i) furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom and (ii) shall
reasonably assist the Indemnifying Party in any such defense, provided that the
Indemnified Party shall not be required to expend its funds in connection with
such assistance.
(d) No Holder shall be required to participate in a registration
pursuant to which it would be required to execute an underwriting agreement in
connection with a registration effected under Section 7.2 or 7.3 which imposes
indemnification or contribution obligations on such Holder more onerous than
those imposed hereunder; provided, however, that the Company shall not be deemed
to breach the provisions of Section 7.2 or 7.3 if a Holder is not permitted to
participate in a registration on account of his refusal to execute an
underwriting agreement on the basis of this subsection (d).
7.8 Information by Holder. Each Holder of Registrable Securities included
---------------------
in any registration shall furnish to the Company such information regarding such
Holder and the distribution proposed by such Holder as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance referred to in this Article
VII or otherwise required by applicable state or federal securities laws.
7.9 Limitations on Registration Rights. From and after the date of this
----------------------------------
Agreement, the Company shall not enter into any agreement with any holder or
prospective holder of any securities of the Company giving such holder or
prospective holder (a) the right to require the Company, upon any registration
of any of its securities, to include, among the securities which the Company is
then registering, securities owned by such holder, unless under the terms of
such agreement, such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of its securities
will not limit the number of Registrable Securities sought to be included by the
Holders of Registrable Securities or reduce the offering price thereof; or (b)
the right to require the Company to initiate any registration of any securities
of the Company.
7.10 Exception to Registration. The Company shall not be required to
-------------------------
effect a registration under this Article VII if (i) in the written opinion of
counsel for the Company, which counsel and the opinion so rendered shall be
reasonably acceptable to the Holders of Registrable Securities, such Holders may
sell without registration under the Act all Registrable Securities for which
they requested registration under the provisions of the Act and in the manner
and in the quantity in which the Registrable Securities were proposed to be
sold, or (ii) the Company shall have obtained from the Commission a "no-action"
letter to that effect; provided that this Section 7.10 shall not apply to sales
made under Rule 144(k) or any successor rule promulgated by the Commission until
after the effective date of the Company's initial registration of shares under
the Act. Notwithstanding the foregoing, in no event shall the provisions of
this Section 7.10 be construed to preclude a Holder of Registrable Securities
from exercising rights under Section 7.3
<PAGE>
for a period of three years after the effective date of the Company's initial
registration of shares under the Act.
7.11 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may permit the sale of
restricted securities (as that term is used in Rule 144 under the Act) to the
public without registration, the Company agrees to:
(a) make and keep public information available as those terms are
understood and defined in Rule 144 under the Act, at all times from and after
ninety days following the effective date of the first registration under the Act
filed by the Company for an offering of its securities to the general public;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the Act and
the Exchange Act at any time after it has become subject to such reporting
requirements; and
(c) so long as a Purchaser owns any restricted securities, furnish to
the Purchaser forthwith upon written request a written statement by the Company
as to its compliance with the reporting requirements of Rule 144 (at any time
from and after ninety days following the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Act and Exchange Act (at any time after it has
become subject to such reporting requirements), a copy of the most recent annual
or quarterly report of the Company, and such other reports and documents so
filed as a Purchaser may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Purchaser to sell any such securities
without registration.
7.12 Listing Application. If shares of any class of stock of the Company
-------------------
shall be listed on a national securities exchange, the Company shall, at its
expense, include in its listing application all of the shares of the listed
class then owned by any Purchaser.
7.13 Damages. The Company recognizes and agrees that the holder of
-------
Registrable Shares shall not have an adequate remedy if the Company fails to
comply with the provisions of this Article VII, and that damages will not be
readily ascertainable, and the Company expressly agrees that in the event of
such failure any Holder of Registrable Shares shall be entitled to seek specific
performance of the Company's obligations hereunder and that the Company will not
oppose an application seeking such specific performance.
7.14 "Lock-Up" Agreements with Underwriters. If on any occasion of
--------------------------------------
registration, other than pursuant to Section 7.2, in which the Company proposes
to file a registration statement under the Act with respect to the proposed sale
of Common Stock of the type which has been or may be issued upon conversion of
the Purchased Shares pursuant to a fully-underwritten public offering, and the
managing underwriters shall request an agreement by the Holders not to sell any
of the Registrable Securities so held by each Holder for a period of 90 days
commencing on the date of effectiveness of any such registration statement in
order to effect an orderly public distribution thereof, then the Holders shall
agree to enter into and execute
<PAGE>
such an agreement with such managing underwriter and the Company pertaining to a
restriction on the transfer of any shares of capital stock of the Company then
held by the Holder during such 90 day period; provided, however, that this
------ --------
Section 7.14 shall in no way limit the Holders' rights pursuant to Section 7.3
and provided further that, in the event of a registration covered by Section
7.3, any such agreement shall restrict only sales of such number of Registrable
Securities that are not being sold by the Holder pursuant to such registration.
<PAGE>
EXHIBIT 5
BUCHANAN INGERSOLL
Attorneys
500 College Road East
Princeton, NJ 08540
February 12, 1998
DSET Corporation
1011 US Highway 22
Bridgewater, New Jersey 08807
Gentlemen:
In connection with the Registration Statement on Form S-1, as amended
(Registration No. 333-43827) (the "Registration Statement"), filed by DSET
Corporation, a New Jersey corporation (the "Company"), under the Securities Act
of 1933, as amended, relating to the initial public offering of an aggregate of
up to 4,025,000 shares of the Company's Common Stock, no par value, of which (a)
2,500,000 shares will be purchased by the underwriters from the Company which
shall sell such shares from its treasury; (b) 1,000,000 shares will be purchased
by the underwriters from certain existing securityholders of the Company (the
"Selling Shareholders"); and (c) up to 525,000 shares may be purchased by the
underwriters from certain Selling Shareholders, if the underwriters exercise the
option granted to them to cover over-allotments (collectively, the "Shares"),
we, as counsel for the Company and the Selling Shareholders, have examined such
corporate records, other documents, and questions of law as we have considered
necessary or appropriate for the purposes of this opinion.
Upon the basis of such examination, we advise you that in our opinion:
(i) the Shares to be sold by the Company from its treasury have been duly
and validly authorized and, when sold in the manner contemplated by the
underwriting agreement (the "Underwriting Agreement") filed as an exhibit to the
Registration Statement and upon receipt by the Company of payment therefor as
provided in the Underwriting Agreement, will be legally issued, fully paid and
non-assessable; and
(ii) the Shares to be sold by the Selling Shareholders pursuant to the
Underwriting Agreement are, or upon the due exercise of certain options or
conversion of shares of Series A Preferred Stock in accordance with the terms
thereof, as applicable, will be, duly and validly authorized, legally issued,
fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the caption "Legal Matters" in
the Prospectus contained therein.
Very truly yours,
/s/ Buchanan Ingersoll
<PAGE>
EXHIBIT 10.1
CORPORATE REVOLVING AND TERM LOAN AGREEMENT
BETWEEN
MANUFACTURERS AND TRADERS TRUST COMPANY
AND
DSET CORPORATION
DATED AUGUST 5, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS....................................................... 1
-----------
a. Accumulated Funding Deficiency............................. 1
------------------------------
b. Affiliate.................................................. 1
---------
c. Bankruptcy Law............................................. 1
--------------
d. Business Day............................................... 1
------------
e. Consolidated Adjusted Net Income........................... 1
--------------------------------
f. Consolidated Current Assets................................ 2
---------------------------
g. Consolidated Current Liabilities........................... 2
--------------------------------
h. Consolidated Net Income Available for Interest Charges..... 2
------------------------------------------------------
i. Consolidated Tangible Net Worth............................ 2
-------------------------------
j. Consolidated Total Liabilities............................. 3
------------------------------
k. Control.................................................... 3
-------
l. Distribution............................................... 3
------------
m. EBITDA..................................................... 3
------
n. ERISA...................................................... 3
-----
o. Event of Default........................................... 3
----------------
p. Interest Charges........................................... 4
----------------
q. Interest Payment Date...................................... 5
---------------------
r. Internal Revenue Code...................................... 5
---------------------
s. Law........................................................ 5
---
t. Libor Rate................................................. 5
----------
u. Libor Rate Business Day.................................... 5
-----------------------
v. Libor Rate Election........................................ 5
-------------------
w. Libor Rate Period.......................................... 5
-----------------
x. Libor Rate Period Commencement Date........................ 5
-----------------------------------
y. Libor Rate Portion......................................... 5
------------------
z. Loan....................................................... 6
----
aa. Loan Document.............................................. 6
-------------
bb. Material Adverse Effect.................................... 6
-----------------------
cc. Pension Plan............................................... 6
------------
dd. Permitted Indebtedness..................................... 6
----------------------
ee. Permitted Lien............................................. 6
--------------
ff. Person..................................................... 7
------
gg. Potential Event of Default................................. 7
--------------------------
hh. Prime Rate................................................. 7
----------
ii. Prime Rate Portion......................................... 7
------------------
jj. Prohibited Transaction..................................... 8
----------------------
kk. Reportable Event........................................... 8
----------------
ll. Revolving Loan............................................. 8
--------------
mm. Revolving Loan Repayment Date.............................. 8
-----------------------------
nn. Subsidiary................................................. 8
----------
oo. Term Loan.................................................. 8
---------
pp. Working Capital............................................ 8
---------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
2. LOANS............................................................. 8
-----
a. Revolving Loans............................................. 8
---------------
b. Revolving Loan Note......................................... 9
-------------------
c. Interest on Revolving Loans................................. 9
---------------------------
d. Term Loan................................................... 9
---------
e. Term Note................................................... 10
---------
f. Interest on Term Loan....................................... 10
---------------------
g. Interest on Prime Rate Portions............................. 10
-------------------------------
h. Interest on Libor Rate Portions............................. 10
-------------------------------
i. Libor Rate Election......................................... 11
-------------------
j. Extension of Revolving Loan Repayment Date.................. 12
------------------------------------------
k. Optional Repayment in Advance............................... 12
-----------------------------
l. Non-Usage Fee............................................... 12
-------------
m. Default Rate of Interest.................................... 12
------------------------
n. Late Charge................................................. 12
-----------
o. Application of Payments and Computations.................... 12
----------------------------------------
p. General Provisions as to Repayment and Payment.............. 13
----------------------------------------------
q. Limitation on Interest...................................... 13
----------------------
3. PREREQUISITES TO LOAN............................................. 13
---------------------
a. No Default.................................................. 13
----------
b. Representations and Warranties.............................. 13
------------------------------
c. Proceedings................................................. 14
-----------
d. Receipt by Bank Prior to Making of First Revolving Loan..... 14
-------------------------------------------------------
e. Receipt by Bank Prior to Making of Additional Revolving Loan 15
------------------------------------------------------------
f. Receipt by Bank Prior to Making of Term Loan................ 15
--------------------------------------------
4. REPRESENTATIONS AND WARRANTIES.................................... 15
------------------------------
a. Use of Proceeds............................................. 15
---------------
b. Subsidiaries................................................ 15
------------
c. Good Standing; Qualification; Authority..................... 15
---------------------------------------
d. Compliance.................................................. 16
----------
e. Legality.................................................... 16
--------
f. Fiscal Year................................................. 17
-----------
g. Financial Statements........................................ 17
--------------------
h. Material Adverse Effects; Distributions..................... 17
---------------------------------------
i. Tax Returns and Payments.................................... 17
------------------------
j. Indebtedness................................................ 17
------------
k. Pension Obligations......................................... 18
-------------------
l. Assets; Liens and Encumbrances.............................. 18
------------------------------
m. Loans....................................................... 18
-----
n. Judgments and Litigation.................................... 18
------------------------
o. Default..................................................... 19
-------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
p. Full Disclosure............................................. 19
---------------
5. AFFIRMATIVE COVENANTS 19
---------------------
a. Good Standing; Qualification................................ 19
----------------------------
b. Compliance.................................................. 19
----------
c. EBITDA...................................................... 19
------
d. Working Capital............................................. 19
---------------
e. Net Worth; Liabilities...................................... 19
----------------------
f. Ratio of Liabilities to Net Worth........................... 20
---------------------------------
g. Accounting; Reserves; Tax Returns........................... 20
---------------------------------
h. Reporting Requirements...................................... 20
----------------------
i. Payment of Certain Indebtedness............................. 21
-------------------------------
j. Maintenance of Title and Assets; Insurance.................. 22
------------------------------------------
k. Inspections................................................. 22
-----------
l. Pension Obligations......................................... 22
-------------------
m. Changes in Management, Ownership and Control................ 23
--------------------------------------------
n. Judgments................................................... 23
---------
o. Litigation.................................................. 23
----------
p. Liens and Encumbrances...................................... 24
----------------------
q. Defaults and Material Adverse Effects....................... 24
-------------------------------------
r. Guaranties.................................................. 24
----------
s. Further Actions............................................. 24
---------------
6. NEGATIVE COVENANTS................................................ 24
------------------
a. Fiscal Year................................................. 24
-----------
b. Indebtedness................................................ 25
------------
c. Pension Obligations......................................... 25
-------------------
d. Liens....................................................... 25
-----
e. Distributions............................................... 25
-------------
f. Corporate Changes........................................... 25
-----------------
g. Stock of Subsidiary......................................... 26
-------------------
h. Full Disclosure............................................. 26
---------------
7. INDEBTEDNESS IMMEDIATELY DUE...................................... 26
----------------------------
8. EXPENSES; INDEMNIFICATION......................................... 26
-------------------------
a. Expenses.................................................... 26
---------------------------
b. Expenses Due to Law Changes................................. 27
---------------------------
9. GENERAL........................................................... 28
-------
a. Term; Survival.............................................. 28
--------------
b. Survival; Reliance........................................... 28
------------------
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
c. Cumulative Nature, Nonexclusive Exercise and Waivers of
--------------------------------------------------------
Rights and Remedies.......................................... 28
-------------------
d. Binding Effect............................................... 29
--------------
e. Entire Agreement............................................. 29
----------------
f. Governing Law................................................ 29
-------------
g. Notices...................................................... 29
-------
h. Assignments and Participations............................... 30
------------------------------
i. Requests..................................................... 30
--------
j. Right of Setoff.............................................. 30
---------------
k. Invalidity................................................... 31
----------
l. Directly or Indirectly....................................... 31
----------------------
m. Accounting Terms and Computations............................ 31
---------------------------------
n. Headings..................................................... 31
--------
10. CONSENTS AND WAIVERS RELATING TO LEGAL PROCEEDINGS................. 31
--------------------------------------------------
a. JURISDICTIONAL CONSENTS AND WAIVERS.......................... 31
-----------------------------------
b. WAIVER OF TRIAL BY JURY AND CLAIMS TO CERTAIN DAMAGES........ 32
-----------------------------------------------------
</TABLE>
iv
<PAGE>
CORPORATE REVOLVING AND TERM LOAN AGREEMENT
This Agreement is made this 5th day of August, 1997, between
Manufacturers and Traders Trust Company, a New York banking corporation having
its chief executive office at One M&T Plaza, Buffalo, New York 14203 (the
"Bank") and DSET Corporation, a New Jersey business corporation having its chief
executive office at 1011 US Highway 22, Suite 100, Bridgewater, New Jersey 08807
(the "Borrower").
The Bank and the Borrower agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
-----------
a. Accumulated Funding Deficiency. "Accumulated Funding
------------------------------
Deficiency" has the meaning given to such term in Section 412(a) of the Internal
Revenue Code.
b. Affiliate. "Affiliate" means, other than all Subsidiaries,
---------
any Person who or that now or hereafter has Control of, or is now or hereafter
under common Control with, the Borrower or any Subsidiary or over whom or over
which the Borrower or any Subsidiary now or hereafter has Control.
c. Bankruptcy Law. "Bankruptcy Law" means any bankruptcy or
--------------
insolvency Law or any other Law relating to the relief of debtors, to the
readjustment, composition or extension of indebtedness, to liquidation or to
reorganization.
d. Business Day. "Business Day" means any day not a Saturday,
------------
Sunday or legal holiday, on which the Bank is open for business in Buffalo, New
York.
e. Consolidated Adjusted Net Income. "Consolidated Adjusted Net
--------------------------------
Income" for any period means the consolidated gross revenues of the Borrower for
such period less all expenses and other proper charges (including taxes on
income) and extraordinary items of income, but excluding in any event (to the
extent not previously deducted as extraordinary items of income):
i) any gains or losses on the sale or other disposition
of investments or fixed or capital assets, and any taxes on such excluding gains
and any tax deductions or credits on accounts of any such excluded losses;
ii) the proceeds of any life insurance policy;
<PAGE>
iii) net earnings and losses of any corporation,
substantially all the assets of which have been acquired in any manner by the
Borrower or a Subsidiary, realized by such corporation prior to the date of such
acquisition;
iv) net earnings and losses of any corporation with which
the Borrower or a Subsidiary shall have consolidated or which shall have merged
into or with the Borrower or a Subsidiary prior to the date of such
consolidation or merger;
v) net earnings of any business entity in which the
Borrower or a Subsidiary has an ownership interest unless such net earnings
shall have actually been received by the Borrower in the form of cash
distributions;
vi) earnings resulting from any reappraisal, revaluation
or write-up of assets;
vii) any gain arising from the acquisition of any
securities of the Borrower; and
viii) any reversal of any contingency reserve, except to the
extent that provision for such contingency reserve shall have been made from
income arising during such period.
f. Consolidated Current Assets. "Consolidated Current Assets"
---------------------------
means, at any date, the aggregate amount of all assets of the Borrower and its
Subsidiaries which would be properly classified as current assets at such date,
all computed as per management statements prepared on a consistent basis.
g. Consolidated Current Liabilities. "Consolidated Current
--------------------------------
Liabilities" means the aggregate amount of all liabilities of the Borrower and
its Subsidiaries (including tax and other proper accruals) which would be
classified as current liabilities, all computed as per management statements
prepared on a consistent basis.
h. Consolidated Net Income Available for Interest Charges.
------------------------------------------------------
"Consolidated Net Income Available for Interest Charges" for any period means
the sum of (i) Consolidated Adjusted Net Income during such period, plus (to the
extent deducted in determining adjusted net income) (ii) all provisions for any
federal, state or other income taxes made by the Borrower during such period,
and (iii) Interest Charges during such period.
i. Consolidated Tangible Net Worth. "Consolidated Tangible Net
-------------------------------
Worth" means for the Borrower and its Subsidiaries, the excess of (i) the
aggregate net book value of the assets (other than patents, patent rights,
trademarks, trade names, treasury stock, franchises, copyrights, licenses,
permits, goodwill and other intangible
2
<PAGE>
assets classified as such in accordance with generally accepted accounting
principles and appearing on the balance sheet as of the date on which
Consolidated Tangible Net Worth is being determined) after all appropriate
adjustments in accordance with generally accepted accounting principles applied
on a consistent basis (including, without limitation, reserves for doubtful
receivables, obsolescence, depreciation and amortization and excluding the
amount of any write-up or revaluation of any asset) over (ii) Consolidated Total
Liabilities, in each case computed and consolidated in accordance with generally
accepted accounting principles applied on a consistent basis.
j. Consolidated Total Liabilities. "Consolidated Total
------------------------------
Liabilities" means all items which, in accordance with generally accepted
accounting principles applied on a consistent basis, would properly be included
on the liability side of the balance sheet (other than capital stock, capital
surplus and retained earnings), as of the date on which the amount of
Consolidated Total Liabilities is to be determined, of the Borrower and its
Subsidiaries, computed and consolidated in accordance with generally accepted
accounting principles applied on a consistent basis.
k. Control. "Control" means, with respect to any Person,
-------
whether direct or indirect, (i) if such Person is a corporation, the power to
vote 10% or more of the outstanding shares of any class of stock of such Person
ordinarily having the power to vote for the election of directors of such
Person, (ii) the beneficial ownership of 10% or more of the outstanding shares
of any class of stock of such Person or of 10% or more of any other ownership
interest in such Person or (iii) the power to direct or cause the direction of
the management and policies of such Person, whether by ownership of any stock or
other ownership interest, by agreement or otherwise.
l. Distribution. "Distribution" means, with respect to any
------------
corporation, (i) any dividend or other distribution, whether in cash or in the
form of any other asset, on account of any of its stock or (ii) any payment on
account of the purchase, redemption, retirement or other acquisition of any of
its stock.
m. EBITDA. "EBITDA" means the sum of Consolidated Net Income
------
Available for Interest Charges, plus depreciation and amortization.
n. ERISA. "ERISA" means the Employee Retirement Income
-----
Security Act of 1974, as amended.
o. Event of Default. An "Event of Default" occurs or exists if
----------------
(i) the Borrower defaults in the payment when due of the principal of or
interest on any Loan or of any other amount owing by the Borrower to the Bank
pursuant to this Agreement, (ii) the Borrower or any Subsidiary defaults in the
payment when due of any sum that is now or hereafter owing by it to the Bank
other than pursuant to this Agreement, or the maturity of any such sum is
accelerated, (iii) the Borrower defaults in
3
<PAGE>
the performance when due of any obligation owing by it to the Bank pursuant to
this Agreement other than an obligation to pay money, and fails to cure such
default within 90 days after notice of such default is given by the Bank, (iv)
the Borrower is dissolved, ceases to exist, participates or agrees to
participate in any merger, consolidation or other absorption in which the
Borrower is not the surviving entity, assigns, sells or otherwise transfers or
disposes of all or substantially all of its assets, makes or permits what might
be fraudulent transfer or fraudulent conveyance of any of its assets, makes any
bulk sale, sends any notice of any intended bulk sale, becomes insolvent
(however such insolvency is evidenced), generally fails to pay its debts as they
become due, fails to pay, withhold or collect any tax as required by any Law
(except for any tax not yet required by Section 5i of this Agreement to be
paid), suspends or ceases its present business, has served or filed against it
or against any of its assets any attachment, levy, tax lien, warrant or similar
lien other than a Permitted Lien or has entered against it or against any of its
assets any judgment, order or award of any court, agency or other governmental
authority or of any arbitrator, (vi) the Borrower has any receiver, trustee,
liquidator, sequestrator or custodian of it or of any of its assets appointed
(whether with or without its consent), makes any assignment for the benefit of
creditors or commences or has commenced against it any case or other proceeding
pursuant to any Bankruptcy Law or any formal or informal proceeding for the
dissolution, liquidation or winding up of the affairs of, or for the settlement
of claims against it, (vii) any representation or warranty made in this
Agreement or heretofore or hereafter made to the Bank proves, as of the time it
was made or deemed to have been made, to have been incorrect or misleading in
any material respect, except to the extent updated in a certificate executed by
the President or a Vice President of the Borrower and by the chief financial
officer of the Borrower and received by the Bank, or (viii) there occurs or
exists with respect to any Pension Plan any Prohibited Transaction, Reportable
Event or other event or condition that, in the opinion of the Bank, constitutes
or will or might constitute grounds for the institution by the Pension Benefit
Guaranty Corporation of any proceeding under ERISA seeking the termination of
such Pension Plan or the appointment of a trustee to administer such Pension
Plan, the Pension Benefit Guaranty Corporation institutes any proceeding under
ERISA seeking the termination of any Pension Plan or the appointment of a
trustee to administer any Pension Plan, any Person other than the Pension
Benefit Guaranty Corporation institutes any proceeding under ERISA seeking the
termination of any Pension Plan or the appointment of a trustee to administer
any Pension Plan that is, in the opinion of the Bank, likely to result in the
termination of such Pension Plan, any trustee is appointed by a United States
District Court to administer any Pension Plan, or there are vested unfunded
liabilities under any Pension Plan that, in the opinion of the Bank, have or
will or might have any Material Adverse Effect.
p. Interest Charges. "Interest Charges" for any period means
----------------
all interest and all amortization of debt discount and expense on all
indebtedness of the Borrower and its Subsidiaries.
4
<PAGE>
q. Interest Payment Date. "Interest Payment Date" means,
---------------------
except as otherwise provided in this Agreement, (i) the first day of each
calendar month, beginning on the first day of the first calendar month after the
calendar month in which the first Revolving Loan is made, except for any of such
interest payable with respect to any Libor Rate Portion for any Libor Rate
Period, and (ii) with respect to any Libor Rate Portion for any Libor Rate
Period, the day after the last day in such Libor Rate Period.
r. Internal Revenue Code. "Internal Revenue Code" means the
---------------------
Internal Revenue Code of 1986, as amended.
s. Law. "Law" means any statute, ordinance, regulation, rule,
---
interpretation, decision, guideline or other requirement enacted or issued by
any court, agency or other governmental authority.
t. Libor Rate. "Libor Rate" means the rate to be charged
----------
during a Libor Rate Period, as determined by the Bank from any broker, quoting
service or commonly available source utilized by the Bank, at which United
States dollar deposits in immediately available funds are offered to leading
banks for deposit in the London interbank eurodollar market at approximately
11:00 a.m. London, England time (or as soon thereafter as practicable) on the
date that is two Libor Rate Business Days before the first day of such period
for delivery on the first day of such period for a period equal to such period.
u. Libor Rate Business Day. "Libor Rate Business Day" means
-----------------------
any day on which in both New York, New York and London, England banks are open
to conduct regular business.
v. Libor Rate Election. "Libor Rate Election" means any oral
-------------------
(including, but not limited to, telephonic), written or other (including, but
not limited to, facsimile) election to have the interest charged for any period
on a portion of the aggregate outstanding principal amounts of all Loans
determined by reference to the Libor Rate for such period.
w. Libor Rate Period. "Libor Rate Period" means any period for
----------------
which interest is to be charged on any Libor Rate Portion at a rate determined
by reference to the Libor Rate for such period pursuant to a Libor Rate
Election.
x. Libor Rate Period Commencement Date. "Libor Rate Period
-----------------------------------
Commencement Date" means the date on which any Libor Rate Period begins.
y. Libor Rate Portion. "Libor Rate Portion" means any portion
------------------
of the aggregate outstanding principal amounts of all Loans on which interest is
to be
5
<PAGE>
charged for any period at a rate determined by reference to the Libor Rate for
such period pursuant to a Libor Rate Election.
z. Loan. "Loan" means any Revolving Loan or the Term Loan.
----
aa. Loan Document. "Loan Document" means this Agreement or any
-------------
other agreement or instrument referred to in Section 3d, 3e or 3f of this
Agreement.
bb. Material Adverse Effect. "Material Adverse Effect" means
-----------------------
any material adverse effect on (i) the ability of the Borrower to repay when due
any of the principal amount of the Loan or to pay when due any interest owing to
any Bank pursuant to this Agreement or any other amount owing by the Borrower to
the Bank pursuant to this Agreement, (ii) the ability of the Borrower or of any
Subsidiary to perform when due any obligation pursuant to any Loan Document or
(iii) the Borrower and its Subsidiaries taken as a whole or the business,
operations, assets, affairs or condition (financial or other) of the Borrower
and its Subsidiaries taken as a whole.
cc. Pension Plan. "Pension Plan" means (i) any pension plan,
------------
as such term is defined in Section 3(2) of ERISA, that (A) has heretofore been
or is hereafter established or maintained by the Borrower, by any Subsidiary or
by any other Person that is, together with the Borrower or with any Subsidiary,
a member of a controlled group of corporations for purposes of Section 414(b) of
the Internal Revenue Code or is under common control with the Borrower or with
any Subsidiary for purposes of Section 414(c) of the Internal Revenue Code, (B)
to which contributions have heretofore been or are hereafter made by the
Borrower, by any Subsidiary or by any such other Person or (C) to which the
Borrower, any Subsidiary or any such other Person has heretofore agreed or
hereafter agrees or otherwise has heretofore incurred or hereafter incurs any
obligation to make contributions or (ii) any trust heretofore or hereafter
created under any such pension plan.
dd. Permitted Indebtedness. "Permitted Indebtedness" means
----------------------
indebtedness, liabilities and obligations (i) to the Bank, (ii) resulting from
the endorsement in the ordinary course of business of any check or other
negotiable instrument for deposit or for collection, (iii) trade payables
incurred in the ordinary course of business, or (iv) obligations on capital
leases and the principal amount of the deferred purchase price of assets, not
exceeding $1,000,000 in aggregate principal amount at any given time, and
incurred by the Borrower or any Subsidiary in the ordinary course of its
business.
ee. Permitted Lien. "Permitted Lien" means (i) any lease of any
--------------
asset by the Borrower or by any Subsidiary as a lessor in the ordinary course of
its business and without interference with the conduct of its business or
operations, (ii) any pledge or deposit made by the Borrower or by any Subsidiary
in the ordinary course of its business (A) in connection with any workers'
compensation, unemployment insurance,
6
<PAGE>
social security or similar Law or (B) to secure the payment of any indebtedness,
liability or obligation in connection with any letter of credit, bid, tender,
trade or government contract, lease, surety, appeal or performance bond or Law,
or of any similar indebtedness, liability or obligation, not incurred in
connection with the borrowing of any money or in connection with the deferral of
the payment of the purchase price of any asset, (iii) any attachment, levy or
similar lien with respect to the Borrower or with respect to any Subsidiary
arising in connection with any action or other legal proceeding so long as (A)
the validity of the claim or judgment secured thereby is being contested in good
faith by appropriate proceedings promptly instituted and diligently conducted,
(B) adequate reserves have been appropriately established for such claim or
judgment, (C) the execution or other enforcement of such attachment, levy or
similar lien is effectively stayed and (D) neither such claim or judgment nor
such attachment, levy or similar lien has any Material Adverse Effect, (iv) any
statutory lien in favor of the United States for any amount paid to the Borrower
or to any Subsidiary as a progress payment pursuant to any government contract,
(v) any statutory lien securing the payment of any tax, assessment, fee, charge,
fine or penalty imposed by any government or political subdivision upon the
Borrower, upon any Subsidiary or upon any of the assets, income and franchises
of the Borrower or of any Subsidiary but not yet required by Section 5i of this
Agreement to be paid, (vi) any statutory lien securing the payment of any claim
or demand of any materialman, mechanic, carrier, warehouseman, garageman or
landlord against the Borrower or against any Subsidiary but not yet required by
such Section 5i to be paid, (vii) any reservation, exception, encroachment,
easement, right-of-way, covenant, condition, restriction, lease or similar title
exception or encumbrance affecting the title to any real property of the
Borrower or of any Subsidiary but not interfering with the conduct of its
business or operations, or (viii) any security interest, mortgage, leasehold
interest or other lien or encumbrance securing any Permitted Indebtedness.
ff. Person. "Person" means (i) any individual, corporation,
------
partnership, limited liability company, joint venture, trust, unincorporated
association, government or political subdivision, (ii) any court, agency or
other governmental authority or (iii) any other entity, body, organization or
group.
gg. Potential Event of Default. "Potential Event of Default"
--------------------------
means any event or condition that, after notice, after lapse of time or after
both notice and lapse of time, would constitute an Event of Default.
hh. Prime Rate. "Prime Rate" means the rate announced by the
----------
Bank as its prime rate of interest.
ii. Prime Rate Portion. "Prime Rate Portion" means the
------------------
aggregate outstanding principal amounts of all Loans less the Libor Rate
Portion.
7
<PAGE>
jj. Prohibited Transaction. ""Prohibited Transaction" (i) has
----------------------
the meaning given to such term in Section 4975(c) of the Internal Revenue Code,
and (ii) means any transaction prohibited by Section 406(a) of ERISA.
kk. Reportable Event. "Reportable Event" has the meaning given
----------------
to such term in Section 4043(b) of ERISA.
ll. Revolving Loan. "Revolving Loan" means any loan by the Bank
--------------
to the Borrower pursuant to Section 2a of this Agreement.
mm. Revolving Loan Repayment Date. "Revolving Loan Repayment
-----------------------------
Date" means the later of (i) August 5, 2000, or (ii) any date specified in any
extension request executed by the Bank in accordance with Section 2j of this
Agreement.
nn. Subsidiary. "Subsidiary" means any corporation of which the
----------
Borrower now or hereafter has beneficial ownership, whether direct or indirect,
of (i) 50% or more of the outstanding shares of any class of stock ordinarily
having the power to vote for the election of directors of such corporation or
(ii) such lower percentage of the outstanding shares of any class of such stock
as is sufficient to render such corporation a subsidiary of the Borrower for
purposes of generally accepted accounting principles as in effect at the time of
determination of the status of such corporation for purposes of this definition.
oo. Term Loan. "Term Loan" means the loan by the Bank to the
---------
Borrower pursuant to Section 2d of this Agreement.
pp. Working Capital. "Working Capital" shall mean for the
---------------
Borrower and its Subsidiaries, the amount by which Consolidated Current Assets
exceed Consolidated Current Liabilities.
2. LOANS.
-----
a. Revolving Loans. (i) Subject to the terms and conditions,
---------------
and relying upon the representations and warranties, set forth herein, the Bank
agrees to make Revolving Loans to the Borrower at any time or from time to time
on or after the date hereof and until the Revolving Loan Repayment Date, in an
aggregate principal amount not in excess of $3,000,000 at any time (the
"Commitment"). Within the foregoing limits, the Borrower may borrow hereunder on
or after the date hereof and prior to the Revolving Loan Repayment Date, repay
or reborrow subject to the terms, provisions and limitations set forth herein.
After the Revolving Loan Repayment Date, no amounts repaid may be reborrowed.
8
<PAGE>
(ii) Revolving Loans made by the Bank on any one day shall
be in any combination of Prime Rate Portions and Libor Rate Portions, provided,
that each such Portion of a Revolving Loan shall be in an amount not less than
$50,000 and in integral multiples thereof. The initial Revolving Loan by the
Bank to the Borrower shall be made against delivery to the Bank of the Revolving
Loan Note, payable to the order of the Bank, as described in Section 2b hereof,
and upon delivery of the other documentation required in Article 3 herein.
(iii) Each Revolving Loan shall be made upon one (1)
Business Day's (or three (3) Libor Rate Business Days' in the case of a
Revolving Loan consisting wholly or partly of a Libor Rate Portion) prior notice
from the Borrower to the Bank. Each such notice shall specify (A) the requested
date of such Loan, (B) the requested type of Loan, and (C) the requested amount
of such Loan.
b. Revolving Loan Note. The Revolving Loans shall be
-------------------
evidenced by a promissory note (the "Revolving Loan Note"), substantially in the
form attached hereto as Exhibit A, appropriately completed by the Borrower, duly
executed and delivered on behalf of the Borrower, and payable to the order of
the Bank. The date and amount of each Revolving Loan, and the date and amount of
each payment or prepayment of principal of any Revolving Loan, shall be recorded
on the grid schedule annexed to the Revolving Loan Note, and the Borrower
authorizes the Bank to make such recordation. The Revolving Loan Note and grid
schedule shall be presumptive evidence of the Revolving Loans, absent manifest
error. The aggregate principal amount outstanding on each Revolving Loan Note
shall be payable on the Revolving Loan Repayment Date. All accrued and unpaid
interest on the Revolving Loans shall be payable on each Interest Payment Date
and on the Revolving Loan Repayment Date; provided, however, that if any such
-------- -------
day is not a Business Day, such accrued interest, if any, shall be payable on
the next succeeding Business Day with additional accrued interest until paid.
c. Interest on Revolving Loans. The Prime Rate Portion of each
---------------------------
Revolving Loan shall bear interest in accordance with Section 2g, and the Libor
Rate Portion of each Revolving Loan shall bear interest in accordance with
Section 2h.
d. Term Loan. Not later than 30 days nor more than 90 days
---------
prior to the Revolving Loan Repayment Date, the Borrower may deliver to the Bank
a request (a "Conversion Request") that all or a portion of the then outstanding
principal amount of Revolving Loans made to the Borrower be converted to a Term
Loan. Subject to the terms and conditions of this Agreement, including Section
3f, the Bank agrees, upon the simultaneous payment in full of the principal of
and interest on the Revolving Loans then outstanding, to make a four year term
loan (the "Term Loan") to the Borrower on the Revolving Loan Repayment Date. The
Term Loan shall be in the principal amount contained in the Conversion Request;
provided that the Term Loan shall be in a principal
- --------
9
<PAGE>
amount of not more than the lesser of (i) the total of the outstanding principal
amounts of all Revolving Loans, or (ii) $3,000,000.
e. Term Note. The Term Loan shall be evidenced by a promissory
---------
note ("Term Note") substantially in the form attached hereto as Exhibit B,
appropriately completed, payable to the order of the Bank, duly executed and
delivered on behalf of the Borrower, dated the Revolving Loan Repayment Date and
in the principal amount of the Term Loan. The principal amount outstanding on
such Term Note shall be payable as to principal in sixteen (16) equal
consecutive quarterly installments, with the first of such installments due on
the date that is three months after the Revolving Loan Repayment Date, and
additional installments due on the same day of each succeeding calendar quarter
through the date that is four years after the Revolving Loan Repayment Date,
when the Borrower shall repay the entire outstanding principal amount of the
Term Loan to the Bank together with all interest and other amounts owing
pursuant to this Agreement and remaining unpaid.
f. Interest on Term Loan. The Prime Rate Portion of the Term
---------------------
Loan shall bear interest in accordance with Section 2g, and the Libor Rate
Portion of the Term Loan shall bear interest in accordance with Section 2h.
g. Interest on Prime Rate Portions. The Borrower shall pay
-------------------------------
interest on the unpaid principal amount of the Prime Rate Portion of each Loan
from the date such Loan is disbursed to the Borrower until the date such
principal amount is due and payable, on each Interest Payment Date for such Loan
at an interest rate per annum equal to (a) the Prime Rate in effect from time to
time, minus 0.25%, on the aggregate principal amount of the Prime Rate Portions
of all Loans to the extent it is $1,000,000 or less, and (b) the Prime Rate in
effect from time to time on the aggregate principal amount of the Prime Rate
Portions of all Loans to the extent such aggregate principal amount exceeds
$1,000,000.
h. Interest on Libor Rate Portions. (i) The Borrower shall pay
-------------------------------
interest on the unpaid principal amount of the Libor Rate Portion of each Loan
from the date such Loan is disbursed to the Borrower until the date such
principal amount is due and payable, on each Interest Payment Date for such
Loan, at an interest rate per annum equal to (a) the Libor Rate plus 1.25%, if
the aggregate principal amount of all Loans is $1,000,000 or less, (b) the Libor
Rate plus 1.75%, if the aggregate principal amount of the Prime Rate Portions of
all Loans exceeds $1,000,000, or (c) if the aggregate principal amount of all
Loans exceeds $1,000,000, but the aggregate principal amount of the Prime Rate
Portions of all Loans is $1,000,000 or less, (i) the Libor Rate plus 1.25% on
the aggregate principal amount of the Libor Rate Portions of Loans which is
equal to the difference between $1,000,000 and the aggregate principal amount of
the Prime Rate Portions of all Loans, and (ii) the Libor Rate plus 1.75% on the
aggregate principal amount of the Libor Rate Portions of all Loans to the extent
they exceed such amount.
10
<PAGE>
(ii) Notwithstanding anything to the contrary in paragraph
2h(i), (1) interest shall not be charged at as determined under paragraph 2h(i),
and shall instead be charged as provided in Section 2g, with respect to any
Libor Rate Portion during any Libor Rate Period if before such Libor Rate Period
begins (a) any governmental authority asserts that it is unlawful, or the Bank
determines that it is unlawful, for the Bank to charge interest with respect to
such Libor Rate Portion during such Libor Rate Period at a rate determined by
reference to a Libor Rate, (b) the Bank determines that sufficient United States
dollar deposits in immediately available funds offered for deposit are not
available for such Libor Rate Period to the Bank or any participant in such
Libor Rate Portion to the extent of its interest in such Libor Rate Portion or
(c) the Bank determines that information necessary to determine the rate to be
charged pursuant to paragraph 2h(i) is unavailable, and (2) such interest shall
cease to be charged as provided in such paragraph 2h(i), and shall begin to be
charged as provided in Section 2g, with respect to any Libor Rate Portion during
any Libor Rate Period if any governmental authority asserts that it is unlawful,
or the Bank determines that it is unlawful, for the Bank to continue to charge
interest with respect to such Libor Rate Portion during such Libor Rate Period
at a rate determined by reference to a Libor Rate.
i. Libor Rate Election. At any time and from time to time,
-------------------
upon three (3) Libor Rate Business Days' prior notice by the Borrower to Bank,
the Borrower may irrevocably make a Libor Rate Election that specifies (i) the
Libor Rate Business Day that is to be the Libor Rate Period Commencement Date
for the Libor Rate Period elected pursuant to such Libor Rate Election, (ii)
whether a one-month, two-month, three-month or six-month option is elected as
the length of such Libor Rate Period and (iii) expressed as a dollar amount, (A)
any portion of the principal amount of any Loan requested to be made on such
Libor Rate Period Commencement Date to which such Libor Rate Election relates
and (B) any portion of the aggregate outstanding principal amounts of all Loans
made prior to such Libor Rate Period Commencement Date to which such Libor Rate
Election relates; provided, however, that (I) such Libor Rate Period may not
extend beyond the Revolving Loan Repayment Date in the case of Revolving Loans,
or beyond the maturity date of the Term Loan in the case of the Term Loan, (II)
such Libor Rate Election may not change any election made pursuant to any prior
Libor Rate Election, and (III) such Libor Rate Election need not be honored by
the Bank if (1) such Libor Rate Election is received by the Bank more than five
or less than three Libor Rate Business Days before such Libor Rate Period
Commencement Date, (2) any Event of Default occurs or exists before the time
such Libor Rate Election is received by the Bank or exists at such time, or (3)
the total of the dollar amounts specified in clause (iii) of this sentence is
not at least $250,000. Each Libor Rate Period shall end on the day before the
anniversary of such Libor Rate Period Commencement Date corresponding to the
option elected pursuant to such Libor Rate Election (e.g., one-month, two-month,
----
three-month or six-month anniversary) or, if such anniversary is not a Libor
Rate Business Day, on the day before the first day following such anniversary
that is a Libor Rate Business Day. The Bank may treat as made by the Borrower
and rely upon, and the Borrower shall be bound by, any Libor Rate
11
<PAGE>
Election that the Bank believes in good faith to be valid and to have been made
in the name or on behalf of the Borrower by any officer of the Borrower, and the
Bank shall not incur any liability to the Borrower or any other Person as a
direct or indirect result of honoring such Libor Rate Election.
j. Extension of Revolving Loan Repayment Date. At least 30 days
------------------------------------------
but not more than 90 days before the Revolving Loan Repayment Date, the Borrower
may request that the Revolving Loan Repayment Date be extended for one year by
executing and delivering to the Bank an extension request. If prior to the
Revolving Loan Repayment Date, the Bank executes such extension request, the
Revolving Loan Repayment Date shall automatically be extended to the date
specified in such extension request. If the Bank does not so execute such
extension request, the Revolving Loan Repayment Date shall remain the same.
k. Optional Repayment in Advance. Subject to Section 8b, the
-----------------------------
Borrower shall have the option of repaying the principal amount of any Loan to
the Bank in advance in full or in part at any time and from time to time without
any premium or penalty; provided, however, that (i) the amount of any such
repayment of the Term Loan in part shall be an integral multiple of $100,000 and
(ii) upon making any such repayment in full the Borrower shall pay to the Bank
all interest owing pursuant to this Agreement and remaining unpaid and all other
amounts owing by the Borrower to the Bank pursuant to this Agreement and
remaining unpaid. Each such repayment in part of the Term Loan shall be applied
to the installments of the principal amount of the Term Loan in the inverse
order of such installments becoming due.
l. Non-Usage Fee. The Borrower agrees to pay to the Bank, in
-------------
consideration of its Commitment, a non-usage fee of 0.25% per annum on the
average daily unused portion of the Commitment (based on a year of 360 days),
payable quarterly commencing on the first day of the second quarter following
the Closing Date.
m. Default Rate of Interest. Upon the occurrence of an uncured
------------------------
Event of Default, the interest rates applicable to the Loans shall immediately
without further action by the Bank be increased to a rate equal to 5% above the
Prime Rate until paid in full.
n. Late Charge. If the outstanding principal amount of any
-----------
Loans is not repaid, or any interest owing pursuant to this Agreement in
connection with any Loan is not paid, within ten days after the date it becomes
due, whether by acceleration or otherwise, the Borrower shall pay to the Bank a
late charge of the greater of (a) 5% of the amount due or (b) $50.
o. Application of Payments and Computations. All computations
----------------------------------------
of the Prime Rate and Libor Rate and of fees, overdue payment interest charges
and
12
<PAGE>
penalties hereunder shall be made by the Bank on the basis of a year of 360
days, for the actual number of days (including the first day but excluding the
last day) occurring in the period for which such amounts are payable.
p. General Provisions as to Repayment and Payment. Repayment of
----------------------------------------------
the principal amount of each Loan, payment of all interest owing pursuant to
this Agreement in connection with any Loan and payment of all other amounts
owing by the Borrower to the Bank pursuant to this Agreement in connection with
any Loan shall be made in lawful money of the United States and in immediately
available funds at the banking office of the Bank located at One M&T Plaza,
Buffalo, New York, or at such other office of the Bank as may at any time and
from time to time be specified in any notice delivered, given or sent to the
Borrower by the Bank. No such repayment or payment shall be deemed to have been
received by the Bank until received by the Bank at the office of the Bank
determined in accordance with the preceding sentence, and any such repayment or
payment received by the Bank at such office after 2:00 P.M. on any day shall be
deemed to have been received by the Bank at the time such office opens for
business on the next Business Day of the Bank. If the time by which any of the
principal amount of any Revolving Loan is to be repaid is extended by operation
of law or otherwise, the Borrower shall pay interest on the outstanding portion
thereof during such period of extension as provided in this Agreement.
q. Limitation on Interest. Notwithstanding anything to the
----------------------
contrary contained in this Agreement, in no event shall interest be payable on
any Loan at a rate in excess of the maximum rate permitted by applicable law,
and solely to the extent necessary to result in such interest not being payable
at a rate in excess of such maximum rate, any amount that would be treated as
part of such interest under a final judicial interpretation of applicable law
shall be deemed to have been a mistake and automatically canceled, and, if
received by the Bank, shall be refunded to the Borrower, it being the intention
of the Bank and of the Borrower that such interest not be payable at a rate in
excess of such maximum rate.
3. PREREQUISITES TO LOAN. The obligation of the Bank to make any
---------------------
Loan shall be conditioned upon the following:
a. No Default. (i) There not existing at the time such Loan is
----------
to be made, any Event of Default or Potential Event of Default and (ii) the Bank
not believing in good faith that any Event of Default or Potential Event of
Default has so occurred or existed or so exists;
b. Representations and Warranties. (i) Each representation and
------------------------------
warranty made in this Agreement being true and correct as of the time such Loan
is to be made, (ii) each financial statement provided to the Bank by or on
behalf of the Borrower or by or on behalf of any Subsidiary before the time such
Loan is to be made being
13
<PAGE>
materially true and correct as of the date thereof, and (iii) the Bank not
believing in good faith that (A) any such representation or warranty is other
than true and correct as of such date, or (B) any such financial statement was
other than materially true and correct as of the date thereof;
c. Proceedings. The Bank being satisfied as to each corporate
-----------
or other proceeding in connection with any transaction contemplated by this
Agreement;
d. Receipt by Bank Prior to Making of First Revolving Loan. The
-------------------------------------------------------
receipt by the Bank at or before the time the first Revolving Loan is to be made
of the following, in form and substance satisfactory to the Bank:
i) A Revolving Loan Note, appropriately completed and
duly executed by the Borrower;
ii) An opinion of Buchanan Ingersoll, counsel to the
Borrower;
iii) A certificate executed by the President or a Vice
President of the Borrower or by the chief financial officer of the Borrower and
stating that (A) there does not exist at the time such Loan is to be made any
Event of Default or Potential Event of Default and (B) each representation and
warranty made in this Agreement is true and correct as of the time such Loan is
to be made;
iv) Evidence that each of the Borrower and all
Subsidiaries is at the time such Loan is to be made (A) in good standing under
the law of the jurisdiction in which it is incorporated and (B) duly qualified
and in good standing as a foreign corporation authorized to do business in each
jurisdiction in which such qualification is necessary;
v) A copy of the certificate of incorporation or other
charter document of each of the Borrower and all Subsidiaries certified by its
Secretary to be complete and accurate at the time such Loan is to be made;
vi) A copy of the by-laws or other organizational document
of each of the Borrower and all Subsidiaries certified by its Secretary to be
complete and accurate at the time such Loan is to be made;
vii) Evidence of the taking, and of the continuation in
full force and effect at the time such Loan is to be made, of each corporate or
other action of the Borrower and the execution, delivery to the Bank and
performance of each Loan Document;
14
<PAGE>
viii) Evidence that each requirement contained in any Loan
Document with respect to insurance is being met at the time such Loan is to be
made;
ix) Each additional writing required by any Loan Document
or deemed necessary or desirable by the Bank at the sole option of the Bank; and
x) Payment of all costs and expenses payable pursuant to
the first sentence of Section 8a of this Agreement at or before the time such
Loan is to be made;
e. Receipt by Bank Prior to Making of Additional Revolving
-------------------------------------------------------
Loan. If such Loan is a Revolving Loan other than the first Revolving Loan, to
- ----
the extent requested by the Bank, the receipt by the Bank at or before the time
such Loan is to be made of the items described in Section 3d of this Agreement,
in form and substance satisfactory to the Bank; and
f. Receipt by Bank Prior to Making of Term Loan. If such Loan
--------------------------------------------
is the Term Loan, the receipt by the Bank at or before the time such Loan is to
be made of the following, in form and substance satisfactory to the Bank:
i) A Term Loan Note, appropriately completed and duly
executed by the Borrower; and
ii) To the extent requested by the Bank, the items
described in clauses (ii) through (x) of Section 3d of this Agreement.
4. REPRESENTATIONS AND WARRANTIES. Except as fully and accurately
------------------------------
described in Schedule A attached to and made a part of this Agreement, the
Borrower represents and warrants to the Bank as follows:
a. Use of Proceeds. The proceeds of each Revolving Loan will
---------------
be used only for working capital of the Borrower or general corporate needs of
the Borrower. The proceeds of the Term Loan will be used only to repay the
outstanding principal amounts of Revolving Loans.
b. Subsidiaries. The Borrower has no majority-owned
------------
Subsidiaries.
c. Good Standing; Qualification; Authority. Each of the
---------------------------------------
Borrower and all Subsidiaries (i) is a corporation duly incorporated and
organized, validly existing and in good standing under the law of the
jurisdiction in which it is incorporated, (ii) is duly qualified and in good
standing as a foreign corporation authorized to do
15
<PAGE>
business in each jurisdiction in which such qualification is necessary, and
(iii) has the power and authority to own each of its assets, to use each of its
assets as now and as anticipated that such asset will hereafter be used and to
conduct its business and operations as now and as anticipated that its business
and operations will hereafter be conducted.
d. Compliance. The present and anticipated conduct of the
----------
business and operations of the Borrower and of each Subsidiary and the present
and anticipated ownership or lease and use of each asset owned or leased by the
Borrower and each Subsidiary are in compliance in each material respect with
each applicable Law. Each authorization, approval, permit, consent, franchise
and license from, each registration and filing with, each declaration, report
and notice to, and each other act by or relating to, any Person necessary for
the present or anticipated conduct of the business or operations of the Borrower
or of any Subsidiary, and for the present or anticipated ownership, lease or use
of any asset of the Borrower or of any Subsidiary, has been duly obtained, made,
given or done, and is in full force and effect. Each of the Borrower and all
Subsidiaries is in compliance in each material respect with each such
authorization, approval, permit, consent, franchise and license with respect to
it, with its certificate or articles of incorporation or other charter document,
with its by-laws or other organizational document and with each agreement and
instrument to which it is a party or by which it or any of its assets is bound.
e. Legality. The obtaining of each Loan and the execution,
--------
delivery to the Bank and performance of each Loan Document by the Borrower (i)
are and will be in furtherance of the purposes of the Borrower and within the
power and authority of the Borrower, (ii) do not and will not (A) violate, or
result in any violation of, any Law or any judgment, order or award of any
court, agency or other governmental authority or of any arbitrator or (B)
violate, result in any violation of, constitute (whether immediately or after
notice, after lapse of time or both notice and lapse of time) any default under,
or result in or require the imposition or creation of any security interest in,
or of any mortgage or other lien or encumbrance upon, any asset of the Borrower
pursuant to, (I) the certificate of incorporation or other charter document of
the Borrower, (II) the by-laws or other organizational document of the Borrower,
(III) any shareholder agreement, voting trust or similar arrangement applicable
to any of the outstanding shares of any class of stock of the Borrower, (IV) any
resolution or other action of record of the shareholders or board of directors
of the Borrower or (V) any agreement or instrument to which the Borrower is a
party or by which the Borrower or any asset of the Borrower is bound, and (iii)
have been duly authorized by each necessary action of the shareholders or board
of directors of the Borrower. Each authorization, approval, permit and consent
from, each registration and filing with, each declaration and notice to, and
each other act by or relating to, any Person required as a condition of the
obtaining of any Loan by the Borrower, of the execution, delivery to the Bank or
performance of any Loan Document by any Person other than the Bank has been duly
obtained, made, given or done, and is in full force and effect. Each Loan
Document has been duly executed and delivered to the
16
<PAGE>
Bank by each Person other than the Bank who or that is contemplated by such Loan
Document as a party thereto.
f. Fiscal Year. The fiscal year of the Borrower and of each
-----------
Subsidiary is the year ending on the last day of December.
g. Financial Statements. The Borrower has heretofore delivered to
--------------------
the Bank a copy of each of the following financial statements:
i. Audited statements of income and cash flows of the Borrower
for its fiscal year ended December 31, 1996; and
ii. An audited balance sheet of the Borrower dated as of
December 31, 1996.
Each such financial statement (i) is correct and complete, (ii) is in accordance
with the records of the Borrower, (iii) presents fairly the results of the
operations and cash flows of the Borrower for the fiscal period covered thereby,
or the financial position of the Borrower as of the date thereof, in conformity
with generally accepted accounting principles applied consistently with the
application of such principles with respect to the preceding fiscal period of
the Borrower, and (iv) if a balance sheet, reflects each indebtedness and other
obligation of the Borrower as of the date thereof that has had or (so far as the
Borrower can foresee) will or might have any Material Adverse Effect.
h. Material Adverse Effects; Distributions. Since December 31, 1996,
---------------------------------------
(i) there has not occurred or existed any event or condition that has had or (so
far as the Borrower or any Subsidiary can foresee) will or might have any
Material Adverse Effect, and (ii) neither the Borrower nor any Subsidiary has
declared, paid, made or agreed or otherwise incurred any obligation to declare,
pay or make any Distribution, except for Distributions to the holders of
Borrower's preferred stock in accordance with the terms thereof.
i. Tax Returns and Payments. Each of the Borrower and all
------------------------
Subsidiaries has duly (i) filed each tax return required to be filed by it and
(ii) paid or caused to be paid each tax, assessment, fee, charge, fine and
penalty that has been imposed by any government or political subdivision upon it
or upon any of its assets, income and franchises and has become due.
j. Indebtedness. Except for Permitted Indebtedness, neither the
------------
Borrower nor any Subsidiary has any indebtedness, liability or obligation (i)
arising from the borrowing of money or from the deferral of the payment of the
purchase price of any asset, including by means of a capital lease, or (ii)
pursuant to any guaranty or other contingent obligation (including, but not
limited to, any obligation to (A) maintain the net
17
<PAGE>
worth of any other Person, (B) purchase or otherwise acquire, or assume, any
indebtedness, liability or obligation or (C) provide funds for or otherwise
assure the payment of any indebtedness, liability or obligation, whether by
means of any investment, by means of any sale or other disposition, or by means
of any purchase or other acquisition, of any asset or service or otherwise);
k. Pension Obligations. No Pension Plan was or is a multiemployer
-------------------
plan, as such term is defined in Section 3(37) of ERISA. The present value of
all benefits vested under any Pension Plan does not exceed the value of the
assets of such Pension Plan allocable to such vested benefits. Since September
2, 1974, (i) no Prohibited Transaction that could subject any Pension Plan to
any tax or penalty imposed pursuant to the Internal Revenue Code or pursuant to
ERISA has been engaged in by any Pension Plan, (ii) there has not occurred or
existed with respect to any Pension Plan any Reportable Event, Accumulated
Funding Deficiency or event or condition that, but for a waiver by the Internal
Revenue Service, would constitute an Accumulated Funding Deficiency, that, after
notice, after lapse of time or after both notice and lapse of time, will or
might constitute a Reportable Event or that constituted or will or might
constitute grounds for the institution by the Pension Benefit Guaranty
Corporation of any proceeding under ERISA seeking the termination of such
Pension Plan or the appointment of a trustee to administer such Pension Plan,
(iii) no Pension Plan has been terminated, (iv) no trustee has been appointed by
a United States District Court to administer any Pension Plan, (v) no proceeding
seeking the termination of any Pension Plan or the appointment of a trustee to
administer any Pension Plan has been instituted, and (vi) neither the Borrower
nor any Subsidiary has made any complete or partial withdrawal from any Pension
Plan.
l. Assets; Liens and Encumbrances. Each of the Borrower and all
------------------------------
Subsidiaries has good and marketable title to each asset it purports to own, and
no such asset is subject to any security interest, mortgage or other lien or
encumbrance, except for Permitted Liens.
m. Loans. Neither the Borrower nor any Subsidiary has made any
-----
loan, advance or other extension of credit with respect to which any sum is
owing to it, except for Permitted Loans.
n. Judgments and Litigation. There is no outstanding judgment,
------------------------
order or award of any court, agency or other governmental authority or of any
arbitrator, and no pending or threatened claim, audit or investigation, and no
pending or threatened action or other legal proceeding, by or before any court,
agency or other governmental authority or before any arbitrator, that (i) is
against, or otherwise involves, the Borrower, any Subsidiary or any asset of the
Borrower or of any Subsidiary, and which has had or (so far as the Borrower or
any Subsidiary can foresee) will or might have any Material Adverse Effect, or
(ii) renders invalid, or questions the validity of, any Loan Document or any
action taken or to be taken pursuant to any Loan Document.
18
<PAGE>
o. Default. There does not exist any Event of Default or
-------
Potential Event of Default.
p. Full Disclosure. Neither any Loan Document nor any certificate,
---------------
financial statement or other writing heretofore provided to the Bank by or on
behalf of the Borrower or by or on behalf of any Subsidiary contains any
statement of fact that is incorrect or misleading in any material respect or
omits to state any fact necessary to make any statement of fact contained
therein not incorrect or misleading in any material respect. Neither the
Borrower nor any Subsidiary has failed to disclose to the Bank any fact that has
had or (so far as the Borrower or any Subsidiary can foresee) will or might have
any Material Adverse Effect.
5. AFFIRMATIVE COVENANTS. During the term of this Agreement, the
---------------------
Borrower shall do the following unless the prior written consent of the Bank to
not doing so shall have been obtained by the Borrower:
a. Good Standing; Qualification. Cause each of the Borrower and
----------------------------
all Subsidiaries at all times to (i) maintain its corporate existence in good
standing and (ii) remain or become and remain duly qualified and in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which such qualification is or becomes necessary;
b. Compliance. Cause each of the Borrower and all Subsidiaries at
----------
all times to (i) conduct its business and operations, own and use each of its
assets, and use each asset leased by it as a lessee, in compliance in each
material respect with each applicable Law, (ii) obtain, make, give or do, and
maintain in full force and effect, each authorization, approval, permit,
consent, franchise and license from, each registration and filing with, each
declaration, report and notice to, and each other act by or relating to, any
Person necessary for the conduct of its business or operations, for the
ownership, lease or use of any of its assets, and (iii) remain in compliance in
each material respect with each such authorization, approval, permit, consent,
franchise and license, with its certificate of incorporation or other charter
document, with its by-laws or other organizational document and with each
agreement and instrument to which it is a party or by which it or any of its
assets is bound;
c. EBITDA. Assure that at the end of each calendar quarter EBITDA
------
for the four calendar quarters then ending is at least $2,000,000;
d. Working Capital. Assure that at the end of each calendar quarter
---------------
the Working Capital of the Borrower is at least $3,700,000;
e. Net Worth; Liabilities. Assure that at the end of each calendar
----------------------
quarter the Consolidated Tangible Net Worth of the Borrower is at least
$4,500,000;
19
<PAGE>
f. Ratio of Liabilities to Net Worth. Assure that at the end of
---------------------------------
each calendar quarter the ratio of Consolidated Total Liabilities of the
Borrower, other than indebtedness, liabilities and obligations of the Borrower
that are fully subordinated pursuant to a subordination agreement in form and
substance satisfactory to the Bank to all indebtedness, liabilities and
obligations of the Borrower to the Bank, to Consolidated Tangible Net Worth,
does not exceed 1.2 to 1.0;
g. Accounting; Reserves; Tax Returns. Cause each of the Borrower
---------------------------------
and all Subsidiaries at all times to (i) maintain a system of accounting
established and administered in accordance with generally accepted accounting
principles, (ii) establish each reserve it is required by generally accepted
accounting principles to establish and (iii) file each tax return it is required
to file;
h. Reporting Requirements. Furnish directly to the Bank:
----------------------
i) as soon as available and in any event within 120 days after
the end of each fiscal year of the Borrower, a consolidated balance sheet of the
Borrower and its consolidated Subsidiaries as of the end of such fiscal year and
a consolidated income statement and statements of cash flows and changes in
stockholders' equity of the Borrower and its consolidated Subsidiaries for such
fiscal year, all in reasonable detail and stating in comparative form the
respective consolidated figures for the corresponding date and period in the
prior fiscal year, and all prepared in accordance with generally accepted
accounting principles and as to the consolidated statements accompanied by an
opinion thereon acceptable to the Bank by independent accountants of national
standing selected by the Borrower;
ii) as soon as available and in any event within 45 days after
the end of each of the first three quarters of each fiscal year of the Borrower,
a consolidated and consolidating balance sheet of the Borrower and its
consolidated Subsidiaries as of the end of such quarter and a consolidated and
consolidating income statement and statements of cash flows of the Borrower and
its consolidated Subsidiaries for the period commencing at the end of the
previous fiscal year and ending with the end of such quarter, all in reasonable
detail and stating in comparative form the respective consolidated and
consolidating figures for the corresponding date and period in the previous
fiscal year and all prepared in accordance with generally accepted accounting
principles and certified by the chief financial officer of the Borrower (subject
to year-end adjustments);
iii) promptly upon receipt thereof, copies of any reports
submitted to the Borrower or any of its Subsidiaries by independent certified
public accountants in connection with examination of the financial statements of
the Borrower or any such Subsidiary made by such accountants;
20
<PAGE>
iv) simultaneously with the delivery of the financial
statements referred to above, a certificate of the Chief Financial Officer of
the Borrower (i) certifying that to the best of his knowledge no Default or
Event of Default has occurred and is continuing or, if a Default or Event of
Default has occurred and is continuing, a statement as to the nature thereof and
the action which is proposed to be taken with respect thereto, and (ii) with
computations demonstrating compliance with the covenants contained in Sections
5c, 5d, 5e and 5f;
v) promptly after the commencement thereof, notice of each
action, suit, and proceeding before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
affecting the Borrower or any of its Subsidiaries;
vi) as soon as possible after the occurrence of each Default or
Event of Default, a written notice setting forth the details of such Default or
Event of Default and the action which is proposed to be taken by the Borrower
with respect thereto;
vii) at all times indicated in (i) above, a copy of the
management letter prepared by the independent auditors;
viii) as soon as available, (A) each financial statement, report,
notice and proxy statement sent or made available by the Borrower or by any
Subsidiary to holders of its stock generally, (B) each periodic or special
report, registration statement, prospectus and other written communication other
than a transmittal letter filed by the Borrower or by any Subsidiary with, and
each written communication received by the Borrower or by any Subsidiary from,
any securities exchange or the Securities and Exchange Commission, (C) each
annual report relating to any Pension Plan and filed with the Internal Revenue
Service, with the Department of Labor or with the Pension Benefit Guaranty
Corporation and (D) each press release and other statement made available by the
Borrower or by any Subsidiary to the public generally and relating to the
business, operations, assets, affairs or condition (financial or other) of the
Borrower or of any Subsidiary;
ix) promptly, from time to time, such other information
regarding the operations, business affairs and financial condition of the
Borrower and any of its Subsidiaries as the Bank may reasonably request.
i. Payment of Certain Indebtedness. Cause each of the Borrower and
-------------------------------
all Subsidiaries to pay, before the end of any applicable grace period, each
tax, assessment, fee, charge, fine and penalty imposed by any government or
political subdivision upon it or upon any of its assets, income and franchises
and each claim and demand of any materialman, mechanic, carrier, warehouseman,
garageman or landlord against it; provided, however, that no such tax,
assessment, fee, charge, fine, penalty,
21
<PAGE>
claim or demand shall be required to be so paid so long as (i) the validity
thereof is being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted, (ii) adequate reserves have been
appropriately established therefor, (iii) the execution or other enforcement of
any lien resulting therefrom is effectively stayed and (iv) the nonpayment
thereof does not have any Material Adverse Effect;
j. Maintenance of Title and Assets; Insurance. Cause each of the
------------------------------------------
Borrower and all Subsidiaries to (i) at all times maintain good and marketable
title to each asset it purports to own, (ii) at all times maintain each of its
tangible assets in good working order and condition, (iii) at any time and from
time to time make each replacement of any of its tangible assets necessary or
desirable for the conduct of its business or operations, (iv) at all times keep
each of its insurable tangible assets insured with financially sound and
reputable insurance carriers against fire and other hazards to which extended
coverage applies in such manner and to the extent that the amount of insurance
carried on such asset shall be adequate, taking into account such factors as the
probability of loss of such asset, the value of such asset and the cost to the
Borrower of such insurance, and (v) at all times keep adequately insured with
financially sound and reputable insurance carriers against business interruption
and against liability on account of damage to any Person or asset or pursuant to
any applicable workers' compensation law;
k. Inspections. Upon the request of the Bank, upon five days' prior
-----------
written notice, permit each officer, employee, accountant, attorney and other
agent of the Bank to (i) visit and inspect each of the premises of the Borrower
and of each Subsidiary, (ii) examine, audit, copy and extract each record of the
Borrower and of each Subsidiary and (iii) discuss the business, operations,
assets, affairs and condition (financial or other) of the Borrower and of each
Subsidiary with each responsible officer of the Borrower and of each Subsidiary
and with each independent accountant of the Borrower and of each Subsidiary;
l. Pension Obligations. (i) Immediately upon acquiring knowledge or
-------------------
reason to know of the occurrence or existence with respect to any Pension Plan
of any Prohibited Transaction, Reportable Event, Accumulated Funding Deficiency
or event or condition that, but for a waiver by the Internal Revenue Service,
would constitute an Accumulated Funding Deficiency, that, after notice, after
lapse of time or after both notice and lapse of time, will or might constitute a
Reportable Event or that constitutes or will or might constitute grounds for the
initiation by the Pension Benefit Guaranty Corporation of any proceeding under
ERISA seeking the termination of such Pension Plan or the appointment of a
trustee to administer such Pension Plan, provide to the Bank a certificate
executed by the President or a Vice President of the Borrower and by the chief
financial officer of the Borrower and specifying the nature of such Prohibited
Transaction, Reportable Event, Accumulated Funding Deficiency, event or
condition, what action the Borrower has taken, is taking or proposes to take
with respect thereto and, when known, any action taken or threatened by the
Internal Revenue Service, by the Department of
22
<PAGE>
Labor or by the Pension Benefit Guaranty Corporation with respect thereto and
(ii) immediately upon acquiring knowledge or reason to know of (A) the
institution by the Pension Benefit Guaranty Corporation or by any other Person
of any proceeding under ERISA seeking the termination of any Pension Plan or the
appointment of a trustee to administer any Pension Plan or (B) the complete or
partial withdrawal or proposed complete or partial withdrawal by the Borrower or
by any Subsidiary from any Pension Plan, provide to the Bank a certificate
executed by the President or a Vice President of the Borrower and by the chief
financial officer of the Borrower and describing such proceeding, withdrawal or
proposed withdrawal;
m. Changes in Management, Ownership and Control. Immediately upon
--------------------------------------------
acquiring knowledge or reason to know of any change in the identity of the
Chairman, President or chief executive officer of the Borrower, or in the
beneficial ownership of more than 10% of the stock of the Borrower, provide to
the Bank a certificate executed by the President or a Vice President of the
Borrower and specifying such change;
n. Judgments. Immediately upon acquiring knowledge or reason to
---------
know of any judgment, order or award of any court, agency or other governmental
authority or of any arbitrator that (i) is against, or otherwise involves, the
Borrower, any Subsidiary or any asset of the Borrower or of any Subsidiary, and
which has or (so far as the Borrower or any Subsidiary can foresee) will or
might have any Material Adverse Effect or (ii) renders invalid any Loan Document
or any action taken or to be taken pursuant to any Loan Document, provide to the
Bank a certificate executed by the President or a Vice President of the Borrower
and specifying the nature of such judgment, order or award and what action the
Borrower has taken, is taking or proposes to take with respect thereto;
o. Litigation. (i) Immediately upon acquiring knowledge or reason
----------
to know of the commencement or threat of any claim, audit or investigation, or
of the commencement or threat of any action or other legal proceeding, by or
before any court, agency or other governmental authority or before any
arbitrator that is against, or otherwise involves, the Borrower, any Subsidiary
or any asset of the Borrower or of any Subsidiary, and which (so far as the
Borrower or any Subsidiary can foresee) will or might have any Material Adverse
Effect, provide to the Bank a certificate executed by the President or a Vice
President of the Borrower and specifying the nature of such claim, audit or
investigation or of such action or other legal proceeding and what action the
Borrower has taken, is taking or proposes to take with respect thereto and (ii)
immediately upon acquiring knowledge or reason to know of any development with
respect to any claim, audit, investigation, action or other legal proceeding
theretofore disclosed by the Borrower to the Bank that has or (so far as the
Borrower or any Subsidiary can foresee) will or might have any Material Adverse
Effect, provide to the Bank a certificate executed by the President or a Vice
President of the Borrower and specifying the nature of such
23
<PAGE>
development and what action the Borrower has taken, is taking or proposes to
take with respect thereto;
p. Liens and Encumbrances. Immediately upon acquiring knowledge or
----------------------
reason to know that any asset of the Borrower or of any Subsidiary has or may
become subject to any security interest, mortgage or other lien or encumbrance
other than Permitted Liens, provide to the Bank a certificate executed by the
President or a Vice President of the Borrower and specifying the nature of such
security interest, mortgage or other lien or encumbrance and what action the
Borrower has taken, is taking or proposes to take with respect thereto;
q. Defaults and Material Adverse Effects. Immediately upon
-------------------------------------
acquiring knowledge or reason to know of the occurrence or existence of (i) any
Event of Default or Potential Event of Default or (ii) any event or condition
that has or (so far as the Borrower or any Subsidiary can foresee) will or might
have any Material Adverse Effect, provide to the Bank a certificate executed by
the President or a Vice President of the Borrower and by the chief financial
officer of the Borrower and specifying the nature of such Event of Default,
Potential Event of Default, event or condition, the date of occurrence or period
of existence thereof and what action the Borrower has taken, is taking or
proposes to take with respect thereto;
r. Guaranties. Unless prohibited by applicable law, cause each
----------
Person that is or becomes a majority-owned Subsidiary after the date of this
Agreement to execute and deliver to the Bank, in form and substance satisfactory
to the Bank, a guaranty agreement guaranteeing, without any limitation as to
amount, the payment of all indebtedness and other obligations of the Borrower to
the Bank, whether then existing or thereafter arising or accruing; and
s. Further Actions. Promptly upon the request of the Bank, execute
---------------
and deliver, or cause to be executed and delivered, each writing, and take, or
cause to be taken, each other action, that the Bank shall deem necessary or
desirable at the sole option of the Bank in connection with any transaction
contemplated by any Loan Document.
6. NEGATIVE COVENANTS. During the term of this Agreement, the Borrower
------------------
shall not, without the prior written consent of the Bank, do, attempt to do, or
agree or otherwise incur, assume or have any obligation to do, and the Borrower
shall assure that, without the prior written consent of the Bank, no Subsidiary
does, attempts to do, or agrees or otherwise incurs, assumes or has any
obligation to do, any of the following:
a. Fiscal Year. Change its fiscal year;
-----------
24
<PAGE>
b. Indebtedness. Create, incur, assume or have any indebtedness,
------------
liability or obligation (i) arising from the borrowing of money or from the
deferral of the payment of the purchase price of any asset, including by means
of a capital lease, or (ii) pursuant to any guaranty or other contingent
obligation (including, but not limited to, any obligation to (A) maintain the
net worth of any other Person, (B) purchase or otherwise acquire, or assume, any
indebtedness, liability or obligation or (C) provide funds for or otherwise
assure the payment of any indebtedness, liability or obligation, whether by
means of any investment, by means of any sale of other disposition, or by means
of any purchase or other acquisition, of any asset or service or otherwise),
except for Permitted Indebtedness;
c. Pension Obligations. (i) Engage in any Prohibited Transaction
-------------------
with respect to any Pension Plan, (ii) permit to occur or exist with respect to
any Pension Plan any Accumulated Funding Deficiency or event or condition that,
but for a waiver by the Internal Revenue Service, would constitute an
Accumulated Funding Deficiency or that constitutes or will or might constitute
grounds for the institution by the Pension Benefit Guaranty Corporation of any
proceeding under ERISA seeking the termination of such Pension Plan or the
appointment of a trustee to administer such Pension Plan, (iii) make any
complete or partial withdrawal from any Pension Plan, (iv) fail to make to any
Pension Plan any contribution that it is required to make, whether to meet any
minimum funding standard under ERISA or any requirement of such Pension Plan or
otherwise, or (v) terminate any Pension Plan in any manner, or otherwise take or
omit to take any action with respect to any Pension Plan, that would or might
result in the imposition of any lien upon any asset of the Borrower or of any
Subsidiary pursuant to ERISA;
d. Liens. Cause or permit, whether upon the happening of
-----
any contingency or otherwise, any of its assets to be subject to any security
interest, mortgage or other lien or encumbrance, except for Permitted Liens;
e. Distributions. Declare, pay or make any Distribution, except for
-------------
(i) dividends payable on the preferred stock of Borrower in accordance with its
terms, (ii) dividends payable solely in any of its stock, and (iii) cash
dividends paid to the Borrower by any Subsidiary all of the outstanding shares
of stock of which other than shares required by any applicable Law to enable any
individual to serve as a director of such Subsidiary are owned by the Borrower
at the time of such payment;
f. Corporate Changes. (i) Assign, sell or otherwise transfer or
-----------------
dispose of all or substantially all of its assets, (ii) participate in any
merger, consolidation or other absorption unless the Borrower is the surviving
entity in such merger, consolidation or absorption and does not as a result
thereof fail to comply with any of the covenants set forth in this Agreement, or
(iii) make any change in its corporate structure, except for the merger into the
Borrower of, or the acquisition by the Borrower of all of the assets of, any
Subsidiary all of the outstanding shares of stock of which are owned by the
25
<PAGE>
Borrower, or (iv) make any significant change in any of its business objectives
and purposes or in its business or operations that would or might have any
Material Adverse Effect, except for expansion of its business into related
areas, utilizing its human resources and body of knowledge developed in
connection with software applications, which management of the Borrower
determines to be in the best interests of the Borrower;
g. Stock of Subsidiary. Issue or sell any stock of any Subsidiary,
-------------------
except (i) to the minimum extent required by any applicable Law to enable any
individual to serve as a director of such Subsidiary, (ii) as a dividend to the
shareholders of such Subsidiary and (iii) to the Borrower or to another
Subsidiary; or
h. Full Disclosure. Provide to the Bank, or permit to be provided
---------------
to the Bank on its behalf, any certificate, financial statement or other writing
that contains any statement of fact that is incorrect or misleading in any
material respect or omits to state any fact necessary to make any statement of
fact contained therein not incorrect or misleading in any material respect.
7. INDEBTEDNESS IMMEDIATELY DUE. Upon or at any time or from time to
----------------------------
time after the occurrence or existence of any uncured Event of Default other
than an Event of Default described in clause (vi) of Section 1o of this
Agreement, the outstanding principal amount of each Loan, all interest owing
pursuant to this Agreement and remaining unpaid and all other amounts owing by
the Borrower to the Bank pursuant to this Agreement and remaining unpaid shall,
at the sole option of the Bank and without any notice, demand, presentment or
protest of any kind (each of which is knowingly, voluntarily, intentionally and
irrevocably waived by the Borrower), become immediately due. Upon the occurrence
or existence of any Event of Default described in such clause (vi), such
outstanding principal amount, all such interest and all such other amounts
shall, without any notice, demand, presentment or protest of any kind (each of
which is knowingly, voluntarily, intentionally and irrevocably waived by the
Borrower), automatically become immediately due.
8. EXPENSES; INDEMNIFICATION.
-------------------------
a. Expenses. The Borrower shall pay to the Bank on demand each cost
--------
and expense (including, but not limited to, the reasonable fees and
disbursements of counsel to the Bank) incurred by the Bank in connection with
(a) the preparation of, entry into or performance of any Loan Document, whether
or not any Loan is made, or (b) any modification of, or any release, consent or
waiver relating to, any Loan Document, whether or not such modification,
release, consent or waiver becomes effective. In addition, the Borrower shall
pay to the Bank on demand each cost and expense (including, but not limited to,
the reasonable fees and disbursements of counsel to the Bank, whether retained
for advice, for litigation or for any other purpose) incurred by the Bank in
endeavoring to (a) collect any of the outstanding principal amount of any Loan,
any
26
<PAGE>
interest owing pursuant to this Agreement and remaining unpaid or any other
amount owing by the Borrower to the Bank pursuant to this Agreement and
remaining unpaid, (b) preserve or exercise any right or remedy of the Bank
relating to, enforce or realize upon any guaranty, endorsement, subordination,
collateral or other security or assurance of payment now or hereafter directly
or indirectly securing the repayment or payment of, or otherwise now or
hereafter directly or indirectly applicable to, any of such outstanding
principal amount, any such interest or any such other amount, (c) preserve or
exercise any right or remedy of the Bank pursuant to any Loan Document or (d)
defend against any claim, regardless of the basis or outcome thereof, asserted
against the Bank as a direct or indirect result of the entry into any Loan
Document, except for any claim for any tax imposed by any government or
political subdivision upon any income of the Bank or for any interest or penalty
relating to any such tax.
b. Expenses Due to Law Changes. The Borrower shall pay to the Bank
---------------------------
on demand made by the Bank each amount necessary to compensate the Bank for any
liability, cost or expense that is a direct or indirect result of (i) the
repayment in full or part of any Libor Rate Portion during any Libor Rate Period
for such Libor Rate Portion (whether by reason of any reduction in yield, by
reason of the liquidation or reemployment of any deposit or other funds acquired
by the Holder by reason of the fixing of the rate of interest payable on such
Libor Rate Portion or otherwise), (ii) any increase in the amount of capital
required or expected to be maintained by the Bank or any bank holding company of
the Bank with respect to any Loan or the obligation of the Bank to make any Loan
that is due to (A) after the date of this Agreement, the enactment or issuance
of or any change in any Law relating to capital adequacy of banks and banking
holding companies or (B) the compliance by the Bank or such bank holding company
with any request or direction relating to such capital made or issued by any
governmental authority after the date of this Agreement, (iii) any change in the
basis of taxation of repayments of the outstanding principal amount of any Loan
or the payment of any interest payable pursuant to this Agreement or any other
amount payable by the Borrower to the Bank pursuant to this Agreement that is
due to, after the date of this Agreement, any change in the basis of taxation of
the overall net income of the Bank in the jurisdiction in which the Bank has its
principal place of business, (iv) any imposition or application of or increase
in any reserve or similar requirement applicable to assets or liabilities of,
deposits with or credit extended by the Bank, or for the account of the Bank,
that increases the cost to the Bank of making, funding or maintaining any Loan
and is due to, after the date of this Agreement, the enactment or issuance of or
any change in any Law, except for any reserve or similar requirement reflected
in the rate of interest charged on any Libor Rate Portion, (v) any imposition or
application of, increase in or deduction or withholding for any tax, assessment,
fee, charge, fine or penalty imposed by any governmental authority that is due
to, after the date of this Agreement, the enactment or issuance of or any change
in any Law or (vi) without limiting any of clauses (i) through (v) of this
sentence, after the date of this Agreement, any enactment or issuance of or any
change in any Law that directly or indirectly (A) results in any increase in the
cost to the Bank of making, funding
27
<PAGE>
or maintaining any Loan or (B) reduces that amount of, requires the Bank to
forego or, except for any tax on the overall net income of the Bank in the
jurisdiction in which the Bank has its principal place of business, make any
payment with respect to any repayment by the Borrower of any of the outstanding
principal amount of any Loan or the payment by the Borrower of any interest
payable pursuant to this Agreement or any other amount payable by the Borrower
to the Bank pursuant to this Agreement. The determination by the Bank of the
amount necessary to compensate the Bank for any such liability, cost or expense
shall, in the absence of manifest error, be conclusive and binding upon the
Borrower.
9. GENERAL.
-------
a. Term; Survival. The term of this Agreement shall be until the
--------------
principal amount of each Loan, all interest owing pursuant to this Agreement and
all other amounts owing by the Borrower to the Bank pursuant to this Agreement
have been fully, finally and irrevocably repaid, paid or otherwise discharged.
The obligation of the Borrower to pay liabilities, costs and expenses described
in Section 8 of this Agreement shall survive beyond the term of this Agreement.
b. Survival; Reliance. Each representation, warranty, covenant and
------------------
agreement contained in this Agreement shall survive the making of each Loan and
the execution and delivery to the Bank of each Loan Document, and shall continue
in full force and effect during the term of this Agreement. Each such
representation, warranty, covenant and agreement shall be presumed to have been
relied upon by the Bank regardless of any investigation made or not made, or any
information possessed or not possessed, by the Bank.
c. Cumulative Nature, Nonexclusive Exercise and Waivers of Rights
--------------------------------------------------------------
and Remedies. All rights and remedies of the Bank pursuant to this Agreement
- ------------
or otherwise shall be cumulative, and no such right or remedy shall be exclusive
of any other such right or remedy. No single or partial exercise by the Bank of
any such right or remedy shall preclude any other or further exercise thereof,
or any exercise of any other such right or remedy, by the Bank. No course of
dealing, performance or other conduct heretofore pursued, accepted or acquiesced
in, no oral or written agreement or representation heretofore made, and no oral
agreement or representation hereafter made, by or on behalf of the Bank, whether
or not relied or acted upon, and no usage of trade, whether or not relied or
acted upon, shall operate as a waiver of any such right or remedy. No delay by
the Bank in exercising any such right or remedy, whether or not relied or acted
upon, shall operate as a waiver thereof or of any other such right or remedy. No
notice or demand of any kind, and no attempted but unsuccessful notice or demand
of any kind, by the Bank prior to exercising any such right or remedy on any one
occasion, whether or not relied or acted upon, shall operate as a waiver of any
right of the Bank to exercise the same or any other such right or remedy on such
or any future occasion
28
<PAGE>
without any notice or demand of any kind. No waiver by the Bank of any such
right or remedy shall be effective unless made in a writing duly executed by the
Bank and specifically referring to such waiver. No waiver by the Bank on any one
occasion of any such right or remedy shall operate as a waiver thereof or of any
other such right or remedy on any future occasion.
d. Binding Effect. This Agreement shall be binding upon the
--------------
Borrower and each direct or indirect successor and assignee of the Borrower and
shall inure to the benefit of and be enforceable by the Bank and each direct or
indirect successor and assignee of the Bank.
e. Entire Agreement. This Agreement contains the entire agreement
----------------
between the Bank and the Borrower with respect to the subject matter of this
Agreement, and supersedes each course of dealing or other conduct heretofore
pursued, accepted or acquiesced in, and each oral or written agreement and
representation heretofore made, by or on behalf of the Bank with respect
thereto, whether or not relied or acted upon. No modification or termination of
this Agreement shall be effective unless made in a writing duly executed by the
Bank and specifically referring to each provision of this Agreement being
modified or to such termination.
f. Governing Law. This Agreement shall be governed by and
-------------
construed, interpreted and enforced in accordance with the internal law of the
State of New York, without regard to principles of conflict of laws.
g. Notices. All notices, requests and other communications provided
-------
for hereunder shall be in writing and shall be deemed to have been duly given or
made when delivered by hand or facsimile at the address set forth below, or if
sent by certified mail, three days after the day on which mailed, or, in the
case of telex, when answer back received, or, in the case of an overnight
courier service, one business day after delivery to such courier service,
addressed as set forth below, or to such other address as may be hereafter
notified by the respective parties hereto:
(a) if to the Bank, at
Western New York Commercial Banking Department
Manufacturers and Traders Trust Company
One Fountain Plaza
Buffalo, New York 14203-1495
Attention: Mr. C. Gregory Vogelsang, Banking Officer
Fax #: 716-848-7318
29
<PAGE>
(b) if to Borrower, at
DSET Corporation
1011 US Highway 22
Suite 100
Bridgewater, New Jersey 08807
Attention: Mr. Paul Lipari
Fax #: 908-526-3435
h. Assignments and Participations. This Agreement shall inure to
------------------------------
the benefit of, and be enforceable by, the Bank, each successor of the Bank and
each assignee of any of the rights and remedies of the Bank pursuant to this
Agreement, and shall be binding upon the Borrower, upon each successor of the
Borrower and upon each assignee of any of the rights of the Borrower pursuant to
this Agreement; provided, however, the Borrower shall not assign or otherwise
transfer any of the rights of the Borrower pursuant to this Agreement without
the prior written consent of the Bank, and any such assignment or other transfer
without such prior written consent shall be void. No consent by the Bank to any
such assignment or other transfer shall release the Borrower from any
indebtedness, liability or obligation of the Borrower pursuant to this
Agreement. The Bank shall have the right to assign or otherwise transfer, or to
grant any participation in, any indebtedness, liability or obligation of the
Borrower to the Bank pursuant to this Agreement or any of the rights and
remedies of the Bank pursuant to this Agreement.
i. Requests. Each request of the Bank pursuant to this Agreement
--------
may be made (i) at any time and from time to time, (ii) at the sole option of
the Bank and (iii) whether or not any Event of Default or Potential Event of
Default has occurred or existed.
j. Right of Setoff. Upon and at any time and from time to time
---------------
after the occurrence or existence of any Event of Default, (i) the Bank shall
have the right, at the sole option of the Bank and without any notice or demand
of any kind (each of which is knowingly, voluntarily, intentionally and
irrevocably waived by the Borrower), other than any notice required by
applicable law (including, but not limited to, any notice required by Section 9-
g of the New York Banking Law), to set off against the outstanding principal
amount of each Loan, against all interest owing pursuant to this Agreement and
remaining unpaid and against all other amounts owing by the Borrower to the Bank
pursuant to this Agreement and remaining unpaid each indebtedness of the Bank in
any capacity to the Borrower in any capacity, whether alone or otherwise and
whether or not then due, (including, but not limited to, any such indebtedness
arising as a direct or indirect result of any deposit account, whether evidenced
by a certificate of deposit or otherwise), and (ii) each holder of any
participation in any unpaid indebtedness of the Borrower to the Bank pursuant to
this Agreement shall have the right, at the sole option of such holder and
without any notice or demand of any kind (each of which is knowingly,
30
<PAGE>
voluntarily, intentionally and irrevocably waived by Borrower), to set off
against such unpaid indebtedness, to the extent of such holder's participation
in such unpaid indebtedness, each indebtedness of such holder in any capacity to
the Borrower in any capacity, whether alone or otherwise and whether or not then
due, (including, but not limited to, any such indebtedness arising as a direct
or indirect result of any deposit account, whether evidenced by a certificate of
deposit or otherwise). Each exercise of such right by the Bank or by such holder
shall be deemed to be immediately effective at the time the Bank or such holder
opts therefor even though evidence thereof is not entered on the records of the
Bank or of such holder until later. For purposes of this Section 9j, the Bank
acknowledges that M&T Securities, Inc. is a separate corporation from the Bank
and does not fall within the definition of "Bank" as used in this Agreement.
k. Invalidity. Whenever possible, each provision of this Agreement
----------
shall be interpreted in such manner as to be effective and valid under
applicable law. If, however, any such provision shall be prohibited by or
invalid under such law, it shall be deemed modified to conform to the minimum
requirements of such law, or, if for any reason it is not deemed so modified, it
shall be prohibited or invalid only to the extent of such prohibition or
invalidity without the remainder thereof or any other such provision being
prohibited or invalid.
l. Directly or Indirectly. Any provision of this Agreement that
----------------------
prohibits or has the effect of prohibiting the Borrower or any Subsidiary from
taking any action shall be construed to prohibit it from taking such action
directly or indirectly.
m. Accounting Terms and Computations. Each accounting term used
---------------------------------
in this Agreement shall be construed as of any time in accordance with generally
accepted accounting principles as in effect at such time. Each accounting
computation that this Agreement requires to be made as of any time shall be made
in accordance with such principles as in effect at such time, except where such
principles are incompatible with any requirement of this Agreement.
n. Headings. In this Agreement, headings of sections are for
--------
convenience of reference only, and are not of substantive effect.
10. CONSENTS AND WAIVERS RELATING TO LEGAL PROCEEDINGS.
--------------------------------------------------
a. JURISDICTIONAL CONSENTS AND WAIVERS. THE BORROWER KNOWINGLY,
-----------------------------------
VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY (i) CONSENTS IN EACH ACTION AND OTHER
LEGAL PROCEEDING COMMENCED BY THE BANK IN CONNECTION WITH ANY LOAN, ANY LOAN
DOCUMENT OR ANY COLLATERAL, SUBORDINATION, GUARANTY, ENDORSEMENT OR OTHER
SECURITY OR ASSURANCE OF
31
<PAGE>
PAYMENT, WHETHER NOW EXISTING OR HEREAFTER ARISING, THAT NOW OR HEREAFTER
DIRECTLY OR INDIRECTLY SECURES THE REPAYMENT OR PAYMENT OF OR IS OTHERWISE NOW
OR HEREAFTER DIRECTLY OR INDIRECTLY APPLICABLE TO ANY OF THE OUTSTANDING
PRINCIPAL AMOUNT OF ANY LOAN, ANY INTEREST PAYABLE PURSUANT TO THIS AGREEMENT OR
ANY OTHER AMOUNT PAYABLE BY THE BORROWER TO THE BANK PURSUANT TO THIS AGREEMENT,
TO THE PERSONAL JURISDICTION OF ANY COURT THAT IS EITHER A COURT OF RECORD OF
THE STATE OF NEW YORK OR A COURT OF THE UNITED STATES LOCATED IN THE STATE OF
NEW YORK, (ii) WAIVES EACH OBJECTION TO THE LAYING OF VENUE OF ANY SUCH ACTION
OR OTHER LEGAL PROCEEDING IN THE COUNTY OF ERIE OF THE STATE OF NEW YORK, (iii)
WAIVES PERSONAL SERVICE OF PROCESS IN EACH SUCH ACTION AND OTHER LEGAL
PROCEEDING, (iv) CONSENTS TO THE MAKING OF SERVICE OF PROCESS IN EACH SUCH
ACTION AND OTHER LEGAL PROCEEDING BY REGISTERED MAIL DIRECTED TO THE BORROWER AT
THE LAST ADDRESS OF THE BORROWER SHOWN IN THE RECORDS RELATING TO THIS AGREEMENT
MAINTAINED BY THE BANK, WITH SUCH SERVICE OF PROCESS TO BE DEEMED COMPLETED FIVE
DAYS AFTER THE MAILING THEREOF, (v) WAIVES EACH RIGHT TO ATTACK ON ANY OF THE
FOREGOING GROUNDS ANY FINAL JUDGMENT THAT IS OBTAINED AS A DIRECT OR INDIRECT
RESULT OF ANY SUCH ACTION OR OTHER LEGAL PROCEEDING AND (vi) CONSENTS TO EACH
SUCH FINAL JUDGMENT BEING SUED UPON IN ANY COURT HAVING JURISDICTION WITH
RESPECT THERETO AND ENFORCED IN THE JURISDICTION IN WHICH SUCH COURT IS LOCATED
AS IF ISSUED BY SUCH COURT.
b. WAIVER OF TRIAL BY JURY AND CLAIMS TO CERTAIN DAMAGES. EACH OF
-----------------------------------------------------
THE BANK AND THE BORROWER KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION,
WHETHER BASED ON ANY CONTRACT, ON ANY NEGLIGENT OR INTENTIONAL TORT, ON ANY LAW
OR OTHERWISE, IN CONNECTION WITH, OR OTHERWISE RELATING TO, (A) ANY LOAN, ANY
LOAN DOCUMENT OR ANY GUARANTY, ENDORSEMENT, SUBORDINATION, COLLATERAL OR OTHER
SECURITY OR ASSURANCE OF PAYMENT NOW OR HEREAFTER DIRECTLY OR INDIRECTLY
SECURING THE PAYMENT OR REPAYMENT OF, OR NOW OR HEREAFTER DIRECTLY OR INDIRECTLY
APPLICABLE TO, ANY OF THE PRINCIPAL AMOUNT OF ANY LOAN, ANY INTEREST OWING
PURSUANT TO THIS AGREEMENT OR ANY OTHER AMOUNT OWING BY THE BORROWER TO THE BANK
PURSUANT TO THIS AGREEMENT, (B) ANY OTHER WRITING HERETOFORE OR HEREAFTER
EXECUTED IN CONNECTION WITH, OR OTHERWISE RELATING TO, ANY LOAN, ANY LOAN
DOCUMENT OR ANY SUCH GUARANTY, ENDORSEMENT, SUBORDINATION, COLLATERAL OR
32
<PAGE>
OTHER SECURITY OR ASSURANCE OF PAYMENT OR (C) ANY COURSE OF DEALING, COURSE OF
PERFORMANCE OR OTHER CONDUCT HERETOFORE OR HEREAFTER PURSUED, ANY ACTION
HERETOFORE OR HEREAFTER TAKEN OR OMITTED TO BE TAKEN, OR ANY ORAL OR WRITTEN
REPRESENTATION HERETOFORE OR HEREAFTER MADE, BY OR ON BEHALF OF THE OTHER IN
CONNECTION WITH, OR OTHERWISE RELATING TO, ANY LOAN, ANY LOAN DOCUMENT OR ANY
SUCH GUARANTY, ENDORSEMENT, SUBORDINATION, COLLATERAL OR OTHER SECURITY OR
ASSURANCE OF PAYMENT. THIS SECTION 10b IS A MATERIAL INDUCEMENT FOR EACH OF THE
BANK AND THE BORROWER IN CONNECTION WITH ITS ENTRY INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the Bank and the Borrower have caused this
Agreement to be duly executed on the date shown at the beginning of this
Agreement.
MANUFACTURERS AND TRADERS
TRUST COMPANY
By: /s/ C. Gregory Vogelsang
--------------------------------------
C. Gregory Vogelsang, Banking Officer
DSET CORPORATION
By: /s/ Paul Lipari
--------------------------------------
Paul Lipari, Chief Financial Officer
33
<PAGE>
ACKNOWLEDGMENTS
STATE OF NEW JERSEY )
) SS.:
COUNTY OF )
On the 5th day of August in the year 1997, before me personally came
C. Gregory Vogelsang, to me known, who, being by me duly sworn, did depose and
say that he resides at 28 Devonbrook, Williamsville; that he is a Banking
Officer of Manufacturers and Traders Trust Company, the corporation described in
and which executed the above instrument; and that he signed his name thereto by
order of the board of directors of said corporation.
/s/ STACY L. LETTIE, ESQUIRE
---------------------------------------
Notary Public
Attorney at Law
State of New Jersey
STATE OF NEW JERSEY )
) SS.:
COUNTY OF )
On the 5th day of August in the year 1997, before me personally came
Paul Lipari, to me known, who, being by me duly sworn, did depose and say that
he resides at 1011 Rt 22 W Bridge water NJ 08807;that he is the Chief Financial
Officer of DSET Corporation, the corporation described in and which executed the
above instrument; and that he signed his name thereto by order of the board of
directors of said corporation.
/s/ STACY L. LETTIE, ESQUIRE
---------------------------------------
Notary Public
Attorney at Law
State of New Jersey
34
<PAGE>
SCHEDULE A
EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
None
<PAGE>
EXHIBIT A
REVOLVING CREDIT NOTE
$3,000,000 Buffalo, New York
August 5, 1997
FOR VALUE RECEIVED, the undersigned, DSET CORPORATION, a New Jersey
corporation (the "Borrower"), DOES HEREBY PROMISE to pay to the order of
MANUFACTURERS AND TRADERS TRUST COMPANY (the "Bank"), at the office of the Bank
at One M&T Plaza, Buffalo, New York 14203, on the Revolving Loan Repayment Date
as defined in the Corporate Revolving and Term Loan Agreement (the "Agreement")
dated as of August 5, 1997, between the Borrower and the Bank, in lawful money
of the United States of America, in immediately available funds, the principal
amount of Three Million Dollars ($3,000,000) or, if less than such principal
amount, the aggregate unpaid principal amount of all Revolving Loans (as defined
in the Agreement) made by the Bank to the Borrower pursuant to the Agreement as
shown on the grid schedules annexed hereto, and to pay interest from the date
hereof on the unpaid principal amount hereof, in like money, at said office, on
the dates and at the rates selected in accordance with Article 2 of the
Agreement and, upon default, on demand from time to time, on any overdue
principal and on any overdue charge or fee, and, to the extent permitted by law,
on any overdue interest, for each day from the due date thereof (by acceleration
or otherwise) until such sum is paid in full, at the rate in effect from time to
time as described in the Agreement.
This Note is the Revolving Loan Note referred to in Section 2b of the
Agreement, and is subject to prepayment and acceleration of maturity as set
forth in the Agreement. All terms defined in the Agreement are used herein with
their defined meanings unless otherwise provided.
All Revolving Loans made by the Bank to the Borrower under the Agreement
and the applicable rates together with all payments or prepayments of principal
shall be recorded by the Bank and endorsed on the grid schedule or grid
schedules attached hereto and hereby made a part of this Note.
This Note shall be governed by and construed in accordance with the laws of
the State of New York and any applicable laws of the United States of America.
DSET CORPORATION
By:___________________
Title:
<PAGE>
SCHEDULE OF ADVANCES AND PAYMENTS
Principal Principal Outstanding
Date Amount Amount Principal Approving
Advanced Advanced Date Paid Paid Amount Employee
- -------- -------- --------- ---- ------ --------
<PAGE>
EXHIBIT B
TERM NOTE
$ Buffalo, New York
__________, 200__
FOR VALUE RECEIVED, the undersigned, DSET Corporation, a _________________
corporation (the "Borrower"), DOES HEREBY PROMISE to pay to the order of
MANUFACTURERS AND TRADERS TRUST COMPANY (the "Bank"), at the office of the Bank
at One M&T Plaza, Buffalo, New York 14203, in lawful money of the United States
of America, in immediately available funds, the principal amount of ____________
($_______) in sixteen (16) equal consecutive quarterly calendar installments,
with the first of such installments due on ______________________, 200__, and
additional installments due on the dates described in the Corporate Revolving
and Term Loan Agreement (the "Agreement") dated as of August 5, 1997, between
the Borrower and the Bank, and to pay interest from the date hereof on the
unpaid principal amount hereof, in like money, at said office, on the dates and
at the rates selected in accordance with Article 2 of the Agreement and, upon
default, on demand from time to time, on any overdue principal and on any
overdue charge or fee, and, to the extent permitted by law, on any overdue
interest, for each day from the due date thereof (by acceleration or otherwise)
until such sum is paid in full, at the rate in effect from time to time as
described in the Agreement.
This Note is the Term Note referred to in Section 2e of the Agreement, and
is subject to prepayment and acceleration of maturity as set forth in the
Agreement. All terms defined in the Agreement are used herein with their defined
meanings unless otherwise provided.
This Note shall be governed by and construed in accordance with the laws of
the State of New York and any applicable laws of the United States of America.
DSET CORPORATION
By:___________________
Title:
<PAGE>
EXHIBIT 10.2
JOINT VENTURE AGREEMENT
-----------------------
THIS AGREEMENT is made as of this 21st day of May, 1997 between
SLIGOS/MARBEN S.A. (on behalf of itself and MARBEN S.A.), a French limited
liability company having its registered office at 1 avenue Newton, 92142
Clamart, France and represented by Gilles Arditti, as authorized signatory
(hereinafter "Sligos/Marben") and DSET CORPORATION, a New Jersey corporation
having its principal office at Bridgewater, New Jersey, U.S.A., and represented
by its President, William McHale (hereinafter "DSET").
RECITALS
--------
Sligos/Marben and DSET are engaged, among other things, in the manufacture,
development, sale and distribution of the communications and telephone network
management products described in Annex 1 hereto (the "Products"). DSET and
-------
Sligos/Marben wish to combine their resources and efforts in order to promote
the distribution of the Products in Europe and Israel (as further defined below,
the "Territories") on the terms and conditions set forth in this Agreement. In
furtherance thereof, DSET and Sligos/Marben have agreed to form a French societe
-------
anonyme (the "Company") on the terms and conditions set forth herein.
- -------
NOW, THEREFORE, IT IS AGREED as follows:
ARTICLE I
---------
DEFINITIONS
-----------
As used in this Agreement, the following terms shall have the following
meanings unless the context requires otherwise:
1. Affiliate as applied to any party, or any other person or entity,
---------
shall mean any person or entity controlling, controlled by or under common
control with such person or entity. For purposes hereof "control" shall mean
ownership of more than 50% of the voting rights of another entity, or the power
to designate a majority of the directors of or the principal manager of another
entity, or any contract or other arrangement by which one person or entity is
able to substantially determine the policies or actions of another person or
entity.
2. Board shall mean the board of directors (conseil d'administration) of
----- ------------------------
the Company.
3. Breach shall mean the material breach by any party of any of its
------
obligations hereunder, and in addition shall be deemed to include for purposes
hereof (a) any act, or omission to act, in bad faith that results in a Deadlock
or that prevents the resolution of an existing Deadlock, and (b) any Change of
Control of either party.
<PAGE>
4. Change of Control of a party means whenever any person or entity or
-----------------
group of persons or entities acting together shall acquire, beneficially or
otherwise, equity securities of any party that represent in excess of fifty
percent (50%) of the voting power of all outstanding equity securities of such
party generally entitled to vote for the election of directors (whether by
merger, consolidation, sale, assignment, lease, transfer or otherwise, in one
transaction or any related series of transactions).
5. Closing Date shall mean the date on which the last to occur of the
------------
following actions has occurred:
(a) formation of the Company and contribution of the capital by the
Shareholders, as provided in Article II of this Agreement; and
(b) signature of the Distribution Agreements by all parties thereto
6. Company shall mean the company formed pursuant to Article II of this
-------
Agreement.
7. Deadlock shall have the meaning given to such term in Article III.2
--------
and Article VIII.1.
8. Distribution Agreements shall mean the distribution agreement
-----------------------
between DSET and the Company and the distribution agreement between
Sligos/Marben and the Company as provided in Article V.5 of this Agreement;
9. Effective Date shall mean the date this Agreement becomes effective
--------------
which, upon signature by the parties, shall be the date first appearing above.
10. FF shall mean the legal currency of the Republic of France.
--
11. Initial Term shall mean the period commencing on the Effective Date
------------
and ending on the second anniversary of such Effective Date.
12. Products shall mean the products as described in Annex 1 and Joint
-------- -------
Product shall mean the Joint Product described therein, the definitive terms of
which shall be agreed by the parties not later than 60 days after the date
hereof.
13. Service Agreement shall mean the management and administrative
-----------------
services agreement between Sligos/Marben and the Company as described in Article
V.1 of this Agreement.
14. Shares and Shareholders shall mean respectively the issued and
------ ------------
outstanding shares of the capital stock of the Company and the holders of the
Shares.
15. Territories shall mean, collectively to the extent permitted by law,
-----------
all member-states of the European Union and all other countries on the continent
of Europe (but not including, with respect to any of the foregoing, the overseas
territories or possessions of any such country which are not located on the
European continent) and the State of Israel.
<PAGE>
16. Technology Provider shall mean the party hereto (or its Affiliate as
-------------------
the case may be) that is providing the Products and related services identified
in this Agreement, as required by the context.
ARTICLE II
----------
FORMATION OF COMPANY
--------------------
1. Formation. As promptly as practicable after the date hereof, the
---------
parties shall cause the Company to be formed under the laws of France as a
societe anonyme having the Articles of Association (statuts) attached hereto and
- --------------- -------
made a part hereof as Annex 3 (the "Articles").
-------
2. Name. The Company shall be called "[_________________] S.A.", or such
----
other name as the parties shall agree.
3. Purpose. The purpose of the Company shall be the promotion,
-------
distribution and sale of the Products in the Territories.
4. Commencement of Operations. The Company shall commence operations as a
--------------------------
company "in formation" upon the Effective Date of this Agreement, the parties
having initialed and signed the Company's original French language Articles
together with the signature of this Agreement. The parties agree that the Board
and the shareholders, at the first duly called meeting of each such body, shall
notify and approve all actions taken in good faith by the President and Chief
Operating Officer (and any person acting under this authority) on behalf of the
Company prior to the immatriculation of the Company with the Company Register.
5. Transition of Sales Opportunities. The Company shall make royalty
---------------------------------
payment to DSET in the amount of 80% of revenues earned by it for DSET products
and maintenance sold to the following customers for the identified projects
during May or June 1997.
<TABLE>
<CAPTION>
Customer Country Project Expected
-------- ------- ------- --------
<S> <C> <C> <C>
Origin NL ASN.1 Q2
Pirelli IT/USA CPM Q2
Siemens DE/TW M-CATS Q2
Efrat IL Q-Adapt Q2
Nicotra IT Q-Adapt Q2
Sodalia IT Manager Q2
Italtel* IT SBS Q2
Italtel* IT SBS2 Q2
Italtel* IT ATM-CC Q2
Teledata IL Win Q-A Q2/Q3
Thomson FR ATNSI Q3
Ericsson IT WLL (TR-303) Q3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Bosch DE SDH Q3
EniNet IT Q-Adapt Q3
Aselsan TR PABX Q3
</TABLE>
* With respect to the Italtel projects referred to above, the parties agree
that a reduced royalty rate to be reasonably determined will be payable in light
of the prior contribution of Sligos/Marben to the sales effort.
ARTICLE III
-----------
CAPITAL AND SHAREHOLDER FINANCING
---------------------------------
1. Initial Capital.
---------------
(a) Initial Capital. The initial capital of the Company shall be Two
---------------
Million Seven Hundred and Fifty French Francs (FF 2,750,000) represented by
Twenty Seven Thousand Five Hundred (27,500) Shares fully paid in cash of FF 100
each. The allocation of capital shall be (i) 14,000 Class A Shares subscribed by
Sligos/Marben, and (ii) 13,750 Class B Shares subscribed by DSET. The rights of
Class A and Class B Shares shall be as set forth in the Company Articles,
including without limitation with respect to any dividends which, if declared,
shall be distributed to the Shareholders on a pro rata basis in accordance with
their percentage interest in the capital of the Company.
(b) Payment of Initial Capital. As promptly as practicable after the
--------------------------
date hereof and not later than May 30, 1997, Sligos/Marben and DSET each shall
pay to the Company in cash and in full the amount set opposite its name below as
payment for the foregoing Class A or Class B Shares being respectively purchased
by them:
Sligos/Marben: FF 1,400,000 (approximately USD 250,000)
DSET: FF 1,375,000 (approximately USD 245,000)
2. Additional Capital.
------------------
If during the Initial Term, the Board unanimously agrees that the
Company requires further capital and the parties hereto are unable to agree on
the amount or manner of advancing such capital to the Company, either party may
by notice to the other party within thirty (30) days of the Board meeting at
which such deadlock is formally notified to the Board elect to treat such
impasse as a "Deadlock" that will thereupon be subject to the provisions of
Article VIII.1.
ARTICLE IV
----------
MANAGEMENT OF COMPANY
---------------------
1. Board of Directors. The Company's Board shall consist of four (4)
------------------
directors (administrateurs), two (2) of whom shall be elected from among the
candidates designated by the Class A Shareholder and two (2) of whom shall be
elected from among the candidates designated by the Class B Shareholder. The
directors shall be elected for a duration of
<PAGE>
three (3) years. The President (President-Directuer General) of the Company
shall be nominated by the Board from among the directors elected by the Class A
Shareholder. The Board shall initially consist of Jean-Pierre Ansart, Valerie
Ajzenberg, William McHale and Paul Lipari. Board meetings will be held not less
often than once per quarter, shall be held in the English language, and shall be
held in Paris, France unless otherwise agreed by all the members of the Board,
except that one Board meeting per year will be held in Bridgewater, New Jersey
if so requested in writing by the members of the Board designated by the Class B
Shareholder. The agenda for such meetings shall include, but shall not be
limited to, a presentation by the Chief Operating Officer of the Company on any
lost sales from the previous quarter. The Board shall undertake an analysis of
all lost opportunities in relation to the products being sold, and shall
endeavor to provide the individual parties with any suggested product
improvements or enhancements necessary to maintain product competitiveness.
2. Special Voting Requirements. The President of the Company shall
---------------------------
have the authority to commit the Company vis-a-vis third parties except for the
actions described in Article 20 of the Articles and further listed below which
shall each require the unanimous prior approval of the Board:
(a) the determination of the annual budget, including the investment
budget and the financing plan, as well as any decision which has the effect of
increasing the expenses of the Company in a given fiscal year beyond the budget
set for such fiscal year;
(b) the approval of the annual accounts, including the distribution of any
dividends;
(c) any acquisition or disposition of any interest in any company,
partnership, trust or similar entity
(d) the hiring or dismissal of any employee whose annual gross
remuneration exceeds or shall exceed FF 300,000 per year, as well as the
establishment or modification of the Company's remuneration policy;
(e) any proposal to increase the Company's capital and, more generally, to
modify the Company's Articles;
(f) any borrowings or loans in an aggregate amount (on a cumulative basis)
in excess of FF 500,000 (or its currency equivalent);
(g) the purchase, sale or transfer of any kind to a third party of any of
the Company's assets or property having a value in excess of FF 30,000 other
than in the ordinary course of the Company's business;
(h) the issuance of any type of guarantee by the Company on behalf of a
third party, and more generally, any agreement in which the Company guarantees
the full performance of a third party's obligations;
(i) the entering into of any agreement between the Company and one or more
of its Shareholders or an Affiliate of a Shareholder, other than the Service
Agreement and the
<PAGE>
Distribution Agreements, and any modifications or amendments thereto, including
the Service Agreement and the Distribution Agreements;
(j) the modification of the Company's purpose of the undertaking of any
activity other than those within the purpose of the Company as described in
Article II.3;
(k) any decision relating to the use of any name or trademark as
contemplated by Article VI.1;
(l) the selection and removal of the President or the Chief Operating
Officer (Directeur General) of the Company; and
(m) the commencement or settlement of any litigation.
3. President and Management. The management of the day-to-day affairs
------------------------
of the Company shall be entrusted to the President and, in particular, the Chief
Operating Officer. The management of the Company including the Chief Operating
Officer will be selected by the President in consultation with and, where
required by Article IV.2(d), subject to the approval of the Board. The initial
Chief Operating officer shall be Karim Jammal. The President or the Chief
Operating Officer shall meet (in person or via video conference) at least once
per month with one director of the Company nominated by the Class B Shareholder
in order to review operations.
4. Access to Information. Each member of the Board shall be entitled
---------------------
to receive such information relating to the Company's business, as he or she may
reasonably request, and the President shall use his or her best efforts to
respond promptly to any such request for information. The President shall, in
addition, cause to be prepared and provided to each member of the Board and to
each Shareholder a quarterly report on the activities of the Company in such
form as the Board shall determine.
ARTICLE V
---------
OPERATIONS OF COMPANY
---------------------
1. Services OF Sligos/Marben. On or prior to the Closing Date, the
-------------------------
Company shall enter into an annual exclusive management and administrative
service agreement with Sligos/Marben in the form of Annex 4 hereto (the "Service
-------
Agreement") providing for rendering certain administrative services to the
Company as provided therein.
2. Commercial Strategy. The Company's commercial strategy will be
-------------------
determined by the Board upon the proposal of the President. The President shall
inform the Board of the status of the Company's implementation of its strategy
on a regular basis, and shall from time to time as may be appropriate under the
circumstances provide written status reports with respect thereto.
3. Financial Goal. The parties confirm that their expectation is that
--------------
the Company will be self-sufficient and profitable, and will have achieved
minimum annual revenues of FF 10,000,000 (before tax), by the end of the second
year of the Initial Term.
<PAGE>
4. Overhead Expenses. It is the parties' intention that overhead expenses
-----------------
be kept as low as reasonably possible. General overhead expenses shall include
all customary expenses of a general and administrative nature, and in particular
shall include the cost of the Company's full-time employees responsible for
business management, marketing and service, the negotiation of contracts and the
organization of financial controls for the Company, and the cost of the Service
Agreement. Legal expenses shall be included in overhead, and where such legal
expenses of the Company are incurred by a party hereto for the benefit of the
Company, they may be charged back to the Company by such party, provided that
no such expenses in excess of FF 50,000 may be charged back by either party in
any one year without the prior majority consent of the Board. Notwithstanding
the foregoing, all reasonable operating expenses already incurred on behalf of
the Company by the parties prior to its formation shall be charged back to the
Company by and reimbursed to each party. However, legal expenses incurred by
each party in connection with the preparation of this Agreement and otherwise in
connection with the formation of the Company and the setting up of its
activities shall be borne by the party concerned, except for expenses incurred
for the incorporation of the Company which shall be borne in equal shares by the
parties.
5. Distribution. On or prior to the Effective Date, the Company shall
------------
enter into with each of Sligos/Marben and DSET a distribution agreement (the
"Distribution Agreements") substantially in the form of Annex 5 (with respect to
-------
DSET, and on such terms, mutatis mutandis with respect to Sligos/Marben),
------- --------
pursuant to which the Company shall be granted to exclusive right to promote,
distribute and sell the Products in the Territories for an initial term of two
years renewable for a period of one year and on the terms provided therein. The
parties agree that if at any time during the 10-month period following the
Effective Date, DSET makes an acquisition of a company that is engaged in the
manufacture and distribution of products similar to the Products hereunder, the
parties will meet promptly to discuss what if any changes may be desirable to
the provisions of this Agreement or to such Distribution Agreements (including
the possibility that such Distribution Agreements should become non-exclusive),
provided that the foregoing shall create no obligation on either party to agree
to any such changes, it being understood that only such changes as may be
negotiated in good faith and agreed in writing at the time of such discussions
shall be binding on the parties.
6. Distributors/Systems Integration. The parties agree that the Company
--------------------------------
shall used its best efforts to enter into distribution agreements with DSET's
and Sligos/Marben's existing distributors for the Products, and that such new
distribution agreements shall replace any existing agreements with such
distributors, provided that the Company shall not be required to assume any
pre-existing obligation of either DSET or Sligos/Marben to such distributors.
The parties agree that the Company shall actively recruit and enter into
agreements with multiple distributors and systems integrators, and that all such
distributors and systems integrators shall enter into agreements on
substantially the same terms and conditions, as well as such product discounts,
as the Board shall determine from time to time. The parties further agree that
the Company shall not enter into any such agreement with an Affiliate of one of
the parties except with the unanimous consent of the Board.
<PAGE>
7. Maintenance Services. It is the intention of the parties that the
--------------------
Company will sell maintenance contracts, either directly or through its network
of resellers (sub-distributors, agents or system integrators).
Maintenance is comprised of two components.
1. Technical support that can be accessed via the e-mail or phone
to ask operational questions, request enhancements or to report bugs in the
software. If technical support is required on-site by the customer, each party
agrees to provide such support on standard terms but at a preferred rate of 25%
off the then currently published rate.
2. Software updates (which include maintenance releases, point
releases and major upgrades) that are automatically shipped to customers that
have valid maintenance contracts.
Technical Support will be divided onto three levels:
Level 1: Provides answers to customers questions about the operation of
the software products.
Level 2: Provides a "debugging" process that assists in isolating the
problem area which will be reported to the Technology Provider
for resolution.
Level 3: The Technology Provider will generally be responsible to provide
solutions to problems reported above in accordance with its
standard procedures.
Financial transactions for Maintenance Contracts:
(a) The entity that sells the maintenance contract to the customer
will be entitled to 20% of value of the maintenance contract. The entity that
sells the contract could be the Company or one of its resellers.
(b) The provider of Level 1 and Level 2 support will be entitled to
30% of the value of the maintenance contract and will be the Company, unless
otherwise agreed by the parties.
(c) The Technology Provider who provides Level 3 support receives
the remaining 50% to implement Level 3 and the software update service.
8. Discounting Authority. If the Company needs to discount the published
---------------------
list price of the products by more than 30% to win new business, the parties
agree it must first get approval from the party which is the Technology Provider
of the respective products. If the Company plans to implement any specific
marketing programs that require special discounts other than those in the
ordinary course of business, it shall likewise obtain the prior approval from
the appropriate Technology Provider.
<PAGE>
9. Financial Reporting. The Company shall use all reasonable efforts
-------------------
to provide profit/loss, balance sheet and cash flow statements to the Technology
Providers within 15 business days of the close of each fiscal quarter. These
quarterly reports do not need to be audited.
The Company shall use all reasonable efforts to provide audited
profit/loss, balance sheet and cash flow statements to the Technology Providers
within 35 business days of the close of a fiscal year.
ARTICLE VI
----------
INTELLECTUAL PROPERTY MATTERS
-----------------------------
1. Trademarks. The Products shall be sold by the Company in the
----------
Territories only under such trademarks or marks as will be decided by the Board
that are not confusingly similar to any trademark currently owned by either
party, or subsequently owned and notified by either party to the Company. All
trademarks, brand names, trade names, and logos relating to the Products
currently owned or used by either party (collectively, "Product Identification
Rights", which for the avoidance of doubt do not include the Company name and
logo and any trademarks approved by the Board as provided above), shall continue
to be the sole and exclusive property of the party which makes such Product
Indentification Rights available for use by the Company. The Company shall have
the right to use the Product Indentification Rights in a responsible manner in
connection with the commercialization of the Products free of charge during the
term of this Agreement. The Company shall take all reasonable steps to protect
the Producer Indentification Rights from infringement by third parties in the
Territories.
2. Placement of Logos and Marks. The Products and all promotional
----------------------------
materials used by the Company in launching, promoting and advertising the
Products in the Territories shall bear the name and logo of the party which has
developed the respective Product, the words "manufactured by [applicable
party]", and "marketed and distributed by (insert name of Company)", but the
Company's name and logo shall be given prominence.
3. Rights to Other Intellectual Property.
-------------------------------------
(a) Each party will be the exclusive owner of any and all patents,
know-how or other intellectual property relating to the development or
manufacturing or registration of the Products developed or manufactured by such
party, and shall not hereby convey any rights in such intellectual property to
the Company. Each party shall make available to the Company free of charge
during the term of this Agreement such client lists, market reports, promotional
surveys, training materials, and other reports, data, or programs as it may have
developed prior to the date of this Agreement in connection with the promotion,
marketing, distribution and sale of its other such Products, but all such
pre-existing materials shall remain the property of the party that developed
such materials.
<PAGE>
(b) Any intellectual property developed by the parties or their
respective Affiliates jointly with or by the Company, including without
limitation, promotional materials, market reports, promotional surveys, training
materials and other similar reports, or data developed in connection with the
commercialization of the Products ("Joint Venture Intellectual Property") shall
be the property of the Company. To the extent the Joint Venture Intellectual
Property incorporates or uses a commercial concept or plan, invention (whether
patentable or otherwise), trademark, copyrightable material, software or data
base developed and used generally by either party in the conduct of their
respective other businesses, each hereby grants to the Company, for the term of
this Agreement, free of charge, the right to utilize such software, data base or
other intellectual property solely in connection with the commercialization of
the Products.
4. Post-Termination Rights. Following the termination of this Agreement for
-----------------------
any reason, each of Sligos/Marben and DSET (a) shall have the right, free of
charge, to use any or all of the Joint Venture Intellectual Property (other than
the Company name and logo and any trademarks approved by the Board as provided
in Article VI.1 above, which shall not be used by either party except as the
parties may hereafter agree in writing), (b) shall have the non-exclusive right
to promote, distribute and sell the Products of the other party in the
Territories for a period of one year following such termination on substantially
the same terms as provided in the Distribution Agreements (and on the basis that
the counterparty to each such Distribution Agreement is not the Company but the
other party or such other exclusive distributor with which such party may
contract during such period), and each of Sligos/Marben and DSET agrees to enter
into a successor distribution agreement with the other party on such terms, and
such other terms as the parties may agree, promptly after the termination of
this Agreement, and (c) for a period of two months following such termination,
agrees not to make any offer of employment to any employee of the Company that
was previously employed by the other party, except with the prior written
consent of the other party.
ARTICLE VII
-----------
EXCLUSIVITY/NON-COMPETITION
---------------------------
1. Subject to Article IX.2(d) below, in order to properly support the
operations and the development and to maximize the value of the business of the
Company, each party agrees (and agrees to cause its Affiliates to comply with
the terms hereof), that except as otherwise expressly provided herein, neither
it nor its Affiliates shall engage in the Territories in, or form or participate
in the Territories by equity ownership or otherwise in or with any other person
or entity which engages in, or otherwise competes in the Territories with the
Company in relation to, the distribution of products substantially similar to
the Products or otherwise in direct competition with the Company.
2. Product Competitiveness. Both parties agree that it is in the best
-----------------------
interest of the respective parties to continue to modify and enhance their
Products. The parties agree to share with each other their product development
plans and information about the resources dedicated to implementing these plans.
<PAGE>
Additionally, each Technology Provider shall, the extent feasible, provide
trained personnel to satisfy customer requirements for porting to unique
platforms or customizing the Products to work in a customer's environment.
ARTICLE VIII
------------
DEADLOCK/BREACH/RESTRICTIONS ON TRANSFER
----------------------------------------
1. Board Deadlock.
--------------
(a) Deadlock. If, after the Initial Term, the Board fails at any
--------
time to agree upon an issue the resolution of which requires a unanimous
decision of the Board as provided herein, or as expressly contemplated by
Article III.2 (a "Deadlock"), then during a period of forty-five (45) days after
the Deadlock (the "Discussion Period") the parties shall meet to discuss the
reasons for the Deadlock and to consider solutions to propose to the Board to
resolve the Deadlock. During the Discussion Period the parties shall not proceed
to commence any court or other dispute resolution proceeding which may be
available to the parties. The parties shall use their best efforts not to
involve management of the Company (other than the President) in, and to keep
confidential from, management of the Company any matter constituting the subject
of a Deadlock. Communications to management, if any, with respect thereto will
be made by the President. In the event the Deadlock has not been resolved by the
Board within the Discussion Period, then in addition to any rights available to
the parties for breach of contract of otherwise at law, either party shall have
the rights set forth in Article IX.2 hereof.
2. Breach. In the event any party (the "Breaching Party") shall be in
------
Breach of any of its obligations hereunder and such Breaching Party shall have
failed to cure such breach within thirty (30) days (the "Cure Period") after
receiving written notice of such breach from the Company or from the
non-Breaching Party (an "Uncured Breach"), then the non-Breaching Party, in
addition to any other remedies available to it for breach of contract or
otherwise at law, shall have the rights set forth in Article IX.2 hereof.
3. Sale to Third Parties.
---------------------
(a) The parties hereto hereby agree that, during the Initial Term,
they shall not sell, encumber, pledge, or otherwise dispose of their Shares,
unless such disposition has been approved by the Board pursuant to the
provisions of the Articles or to an Affiliate, as provided in the following
sub-paragraph.
(b) Any party may transfer its Shares to an Affiliate of such party,
provided (1) such transferring party holds more than 50% of the outstanding
voting shares of such Affiliate (for purposes hereof, a "Corporate Affiliate"),
(2) such Corporate Affiliate enters into an agreement to be bound by the terms
and conditions of this Agreement and agrees to re-transfer such Shares to the
transferring party if at any time during the effectiveness of this Agreement
such Corporate Affiliate ceases to be a Corporate Affiliate of such transferring
party, and (3) the transferring party shall continue to remain liable hereunder
and shall be liable for any breach by its Corporate Affiliate of the terms
hereof, and agrees to repurchase the Shares from such Corporate Affiliate if at
any time during the
<PAGE>
effectiveness of this Agreement such Corporate Affiliate ceases to be an
Corporate Affiliate of such transferring party.
ARTICLE IX
----------
TERM AND TERMINATION
--------------------
1. Term. This Agreement shall be effective as of the Effective Date and
----
shall continue in effect in accordance with its terms for as long as the parties
or their Affiliates continue as Shareholders of the Company. In the event one
party delivers a Liquidation Notice as defined in and provided by Article XI.2
below, the provisions of that Article shall prevail over any other
contradictory provisions of this Agreement.
2. Certain Procedures for Winding Up Operations.
--------------------------------------------
(a) Either party may cause the operations of the Company to be wound
up as hereinafter provided:
(i) During a period commencing six (6) months prior to the end of the
Initial Term the parties shall meet to discuss the performance of the Company
during such Initial Term. If the parties have not by the end of such period
agreed in writing on the basis on which the operations of the Company shall be
continued, then either party shall be entitled to require that the operations of
the Company be wound up and its assets distributed to Shareholders in accordance
with the provisions of this Article set forth below by giving written notice to
that effect (a "Liquidation Notice") to the other party and the Company not
later than four (4) months following the expiration of the Initial Term. If no
Liquidation Notice is given within such four (4) month period, the Company shall
continue its operations as otherwise contemplated by this Agreement and the
Initial Term shall thereupon by extended for an additional two (2) year period.
(ii) In addition to the foregoing, in the event of the occurrence of a
Deadlock, any party shall be entitled to require that the operations of the
Company be wound up and its assets distributed to Shareholders in accordance
with the provisions of this Article set forth below by sending a Liquidation
Notice to the other party and the Company at any time after but not later than
sixty (60) days following the expiration of the applicable Discussion Period
with respect thereto. If no Liquidation Notice is given within such sixty (60)
day period, the Company shall continue its operations as otherwise contemplated
by this Agreement.
(iii) In addition to the foregoing, in the event of the occurrence of
an Uncured Breach, the non-Breaching Party shall be entitled to require that the
operations of the Company be wound up and its assets distributed to Shareholders
in accordance with the provisions of this Article set forth below by sending a
Liquidation Notice to the other party and the Company at any time after but not
later than sixty (60) days following the expiration of the applicable Cure
Period with respect thereto. If no Liquidation Notice is given within such sixty
(60) day period,
<PAGE>
the Company shall continue its operations as otherwise contemplated by this
Agreement.
(iv) In addition to the foregoing, in the event where either (1)
during the Initial Term the Company incurs losses in any fiscal year in
excess of FF 250,000 or (2) after the Initial Term, incurs losses in any
fiscal year which when added to losses carried forward exceed the amount of
the share capital of the Company, the parties shall meet during the first
quarter following the relevant fiscal year to discuss the Company's
position and to determine whether to wind up or continue the Company's
operations. If no agreement in writing is reached between the parties prior
to the end of such quarter, then either party shall be entitled to require
that the operations of the Company be wound up and its assets distributed
to Shareholders in accordance with the provisions of this Article set forth
below by sending a Liquidation Notice to the other party and the Company at
any time after but not later than thirty (30) days following the end of the
applicable first quarter. If no Liquidation Notice is given within such
thirty (30) day period, the Company shall continue its operation as
otherwise contemplated by this Agreement.
(b) Following the delivery of a Liquidation Notice by either party,
and subject to Article IX.2(c) below, the Board shall proceed to wind up the
affairs of the Company in accordance with its obligations to creditors and
employees and as otherwise required by French law. Subject thereto, each party
hereto shall be entitled to cause the Company to transfer or grant back to such
party all property rights that were transferred or granted by such party to the
Company, subject to the provisions of Article VI hereof.
(c) The exclusively and non-competition obligations of the parties
as defined in this Agreement shall, unless otherwise agreed by the parties at
such time, automatically terminate upon the delivery of a Liquidation Notice by
either party. This Agreement shall terminate upon the effective liquidation of
the Company, except as specifically provided herein.
ARTICLE X
---------
GOVERNING LAW AND ARBITRATION
-----------------------------
1. Governing Law. This Agreement shall be interpreted and governed by the
-------------
laws of the Republic of France, without giving effect to the rules of conflict
of law.
2. Arbitration. All disputes arising in connection with this Agreement
-----------
shall be finally settled under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce (the "ICC") by one or more arbitrators
appointed in accordance with the rules of the ICC, or by such other arbitration
body as the parties may mutually agree at the time of such dispute. The
arbitration shall be conducted in Paris in the English language. Each party
shall bear its own costs, including attorney fees, except that the costs of the
arbitration shall be borne as the arbitrators determine. Any award of the
arbitrators shall be final and binding on the parties and enforceable in any
court having jurisdiction.
<PAGE>
ARTICLE XI
----------
MISCELLANEOUS
-------------
1. Confidentiality. The parties agree to keep confidential all
---------------
information they have or may obtain about or with respect to the Company and its
activities, including without limitation its production and development projects
and commercial strategy, to the same extent as if such activities were being
conducted directly by such parties themselves. The foregoing is in addition to
the confidentiality obligations of the parties pursuant to their agreement dated
May 28, 1996.
2. Invalidity. In the event that any provision of this Agreement should
----------
be or become wholly or partly invalid, the validity of the remaining provisions
shall not be affected thereby; rather, the parties shall be obliged to act in
good faith to replace the invalid provision by a provision which achieves the
business purpose intended by the invalid provision to the extent legally
permissible.
3. No Agency or Partnership. Nothing contained in this Agreement shall
------------------------
constitute or be deemed to create a partnership between the parties hereto or
constitute any person the employees or agent of another party.
4. Expenses. Except as otherwise provided herein, each party shall bear
--------
its own costs for counsel retained in connection with the execution of this
Agreement and the agreements referenced herein.
5. Language. This Agreement, the Service Agreement and the Distribution
--------
Agreements shall be concluded in English, and the Articles shall be concluded in
French. The parties have prepared and attached as part of each such annexed
document an English translation for convenience only which they accept as
correct.
6. Other Agreements. The other agreements annexed to this Agreement are
----------------
referenced herein but not incorporated as part of this Agreement and upon
signature by the parties thereto shall constitute separate agreements in
accordance with their terms.
7. Integration and Amendment. This Agreement and the agreements and
-------------------------
documents referenced in the annexes hereto constitute the entire understanding
and agreement of the parties about the subject matter of their transaction and
shall supersede any prior understandings and agreements. Any amendment of this
Agreement shall be in writing and signed by the duly authorized officers of the
parties.
8. Notices. Notices, demands or documents to be delivered to any party
-------
must be given by registered mail, with return receipt requested, by telex or by
facsimile to the following addresses of all the parties:
<PAGE>
(a) If to the Purchaser, to:
DSET
1011 U.S. Highway 22
Suite 100
Bridgewater, New Jersey 08807
USA
Attention: Stacy Lettie
Tel: 00 1 908 526 7500
Fax: 00 1 908 526 3435
(b) If to the Seller, to:
Axime-Sligos
Immeuble Ile de France
3 place de la Pyramide
92067 Paris La Defense 9 Cedex
Attention: Gilles Arditti
Tel: 01 49 00 90 21
Fax: 01 49 00 96 20
with a copy to:
Wilkie Farr & Gallagher
21-23 rue de la Ville l'Eveque
75008 Paris
Attention: John R. Flanigan
Tel: 01 53 43 45 00
Fax: 01 40 06 96 06
or to any other address which the respective party may notify to the other
parties as provided above.
9. Cooperation. The parties undertake after the Effective Date to
------------
execute all applications to the Register of Commerce which may be required to
form the Company.
10. Counterparts. This Agreement may be signed in one or more
-------------
counterparts each of which shall constitute an original and all of which
together shall constitute one agreement.
11. Accession. The parties shall cooperate to cause the Company to
----------
execute a copy of this Agreement prior to the Closing Date for the sole purpose
of complying with its obligations as defined in the following sentence. By
executing this Agreement, the Company agrees to cooperate with the parties,
to act in good faith and to use reasonable efforts to perform the provisions
of this Agreement to be performed by them.
<PAGE>
12. Counsel. The parties agree that the legal department of Sligos/Marben
-------
may from time to time provide legal services to or as required by the Company
pursuant to the Service Agreement, but that in the event of a conflict among the
Board or the Shareholders for which the Board or the Company requires separate
counsel, the Company shall engage independent outside counsel for such purpose.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
SLIGOS/MARBEN S.A.
By: /s/ G. Arditti
------------------------
G. Arditti
DSET CORPORATION
By: /s/ W.P. McHale, Jr.
------------------------
W. P. McHale, Jr.
<PAGE>
JOINT VENTURE AGREEMENT
Annexes
-------
Annex 1 Products
Annex 2 [Blank]
Annex 3 Articles
Annex 4 Service Agreement
Annex 5 Distribution Agreement (Not
included - Original executed
simultaneously herewith
<PAGE>
Annex 1 to JV Agt.
------------------
. SLIGOS MARBEN Products:
- - OSIAM products including part or all of the following entities:
- Kernel,
- Generic Porting Kit Tool,
- Unix Users Space Porting Kit Tool including the Core PKU Product, the
PKS access method, the XTI/TLI access method, the Socket access method,
- Unix streams porting kit tool including the Core PKS Product, the
RFC1006 access method, the TPI provider, the APLI Library, the user
mailbox (USRMBX) for local PKU, the user mailbox (USRMBX) for local PKS,
- Real-time porting kit tool including the Core PKX Product, the Ethernet
access methods, the user mailbox for local PKX,
- Windows NT Porting Kit including the Core PKNT Product, the Socket
access method, the user mailbox for local PKNT, the EICON access method,
- ASN.1 BER encoding/decoding engines,
- ASN.1 PER encoding/decoding engines,
- CONS LAYER,
- CLNS LAYER,
- ES/IS
- IP OVER X.25,
- IS/IS Level 1,
- IS/IS Level 2,
- TARP Protocol Engine,
- TL1 Entity,
- Transport Class 0,2,3,4 Over CONS,
- TP0/RFC1006,
- Transport Class 4 Over CLNS,
- CLTS Over CLNS,
- Transport Relay MSDSG,
<PAGE>
- Session (V1, V2),
- CTS WAN Session and Transport Responders,
- Presentation Entity,
- FTAM Entity,
- FTAM Initiator/Responder Entity
- ACSE Entity,
- FTAM Entity,
- FTI/FTR (FTAM initiator/responder) Entities,
- X.500 Directory Services including Extended Rose for X.500, DUA, DSA,
DIB, XDS, LDAP, SERVER.
. DSET Products:
- DSET TMN Product Line products including part or all of the following
entities: Distributed Systems Generator (DSG) including existing
Hardware/OS dedicated versions, and including DSG Isode Interface,
DSG APLI Interface, DSG One Stack Interface, DSG RETIX Stack
Interface,
- ASN.C/C++ TOOLKIT including C++ Language Support Interface, SNMP V2
Option Package, TCAP Support Package, Rose Support Package
- GDMO Compiler,
- GDMO Agent Toolkit including Scanner Function Option,
- GDMO Agent Tester,
- CMIP: Rose Protocols & Protocol Interface Modules,
- CMIP Translator,
- Cross Development Kits,
- Visual Agent Builder,
- Manager Code Generator,
- GDMO Agent Emulator,
- GDMO Manager Library,
- OODB Interface,
- DSET Interface for HP Overview.
-2-
<PAGE>
. The Joint Product:
The Joint Product will be initially an integration of SLIGOS MARBEN's OSIAM with
DSET's AGENT TOOLKIT with the following components: Kernel, DSG, Porting Kit(s),
ASN.C, Transport, ROSE, Session, CMIP, Presentation, GDMO Agent Toolkit, Acse,
GDMO Compiler. DSET's ROSE will be glued to SLIGOS MARBEN's ACSE/Presentation.
The product shall be packaged to be shipped as a single product.
-3-
<PAGE>
Annex 3
-------
Translation for convenience only
--------------------------------
NAME
Corporation
Registered capital of 2,750,000 FF
Registered office:
------------------------------------
ARTICLES OF INCORPORATION
------------------------------------
<PAGE>
PART I
------
FORM - NAME;
PURPOSE; HEADQUARTERS;
EXISTENCE; ACTIVITY OF COMPANY
ARTICLE 1 - FORM
There is hereby created among the holders of the shares created hereby and
those which may be created in the future, a corporation (the "Company") which is
subject to the law[s] and regulations in effect and to this Charter.
- -[_______________]
[address omitted]
- -[_______________]
[address omitted]
- -[_______________]
[address omitted]
- -[_______________]
[address omitted]
- -[_______________]
[address omitted]
- -[_______________]
[address omitted]
- -[_______________]
[address omitted]
ARTICLE 2 - PURPOSE
The purpose of the Company is:
(a) The promotion, distribution and sale, in Europe including the Central
and Eastern European Countries, in Turkey and in the State of Israel, of
software and telecommunication network management products, including the
following products:
. SLIGOS MARBEN Products:
- -OSIAM products including part or all of the following entities:
- Kernel,
- Generic Porting Kit Tool,
- Unix User Space Porting Kit Took including the Core PKU Product, the PKS
access method, the XTI/TLI access method, the Socket access method,
<PAGE>
- Unix streams porting kit tool including the Core PKS Product, the
RFC1006 access method, the TPI provider, the APLI Library, the user
mailbox (USRMBX) for local PKU, the user mailbox (USRMBX) for local PKS,
- Real-time porting kit tool including the Core PKX Product, the Ethernet
access methods, the user mailbox for local PKX,
- Windows NT Porting Kit including the Core PKNT Product, the Socket
access method, the user mailbox for local PKNT, the EICON access method,
- ASN.1 BER encoding/decoding engines,
- ASN.1 PER encoding/decoding engines,
- CONS LAYER,
- CLNS LAYER,
- ES/IS
- IP OVER X.25,
- IS/IS Level 1,
- IS/IS Level 2,
- TARP Protocol Engine,
- TL1 Entity,
- Transport Class 0,2,3,4 Over CONS,
- TP0/RFC1006,
- Transport Class 4 Over CLNS,
- CLTS Over CLNS,
- Transport Relay MSDSG,
- Session (V1, V2),
- CTS WAN Session and Transport Responders,
- Presentation Entity,
- FTAM Entity,
- FTAM Initiator/Responder Entity
- ACSE Entity,
- FTAM Entity,
- FTI/FTR (FTAM initiator/responder) Entities,
- X.500 Directory Services including Extended Rose for X.500, DUA, DSA,
DIB, XDS, LDAP, SERVER.
. DSET Products:
- DSET TMN Product Line products including part or all of the following
entities: Distributed Systems Generator (DSG) including existing
Hardware/OS dedicated versions, and including DSG Isode Interface, DSG
APLI Interface, DSG One Stack Interface, DSG RETIX Stack Inteface,
- ASN.C/C++ TOOLKIT including C++ Language Support Interface, SNMP V2
Option Package, TCAP Support Package, Rose Support Package
- GDMO Compiler,
- GDMO Agent Toolkit including Scanner Function Option,
- GDMO Agent Tester,
- CMIP: Rose Protocols & Protocol Interface Modules,
- CMIP Translator,
- Cross Development Kits,
- Visual Agent Builder,
- Manager Code Generator,
- GDMO Agent Emulator,
- GDMO Manager Library,
- OODB Interface,
<PAGE>
- DSET Interface for HP Openview.
. The Joint Product:
The Joint Product will be initially an integration of SLIGOS MARBEN's OSIAM with
DSET's AGENT TOOLKIT with the following components: Kernel, DSG, Porting Kit(s),
ASN.C, Transport, ROSE, Session, CMIP, Presentation, GDMO Agent Toolkit, Acse,
GDMO Compiler. DSET's ROSE will be glued to SLIGOS MARBEN's ACSE/Presentation.
The product shall be packaged to be shipped as a single product.
(b) The acquiring of shares and investing of funds in any similar or
related companies, whether French or foreign, through the purchase of or
subscription for stock or securities of whatever nature, by contribution in kind
or by any industrial or commercial agreements, and generally by any activities
related to the accomplishment of its corporate purpose;
(c) In general, all financial, industrial, commercial, stock and
securities transaction which are directly or indirectly related to its corporate
purpose or which would be beneficial, would facilitate, encourage and develop
its fulfillment in France and abroad.
ARTICLE 3 - NAME OF THE COMPANY
The Company is called [_____________]
Acts and documents issued by the Company to third parties, especially
letters, bills, announcements and various publications, must have this company
name, immediately preceded or followed by the clear words "societe anonyme" or
the letters "SA", the amount of its capital, its location and the registration
number of the Company on the Register of Commerce and Companies.
ARTICLE 4 - HEADQUARTERS OF THE COMPANY
The Company's headquarters is at [______________].
The headquarters may be moved to any other place in the same department or
a neighboring department by decision of the Board of Directors, subject to the
approval of this decision by the next ordinary general shareholders meeting, and
to anywhere else in France if so decided by an extraordinary general meeting of
the stockholders.
ARTICLE 5 - TERM
The Company is established for a period of 99 years from the date of its
registration with the Register of Commerce and Companies, unless it is dissolved
or prolonged according to the law or by a decision of an extraordinary general
meeting of the stockholders.
<PAGE>
ARTICLE 6 - FISCAL YEAR
The fiscal year of the Company will be [_____] to [_____] of each year.
However, the first fiscal year of the Company will start as of the
date of the company's registration with the Registry of Commerce until [______].
PART II
-------
CAPITAL OF THE COMPANY; STOCK
ARTICLE 7 - CAPITAL
The capital of the Company is set at Two Million Seven Hundred and Fifty
(2,750,000) Francs. This capital is divided into 27,750 shares of One Hundred
(100) Francs each, as follows:
- 14,000 class A Shares subscribed by Sligos/Marben [_____], and
- 13,750 class B Shares subscribed by DSET [_____].
ARTICLE 8 - FORM OF THE SHARES
The Shares are nominative.
Ownership of shares is demonstrated by their listing in the name of the
owner or owners on the register maintained for this purpose by the Company in
the manner dictated by law. Upon request, a certificate attesting to these
shares will be supplied to the shareholder by the Company.
ARTICLE 9 - RIGHTS AND OBLIGATIONS ATTACHED TO OWNERSHIP OF SHARES
I. Each share conveys the rights and benefits which correspond to the
proportion of the total capital it represents. It also gives the holder the
right to vote and representation at general meetings, within legal and statutory
limits. All shares transferred to a shareholder holding class A Shares are
converted into class A Shares. All shares transferred to a shareholder holding
class B Shares are converted to class B Shares.
II. Shareholders are liable up to the nominal amount of the shares they own. All
calls for funds beyond that are forbidden. Rights and obligations adhere to
shares regardless of the owner. Ownership of shares carries with it the
obligation to adhere to the charter of the Company and the decisions of general
meetings of shareholders.
III. Heirs or creditors at law or other representatives of a shareholder may not
impose a lien on the goods or assets of the Company, nor may they demand its
division or sale, or interfere in its administration; they must, for the
enforcement of their rights, refer to the Company's corporate accounts and the
decisions of the general meeting(s) of shareholders.
IV. Whenever it is necessary to own several shares to exercise a particular
right, in instances of exchanges, groupings together, allocations of shares,
or as a result of an increase or decrease in capital, merger or other Company
action, the holders of single shares, or insufficient number of shares for the
required purpose, can only exercise those rights if they make a private
arrangement to group together and, eventually, buy or sell the necessary number
of shares.
<PAGE>
V. Unless forbidden by law, all fiscal exemptions or impositions or taxes to
which the Company is liable, will be grouped together and will be imputed to all
the shares before proceeding to distributions or refunds, during the term of the
Company or upon its liquidation so that, taking into account their respective
nominal values and rights, all the shares of a particular class will receive the
same net amount.
ARTICLE 10 - INDIVISIBILITY OF SHARES - OUTRIGHT OWNERSHIP AND USUFRUCT
I. Shares are non-divisible with respect to the Company. Multiple owners of one
share must be represented vis-a-vis the Company by a single owner, who will be
considered the sole owner, or by a sole representative. In case of disagreement,
the sole representative may be designated by the Court upon the request of a
co-owner.
II. Unless otherwise agreed and notified to the Company, the right to vote in
ordinary general shareholders meetings belongs to the usufructuary and the right
to vote in extraordinary general shareholders meetings belongs to the outright
owner.
ARTICLE 11 - ISSUANCE OF SHARES
[The shares subscribed for in cash will be issued when at least one-quarter of
their par nominal value has been subscribed for and in certain cases the
totality of their issuance premium. The balance must be paid in one or more
installments, upon the request of the Board of Directors, within a period of
five (5) years from the date of registration of the Company with the Commercial
Registry, or from the date on which there is an increase of capital.
Calls for funds are made known to subscribers and shareholders at least fifteen
(15) days before the due date for each payment by a registered letter, return
receipt requested, from the Board of Directors to each holder of record of
shares, to the address provided by each of them on their subscription form. All
delays in the payment of amounts due on the unpaid balance of shares entails,
automatically and without the need for any formal action, payment of interest at
the legal rate, beginning on the due date, without prejudice to the individual
actions the Company may take against the defaulting shareholder and the measures
of forced payment provided by law.]
ARTICLE 12 - CONVEYANCE AND TRANSFER OF SHARES
I. The shares are freely negotiable as of the time of the registration of the
Company with the Commercial Registry of Commerce and Companies.
II. Except in cases of inheritance, of liquidation of assets and of community
among spouses, of transfer, either to a spouse or to an ascendant or a
descendant, or for the benefit of another shareholder, or of transfers intended
to allow a Director to obtain the shares he required to exercise his functions
and subject to provisions of paragraph III hereafter, transfer of shares to a
third person who is not a shareholder is subject to the approval of the Company
on the following conditions:
1. In the event of a proposed transfer, the transferor must declare it
to the Company by an extrajudicial act or by a registered letter, return receipt
requested, giving the name, surname, profession and address of the transferee,
or the name and headquarters if it is a company, the number of shares planned to
be transferred and the offering price.
<PAGE>
This declaration should be accompanied by a written, irrevocable
commitment by the transferee to acquire, on the condition of obtaining the
approval which is the subject of this Article, the shares intended to be
transferred on the conditions indicated by the transferor in his declaration to
the Company. This declaration should be accompanied by the transfer papers.
Before the expiration of a period of three (3) months from the date of
receipt of this declaration by the Company, the Board of Directors is required
to notify the transferor if it accepts or refuses the proposed transfer. If this
notification is not given within the 3-month time limit, the approval is deemed
given.
The decision to approve requires a unanimous decision of the Directors
present or represented. In accordance with the law and the present charter, the
actual presence of a majority of the Directors is required. The decision does
not need to be accompanied by reasons therefore, and, in the case of refusal,
said decision cannot be approved for any claim(s) whatsoever.
Within 10 days of a decision to accept or refuse, the transferor is to
be informed by a registered letter, return receipt requested. In case of a
refusal, the transferor has a right to eight (8) business days in which to make
known, via the same means if he renounces this proposed transfer or does not.
2. If the transferor does not renounce the transfer, the Board of
Directors is required to arrange for the purchase of his shares, either by
shareholders or by third parties, or, with the consent of the transferor, by the
Company, by means of a reduction in capital, within a time-limit of three (3)
months commencing with the date the transferor received the notice of refusal.
In the case of a reduction in capital by the Company, the Board of Directors
shall call an extraordinary shareholders meeting for the purpose of approving,
in accordance with Article 14 below, the said reduction in capital.
To this end, the Board of Directors will advise the shareholders of the
planned transfer by registered letter, return receipt requested, inviting each
shareholder to indicate the number of shares he wishes to acquire.
Offers to buy should be addressed to the Board of Directors by the
shareholders by registered letter, return receipt requested, within fifteen (15)
business days of their receiving notice of the offer.
The offered shares will be allocated among the buying shareholders by
the Board of Directors proportionately to their interests in the capital and
within their requests. If necessary, the shares not so allocated may be
distributed by a drawing of lots - this being done by the Board of Directors in
the presence of the buying shareholders or their duly appointed representatives
- - to as many buying shareholders as there are shares to be allocated.
3. If no offer to buy is received by the Board of Directors within the
above-mentioned time, or if the offers are not sufficient for all the shares
offered, the Board of Directors can have the offered shares bought by a third
party.
4. The shares can also be bought by the Company if the, transferor
agrees. In this regard, the Board of Directors must first ask his agreement by
registered letter, return receipt requested. The selling shareholder must make
his response known within the eight (8) working days after receiving the
request.
If he agrees, the Board of Directors must convene an extraordinary
general meeting of the shareholders for the purpose of deciding, if necessary on
the buying back of the shares by the Company and the corresponding reduction in
the capital of the Company. This meeting must be called soon enough to comply
with the above-mentioned three-month time limit.
<PAGE>
In all cases of purchase or repurchase as described above, the price of
shares shall be calculated as set forth in paragraph 6 below.
5. If all the shares are not purchased or repurchased within the 3-month
period beginning with the refusal of permission to transfer shares, the selling
shareholder may consummate the sale of the original transferee, for all the
transferred shares, notwithstanding the offers to buy some shares made under the
conditions described above.
This 3-month time limit may be extended by a non-appealable order of the
President of the Commercial Court ruling in an emergency hearing, having duly
convened the selling shareholder and the transferee.
6. If the offered shares are acquired by shareholders or by third
parties, the Board of Directors notifies the selling shareholder of the name,
surname and address of the buyer.
The price of the offered shares is agreed upon by the buyer and seller.
If they cannot agree on a price, the price is determined by an expert, in
accordance with the provisions of Article 1843-4 of the Civil Code.
The fee of the expert is paid one-half by the seller and one-half by the
buyer(s).
7. The transfer to the name of the designated buyer or buyers is
recorded officially by the signature of the President of the Board of Directors
or a delegate of the Board without requiring that of the holder of the shares.
That holder is advised, by registered letter, return receipt requested within
eight (8) days of the determination of the price, to present himself to the
corporate headquarters to be paid the price, which does not accrue interest.
8. The provisions of this Article are applicable in all cases of
transfer between living persons, whether free or paid, even when the transfer is
made by reason of a public adjudication in a court judgment. These provisions
are also applicable in Company contributions in kind, partial transfers of
shares, of merger or scission.
9. The approval clause which is the subject of this Article, can also
apply to transfer of rights in an increase in capital by incorporation of
reserves or profits.
It is also applicable in cases of transfer of rights of subscription to
an increase in capital by capital calls.
In either case, the right of approval and the conditions to repurchase
stipulated in the present article apply to subscribed shares and the time limit
given to the Board of Directors, to notify third party subscribers if it does
or does not accept them as subscribers, is 3 months commencing with the date of
the completion of the increase in capital.
In the case of a repurchase, the price to be paid is equal to the price
of new shares, determined in accordance with the provisions of Article 1843-4 of
the Civil Code.
III. During the first two years of existence of the Company, any shareholder may
transfer its shares to an Affiliate, i.e., any person or entity controlling,
controlled by or under common control with such person or entity (for purposes
hereof "control" shall mean ownership of more than 50% of the voting rights of
another entity, or the power to designate a majority of the directors of or the
principal manager of another entity, or any contract or other arrangement by
which one person or entity is able to
<PAGE>
substantially determine the policies or actions of another person or entity) of
such shareholder, provided such transferring shareholder holds more than 50% of
the outstanding voting shares of such Affiliate.
ARTICLE 13 - INCREASE OF CAPITAL
I. The capital of the Company may be increased either by the issuance of new
shares or by an increase in the nominal value of existing shares. New shares
are issued, either for cash or set-off against due and payable debts on the
Company or by incorporation of reserves, profits or issuance premiums, or by
contributions in kind, or by conversion of bonds. New shares are issued either
at their face value or at an amount increased by an issuance premium.
II. Only an extraordinary general shareholders meeting has the power, upon
recommendation of the Board of Directors, to increase the capital.
If the increase in capital is accomplished by incorporation of reserves,
profits or issuance premiums the general meeting decides under the requirements
of quorum and majority vote required for ordinary general meetings.
An increase in capital by an increase in the nominal value of the shares
can only be decided with the unanimous consent of the shareholders, unless it is
done by incorporation of reserves, profits or issuance premiums.
The general meeting can delegate to the Board of Directors the powers
necessary to effect one or more increases in capital, to decide how such
increase will take place, when they are completed, and proceed to the
corresponding modifications of the charter.
III. An increase in capital must be completed within a time period of five (5)
years from the general meeting which decided or authorized it.
IV. Increase of capital in cash:
(a) Conditions precedent
--------------------
The former capital must be entirely paid in prior to the issuing of new
shares for cash, or the increase can be declared null and void.
If the new shares are paid in by means of set-off against debt, this must
be evidenced by the Board of Directors approving the financial statements as
certified as correct by the official auditors.
(b) Preferential right to subscribe
-------------------------------
1. Each shareholder will have a preferential right to subscribe for newly
issued shares of the same class of shares the shareholder is currently holding,
proportionate to his share of the capital.
2. Shareholders will be informed of the issuance of new shares and
conditions therefrom by registered letter, return receipt requested, at least
six (6) days before the date of the opening of the subscriptions.
3. If some shareholders do not subscribe to shares for which they have an
absolute right, and if the extraordinary general meeting authorizes it, the
shares thus made available will be allocated to
<PAGE>
shareholders who subscribed for a larger number of shares than they had an
absolute right to subscribe for, proportionally to the subscription rights they
had and within the limits they had requested.
If the subscriptions by absolute right and the allocations made by virtue
of non-absolute right subscriptions do not add up to the total of the increase
in capital, the Board of Directors may, if the conditions require, according to
its choice and in the order it chooses, use the means provided by law to limit
the increase in capital to the subscriptions received, allocate the shares not
subscribed for among persons of its choosing or offer all or part of the
non-subscribed shares to the public.
(c) Cancellation of preferential rights to subscribe
------------------------------------------------
The general shareholders meeting that decides to increase capital can vote
to cancel preferential rights to subscribe. Upon penalty of nullification of the
proceedings, it must so decide based on the report of the Board of Directors and
on that of the official auditors.
In this case the provisions of paragraph (b) above will not apply, and the
issued shares will be of class [__].
(d) Subscription
------------
Subscription for issued shares is evidenced by a subscription form drawn
up as required by the law and regulations in effect; it is dated and signed by
the subscriber. Funds derived from subscriptions in cash are deposited in the
manner provided by law. The increase in capital is deemed completed on the date
of the certificate established by the depository of the funds. The withdrawal
of the funds can be effected by a representative of the Company, after the
issuance of a certificate of the depositary of the funds.
If the increase in capital is not accomplished within a period of six (6)
months from the opening of the subscription, all subscribers may apply to the
Court for the appointment of a representative who will withdraw the funds and
return them to the subscribers, less the cost of distribution.
V. Increase of capital by incorporation of reserves
------------------------------------------------
The general shareholders meeting can decide to issue shares which are
allocated to the shareholders without charge by inclusion in the share capital,
of profits, reserves or issuance premiums. In case of the issuance of new
shares to shareholders following incorporation of reserves, profits or issuance
premiums the right thus given may be sold or transferred.
VI. Increase in capital by capital contributions in kind
----------------------------------------------------
In case of capital contributions in kind, one or several appraisers are
named by the Court, upon request of the President of the Board of Directors, for
the purpose of appraising on their own responsibility, the value of these
contributions. Their report is made available to the shareholders at the
Company headquarters, at least eight (8) clays before the date of the
extraordinary general meeting.
This meeting, conducted in the manner set forth in Article 30 of the
present charter, approves the appraisal of the capital contribution and states
the increase in the capital. If the meeting reduces the valuation of the
capital contribution the express approval of this change by the contributors or
their representatives is required. If this in not obtained, the increase in
capital does not take place.
<PAGE>
ARTICLE 14 - REDUCTION OF CAPITAL
1. A reduction in capital is authorized or decided by an extraordinary general
shareholders meeting, subject to the rights of creditors, if any, who can
delegate all powers to the Board of Directors to bring it about. In no case can
these diminish the equality of rights of the shareholders.
A reduction in capital may be carried out either by a reduction in the
number of shares or by a reduction in the nominal value of the shares. If the
reduction of capital is by a reduction in the number of shares, the shareholders
must buy or transfer, as applicable, the numerous shares which are lacking or
in excess in order to permit the exchange of new shares for old shares.
The plan for the reduction in capital is communicated to the official
auditors at least 45 days before the general meeting of shareholders which has
been called to rule on the plan. The meeting rules on the report of the
auditor who indicated his understanding of the reasons for and conditions of the
reduction.
When the Board of Directors, as designated by a vote of the general
shareholders meeting, effects the transaction, it draws up a formal report which
it duly notified in legal journals and it proceeds to make the appropriate
changes in the charter.
If the reduction is not due to losses, the creditors and bond holders can oppose
the reduction decided upon the by the general meeting in a manner consistent
with the law and regulations.
II. The Company may not buy its own shares. However, (a) the Board of Directors
may determine to purchase the Company's shares if the conditions specified in
Article 12.II.2 above are met, provided that the general shareholders meeting
determines to cancel said shares by a reduction in capital in accordance with
the provisions of this Article 14 and (b) the general assembly which approved
the reduction in capital not due to losses may authorize the Board of Directors
to buy a specific number of shares for purposes of cancelling them, under the
conditions prescribed by law.
III. A reduction of capital to an amount below the premium amount required by
law must be followed by an increase which brings the amount back up to this
minimum amount, unless, within the same time limit, the Company was changed into
another form of company. Failing this, any interested party may apply to the
Court to dissolve the Company, pursuant to Article 37 of the present charter. If
the situation is regularized before the Court rules, the dissolution will not be
granted.
PART III
--------
MANAGEMENT OF THE COMPANY
ARTICLE 15 - THE BOARD OF DIRECTORS
1. The Company is managed by a Board of Directors made up of not less than 3 nor
more than 24 members, unless there is a legal exception in cases of mergers.
No more than one-third of the active Directors may be more than 70 years
old. When this number is exceeded, the oldest Director will be deemed to have
retired by the end of the general meeting approving the financial statements for
the period in which the excess occurred.
The maximum term of a Director is 3 years. The term of a Director expires
at the end of the ordinary general shareholders meeting approving the financial
statements for the year during which the
<PAGE>
term of such Director expires. Directors may always be reelected. They may be
removed at any time by the ordinary general shareholders meeting.
II. Directors may be natural persons or legal entities. In the latter case,
when named, the legal entity must designate a permanent representative who is
subject to the same conditions and responsibilities and who is liable to the
same civil and penal risks as if he were a director in his own name, without
prejudice to the joint and several liabilities of the legal entity he
represents.
The mandate of the permanent representative designated by the legal
entity which is a Director, is given for the time of the latter's mandate. It
must be confirmed at each renewal of the mandate of the legal entity as a
Director. If the legal entity revokes the mandate of its permanent
representative, it must immediately inform the Company, by registered letter, of
such revocation as well as the identity of its new permanent representative. The
same is true in case of the death, resignation or prolonged disability of the
permanent representative. The designation of a permanent representative or the
ending of his mandate is subject to the same formalities of publication as it
would be if he were a director in his own name.
III. In case of vacancy of one or more Directors by death or resignation,
without the number of Directors left falling below the legal minimum, the Board
of Directors may, if it is between two general meetings, appoint temporary
Directors. The appointment of temporary Directors made by the Board of Directors
are submitted for ratification at the next ordinary general shareholders
meeting. If they are not ratified the previous decisions and acts of the Board
of Directors remain valid.
If the number of Directors is below the legal or statutory minimum, this
or these Directors, or, failing that, the auditor(s) must immediately call an
ordinary general meeting of the shareholders to complete the Board of Directors.
IV. The Directors who are physical persons may not serve on a total of more than
eight (8) Boards of Directors or supervisory boards of corporations
headquartered in metropolitan France, except for exceptions allowed by law.
V. An employee of the Company may be named a Director.
VI. Directors must own at least one share. Directors may be appointed who are
not shareholders but they must become shareholders within a time limit of three
(3) months, or they will be deemed to have resigned their office.
ARTICLE 16 - OFFICERS OF THE BOARD
The Board of Directors appoints from among its members who are physical
persons a President whose term they decide, although this term may not extend
beyond his term as Director, and whose age may not be over 70 years. When the
President reaches this age, he is deemed to have resigned from office. The Board
of Directors also appoints, if it deems it useful, one or several Vice
Presidents whose terms it also sets, though not for longer than their terms as
Directors.
In case of absence or disability of the President, meetings of the Board
of Directors are presided over by the Vice President, or the most senior Vice
President if several have been appointed. Failing this, the Board designates one
of its members to be President of that meeting.
The Board may likewise appoint a secretary, who is not a member of the
Board.
<PAGE>
The President, Vice Presidents and Secretary may always be re-elected.
ARTICLE 17 - MEETINGS OF THE BOARD OF DIRECTORS
I. The Board of Directors meets as often as the interest of the Company requires
pursuant to the convocations of the President and not less often than once per
quarter, or of at least one-third of its members, even if the last meeting was
less than two (2) months earlier. The meeting takes place at the Company's
headquarters or at any other place indicated in the convocations. The
convocations to a meeting must be given at least five (5) days in advance by
letter, telegram, fax or telex. It may be verbal and immediate if all the
Directors consent. All convocations to meetings should indicate the main order
of business for the meeting.
II. for the meeting to be valid, a majority of the Directors must be actually
present. Subject to provisions of Articles 12 and 20, decisions are by a vote of
the majority of the members present or represented, each Director having one
vote and able to represent only one other Board member. In case of a tie, the
President of the meeting does not cast the deciding vote.
III. An attendance list is kept which is signed by the Directors present at the
meeting of the Board. Proof of the number of Directors in office and their
appointment vis-a-vis third parties results from the notification formalities of
their appointment as required by law.
IV. The deliberations of the Board of Directors are recorded in minutes kept in
accordance with the legal requirements in effect and signed by the President of
the meeting and a Director, or, if the President is unable to do so, by two
Directors; Copies or extracts of these minutes are certified by the President of
the Board of Directors, a general manager, or the Director temporarily appointed
to the functions of President or another responsible person appointed for the
task.
ARTICLE 18 - POWERS OF THE BOARD OF DIRECTORS
The Board of Directors has the fullest powers to act in the name of the
Company and to make or authorize all things relating to the activities of the
Company as such are stated in its purpose. In its relations with third persons,
the Company is bound even by those acts of the Board of Directors which do not
devolve from its purpose, unless it can prove that the third person knew that
the act exceeded that purpose or that he could not help but know it given the
circumstances, except that the simple publication of the charter does not
suffice to constitute this proof.
All administrative acts, including any measure not expressly reserved to
the general meeting of shareholders by law and this charter are within the
competence of the Board of Directors.
The Board of Directors may delegate to the representatives of its
choosing any of its powers which are conferred on it by law and this charter. It
can create committees to study questions which it or the President request be
examined.
ARTICLE 19 - REMUNERATION OF DIRECTORS
I. The ordinary general shareholders meeting may allocate to Directors
compensation for attendance at Board meetings; this expense will be carried in
the general accounts of the Company and continued until decided otherwise by the
general shareholders meeting. The Board of Directors will divide this
remuneration among its members as it sees fit.
<PAGE>
II. The remuneration of the President of the Board of Directors and of the
general managers is set by the Board of Directors. If may be fixed or
proportional or a combination of both.
III. The Board of Directors may allocate exceptional remunerations for
assignment or tasks conferred on certain Directors. In that case, such
remunerations are changed to development expenses and submitted to the ordinary
general shareholders meeting for approval.
IV. No remuneration, permanent or not, other than those provided for herein,
may be allocated to the Directors unless they are bound to the Company by an
employment contract.
ARTICLE 20 - MANAGEMENT
1. The President of the Board of Directors is responsible for the general
management of the Company and he represents the Company in its relations with
third persons with the fullest powers, within the limits of its corporate
purpose, subject always to the powers expressly reserved to the general
shareholders meeting or the Board of Directors under the law.
The President binds the Company even in the event he acts beyond the
corporate purpose, unless it can be proven that the third party knew that the
act went beyond its purpose or that he could not fail to know it given the
circumstances, except that the simple publication of the charter does not
suffice to constitute this proof.
However, for internal purposes and without this provision being valid
an binding vis-a-vis third parties, it is expressly agreed that the President
can perform all management acts in the interests of the Company, with the
exception of the acts listed below, which must first be authorized by a prior
unanimous decision of the board of directors:
(a) the determination of the annual budget, including the investment
budget and the financing plan, as well as any decision which has the effect of
increasing the expenses of the Company in a given fiscal year beyond the budget
set for such fiscal year;
(b) the approval of the annual accounts, including the distribution
of any dividends;
(c) any acquisition or disposition of any interest in any company,
partnership, trust or similar entity;
(d) the hiring or dismissal of any employee whose annual gross
remuneration exceeds or shall exceed FF 300,000 per year, as well as the
establishment or modification of the Company's remuneration policy;
(e) any proposal to increase the Company's capital and, more
generally, to modify the Company's Articles;
(f) any borrowings or loans in an aggregate amount (on a cumulative
basis) in excess of FF 500,000 (or its currency equivalent);
(g) the purchase, sale or transfer of any kind to a third party of
any of the Company's assets or property having a value in excess of FF 30,000
other than in the ordinary course of the Company's business;
<PAGE>
(h) the issuance of any type of guarantee by the Company on behalf of a
third party, and more generally, any agreement in which the Company guarantees
the full performance of a third party's obligations;
(i) the entering into of any agreement between the Company and one or more
of its Shareholders or an Affiliate (as defined in Article 12) of a Shareholder;
(j) the modification of the Company's purpose of the undertaking of any
activity other than those within the purpose of the Company;
(k) any decision relating to the use of any name or trademark;
(l) the selection and removal of the President and of the Chief Operating
Officer of the Company; and
(m) the commencement or settlement of any litigation.
All limitations on the powers of the President resulting from these clauses or
from decisions of the Board of Directors have no effect vis-a-vis third parties.
The President of the Board of Directors has the ability to sub-delegate his
powers to as many representatives as he shall designate.
In case of a temporary impediment or of the death of the President, the
Board of Directors can name a Director to fulfill the functions of the
President. In case of an impediment, this nomination is of limited duration and
renewable. In case of death, it is valid until the election of a new President.
II. Upon the proposal of the President, the Board of Directors may appoint a
general manager and, in the cases provided for by law, two (2) or five (5)
general managers. These general managers must be natural persons; they cannot be
more than 65 years old. When they reach this age limit, they are considered to
have resigned from office. They can be chosen from among the Directors or not,
except when the Company has five general managers; in that case, at least three
of them must be Directors.
A general manager may be removed by the Board of Directors at any time,
upon the request of the President. In case of death, resignation or removal,
unless decided otherwise by the Board of Directors, he will continue with his
function and title until the appointment of a new general manager.
Together with the President, the Board of Directors determines the scope
and duration of the powers given to the general managers. The general managers
have, vis-a-vis third parties, the same powers as the President. When a general
manager is a Director, his appointment may not be for longer than his mandate.
III. All acts and commitments relating to the Company, of whatever nature, are
validly signed by the President, or, if need be, by the Director temporarily
performing the functions of the President, by the general manager, as well as by
anyone qualified given special powers, each acting to the extent of their
powers.
IV. Each member of the Board shall be entitled to receive such information
relating to the Company's business, as he or she may reasonably request, and the
President shall use his or her best efforts to respond promptly to any such
request for information. The President shall, in addition, cause to be prepared
and provided to each member of the Board [and to each Shareholder] a quarterly
report on the activities of the Company in such form as the Board shall
determine.
<PAGE>
ARTICLE 21-AGREEMENTS BETWEEN THE COMPANY AND ONE OF ITS DIRECTORS OR GENERAL
MANAGERS
I. (a) Agreements requiring approval
-----------------------------
Any agreement between the Company and one of its Directors or
general managers must have the prior consent of the Board of Directors. It is
the same with respect to agreements in which a Director or general manager is an
indirectly interested party or in which he contracts with the Company through
an intermediary.
Prior consent is also required for agreements between the Company
and another company if one of the Directors or general managers of the Company
is the owner, responsible party, manager, director, general manager or member of
management or the supervisory board of that company.
(b) Agreements not requiring approval
---------------------------------
The above requirements are not applicable to agreements relating
to the day to day operations of the Company entered into under usual
circumstances.
(c) Procedure for approval
----------------------
The interested Director or general manager must inform the Board of
Directors, as soon as he becomes aware of it, that there exists an agreement
covered by paragraph (a) above. The Board of Directors rules on the requested
authorization. The interested Director or manager may not participate in the
vote.
The President of the Board of Directors notifies the official
auditor-of the agreements authorized pursuant to paragraph (a) above within a
time limit of one month from the conclusion of the agreement.
When agreements concluded and approved in previous fiscal years are
continued into the most recent fiscal year, the official auditor is notified of
this situation within one month of the close of the fiscal year.
The official auditor must prepare and deposit at the Company
headquarters, before the end of the third month following the end of the fiscal
year and, in any case, at least fifteen (15) days before the ordinary general
shareholders meeting, a report on the agreements. He then presents it to the
meeting which votes on it. The interested party may not participate in the vote
and his shares are not taken into account in calculating the quorum and the
majority.
The agreements which are approved and disapproved by the general
shareholders meeting are binding on third parties except when they are
invalidated in cases of fraud.
Even without fraud, results prejudicial to the Company arising from
agreements not preapproved, may be the responsibility of the Director or general
manager concerned and, eventually, of the other members of the Board of
Directors.
<PAGE>
(d) Lack of authorization by the Board of Directors
-----------------------------------------------
Without prejudice to the responsibilities of the interested Director or
general manager agreements of the type covered in paragraph (a) of this Article
which are entered into without the prior consent of the Board of Directors may
be cancelled if they have consequences which are prejudicial to the Company.
The statute of limitations for an action for cancellation is three (3)
years from the date of the agreement. However, if the agreement was concealed,
the statute of limitations begins to run on the day the agreement was made
public.
A vote of the general shareholders meeting acting on a special report of
the official auditor, explaining the circumstances why the approval process was
not followed, can bar an action for cancellation. The interested party may not
participate in this vote and his shares are not taken into account in the
calculation of the quorum or majority.
II. Under penalty for cancellation of the contract, Directors, other than legal
entities, are prohibited from borrowing from the Company, to have the Company
cover an overdraft, or to have it guarantee or cover their engagements with
third parties.
This same prohibition applies to general managers and permanent
representatives of Directors which are legal entities. It also applies to the
spouses, ascendants and descendants of the persons specified in this Article, as
well as to any intermediary.
ARTICLE 22 - PURCHASE BY THE COMPANY OF ASSETS BELONGING TO A SHAREHOLDER
When the Company, within the two years following its registration,
acquires assets belonging to a shareholder, and whose value is at least equal to
one-tenth of the capital of the Company, an appraiser named by the Court,
following a request by the President of the Board of Directors, shall appraise
the value of said assets.
The appraiser's report and the other documents required by law are put at
the disposal of the shareholders. The ordinary general shareholders meeting
must approve the valuation of the assets, or the sale can be cancelled. The
seller has no voice in the discussion, neither on his own behalf nor as a
representative.
However, these measures do not apply when the acquisition was made on the
stock market, under the supervision of a judicial authority, or in the context
of the on-going operations of the Company and under normal conditions.
<PAGE>
PART IV
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OFFICIAL AUDITOR
ARTICLE 23 - AUDITORS
The financial audit of the Company's books and records is carried out
by one or more official auditors appointed and exercising their profession in
accordance with law. One or several deputy auditors who are called upon to
replace one or more of the official auditors in case of refusal, impediment,
resignation, death or removal, are appointed at the same time as the titular
official auditors and for the same period of time. The titular official auditors
and the deputies are appointed for a period of six (6) fiscal years. They are
always eligible for re-appointment.
The official auditor must give to the Board of Directors the reports
prescribed by law, so that the latter can hold them at the disposal of the
shareholders.
PART V
------
GENERAL SHAREHOLDERS MEETINGS
ARTICLE 24 - PURPOSE OF GENERAL MEETINGS
I. The regularly constituted general shareholders meeting represents all the
shareholders. Its decisions, taken in accordance with law and the charter are
binding on all shareholders, even those who are absent, incompetent, or
dissident.
II. Depending on the proposed resolutions, collective decisions of the
shareholders are taken by the extraordinary general shareholders meeting or the
ordinary general shareholders meeting.
ARTICLE 25 - CONVOCATION OF GENERAL SHAREHOLDERS MEETINGS
I. A general shareholders meeting is convened by the Board of Directors. Failing
this, it can be convened by the official auditor, by a representative named by
the President of the Court of Commerce in an emergency proceeding ("refere") at
the request of all interested parties or one or more shareholders holding at
least one-tenth of the shares, or by the liquidators.
II. Notice is given by a convocation sent (fifteen) 15 days prior to the date of
the general meeting by a letter sent to each shareholder, containing the
specifics prescribed by law.
III. When a general shareholders meeting is not able to deliberate normally due
to a lack of the required quorum, the second general meeting is convened at
least six (6) days before the scheduled meeting date. The notice letters to this
second general meeting repeats the date and agenda of the first in the same as
was the first.
IV. The notice of convening of a general shareholders meeting should give the
location of the meeting. This can be the Company headquarters or another site
chosen by the Board of Directors.
<PAGE>
V. Any general shareholders meeting called in an irregular manner can be
cancelled. However, an action for cancellation is not admissible by the court if
all of the shareholders were present or represented.
ARTICLE 26 - AGENDA OF THE GENERAL SHAREHOLDERS MEETING
I. The agenda of the general shareholders meeting is set by the person calling
the meeting.
II. However, one or more shareholders representing at least 5% of the capital of
the Company may request the addition of proposed resolutions to the agenda; this
is done by letter sent to the headquarters by registered mail, return receipt
requested. The request should be accompanied by the text(s) of the proposed
resolution(s), and can also include a brief explanation of the reasons for the
resolutions. The President of the Board of Directors must acknowledge receipt of
proposed resolutions by registered letter within five (5) days of receipt. These
proposed resolutions, which should be communicated to the shareholders, are
added to the agenda and voted upon by the general meeting.
III. The general shareholders meeting may not deliberate on a question which is
not on the agenda. Nevertheless, it can always remove one or more Directors and
proceed to their replacement. The agenda of the general shareholders meeting
cannot be changed at a second general meeting.
ARTICLE 27 - ADMISSION TO GENERAL SHAREHOLDERS MEETINGS
I. Any shareholder has the right to attend general meetings and participate in
their deliberations in person or via a proxy, regardless of how many shares he
owns, upon a simple verification of his identity and inscription on a share
registry maintained by the Company at least two days before the general meeting.
II. Any shareholder may have himself represented by his or her spouse or by
another shareholder. In such case, the representative must prove his mandate.
Any shareholder can also send a proxy to the Company without the name of
his representative. All blank proxies will be considered votes in favor of the
resolutions proposed to the general meeting by the Board of Directors. Legal
representatives of legally incapacitated shareholders and physical persons
representing legal entity shareholders participate in meetings, whether they
themselves are shareholders or not.
III. A shareholder may vote by mail on a form prepared by and sent to the
Company in the manner prescribed by law. This form must be received by the
Company three (3) days before the general meeting, or it will not be counted.
ARTICLE 28 - ATTENDANCE LIST - BUREAU - MINUTES
I. An attendance sheet will be kept at every meeting, with the information
required by law. This attendance sheet, duly signed by the shareholders present
and the representatives and to which is appended the powers given to each
representative, and if needed, the form for voting by mail, is to be certified
correct by the bureau of the meeting.
II. The meetings are presided over by the President of the Board of Directors
or, in his absence, by a Vice-President or by a Director specially delegated for
that purpose by the Board. If the meeting was called by the official auditor(s)
the meeting will be presided over by one of them. Finally, if there is no
<PAGE>
one specifically suited or designated to preside over the meeting, the meeting
will elect its own President.
The functions of vote inspectors are performed by the two shareholders
who, present and willing, have the greatest number of shares, of themselves or
as representatives of others.
The bureau thus constituted selects a secretary, who may not be a
shareholder.
The functions of the members of the bureau are to verify, certify and
sign the attendance list, help maintain order during the discussions and
sessions, keep track of and verify the votes, avoid irregularities in counting
of votes, and verify that the minute are taken.
III. The deliberations of the general meetings of shareholders are recorded in
minutes kept by the members of the bureau and signed by them. These minutes
indicate the date and place of the meeting, the method of convocation, the
agenda, the composition of the bureau, the number of shares voting and the
quorum attained, the documents and reports submitted to the meeting, a summary
of the debates, the texts of the resolutions put to the vote and the results of
the votes. The minutes are recorded in a special register maintained at the
headquarters in the manner directed by law.
If, due to a lack of a quorum, a general meeting cannot deliberate
normally, minutes to that effect are drawn up by the bureau of that meeting.
Copies or extracts of the minutes of general meetings of shareholders
are validly certified by the President of the Board of Directors or by a
Director exercising functions of a general manager. They can also be certified
by the secretary of the general meeting. In the case of the liquidation of the
Company, they are validly certified by one liquidator.
ARTICLE 29 - QUORUM - RIGHT TO VOTE
I. In ordinary and extraordinary general shareholders meetings, the quorum is
calculate on the total of shares comprising the share capital of the Company,
minus the shares which cannot vote under the law.
In the case of votes by mail the quorum is calculated including those
shares of shareholders who sent in their form within tile specified time both
(i) when the meeting is called upon to vote on resolutions on the agenda or on a
proposal which intends or would have the effect of amending or rendering partly
or completely inoperative a resolution on the agenda and (ii) when the meeting
is called upon to vote on a question raised or a resolution proposed in the
session.
II. The right to vote attached to shares is proportionate to the capital those
shares represent. Each share of capital or "actions de jouissance" (shares to be
redeemed prior to liquidation) conveys the right to a vote.
However, the Company shares owned by one or several companies which it
controls directly or indirectly do not have the right to vote.
In the case of votes by mail, the shares of shareholders who sent in
their forms within the specified time participate in the voting both (i) when
the meeting is called upon to vote on a question raised or a resolution proposed
in the session.
However, when the proposal put to the vote is meant to or would have the
effect to amending or rendering partly or totally inoperative a resolution on
the agenda, or when the meeting is called upon to
<PAGE>
vote on a question raised or a resolution proposed in the session, the shares
are considered voted against the proposal or against the question raised or the
resolution proposed in the session, whatever the sense of the vote on the
resolution.
III. The vote is taken and the votes can be indicated by raising hands, or
sitting and standing or by roll-call, depending on the decision of the bureau of
the meeting.
ARTICLE 30 - EXTRAORDINARY GENERAL SHAREHOLDERS MEETING
I. Only the extraordinary general meeting has the power to modify the charter at
any time. It cannot, however, increase the commitment of the shareholders,
except for operations resulting from a regroupment of shares effected in the
usual manner.
The extraordinary general meeting can change the nationality of the
Company, on the condition that the new country has concluded a special agreement
with France allowing the acquisition of its nationality, the transfer of the
headquarters to its territory, and the retention of the legal personality of the
Company.
The meeting can change the Company into another kind of company
according to the law and regulations. It can merge the Company with another
company, divide it, transfer part of its stock to another company which is
formed or to be formed, these transactions must be in accordance with applicable
laws and regulations.
An extraordinary general meeting that decides to increase capital by
contributions in kind takes on the characteristics of a constituent meeting and
is regulated by the law.
II. An extraordinary general meeting can only deliberate validly if the
shareholders present or represented by proxy own at least, for the first
convocation, half and, for the second convocation, a quarter of the shares
entitled to vote. Lacking the latter quorum, the second general meeting can be
postponed to a later no more than two months later than the original date. This
meeting will rule by a two-thirds vote of the shares of shareholders present or
represented.
ARTICLE 31 - ORDINARY GENERAL SHAREHOLDERS MEETING
I. The ordinary general meeting makes all decisions other than those that are
reserved to the extraordinary general meeting by law and the present charter. It
exercises the powers given to it by law and especially, but not limited to, the
following:
- it appoints and removes Directors and official auditors;
- it names members to the Board of Directors and ratifies the temporary
appointment of Directors;
- it votes on the report of the official auditor relating to agreements
between the Company and its managers which were approved by the Board of
Directors;
- it discusses, approves, amends or rejects the financial statements and
sets the dividends to be distributed as well as the new carry-forwards:
it decides the make-up of reserve funds; it determines amounts to be
allocated to reserves; it decides distributions; it decides the use or
allocation of issuance premiums, if needed;
<PAGE>
- it sets the amount of Directors' fees for meetings;
- it authorizes the issuance of bonds, as well as guarantees in connection
therewith;
- it ratifies the transfer of headquarters decided by the Board of
Directors; and
- it authorizes the acquisition of goods from a shareholder under the
conditions in Article 22 above.
The ordinary general meeting meets at least once a year, within the six (6)
months after the close of the fiscal year. However, this time period may be
extended, upon request of the Board of Directors by order of the President of
the Commercial Court, acting upon request.
After the reading of its report, the Board of Directors submits to the
meeting the balance sheet, the profit and loss statements and the annexes. Also,
the official auditor explains in his report how he fulfilled his legal duties.
II. An ordinary general meeting can only deliberate validly upon a first
convocation if the shareholders present or represented hold at least one-quarter
of the shares having the right to vote. In a second convocation, no quorum is
required. Resolutions must be adopted by a majority of the votes held by
shareholders present or represented.
ARTICLE 32 - INFORMATION FOR SHAREHOLDERS
Every shareholder has the right, at all times, to see documents necessary
for him to understand and have an informed opinion on the management and
financial affairs of the Company. The nature of these documents and the sending
or access to the same are determined by law.
PART VI
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ANNUAL FINANCIAL STATEMENTS
RESULTS
ARTICLE 33 - ANNUAL FINANCIAL STATEMENTS
Regular accounts of the operation of the Company are maintained as required
by law. At the close of each fiscal year, the Board of Directors draws up an
inventory of the assets and liabilities as of that date. It also draws up a
balance sheet setting forth the assets and liabilities and showing in a clear
manner the net worth, the summary of operating results showing the income and
expenses of the year, and the annexes which complete and comment on the data in
the balance sheet and profit and loss statement.
It includes, even if there is insufficient or no profit, amortizations and
the necessary reserves. A statement of sureties, endorsements and guaranties
given and sureties allowed by the Company is added to the balance sheet.
<PAGE>
The Board of Directors prepares the management report on the state of the
Company during the year ended, its probable development, the important events
that occurred between the close of the fiscal year and the date of the report
and its activities in the areas of research and development.
ARTICLE 34 - FIXING, ALLOCATION AND DISTRIBUTION OF THE RESULT
The results table that recapitulates earnings and expenses for the fiscal
year reveals, after the subtraction of amortization and reserves, the profits or
losses for the year.
After deducting prior losses, if any, at least 5% of the profits for the
year cue allocated to the legal reserve. This payment is no longer obligatory
once the reserve equals 10% of the capital of the Company; it is resumed
whenever, for any reason, the legal reserve drops below this 10%.
Distributable earnings are composed of earnings of the fiscal year minus
prior losses and allocations to the legal reserve as provided by law and the
charter, plus earnings carried over.
After deduction of the amounts put into the reserve as provided by law and
the present charter and of the amount of the cumulative preferred dividends, the
general meeting can decide to apply all of the distributable earnings to the
creation of optional ordinary or extraordinary reserves, to balance carried down
or to distribution to shareholders as dividends. Dividends are taken from the
year's distributable earnings on a priority basis.
The general meeting can, beyond this, decide on the distribution of amounts
set aside for reserves over which it has control, showing clearly from which
parts of the reserve these amounts are deducted.
Aside from cases of reduction of capital, no distributions can be made to
shareholders when its own capital is or would be as a result of the distribution
below the amount of the capital plus reserves that the law or the charter
forbid distributing. Revaluation reserves are not distributable. They can be
incorporated into the capital in part or in total.
Losses, if there are any, can once the accounts have been approved by the
general meeting, be carried over, to be subtracted from the earnings of a
subsequent year until they are extinguished.
ARTICLE 35 - MODES OF PAYMENT OF DIVIDENDS - PAYMENTS IN INSTALLMENTS
The general shareholders meeting voting on the accounts has the power to
offer to each shareholder, for all or a part of the dividend to be distributed
or installments of dividends, the choice of payment of the dividend or
installment on dividend in shares or in cash. The mode of payments of dividends
in cash shall be decided by the Board of Directors or, if they fail to do so, by
the shareholders.
Payments of dividends in cash should be made within not more than nine (9)
months after the close of the fiscal year, unless this period is prolonged by
order of the court.
Nonetheless, once a balance sheet drawn up at the end of a fiscal year and
certified by the official auditor indicates that the Company, since the end of
the previous fiscal year, after amortization, deductions for any past existing
losses if provisions for the amounts to be put in the reserves according to law
or the charter, made a profit, installments on dividends can be distributed
<PAGE>
before the approval of the accounts for the fiscal year. The amount of these
installments cannot exceed the total of the profits so defined.
A request for payment of dividends in shares should be made within a
period fixed by the general meeting but not exceeding three (3) months later.
This time period can be suspended for a period which cannot exceed three (3)
months, by a decision of the Board of Directors, in case of an increase in
capital.
No claiming for dividends can be made by the shareholders unless the
distribution was effected in violation of the legal form and the Company
establishes that the beneficiaries knew the irregular character of this
distribution at the time or could lot be unaware of it given the circumstances.
In that case, the statute of limitations for the claim for refund is three (3)
years after the payment of the dividend.
Dividends not claimed within 5 years of being paid are forfeited.
ARTICLE 36 - "CAPITAUX PROPRES" (NET WORTH) LESS THAN ONE-HALF OF COMPANY'S
SHARE CAPITAL
If due to losses established in the accounting documents the net worth
of the Company becomes less then one-half of the share capital of the Company,
the Board of Directors must, within the four (4) months following the approval
of the accounts which revealed the losses, convene an extraordinary general
meeting of the shareholders, to decide if the Company must be dissolved. If the
dissolution is not declared, the capital must be, in the time period fixed by
law mid under the conditions of Article 14 above, reduced by an amount equal to
the losses if, within this time, the net worth f the Company did not again
become equal to one-half of the Company's capital. In either case, the decision
of the general meeting is published according to law.
In case of non-observance of the above, all interested parties may
request the dissolution of the Company in the court. The same is true if the
shareholders were not able to deliberate validly. However, the court may not
pronounce the dissolution if, on the day it is ruling on the reserve, it has
been regularized.
PART VII
--------
DISSOLUTION AND LIQUIDATION
ARTICLE 37 - DISSOLUTION
I. The Company is dissolved on the expiration date of its terms. At least one
year before this date, the Board of Directors convenes an extraordinary general
meeting to decide whether or not the term of the Company should be extended. In
all cases, the decision of the meeting will be made public.
If the Board of Directors does not call this general meeting any
shareholder, after a formal notice by registered letter has been unsuccessful
can request that the President of the Court of Commerce, acting upon request,
name a legal representative for the purpose of calling this general meeting.
<PAGE>
II. Early dissolution
(a) Sole shareholder.
----------------
If all the shares are held by a single shareholder, this does not
automatically cause the dissolution of the Comapny. Any interested party can
request this dissolution if the situation has not been regularized within one
year. The sole shareholder can dissolve the Company at any time by a declaration
to the Clerk of the Court of Commerce.
(b) Decision of shareholders
------------------------
Early dissolution of the Company can be pronounced by the
extraordinary general meeting at any time.
(c) Reduction of number of shareholders to less than seven (7)
----------------------------------------------------------
The Court of Commerce may, at the request of any interested party,
pronounce the dissolution of the Company if the number of shareholders has been
reduced to under seven (7) for more than one (1) year. It may give the Company a
period of no more than six (6) months to remedy the situation.
(d) Reduction of capital to an amount below the legal minimum
---------------------------------------------------------
When the capital of the Company has been reduced to an amount below
the legal minimum for more than one year, a suit for dissolution of the Company
is only admissible two months after a formal notice to regularize the situation,
as provided by law. This formal notice is addressed to the Company by an extra
legal transaction.
ARTICLE 38 - LIQUIDATION
The Company is in liquidation from the moment of its dissolution for
whatever cause. The Company's name is followed by the words "company in
liquidation". This attribution and the name(s) of the liquidators should be on
all the acts and documents emanating from the Company destined for third
parties, especially on all letters, bills, announcements and publications.
The legal personality of the Company continues for the purpose of
liquidation, until its conclusion. The dissolution of a Company only affects
third parties as of the date of its publication in the Register of Commerce and
Companies.
Upon dissolution of the Company, one or several liquidators are named by an
extraordinary general meeting of shareholders according to same quorum and
majority rules provided for with respect to ordinary general shareholders
meetings. The liquidator represents the Company. He is given the broadest
powers to maximize the assets, even in private sales. He is empowered to pay
creditors and divide available assets. The general meeting of shareholders can
authorize the liquidator to continue current business or to begin new business
for the requirements of the liquidation.
The division of the net value remaining after paying back of the face
value of the shares corresponds to the same proportion as their participation in
the capital. The shareholders are convened at the end of the liquidation to rule
on the final accounts, on the payment for the managment of the liquidator, the
discharge of his mandate and to determine the completion of the liquidation.
<PAGE>
PART VIII
---------
DISPUTES
ARTICLE 39 - DISPUTES
Any disputes which may arise during the term of the Company, or during its
liquidation, between the Company and its shareholders, or between the
shareholders themselves about Company matters, will be submitted to the
jurisdiction of the competent courts of the Company's headquarters.
In this regard, in cage of dispute, any shareholder will have to elect a
domicile in the jurisdiction of the court of the area of the Company's
headquarters and all the writs or notifications will regularly be delivered to
that elected domicile, without regard to the real domicile; failing this
election of domicile; failing this election of domicile, writs or notifications
will be validly delivered at the department of the Procurator of the Republic at
the Superior Court of the Company headquarters.
PART IX
-------
APPOINTMENT OF FIRST DIRECTORS AND OFFICIAL AUDITORS;
FORMALITIES OF CREATION; PUBLICATION
ARTICLE 40 - APPOINTMENT OF FIRST DIRECTORS
The following are appointed to be the first Directors of the Board of
Directors: [addresses omitted]
-[_____________]
-[_____________]
-William McHale
-Paul A. Lipari
The Directors thus appointed have each declared, in person or by their
representatives that, for themselves, they accept the task entrusted to them and
there is not in their own right any incompatibility or restraint to this
appointment.
Terms of office of Directors shall be three (3) years.
However, the first Directors are appointed for a term of three (3) years,
that is, to the close of the ordinary general meeting that will be called to
rule on the accounts of the fiscal year ending [_______].
ARTICLE 41 - APPOINTMENT OF OFFICIAL AUDITORS
The following are appointed titular official auditors until the close of
the ordinary general meeting ruling on the accounts of the sixth fiscal year:
-[__________][address omitted]
<PAGE>
Also appointed for the same period, as deputy official auditor in of the
death or impediment of the titular official auditor:
--[________________] [address omitted]
The official auditors thus appointed declare they accept the mandate
confided to them; they also declare that they will meet the conditions required
by law the exercise of their functions and will not become incompatible with
their legal task,
The terms of their functions will expire with the general meeting which
will rule on the accounts of the sixth fiscal year of the Company, unless they
are renewed.
The compensation of the official auditors is fixed in accordance with
existing regulations.
ARTICLE 42 - DATE OF LEGAL FORMATION OF COMPANY - REGISTRATION AT THE REGISTRY
OF COMMERCE AND COMPANIES - STATE OF ACTS PERFORMED BEFORE SIGNATURE OF CHARTER
- - AUTHORIZATION OF UNDERTAKINGS AFTER SIGNATURE OF CHARTER - PUBLICATION -
POWERS
I. Date of Legal Formation of Company
----------------------------------
In accordance with the law, the Company will only enjoy legal status as of
the date of its registration at the Registry of Commerce and Companies.
II. Registration at the Registry of Commerce and Companies
------------------------------------------------------
The Board of Directors must, beginning now, fulfill all the necessary
formalities so this registration may be accomplished as quickly as possible.
III. A list of the acts performed in the name of the Company-in-formation, with
an indication of the undertakings resulting therefrom, is annexed to the present
charter; its signature will convey the retaking of these engagements by the
Company as soon as it is registered on the Registry of Commerce and Companies.
This list has also been at the disposal of the shareholders for the legal period
of time at the Company's headquarters.
IV. Assumption of undertakings after the registration of the Company
----------------------------------------------------------------
The shareholder(s) having the general management of the Company are also
empowered, as soon as they are appointed, to do and subscribe to acts and
undertakings with their stated and legal powers on behalf of the Company. These
acts and undertakings will be considered as having been made and subscribed to
from the beginning by the Company, upon approval by the general meeting of
shareholders, after the registration of the Company on the Registry of Commerce
and Companies, of their conformity with the mandate described above, and at the
very latest, by the approval of the accounts of the first fiscal year.
V. Publication - Powers
--------------------
For purposes of publishing this Company in conformity with existing law
and regulations, all power is hereby given to the holder of the original or a
copy of the present charter and whatever other documents may be required.
<PAGE>
ARTICLE 43 - EXPENSES
The expenses, fees and compensation of the presents and of their successors
will be borne by the Company as general expenses and amortized in the first
year, and in any case, before any distribution of profits.
Executed in Paris, the [____________], in as many originals as necessary
for one copy to be deposited at the Company headquarters and for the execution
of all the necessary formalities.
[signature lines and annex omitted]
<PAGE>
SERVICE AGREEMENT
BY AND BETWEEN:
[Sligos/Marben], a French societe anonyme, with registered capital of
_______ French francs, having its registered office at ____________, France,
listed with the Registry of Commerce and Businesses of Paris under registration
number ________, and represented by ____________, who is duly authorized to so
act (hereinafter referred to as "[Sligos/Marben]");
AND:
[JVC], a French societe anonyme, with registered capital of ________
French francs, having its registered office at ________________, France, in the
process of being listed with the Registry of Commerce and Businesses of Paris,
and represented by ____________ (hereinafter referred to as the "Company").
WHEREAS:
A. DSET Corporation and [Sligos/Marben] have entered into a joint venture
agreement on April __, 1997 and created the Company, a societe anonyme.
B. The Company wishes to engage [Sligos/Marben] for the purpose of rendering
to it certain administrative services (hereinafter "the Services") as described
below.
C. [Sligos/Marben] is willing to render the Services to the Company under the
terms and conditions set forth below.
NOW, THEREFORE, THE PARTIES HAVE AGREED AS FOLLOWS:
1. Engagement of [Sligos/Marben]
-----------------------------
1.1 The Company hereby engages [Sligos/Marben] to provide the Services to the
Company, and [Sligos/Marben] hereby accepts such engagement. The parties hereto
acknowledge that in rendering the Services and performing its duties hereunder,
[Sligos/Marben] shall be acting as an independent contractor, and nothing in
this Agreement shall be construed as meaning that the Company and
[Sligos/Marben] are partners or joint venturers, any such intent being hereby
expressly disclaimed.
1.2 [Sligos/Marben] shall not be held liable or responsible in any way for any
existing or future debts, liabilities, obligations or duties of the Company
under this Service Agreement. Nor shall [Sligos/Marben] be held liable to the
Company for any act or omission, except in the event of gross negligence,
deliberate transgression of duty or breach of the terms hereof.
<PAGE>
2. Obligations of [Sligos/Marben].
------------------------------
2.1 The Services shall be rendered by [Sligos/Marben] using reasonable care and
in conformity with the principles and guidelines which the Company shall
communicate to [Sligos/Marben] from time to time.
2.2 In rendering the Services hereunder and performing the obligations set forth
herein below, [Sligos/Marben] may not bind the Company contractually with regard
to third parties.
3. Obligations of the Company.
--------------------------
The Company shall take all necessary actions to enable [Sligos/Marben] to
perform its duties as set forth hereunder, including but not limited to
responding as promptly as possible to all matters submitted to the Company for
its opinion, instruction or approval.
4. Services to be rendered by [Sligos/Marben].
------------------------------------------
Subject to the foregoing, [Sligos/Marben] shall provide the Company with the
following Services:
(a) Financial Records and Reports. [Sligos/Marben] shall assist the
-----------------------------
Company in the maintenance of its accounting records and books of account, in
the preparation of its annual accounts and interim financial statements; and it
shall ensure that, within the time limits prescribed by law, the Company shall
prepare an accounting report that is in conformity with legal rules and
regulations in force. In particular, [Sligos/Marben] shall provide the Company
with the following:
(i) Within ninety (90) days following the close of the fiscal year, a
balance sheet and an income statement showing the results of the Company's
operations during the past fiscal year, as certified by the Company's statutory
auditors; and
(ii) From time to time, as may be required by law or as the Company may
deem appropriate, technical assistance and information necessary to prepare and
complete any declaration required of the Company and to respond to any such
request sent to it.
Moreover, on the basis of data provided by the Company, [Sligos/Marben] shall
assist at the request of the Company in the preparation of forecasted financing
plans, budgets and forecasts of any nature, as requested, which must be
furnished to the Company before the commencement of each fiscal year.
(b) Personnel. In accordance with instructions received from the Company,
---------
[Sligos/Marben] shall assist the Company in the selection, recruitment and
administration of the Company's personnel, including, in particular, the
preparation of salary slips and the completion of all formalities regarding the
Company's payroll and social security obligations, pursuant to all applicable
laws and regulations.
(c) General Office. [Sligos/Marben] shall co-ordinate the Company's
--------------
general office functions, under the direction and supervision of the Company.
<PAGE>
(d) Insurance. At the Company's request, [Sligos/Marben] shall
---------
provide the Company with the assistance necessary to take out insurance policies
for those categories of risk for which the Company wishes to be covered.
(e) Corporate legal assistance. [Sligos/Marben] shall provide
--------------------------
general legal assistance for corporate housekeeping matters that may be required
by the Company, being essentially the preparation of the minutes of regularly
held meetings of the board of directors and shareholders meetings, and shall
maintain the Company's legal books and records.
5. Remuneration.
------------
As consideration for the Services rendered by [Sligos/Marben] to the Company,
the Company shall pay [Sligos/Marben] a fixed monthly remuneration (hereinafter
referred to as the "Remuneration") of 12,000 French Francs
The remuneration of any services which is not rendered by [Sligos/Marben] to the
Company under Article 4 herein above will be calculated separately and on a case
by case basis.
6. Payment Terms.
-------------
No later than the fifteenth day following the end of each month and, for the
first time, on __________, the Company shall pay [Sligos/Marben] an amount
equal to [_______] French Francs.
7. Costs and Expenses Not Included in the Services.
-----------------------------------------------
Aside from the Remuneration specified in Article 5 herein above,
[Sligos/Marben] shall be immediately reimbursed for costs and expenses incurred
in connection with the rendering, at the request of the Company, of services
other than those mentioned above, i.e., all expenses assumed by [Sligos/Marben]
in connection with services rendered by third parties for the ultimate and
exclusive benefit of the Company, it being expressly understood by the Parties
that such services may be rendered to the Company indirectly through
[Sligos/Marben]. Supporting documentation must be provided for such expenses and
the amounts involved must not exceed the limits which shall have been set by
mutual agreement between[Sligos/Marben] and the Company.
8. Term and Termination.
--------------------
8.1 The effective date of this Agreement shall be _____ 1997 (hereinafter
referred to as the "Effective Date"). The term of this Agreement shall be for a
period of two (2) years, commencing as of the Effective Date (hereinafter
referred to as the "Initial Term"), subject to the application of Article 8.2
herein below. This Agreement shall be automatically renewed for periods of one
year duration, unless either one of the parties hereto gives notice to the other
party at least three (3) months prior to the expiration of the Initial Term of
its decision not to renew it.
<PAGE>
8.2 The present Agreement may also be terminated by either party upon a notice
sent by registered mail, return receipt requested, (i) if the other party has
defaulted in the performance of any of its obligations and has not remedied such
default within thirty (30) days after receipt of an official notice to such
effect or (ii) if the parties are unable to agree upon the Budget of any
Succeeding Period pursuant to Article 5.1 (b) above.
8.3 Upon termination of this Agreement, for any reason whatsoever, the
respective obligations of the parties shall cease. However, each party shall
remain liable for payments which remain due in connection with the Services
rendered.
9. Confidentiality.
---------------
9.1 As of the signature date hereof, [Sligos/Marben] undertakes not to divulge
or disclose to any third party any confidential information to which it had
access in the course of carrying out its duties or obligations hereunder.
[Sligos/Marben] shall cause its directors, officers, employees and agents to
observe this obligation of confidentiality.
9.2 However, [Sligos/Marben] shall not be subject to any obligation of
confidentiality if:
(a) the divulged information had already become public knowledge by the
time it was disclosed by [Sligos/Marben]; or
(b) the divulged information was disclosed with the prior written approval
of the Company; or
(c) the disclosure of such information was required by governmental,
administrative or judicial authorities.
10. Indemnification.
---------------
The Company shall, to the fullest extent permitted by applicable law, indemnify
[Sligos/Marben] for any expenses (including legal fees and expenses), judgments,
fines and amounts incurred by [Sligos/Marben] in connection with any complaint,
legal action and, more generally, any third-party claim generated by, or arising
from, the rendering of the Services. However, [Sligos/Marben] may not claim
indemnification if the procedure or action in question establishes that
[Sligos/Marben] committed and act of negligence, intentional wrongdoing or
breach of its obligations hereunder.
11. Notices.
-------
Any notices or exchanges of information contemplated hereunder shall be deemed
to have been validly sent when sent to the addresses which appear at the
beginning of this Agreement, or to any other address as may have been indicated
by the intended recipient pursuant to the terms of the present Article. Unless
stated otherwise hereunder, all instructions, directions and notices shall be
sent by hand delivery, in exchange for a receipt dated and signed by the
recipient, or by registered mail, return receipt requested, postage prepaid, and
such notice shall be presumed to have been received on the date indicated by the
intended recipient on the receipt, if delivered by hand, or on the date
indicated on the return receipt for registered mail if sent by registered mail,
<PAGE>
or, moreover, on the date it was first delivered, if it has not been retrieved
by its intended recipient.
12. Miscellaneous.
-------------
12.1 No Assignment.
-------------
Except in the event of a merger, spin-off or partial business transfer, the
rights and obligations hereunder may not be assigned by either party without the
prior written consent of the other party to this Agreement.
12.2 Entire Agreement; Amendments.
----------------------------
This Agreement represents the entire agreement of the parties with respect to
the subject matter hereof and supersedes any and all prior agreements or
understandings on such subject matter. This Agreement may not be modified or
amended, except by an instrument in writing signed by the parties hereto.
12.3 Section Headings.
----------------
The section headings contained in this Agreement are for convenience only and
shall not affect in any way the meaning or interpretation of this Agreement.
12.4 Examination of Books.
--------------------
[Sligos/Marben] and the Company shall have the right, upon request, to examine
at all reasonable times all accounting and corporate records maintained by the
other party and which pertain to this Agreement.
12.5 Binding Effect.
--------------
Subject to the provisions of Article 12.1, this Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
12.6 Governing Law.
-------------
This Agreement is governed by the laws of France.
12.7 Severability.
------------
If any term, clause or provision of this Agreement is found to be invalid or
unenforceable, the remaining provisions shall not be affected, but shall
continue in full force and effect. The parties undertake to replace such invalid
or unenforceable term, clause or provision, by adhering, to the greatest extent
possible, to the meaning and the intent of the invalid term, clause or
provision.
<PAGE>
12.8 Return of Books.
---------------
In the event that this Agreement is terminated, the originals of all books,
records and other information that [Sligos/Marben] prepared or maintained in
connection with the performance of its obligations hereunder shall be returned
within thirty (30) days following the termination of this Agreement. However,
[Sligos/Marben] may retain a copy of the documents that it shall have returned
to the Company.
12.9 No liability for Judgments.
--------------------------
[Sligos/Marben] may not be held liable for any of the Company's obligations. Nor
may [Sligos/Marben] be held liable for any act of breach or default committed by
the Company, unless the obligation or default resulted from an act of negligence
or from an intentionally wrongful act committed by [Sligos/Marben].
12.10 Jurisdiction.
------------
The Parties shall undertake to reach an amicable, out-of-court settlement with
regard to any disputes which arise in connection with the interpretation or
performance of this Agreement. If no such settlement can be reached, all
disputes shall be submitted to the exclusive jurisdiction of the Courts of
Paris.
IN WITNESS WHEREOF, this Agreement is executed by the parties in two originals
On April __, 1997
- ------------------------------------ --------------------------------
[Sligos/Marben] [JVC]
<PAGE>
EXHIBIT 10.3
HOCROFT ASSOCIATES,
Landlord,
and
DSET CORPORATION,
Tenant
________________________________________________________________________________
LEASE
________________________________________________________________________________
BUILDING:
1011 ROUTE 22
BRIDGEWATER, NJ
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C>
1 Demise 1
2 Term, Improvements 1
3 Basic Rent 3
4 Use and Occupancy 4
5 Care and Repair of Premises 4
6 Alterations, Additions or Improvements 5
7 Activities Increasing Fire Insurance Rates 5
8 Abandonment 5
9 Assignment and Sublease 6
10 Compliance with Rules and Regulations 7
11 Damages to Building/Waiver or Subrogation 7
12 Eminent Domain 8
13 Insolvency of Tenant 8
14 Default of Tenant 8
15 Landlord's Remedies on Default 9
16 Deficiency 12
17 Subordination of Lease 13
18 Security Deposit 14
19 Right to Cure Tenant's Breach 15
20 Mechanic's Liens 15
21 Right to Inspect and Repair 15
22 Services Provided by Landlord/Landlord's Exculpation 16
23 Electricity 17
24 Additional Rent 18
25 Interruption of Services or Use 21
26 Tenant's Estoppel 21
27 Holdover Tenancy 22
28 HVAC System 22
29 Right to Show Premises/Right to Relocate Premises 22
30 Waiver of Trial by Jury 22
31 Late Charge 23
32 No Other Representations 23
33 Quiet Enjoyment 23
34 Tenant's Insurance 23
35 Paragraph Headings 23
36 Applicability to Heirs and Assigns 23
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C>
37 Parking Spaces 24
38 Landlord's Liability for Loss of Property 24
39 Broker 24
40 Personal Liability 24
41 No Option 24
42 Definitions 24
43 General Provisions 25
44 Notices 26
45 Tenant's Indemnification 26
46 After-Hours Use 26
47 Renewal Option 27
48 Signs 28
49 Submission Not Binding 28
Signatures 28
Performance by Lessee 29
</TABLE>
EXHIBITS
--------
Exhibit A-I - Demised Premises
Exhibit A-2 - Description of Land
Exhibit B - Estoppel Certificate
Exhibit C - Rules and Regulations
Exhibit D - Building Standard
Exhibit E - Cleaning Specifications
Exhibit F - Building Holiday Schedule
Exhibit G - Confirmation of Lease
Commencement Date
<PAGE>
LEASE, made the 20th day of November, 1995, between HOCROFT ASSOCIATES
(hereinafter referred to as "Landlord"), whose mailing address is P.O. Box 6872,
981 Route 22, Bridgewater, New Jersey, and DSET CORPORATION, a New Jersey
corporation, hereinafter referred to as "Tenant") having an office at 1011 Route
22, Bridgewater, New Jersey 08807.
WITNESSETH:
For and in consideration of the covenants herein contained, and upon
the terms and conditions herein set forth, Landlord and Tenant agree as follows:
1. DESCRIPTION. Landlord hereby leases to Tenant, and Tenant hereby hires
-----------
from Landlord, space on the 1st and second floors (hereinafter called "Demised
Premises" or "Premises") which includes an allocable share of the common
facilities, as shown on the plan or plans, initialed by the parties hereto,
marked "Exhibit A-1" attached hereto and made part of this Lease in the building
located at 1011 Route 22, Bridgewater, New Jersey (hereinafter called the
"Building") which is situated on that certain parcel of land (hereinafter called
"Office Building Area") as described on "Exhibit A-2" attached hereto and made
part of this lease, together with the right to use in common with other tenants
of the Building, their invitees, customers and employees, those public areas of
the common facilities as hereinafter defined. For the purposes of this Lease,
the rentable square footage of the Demised Premises shall be deemed to be
15,857.
2. TERM, IMPROVEMENTS. (A) The term of this lease shall be as follows:
------------------
(a) Space A: for the demise of 5,763 square feet on the second floor, the
lease term shall be for the period beginning December 15, 1995 and terminating
at Midnight, May 31, 1999;
(b) Space B: for the demise of 7,420 square feet on the first floor, the
lease term shall be for the period beginning March 1, 1996 and terminating at
Midnight, May 31, 1999; and
(c) Space C: for the demise of 2,674 square feet on the first floor, the
lease term shall be for the period beginning September 1 , 1996, and terminating
at Midnight on May 31, 1999.
Promptly following possession of the Premises, a memorandum in the form of
Exhibit "G" will be signed by Tenant.
(B) If Landlord shall be unable to give possession of the Premises on
the Commencement Date because the Premises have not been sufficiently completed
to make the Premises ready for occupancy or because of any other reason
whatsoever, Landlord shall not be subject to any liability for such failure.
Under such circumstances, the rent reserved and covenanted to be paid herein
shall not commence until the possession of the Premises is given (provided
Tenant is not responsible for inability to obtain possession). No such failure
to give possession on the Commencement Date shall in any wise affect the
validity of this Lease or the
<PAGE>
obligations of Tenant hereunder, nor shall same be construed in any wise to
extend the term of this Lease, and the Commencement Date shall be deemed to be
postponed until the date Premises are available for Tenant's occupancy.
(C) The second (2nd) floor Premises ("Space A") shall be prepared for
Tenant's occupancy by Landlord ("Initial Installations") in accordance with
Building Standard, hereinafter defined, and with Tenant's plans and
specifications therefor (Tenant's Plans). Tenant's Plans shall be submitted to
Landlord within ten (10) days of the execution hereof, shall be prepared by
Rotwein & Blake, AIA, the architect for the Building, at Landlord's sole cost
and expense, and shall be subject to Landlord's approval, which shall not be
withheld or delayed unreasonably.
The 7,420 square foot portion of the Premises on the first (1st) floor
(Space B) shall have two (2) rooms, as determined by the Tenant, repainted and
all of the carpet in said unit shall be cleaned by Landlord.
(D) Attached hereto as Exhibit D is a listing of the Initial
Installations and performance specifications to be made and furnished by
Landlord ("Building Standard") at Landlord's expense, except as otherwise noted
therein respect of specific items. To the extent that the Tenant's Plans
shall call for work or materials or performance specifications not shown in
Exhibit D, such work or materials or performance specifications shall be paid
for by Tenant at a cost to be agreed upon by Landlord and Tenant.
(E) The Premises shall be deemed ready for occupancy on the date on
which the Initial Installations shall have been substantially completed; and the
same shall be deemed substantially completed not withstanding the fact that
minor or insubstanstial details of construction, mechanical adjustment or
decoration remain to be performed, the non-completion of which do not materially
interfere with Tenant's use of the Premises. If the substantial completion of
the Initial Installations shall be delayed due to (a) any act or omission of
Tenant or any of its employees, agents, or contractors (including, but not
limited to, (i) any delays due to changes in or additions to the Initial
Installations, or (ii) any delays by Tenant in the submission of plans,
drawings, specifications or other information or in approving any working
drawings or estimates or in giving any authorizations or approvals), or (b) any
additional time needed for the completion of the Initial Installations because
of Tenant's request for materials, finishes or installations other than Building
Standard, then the Premises shall be deemed ready for occupancy on the date when
they would have been ready but for such delay.
(F) Tenant may at its own expense select and employ its own
contractors for finishing work provided:
(i) Tenant advises Landlord in writing of its intention so to do prior to
commencement of any such work,
2
<PAGE>
(ii) the contractors and sub-contractors employed by Tenant shall have been
previously approved by Landlord,
(iii) Tenant and its contractors shall be responsible for the removal of
waste and debris resulting from the performance of tenant's work and Landlord
shall not be responsible for the coordination of the work of Landlord's
contractors with the work of Tenant's contractors,
(iv) Tenant and its contractors shall be restricted to those areas of the
building necessary to perform the work and shall not interfere with or otherwise
restrict all other Tenants access to common areas of the building. Common areas
should be protected by the use of mats, paper, guards and cardboard during
construction,
(v) Prior to commencement of tenant's work, Tenant shall obtain and
maintain at its expense, Workmen's Compensation and Bodily Injury and Property
Damage Public Liability Insurance in amounts and with companies reasonably
satisfactory to Landlord, and shall submit certificates as evidence thereof to
Landlord naming Landlord as an additional insured,
(vi) Landlord shall afford Tenant access to the Premises, at reasonable
times prior to the Commencement Date and at Tenant's sole risk and expense, for
the purposes of inspecting the performance of the work being done by Landlord
and of making preparations for and performing or inspecting the performance of
tenant's work.
(G) If the whole of the Premises shall not be ready for occupancy at
approximately the same time, Tenant may, with the written consent of Landlord,
take possession of any part or parts of the Premises before the Commencement
Date, provided that a Certificate of Occupancy shall have been obtained for the
part or parts of the Premises in respect of which Tenant desires to take
possession. Tenant shall be deemed to have taken possession of a part of the
Premises (herein called "actual possession") when any personnel of Tenant or
anyone claiming under or through Tenant shall first occupy such part for the
conduct of business. Tenant's actual possession of any part or parts of the
Premises prior to the Commencement Date shall be subject to all of the
obligations of this Lease, including the payment of rent.
3. BASIC RENT. (a) The Tenant shall pay to the Landlord during the term
----------
basic rent in the amount of $770,983. 13, (herein "Rent" or "Basic Rent")
payable in such coin or currency of the United States of America as at the time
of payment shall be legal tender for the payment of public and private debts.
The basic rent shall be payable in advance on the first day of each calendar
month in monthly installments as follows:
(a) for the period December 15, 1995 through December 31, 1995, the sum
of $3,608.88;
(b) for the period January 1, 1996 through February 29, 1996, the sum of
$7,203.75 per month for Space A noted in Article 2 hereof;
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(c) for the period March 1, 1996 thorough August 31, 1996, the sum of
$16,478.75 per month, for Space A and Space B noted in Article 2 hereof;
(d) for the period September 1, 1996 through May 31, 1999, the sum of
$19,821.25 per month for Space A, Space B and Space C noted in Article 2 hereof,
except that a proportionately lesser sum shall be paid for the first and
last months of the term of this lease if the term commences on a day other than
the first day of the month, in accordance with the provisions of this Lease
herein set forth. Landlord acknowledges receipt from Tenant of the sum of
$3,601.88 by check, subject to collection, for the basic rent for the period
December 15, 1995 through December 31, 1995 of the lease term. Tenant shall pay
basic rent, and any additional rent as hereinafter provided, to Landlord at
Landlord's above stated address, or at such other place as Landlord may
designate in writing, without demand and without counterclaim, deduction or
setoff.
4. USE AND OCCUPANCY. (a) Tenant shall use and occupy the Premises as
-----------------
general offices and for no other purpose.
(b) Tenant acknowledges that it is required to comply with the
requirements of Title III of the Americans with Disabilities Act ("ADA") with
respect to non-structural elements in the Tenant's Premises and Tenant's
activities in the building. Tenant hereby agrees to indemnify and save the
Landlord harmless for all costs of any kind incurred by the Landlord resulting
from Tenant's failure to comply with the provisions of Title III of the
Americans with Disabilities Act.
(c) Within ten (10) days after receipt, Landlord and Tenant shall
advise the other party in writing, and provide the other with copies of (as
applicable), any notices alleging violation of the Americans with Disabilities
Act of 1990 ("ADA") relating to any portion of the Property or of the Premises;
any claims made or threatened in writing regarding noncompliance with the ADA
and relating to any portion of the Property or of the Premises; or any
governmental or regulatory actions or investigations instituted or threatened
regarding noncompliance with the ADA and relating to any portion of the Property
or the Premises.
5. CARE AND REPAIR OF PREMISES. Tenant shall: (i) commit no act of waste
---------------------------
and shall take good care of the Premises and the fixtures and appurtenances
therein: (ii) procure, at its expense, all permits and licenses to operate its
business in the Premises, other than the Certificate of Occupancy; (iii) comply
with the provisions of any grant, lease or mortgage to which this Lease is
subordinate; and (iv) in the use and occupancy of the Premises, conform to all
laws, orders and regulations of the federal, state and municipal government or
any of their departments. Landlord shall make all necessary repairs to the
Premises, except as may be required by the provisions of 4(b) above, and except
where the repair has been made necessary by misuse or neglect by Tenant or
Tenant's agents, servants, visitors or licensees, in which event
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Landlord shall nevertheless make the repair but Tenant shall pay to Landlord, as
additional rent, immediately upon demand, the costs therefor. All fixtures,
carpeting, partitions, improvements and appurtenances attached to or built into
the Premises at the commencement of or during the term of this Lease shall be
and remain a part of the Premises, shall be deemed the property of the Landlord
and shall not be removed by Tenant, except as provided in the next succeeding
sentence or unless Landlord otherwise elects with respect to any of said
property in the Premises (which election shall be made by giving a notice to
Tenant not less than 5 days prior to the expiration date of the Lease term or
within 30 days after an earlier termination date of this Lease). All furniture,
movable partitions, business and trade fixtures, machinery and equipment, which
can be removed without structural damage to the Building, and all other items of
property as to which Landlord makes the election specified in the immediately
preceding sentence (herein collectively called "Tenant's Property"), shall be
and shall remain the property of Tenant. At or before the expiration of this
Lease, or on the date of any earlier termination of this Lease, Tenant, at its
expense, shall remove from the Premises all of Tenant's Property and Tenant
shall surrender the Premises broom clean, and in good order, condition and
repair, or pay the costs of repairing any damage to the Premises or the Building
resulting from any installation and/or removal of Tenant's Property. Tenant
shall be responsible for all consequential damages to Landlord as a result of
Tenant's failure to surrender the Premises in accordance with this Lease, and
this clause shall survive the termination of the Lease. Any other items of
Tenant's Property which shall remain in the Premises after the expiration date
of this Lease, or after a period of 3 days following an earlier termination
date, may, at the option of Landlord, be deemed to have been abandoned, and in
such case such items may be retained by Landlord as its property or disposed of
by Landlord, without accountability, in such manner as Landlord shall determine
at Tenant's expense. Landlord may have any such property stored at Tenant's risk
and expense. If the Premises be not surrendered on the last day of the term
hereof or on any earlier termination date, Tenant hereby agrees to indemnify
Landlord against all losses, damages and liabilities which may arise from said
failure by Tenant to surrender the premises, including, without limitation,
claims made by any succeeding tenant founded on such delay.
6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS. (a) Tenant shall not, without
--------------------------------------
first obtaining the written consent of Landlord, make any alterations, additions
or improvements in, to or about the Premises, including, but not limited to,
electrical, mechanical and plumbing systems.
(b) Should the Tenant wish to undertake any improvements referred to in
(a) he shall conform to the provisions of paragraph 2(F) above.
7. ACTIVITIES INCREASING FIRE INSURANCE RATES. Tenant shall not do or
------------------------------------------
suffer anything to be done on the Premises which will increase the rate of fire
insurance on the Building.
8. ABANDONMENT. Tenant shall not, without first obtaining the written
-----------
consent of Landlord, abandon the Premises or allow the Premises to become vacant
or deserted.
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9. ASSIGNMENT AND SUBLEASE. Tenant may assign or sublease the within Lease
-----------------------
to any party subject to the following:
(A) In the event Tenant desires to sublet or assign the Demised Premises
in all or part, Tenant shall notify Landlord in writing of its intent and the
terms under which it intends to offer the space. In said notice, Tenant shall
inquire of the Landlord of the terms under which it is then marketing office
space and shall not offer its premises for sublet or assignment, either directly
or through a real estate broker, under such terms and conditions that are less
or substantially different from those under which the Landlord is then marketing
vacant office space.
(B) In the event that the Tenant desires to sublease or assign the
Premises, or any part thereof, to any other party, a copy of the proposed
instrument effecting said sublease or assignment shall be delivered to the
Landlord at least 30 days prior to the effective date of any such sublease or
assignment.
(C) Prior to such effective date of any such sublease or assignment, the
Landlord shall have the option, exercisable in writing to the Tenant, to
recapture the within Lease so that such prospective subtenant or assignee shall
then become the sole tenant of Landlord hereunder, or alternatively to recapture
that part of the premises which is subject of the proposed assignment or sublet
and the within Tenant shall be fully released from any and all obligations
hereunder with regard to said recaptured space. In the event Landlord recaptures
the space to effect a lease with the prospective subtenant or assignee, Tenant
shall assume any brokerage in connection therewith.
(D) In the event that the Landlord elects not to recapture the lease or
space as hereinabove provided, the Tenant may nevertheless assign this Lease or
sublet the whole or any portion of the Premises, subject to Landlord's prior
written consent, which consent shall not be unreasonably withheld, on the basis
of the following terms and conditions:
(1) The Tenant shall provide to the Landlord the name and address of the
prospective assignee or subtenant, which prospective assignee or subtenant
shall be an entity of financial standing satisfactory to Landlord and whose
business shall be of a character consistent with the business of the other
tenants in the office complex of which the Building is a part.
(2) The assignee or subtenant shall assume, by written instrument
acceptable to Landlord, all of the obligations of this Lease, and a copy of
such assumption agreement shall be furnished to the Landlord at least 10
days prior to its effective date.
(3) The Tenant and each assignee shall be and remain liable for the
observance of all the covenants and provisions of this Lease, including,
but not limited to, the payment of rent reserved herein, through the entire
term of this Lease.
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(4) The Tenant shall promptly pay to Landlord any consideration received
for any assignment or sublet, plus all of the rent, as and when received,
in excess of the rent required to be paid by Tenant hereunder for the area
assigned or sublet.
(5) In any event, the acceptance by the Landlord of any rent from the
assignee of from any of the subtenants or the failure of the Landlord to
insist upon a strict performance of any of the terms, conditions and
covenants herein shall not release the Tenant herein, nor any assignee
assuming this lease, from any and all of the obligations herein during and
for the entire term of this Lease.
(E) Any sublet or assignment to an affiliated company shall not be subject
to the provisions of subsections (A) or (B)(4) hereof and shall not require
Landlord's prior written consent, but all other provisions of this Paragraph
shall apply.
(F) Landlord's consent to one assignment or sublease will not waive the
requirement of obtaining the Landlord's consent to any subsequent assignment or
sublease.
10. COMPLIANCE WITH RULES AND REGULATIONS. Tenant shall observe and comply
-------------------------------------
with the rules and regulations hereinafter set forth in Exhibit C attached
hereto and made a part hereof and with such further reasonable rules and
regulations as Landlord may prescribe, on written notice to the Tenant, for the
safety, care and cleanliness of the Building and the comfort, quiet and
convenience of other occupants of the Building. Tenant shall not place a load
upon any floor of the Demised Premises exceeding the floor load per square foot
area which it was designed to carry and which is allowed by law. Landlord
reserves the right to prescribe the weight and position of all safes, business
machines and mechanical equipment. Such installations shall be placed and
maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's
judgment, to absorb and prevent vibration, noise and annoyance. Landlord shall
not be responsible to Tenant for the noncompliance or breach by any other tenant
of any of said rules and regulations.
11. DAMAGES TO BUILDING/WAIVER OF SUBROGATION. If the Building is damaged
-----------------------------------------
by fire or any other cause to such extent that the cost of restoration, as
reasonably estimated by Landlord, will equal or exceed twenty-five (25%) percent
of the replacement value of the Building (exclusive of foundations) just prior
to the occurrence of the damage, then Landlord may, no later than the sixtieth
(60th) day following the damage, give Tenant a notice of Landlord's election to
terminate this Lease, or if the cost of restoration will equal or exceed fifty
(50%) percent of such replacement value and if the Premises shall not be
reasonably usable for the purpose for which they are leased hereunder, then
Tenant may, no later than the sixtieth (60th) day following the damage, give
Landlord a notice of election to terminate this Lease. In either said event of
election, this Lease shall be deemed to terminate on the thirtieth (30th) day
after the giving of said notice, and Tenant shall surrender possession of the
Premises within a reasonable time thereafter, and the basic rent, and any
additional rent, shall be apportioned as of
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the date of said surrender and any basic or additional rent paid for any period
beyond said date shall be repaid to Tenant. If the cost of restoration as
estimated by Landlord shall amount to less than twenty-five (25%) percent of
said replacement value of the Building, or if, despite the cost, Landlord does
not elect to terminate this Lease, Landlord shall restore the Building and the
Premises with reasonable promptness, subject to force majeure, and Tenant shall
have no right to terminate this Lease. Landlord need not restore fixtures and
improvements owned by Tenant.
In any case in which use of the Premises is affected by any damage to the
Building, there shall be either an abatement or an equitable reduction in basic
rent depending on the period for which and the extent to which the Premises are
not reasonably usable for the purpose for which they are leased hereunder. The
words "restoration" and "restore" as used in this Paragraph 11 shall include
repairs. If the damage results from the fault of the Tenant, or Tenant's agents,
servants, visitors or licensees, Tenant shall not be entitled to any abatement
or reduction in basic rent.
12. EMINENT DOMAIN. If Tenant's use of the Premises is materially
--------------
affected due to the taking by eminent domain of (a) the Premises or any part
thereof or any estate therein; or (b) any other part of the Building then, in
either event, this Lease shall terminate on the date when title vests pursuant
to such taking. The rent, and any additional rent, shall be apportioned as of
said termination date and any basic and additional rent paid for any period
beyond said date shall be repaid to Tenant. Tenant shall not be entitled to any
part of the award for such taking or any payment in lieu thereof, but Tenant may
file a separate claim for any taking of fixtures and improvements owned by
Tenant which have not become the Landlord's property, and for moving expenses,
provided the same shall in no way affect or diminish Landlord's award. In the
event of a partial taking which does not effect a termination of this Lease but
does deprive Tenant of the use of a portion of the Demised Premises, there shall
either be an abatement or an equitable reduction of the basic rent and
additional rent, and an equitable adjustment reducing the Base Costs as
hereinafter defined depending on the period for which and the extent to which
the Premises so taken are not reasonably usable for the purpose for which they
are leased hereunder.
13. INSOLVENCY OF TENANT. Either (a) the appointment of a receiver to
--------------------
take possession of all or substantially all of the assets of Tenant, or (b) a
general assignment by Tenant for the benefit of creditors, or (c) any action
taken or suffered by Tenant under any insolvency or bankruptcy act, shall
constitute a default of this Lease by Tenant, and Landlord may terminate this
Lease forthwith and upon notice of such termination Tenant's right to possession
of the Demised Premises shall cease, and Tenant shall then quit and surrender
the Premises to Landlord but Tenant shall remain liable as hereinafter provided
in Paragraph 15 hereof.
14. DEFAULT OF TENANT.
-----------------
Any of the following events shall be a default of Tenant: (a) Tenant's
default in the payment on the due date of the Basic Rents and/or additional
rents and/or any other payment
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required of Tenant by this Lease, unless Tenant shall cure such default after
notice of default within five (5) days after notice of default of such Basic
Rent and/or additional rent and/or other payment required of Tenant hereunder;
(b) Tenant's default in the performance of any of the other covenants of Tenant
or conditions of this Lease, unless Tenant shall cure such default within
fifteen (15) days after notice of such default given by Landlord (or if any such
default is of such nature that it cannot be completely cured within such period,
then unless Tenant shall commence such curing within fifteen (15) days after
notice of such default given by Landlord and shall thereafter proceed with
reasonable due diligence and in good faith to cure such default and shall
succeed in curing such default within a reasonable period of time, and provided
that the existence of such default for more than fifteen (15) days does not, in
Landlord's reasonable judgment, itself result in substantial damages to Landlord
and place Landlord in risk of substantial damage by such additional time to cure
such default); (c) insolvency of Tenant as set forth in Paragraph 13 of this
Lease; (d) the sale or attempted sale by or under execution or other legal
process of Tenant's leasehold interest hereunder and/or substantially all of
Tenant's other assets; (e) the initiation of legal proceedings to effect, or
resulting in, the seizure, sequestering or impounding of any of Tenant's goods
or chattels used in, or incident to, the operation of the Premises by Tenant;
(f) assignment by operation of law of Tenant's leasehold interest hereunder; (g)
any attempt by Tenant to assign the within Lease or sublet the Demised Premises
without the express prior written consent of the Landlord; or (h) any act or
omission of Tenant constituting an anticipatory breach or of this Lease.
15. LANDLORD'S REMEDIES ON DEFAULT.
------------------------------
Upon any default of Tenant as set forth in Paragraph 13 or Paragraph 14 of
this Lease, Landlord, at Landlord's sole option, may elect and enforce any one
of the remedies hereinafter provided in this Paragraph 15, provided, however,
that Landlord may, at Landlord's sole option, elect and enforce multiple
remedies from among those remedies hereinafter provided to the extent such
remedies are not inconsistent and are not legally mutually exclusive and to the
extent Landlord, in Landlord's reasonable judgment, deem the enforcement of such
multiple remedies necessary or appropriate to indemnify and make Landlord whole
from any loss or damage as a result of the default or defaults of Tenant; and
provided further that Landlord, at Landlord's sole discretion, may
successively elect and enforce any number of the remedies hereinafter provided
to the extent that Landlord, in Landlord's reasonable judgment, deems necessary
or appropriate to indemnify and make Landlord whole from any loss or damage as a
result of the default or defaults of Tenant:
(a) Termination and Tenant's Liabilities. Landlord shall have the right to
------------------------------------
terminate this Lease forthwith, and upon notice of such termination given
by Landlord to Tenant in accordance with the notice provisions of this
Lease, Tenant's right to possession, use and enjoyment of the Demised
Premises shall cease, and Tenant shall immediately quit and surrender the
Demised Premises to Landlord, but Tenant shall remain liable to Landlord as
hereinafter provided. Upon such termination of this Lease, Landlord may at
any time thereafter re-enter and resume possession of the Premises by any
lawful means and
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remove Tenant and/or other occupants and their goods and chattels. In any
case where Landlord has recovered possession of the Premises by reason of
Tenant's default, Landlord may, at Landlord's option, occupy the Premises
or cause the Premises to be redecorated, altered, divided, consolidated
with other adjoining premises, or otherwise changed or prepared for
reletting, and may relet the Premises or any portion thereof prepared for
reletting, and may relet the Premises or any part thereof as agent of
Tenant or otherwise, for a term or terms to expire prior to, at the same
time as, or subsequent to, the original expiration date of this Lease, at
Landlord's sole option, and Landlord shall receive the rent therefor. Rent
so received shall be applied first to the payment of such expenses as
Landlord may have incurred in connection with the recovery of possession,
redecorating, altering, dividing, consolidating with other adjoining
premises, or otherwise changing or preparing for reletting, and the
reletting, including brokerage and reasonable attorney's fees, and then to
the payment of damages in amounts equal to the rent (basic and additional)
and other payments required of Tenant hereunder and to the costs and
expenses of performance of the other covenants of Tenant as herein
provided. Tenant agrees, in any such case, whether or not Landlord has
relet, to pay to Landlord damage equal to the basic and additional rent and
other sums herein agreed to be paid by Tenant, less the net proceeds of the
reletting, if any, as ascertained from time to time, and the same shall be
payable by Tenant on the several rent days above specified. Tenant shall
not be entitled to any surplus accruing as a result of any such reletting.
In reletting the Premises as aforesaid, Landlord may grant rent
concessions, and Tenant shall not be credited therewith. No such reletting
shall constitute a surrender and acceptance or be deemed evidenced thereof.
If Landlord elects, pursuant hereto, actually to occupy and use the
Premises or any part thereof during any part of the balance of the term as
originally fixed or since extended, there shall be allowed against Tenant's
obligation for rent, other payments and damages as herein defined, during
the period of Landlord's occupancy, the reasonable value of such occupancy,
equal to in any event the basic and additional rent herein reserved. In no
event shall such occupancy by Landlord be construed as a release of
Tenant's liability hereunder.
(b) Acceleration of the Rents. Landlord shall have the right to declare
-------------------------
the entire remaining unpaid Basic Rents and all other then known additional
rents and other payments required of Tenant by this Lease for the full
balance of the Lease term to be immediately due and payable. Such
declaration of acceleration shall be made by notice given by Landlord to
Tenant in accordance with the notice provisions of this Lease. Upon notice
of declaration of acceleration, Tenant shall immediately pay to Landlord,
without further demand or notice, an amount equal to the sum of the entire
remaining unpaid Basic Rents provided in Paragraph 3 of this Lease for the
entire Lease term, plus the entire remaining balance of all unpaid
additional rents provided in Paragraph 24 of this Lease of the entire Lease
term to the extent the amount of such additional rents are then known, plus
all unpaid other payments required of Tenant by this Lease for the entire
Lease term to the extent the amount of such other payments are then known.
Upon timely payment of all the sums hereinabove provided in this
Subparagraph 15, Tenant
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shall have the right to continue to possess, occupy and enjoy the Demised
Premises for the remaining balance of the Lease term, subject to strict
observance by Tenant of all the covenants, conditions and other provisions
of this Lease and provided that Lessee has not vacated or abandoned the
Premises (except as otherwise provided in Paragraph 8 hereof) and provided
that Tenant shall pay when due all additional rents as provided in
Paragraph 24 of this Lease and all other payments required of Tenant by
this Lease, the amount of which additional rents and other payments were
not paid upon the declaration of acceleration pursuant to the hereinabove
stated provisions of this Subparagraph 15. Landlord shall have the right to
immediately enforce declaration of acceleration as hereinabove provided by
means of distress or any legal action. The foregoing notwithstanding,
Landlord shall have the right to declare an acceleration and collect upon
same and, in addition, to dispossess Tenant and re-enter and take
possession of the Premises if Tenant has vacated or abandoned the Premises
(except as otherwise provided in Paragraph 8 hereof) or if Landlord is
dispossessing and evicting Tenant for the purpose of ultimately reducing
Tenant's liabilities under this Lease. In the event Landlord shall declare
an acceleration as provided in this Subparagraph 15(b) and the amounts due
hereunder shall not be paid forthwith, the Landlord, at Landlord's sole
option, may exercise Landlord's right to terminate this Lease as provided
in Subparagraph 15(a) hereof, in which event Landlord shall be entitled to
the full benefits of, and full endorsement of, Subparagraph 15(a) hereof.
(c) Specific Performance of Lease. Landlord shall have the right to
-----------------------------
enforce Tenant's specific performance of each and every covenant, condition
and other provision of this Lease.
(d) Liquidated Damages. In any case where Landlord has recovered
------------------
possession of the Premises by reason of Tenant's default, Landlord may at
Landlord's option, and at any time thereafter, and without notice or other
action by Landlord, and without prejudice to any other rights or remedies
it might have hereunder or at law or equity, become entitled to recover
from Tenant, as damages for such default, in addition to such other sums
herein agreed to be paid by Tenant, to the date of re-entry, expiration
and/or dispossess, an amount equal to the difference between (i) the sum of
the Basic Rent and additional rents and other payments reserved in this
Lease and required of Tenant hereunder from the date of such default to the
date of expiration of the original term demised, and (ii) the then fair and
reasonable rental value of the Premises for the same period. Said damages
shall become due and payable to Landlord immediately upon such default of
this Lease and without regard to whether this Lease be terminated or not;
and if this Lease be terminated, without regard to the manner in which it
is terminated. In the computation of such damage, the difference between
any installments of rent (basic and additional) thereafter becoming due and
the fair and reasonable rental value of the Premises for the period for
which such installment was payable shall be discounted to the date of such
default at the rate of not more than four (4%) percent per annum.
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Landlord's sole obligation to mitigate damages shall be the
appointment of a nationally recognized exclusive agent to market the
Premises. With the exception of the obligation set forth in the immediately
preceding sentence, Tenant hereby waives any rights it may have at law or
in equity which may impose upon Landlord any obligation to perform further
acts to mitigate its damages resulting from Tenant's default.
(e) Waiver of Right of Redemption. Tenant hereby waives all right of
-----------------------------
redemption to which Tenant or any person under Tenant might be entitled by
any law now or hereafter in force.
(f) Other Remedies. Landlord's remedies hereunder are in addition to any
--------------
remedy allowed by law or in equity.
(g) Non-exclusivity. The remedies set forth above shall be non-exclusive
--------------
and the Landlord's election to enforce any remedy shall not be deemed a
waiver of any other remedy Landlord may be entitled to hereunder or as
allowed by law or in equity.
16. DEFICIENCY. In any case where Landlord has recovered possession of the
----------
Premises by reason of Tenant's default, Landlord may, at Landlord's option,
occupy the Premises or cause the Premises to be redecorated, altered, divided,
consolidated with other adjoining premises, or otherwise changed or prepared for
reletting, and may relet the Premises or any part thereof as agent of Tenant or
otherwise, for a term or terms to expire prior to, at the same time as, or
subsequent to, the original expiration date of this Lease, at Landlord's option,
and receive the rent therefor. Rent so received shall be applied first to the
payment of such expenses as Landlord may have incurred in connection with the
recovery of possession, redecorating, altering, dividing, consolidating with
other adjoining premises, or otherwise changing or preparing for reletting, and
the reletting, including brokerage and reasonable attorney's fees, and then to
the payment of damages in amounts equal to the rent hereunder and to the costs
and expenses of performance of the other covenants of Tenant as herein provided.
Tenant agrees, in any such case, whether or not Landlord has relet, to pay to
Landlord damages equal to the basic and additional rent and other sums herein
agreed to be paid by Tenant, less the net proceeds of the reletting, if any, as
ascertained from time to time, and the same shall be payable by Tenant on the
several rent days above specified. Tenant shall not be entitled to any surplus
accruing as a result of any such reletting. In reletting the Premises as
aforesaid, Landlord may grant rent concessions, and Tenant shall not be credited
therewith. No such reletting shall constitute a surrender and acceptance or be
deemed evidence thereof. If Landlord elects, pursuant hereto, actually to occupy
and use the Premises or any part thereof during any part of the balance of the
term as originally fixed or since extended, there shall be allowed against
Tenant's obligation for rent or damages as herein defined, during the period of
Landlord's occupancy the reasonable value of such occupancy, not to exceed in
any event the basic and additional rent herein reserved and such occupancy shall
not be construed as a release of Tenant's liability hereunder. Landlord
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shall not be liable in any way whatsoever for its refusal or failure to relet
the Premises or any part thereof, and no such refusal or failure to relet shall
release or affect Tenant's liability hereunder.
Alternatively, in any case where Landlord has recovered possession of the
Premises by reason of Tenant's default, Landlord may at Landlord's option, and
at any time thereafter, and without notice or other action by Landlord, and
without prejudice to any other rights or remedies it might have hereunder or at
law or equity, become entitled to recover from Tenant, as damages for such
breach, in addition to such other sums herein agreed to be paid by Tenant, to
the date of re-entry, expiration and/or dispossess an amount equal to the
difference between the rent and additional rent reserved in this Lease from the
date of such default to the date of expiration of the original term demised and
the then fair and reasonable rental value of the Premises for the same period.
Said damages shall become due and payable to Landlord immediately upon such
breach of this Lease and without regard to whether this Lease be terminated or
not, and if this Lease be terminated, without regard to the manner in which it
is terminated. In the computation of such damages, the difference between any
installments of rent (basic and additional) thereafter becoming due and the fair
and reasonable rental value of the Premises for the period for which such
installment was payable shall be discounted to the date of such default at the
rate of not more than four (4%) percent per annum.
Tenant hereby waives service of notice of intention to re-enter or to
institute legal proceedings to that end and all right of redemption to which
Tenant or any person under Tenant might be entitled by any law now or hereafter
in force.
Landlord's sole obligation to mitigate damages shall be the appointment of
a nationally recognized exclusive agent to market the Premises. With the
exception of the obligation set forth in the immediately preceding sentence,
Tenant hereby waives any rights it may have at law or in equity which may impose
upon Landlord any obligation to perform further acts to mitigate its damages
resulting from Tenant's default.
Landlord's remedies hereunder are in addition to any remedy allowed by law
or equity.
17. SUBORDINATION OF LEASE.
----------------------
(A) This Lease is and shall be subject and subordinate in all respects to
all present and future ground leases, overriding leases and underlying leases of
the Premises, Building or the Office Building Area and to all mortgages and
building loan agreements, which may now or hereafter affect the same, to each
and every advance made or to be made under such mortgages, and to all renewals,
modifications, replacements and consolidations of such mortgages or leases. This
Section 17A shall be self-operative and no further instrument of subordination
shall be required. In confirmation of such subordination, Tenant shall promptly
execute and deliver any instrument, in recordable form if required, that
Landlord, the lessor of any such lease or the holder of any mortgage or any of
their respective successors in interest may require to evidence
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such subordination and Tenant hereby irrevocable constitutes and appoints
Landlord attorney-in-fact for Tenant to execute any such instrument for and on
behalf of Tenant.
(B) If any act or omission of Landlord would give Tenant the right to
cancel or terminate this Lease, or to claim a partial or total eviction, Tenant
shall not exercise such right (a) until it has given written notice of such act
or omission to Landlord and each mortgage and each lessor whose name and address
shall previously have been furnished to Tenant, and (b) until a reasonable
period for remedying such act or omission shall have elapsed following the
giving of such notice and following the time when such mortgagee or lessor shall
have become entitled under such mortgage or lease, as the case may be, to remedy
the same (which reasonable period shall in no event be less than 30 days
following the period to which Landlord would be entitled under this Lease or
otherwise, after similar notice, to effect such remedy).
(C) If the holder of a lease or mortgage referred to in Section 17A
hereinabove shall succeed to the rights of Landlord under this Lease, then at
the request of such party so succeeding to Landlord's rights (herein called
"Successor Landlord") Tenant shall attorn to and recognize such Successor
Landlord as Tenant's landlord under this Lease and shall promptly execute and
deliver any instrument that such Successor Landlord may reasonably request to
evidence such attornment. Upon such attornment this Lease shall continue in full
force and effect as a direct lease between the Successor Landlord and Tenant
and upon all of the terms, conditions and covenants as are set forth in this
Lease except that the Successor Landlord shall not be (a) liable for any
previous act or omission of Landlord under this Lease; (b) subject to any
offset, not expressly provided for in this Lease, which theretofore shall have
accrued to Tenant against Landlord; (c) bound by any previous modification of
this Lease or by any previous prepayment of more than one month's basic rent,
unless such modification or prepayment shall have been expressly approved in
writing by the Successor Landlord; or (d) liable for the return of any security
deposited under this Lease, unless the same shall have been actually received by
such Successor Landlord. Tenant hereby appoints Landlord and/or the Successor
Landlord as the attorney-in-fact, irrevocable, of Tenant to execute and deliver
any such instrument of attornment for and on behalf of Tenant. Tenant hereby
waives the provisions of any present or future statute or rule of law which may
give Tenant any right of election to terminate this Lease or to surrender
possession of the Premises in the event any mortgage or lease affecting the
Building or Office Building Area is in default or is terminated and agrees that
this Lease shall not be affected in any way whatsoever by any such default,
termination or any proceeding instituted as a result thereof.
(D) Tenant hereby understands and agrees that this Lease is specifically
subject to the approval of the present mortgagee(s) of the Building and Office
Building Area. If Landlord fails to obtain said approval(s) within ten (10)
business days of the execution date hereof, Landlord shall have the option to
render this Lease null and void for all purposes, at which time each party
hereunder shall be relieved of any and all obligations specified herein.
18. SECURITY DEPOSIT. Prior to the inception of this Lease, Tenant shall
-----------------
have deposited with Landlord in cash the sum of $19,821.25 to be held by
Landlord as security, to be
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returned to Tenant, without interest, at the termination of this Lease provided
there has been no breach of the undertakings of Tenant under this Lease. In no
instance shall the amount of such security deposit be considered a measure of
liquidated damages. All or any part of the said deposit may be applied by
Landlord in total or partial satisfaction of any default by Tenant and said
application shall not deprive Landlord of any other rights or remedies Landlord
may have nor shall such application by Landlord constitute a waiver by Landlord.
If all or any part of the security deposit is applied to an obligation of Tenant
hereunder, Tenant agrees to restore the said security deposit to its original
amount. It is agreed that should Landlord convey its interest under this Lease,
the security deposit may be turned over by Landlord to Landlord's grantee or
transferee, and upon any such delivery of the deposit, Tenant hereby releases
Landlord herein named of any and all liability with respect to the deposit, its
application and return, and Tenant agrees to look solely to such grantee or
transferee, and it is further understood that this provision shall also apply to
subsequent grantees and transferees.
19. RIGHT TO CURE TENANT'S BREACH. If Tenant breaches any covenant
-----------------------------
or condition of this Lease, Landlord may, on reasonable notice to Tenant (except
that no notice need be given in case of emergency), cure such breach at the
expense of Tenant and the reasonable amount of all expenses, including
attorney's fees, incurred by Landlord in so doing (whether paid by Landlord or
not) shall be deemed additional rent payable on demand.
20. MECHANIC'S LIENS. Tenant shall, within fifteen (15) days after notice
----------------
from Landlord, discharge or satisfy by bonding or otherwise any mechanic's liens
for materials or labor claimed to have been furnished to the Premises on
Tenant's behalf.
21. RIGHT TO INSPECT AND REPAIR.
---------------------------
Landlord may enter the Premises but shall not be obligated to do so (except
as required by any specific provision of this Lease) at any reasonable time on
reasonable notice to Tenant (except that no notice need be given in case of
emergency):
(a) for the purpose of inspection or the making of such repairs,
replacement or addition, in, to, and about the Premises or the Building, as
Landlord deems necessary or desirable.
(b) pursuant to any renovation the tenant may have undertaken pursuant to
Exhibit D or otherwise, for the purpose of making such alterations,
additions, deletions or replacements as the Landlord deems necessary to
satisfy the standard of construction established in Exhibit D and to
otherwise maintain the integrity and appearance of the demised premises and
Building.
The costs of such repairs, alterations, additions or deletions shall be borne by
the tenant and paid forthwith on presentation of an invoice. Tenant shall have
no claims or cause of action against Landlord by reason of any action hereof. In
no event shall Tenant have any claim against Landlord for interruption to
Tenant's business, however occurring.
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22. SERVICES TO BE PROVIDED BY LANDLORD/LANDLORD'S EXCULPATION.
----------------------------------------------------------
(A) While Tenant is not in default under any of the provisions of this
Lease, Landlord agrees to furnish to the extent practicable, except on federal
and state legal holidays:
(i) Cleaning services in accordance with the standard for the Building as
determined by the Landlord. In performing such duties the cleaning
contractor shall:
(a) have the right to enter into all parts of the Premises at all
reasonable times;
(b) to use, at Tenant's expense, all light and power in the Premises
required to clean the premises
(c) not be obligated to clean all or any part of the Premises on any
day when all or part is used by Tenant's employees after 7:00 P.M.
(ii) Heating, ventilating and air conditioning (herein "HVAC"), as
appropriate for the season and as set forth on Exhibit C, Section C, during
"Building Hours" as hereinafter defined.
(B) Notwithstanding any contained herein, the Tenant agrees to conform to
all applicable local, state and federal laws, statutes and provisions and the
Landlord's directions and procedures with respect to mandatory recycling:
(i) All recyclable materials including, but not limited to, the following,
shall be separated by the Tenant as follows:
(a) Office Paper: newspapers, magazines, computer, stationery,
------------
letterhead, brochures, copy, envelopes, file folders;
(b) Aluminium;
---------
(c) Glass; and
-----
(d) Cardboard: boxes, dividers,
---------
shall be deposited in containers at those location(s) so designated by the
Landlord for removal by the cleaning contractor.
(ii) All non-recyclable material such as plastic, tin, food waste, carbon
paper, blueprints, napkins, paper and styrofoam cups, pens, and pencils are
likewise to be deposited at those
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locations and in those containers so designated by the Landlord for removal
by the cleaning contractor.
(iii) The Tenant acknowledges that the procedures and provisions of this
mandatory recycling program may change from time to time and agrees to
cooperate with the Landlord with respect to further revisions and
implementations therein.
(iv) Failure by the Tenant to comply with the recycling procedures and
programs may, in the sole discretion of the Landlord, result in a stoppage
of cleaning services, or additional charges to the Tenant incurred by the
Landlord necessary to achieve compliance.
(v) Should any of the services or programs noted hereinbefore increase the
Landlord's cost beyond that provided for in Subparagraph (A), then such
cost shall be born by the Tenant in accordance with the Additional Rent
provision of Paragraph 24.
(C) Notwithstanding any other provision of this Lease to the contrary,
Landlord shall not be liable, under any circumstances, for any interruption to
Tenant's business, or for the loss of, or injury to, Tenant or its business,
however occurring.
23. ELECTRICITY. The cost of electric current which is supplied by the
-----------
Landlord for use by the Tenant in the Demised Premises, other than for heating
or air-conditioning purposes shall be reimbursed monthly to the Landlord at
terms, classification and rates normally charged by the public utilities
corporation serving that part of the municipality where the subject premises are
located.
(a) If any package heating, ventilation and/or air conditioning unit is
installed by Tenant and the electrical costs of operating the same are not
within the $1.25 per square foot hereinafter set forth, the installation and
operation of any such unit may entail an electrical survey as to the additional
electrical costs of operating such unit. The plans for any HVAC package unit
will have to be approved by Landlord and Landlord will be reasonable in
approving the same; provided, Tenant bears all of the costs for adapting such
package unit into the Building's energy management system and all costs of any
electrical risers and/or conduits required for the same. Tenant shall be solely
responsible for all code compliance, maintenance and repairs of any such package
unit Subject to the terms and conditions of Article 24 hereof, Landlord shall
furnish electric energy in according with Base Building electrical capacity
limited or loan limits for such estimated demand. Included in the Base Rent is
the Building's present HVAC electrical operating costs during normal business
hours and on business days.
(b) As long as Tenant is not in default beyond any applicable cure period
under any of the terms, covenants or conditions of this Lease on Tenant's part
to be observed or performed, Landlord at Landlord's expense, shall redistribute
or furnish electrical energy to or for the use of Tenant in the Premises for the
operation of the lighting fixtures and the electrical receptacles. There shall
be no specific charge by way of measuring such electrical energy on any meter or
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otherwise, as the charge for the service of redistributing or furnishing such
electrical energy is in addition to the Base Rent at the rate of $1.25 per
rentable square foot (the "Tenant Electric Charge"). If either the quantity or
character of electrical service is changed by the public utility corporation
supplying electrical service to the Building or is no longer available or
suitable for Tenant's requirements, no such change, unavailability or
unsuitability shall constitute an actual or constructive eviction in whole or in
part, or entitle Tenant to any abatement or diminution of rent, or relieve
Tenant from any of its obligations under this Lease, or impose any liability
upon Landlord, its agents, by reason of inconvenience or annoyance to Tenant, or
injury to or interruption of Tenant's business, or otherwise.
If, at any time after the date of this Lease, the rates at which Landlord
purchases electrical energy from the public utility corporation supplying
electrical service to the Building, fuel pass-along increases or decreases, or
any charges incurred or taxes payable by Landlord in connection therewith, shall
be increased or decreased, the Tenant Electric Charge shall be increased or
decreased, in an annual amount which shall fairly reflect the estimated increase
or decrease in the annual cost to Landlord of redistributing or furnishing
electrical service to Tenant under the provisions of this Article and (B)
hereof. If, within ten (10) days after any such demand, Landlord and Tenant
shall fail to agree upon the amount of such increase or decrease, in the Tenant
Electric Charge then, in lieu of such agreement, the estimated increase or
decrease, in the annual cost to Landlord of redistributing or furnishing
electrical service to Tenant hereunder shall be determined finally by an
independent electrical engineer selected by Landlord, who shall certify such
determination in writing to Landlord and Tenant. Following any such agreement or
determination, Landlord and Tenant shall enter into a written supplementary
agreement, in form satisfactory to Landlord, modifying this Lease, the Tenant
Electric Charge for the remainder of the demised term in an annual amount equal
to such estimated increase in the annual cost to Landlord of redistributing or
furnishing electrical service to Tenant, as so agreed or determined.
Any increase or decrease in the Tenant Electric Charge pursuant to the
provisions hereof, with respect to the period from the effective date of such
increase or decrease to the last day of the month in which such increase or
decrease shall be fixed by agreement or determination, shall be payable by
Tenant upon demand of Landlord if an increase or credited to Tenant as rental if
a decrease.
24. ADDITIONAL RENT. It is expressly agreed that Tenant will pay in
---------------
addition to the basic rent, provided in Paragraph 3 above, an additional rental
to cover Tenant's proportionate share, as hereinafter defined, of the increased
cost to Landlord, for each of the categories enumerated herein, over the "Base
Period Costs" (as hereinafter defined) for said categories.
(A) OPERATING COST ESCALATION. If the operating costs incurred for the
-------------------------
operation, maintenance and repair of the Building and Office Building Area for
any calendar year or proportionate share thereof during the Lease term shall be
greater than the Base Operating Costs (adjusted proportionately for periods less
than a Lease Year), then Tenant shall pay to Landlord, as additional rent, its
proportionate share, as hereinafter defined, of all such excess operating
18
<PAGE>
costs. Operating costs shall include, by way of illustration and not of
limitation, personal property taxes; management fees, labor, including all wages
and salaries; social security taxes, and other taxes which may be levied against
Landlord upon such wages and salaries; fees (including legal and accounting
fees); interest payments made by Landlord to the holder(s) of the permanent
mortgage on the Building in excess of 12% per annum of the principal amount of
the mortgage; costs incurred by the Landlord in compliance with Title III of the
Americans with Disabilities Act; supplies; repairs and maintenance; maintenance
and service contracts; painting; wall and window washing; laundry and towel
service; tools and equipment (which are not required to be capitalized for
federal income tax purposes); food service (if not otherwise noted); fire and
other insurance; trash removal and re-cycling; lawn care; snow removal and all
other items properly constituting direct operating costs according to standard
accounting practices (hereinafter collectively referred to as the "Operating
Costs"), but not including depreciation of Building or equipment; interest,
income or excess profits taxes; costs of maintaining the Landlord's corporate
existence, if a corporation; franchise taxes; any expenditures required to be
capitalized for federal income tax purposes, unless such expenditures are for
the purpose of reducing operating costs within the Building and Office Building
Area or unless same are made by reason of the laws and requirements of any
public authorities or of insurance agencies. The preceding list is for
definitional purposes only and shall not impose any obligation upon Landlord to
incur such expenses or provide such service. As used in this Paragraph 24(A),
the Base Operating Costs shall be those costs incurred during Calendar Year
1996.
(B) FUEL, UTILITIES AND ELECTRIC COST ESCALATION (hereinafter
--------------------------------------------
"Utility and Energy"). If the Utility and Energy Costs, including any fuel
surcharges or adjustments with respect thereto, incurred for water, sewer,
other utilities and heating, ventilating and air conditioning for the Building
and Office Building Area, for any lease year or proportionate part thereof,
during the lease term, shall be greater than the Base Utility and Energy Costs
(adjusted proportionately for periods less than a Lease Year), then Tenant shall
pay to Landlord as additional rent, its proportionate share, as hereinafter
defined, of all such excess Utility and Energy Costs. As used in this Paragraph
24(B), the Base Utility and Energy Costs shall be the Utility and Energy Costs
incurred (including fuel surcharges and/or adjustments) during the Calendar Year
1996.
(C) TAX ESCALATION. If the Real Estate Taxes for the Building and Office
--------------
Building Area at which the Demised Premises are located for any Lease Year or
proportionate part thereof, during the lease term, shall be greater than the
Base Real Estate Taxes (adjusted proportionately for periods less than a Lease
Year), then Tenant shall pay to Landlord as additional rent, its proportionate
share, as hereinafter defined, of all such excess Real Estate Taxes.
As used in this Paragraph 24(C) the words and terms which follow mean and
include the following:
(i) "Base Real Estate Taxes" shall mean those real estate taxes determined
by multiplying the lesser of the tax rate in effect between Calendar Year 1996,
and the Year in which the
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<PAGE>
Building is assessed as a fully completed building, times the assessment for the
Office Building Area and Building as a fully completed building.
(ii) "Real Estate Taxes" shall mean the property taxes and assessments
imposed upon the Building and the land upon which it stands, or upon the rent,
as such, payable to the Landlord. If due to a future change in the method of
taxation, any franchise, income or profit tax shall be levied against Landlord
in substitution for, or in lieu of, or in addition to, any tax which would
otherwise constitute a Real Estate Tax, such franchise, income or profit tax
shall be deemed to be a Real Estate Tax for the purposes hereof; conversely, any
additional real estate tax hereafter imposed in substitution for, or in lieu of,
any franchise, income or profit tax (which is not in substitution for, or in
lieu of, or in addition to, a Real Estate Tax as hereinbefore provided) shall
not be deemed a Real Estate Tax for the purposes hereof.
D. LEASE YEAR. As used in this Paragraph 24, Lease Year shall mean the
----------
twelve (12) month period commencing when possession is delivered and each twelve
(12) month period thereafter. Once the base costs are established, in the event
any lease period is less than twelve (12) months, then the Base Period Costs for
the categories listed above shall be adjusted to equal the proportion that said
period bears to twelve (12) months and Tenant shall pay to Landlord as
additional rent for such period, an amount equal to Tenant's proportionate
share, as hereinafter defined, of the excess for said period over the adjusted
base with respect to each of the aforesaid categories.
E. PAYMENT. At any time, and from time to time, after the establishment of
-------
the Base Period Costs for each of the categories referred to above, Landlord
shall advise the Tenant in writing of Tenant's proportionate share with respect
to each of the categories as estimated for the next twelve (12) month period
(and for each succeeding twelve (12) month period or proportionate part thereof
if the last period prior to the Lease's termination is less than twelve (12)
months) as then known to the Landlord, and thereafter, the Tenant shall pay as
additional rent, its proportionate share, as hereinafter defined, of these costs
for the then current period affected by such advise (as the same may be
periodically revised by Landlord as additional costs are incurred) in equal
monthly installments, such new rates being applied to any months for which the
rental shall have already been paid which are affected by the Operating Cost
Escalation and/or Utility and Energy Cost Escalation, and/or Tax Escalation
costs above referred to, as well as the unexpired months of the current period,
the adjustment for the then expired months to be made at the payment of the next
succeeding monthly rental, all subject to final adjustment at the expiration of
each Lease Year as defined in Subparagraph (D) hereof (or proportionate part
hereof, if the last period prior to the Lease's termination is less than twelve
(12) months). However, Landlord shall be reimbursed by Tenant monthly during the
first year of the lease term for additional Utility and Energy Cost Escalations
resulting from an increase in the monthly rate over the Base Utility Rate.
20
<PAGE>
Notwithstanding anything herein contained to the contrary, in the event the
last period prior to the Lease's termination is less than twelve (12) months,
the Base Period Costs shall be proportionately reduced to correspond to the
duration of said final period.
(F) BOOKS AND RECORDS. For the protection of Tenant, Landlord shall
-----------------
maintain books of account which shall be open to Tenant and its representatives,
at all reasonable times so that Tenant can determine that such Operating,
Utility, Energy and Tax Costs have, in fact, been paid or incurred. Any
disagreement with respect to any one or more of said charges if not
satisfactorily settled between Landlord and Tenant shall be referred by either
party to an independent certified public accountant to be mutually agreed upon,
and if such an accountant cannot be agreed upon, the American Arbitration
Association may be asked by either party to select an arbitrator, whose decision
on the dispute will be final and binding upon both parties, who shall jointly
share any cost of such arbitration. Pending resolution of the issue, Tenant
shall pay the amount established and billed by Landlord, all subject to final
adjustment once the issue is resolved as provided for above. In the event that
Tenant elects to audit Landlord's common area operating costs in accordance with
this clause, such audit must be conducted by an independent nationally
recognized accounting firm that is not being compensated by Tenant on a
contingency fee basis.
25. INTERRUPTION OF SERVICE OR USE. Interruption or curtailment of any
------------------------------
service maintained in the Building or at the Office Building Area, if caused by
force majeure, as hereinafter defined, shall not entitle Tenant to any claim
against Landlord or to any abatement in rent, and shall not constitute a
constructive or partial eviction.
If the Premises are rendered untenable in whole or in part, for a
period of ten (10) consecutive business days, by making of repairs, replacements
or additions, other than those made with Tenant's consent or caused by misuse or
neglect by Tenant, or Tenant's agents, servants, visitors or licensees, there
shall be a proportionate abatement of rent from and after said tenth consecutive
business day and continuing for the period of such untenantability. In no event
shall Tenant be entitled to claim a constructive eviction from the Premises
unless Tenant shall first have notified Landlord in writing of the condition or
conditions giving rise thereto, and, if the complaints be justified, unless
Landlord shall have failed within a reasonable time, after receipt of such
notice to remedy, or commence and proceed with due diligence to remedy, such
condition or conditions, all subject to force majeure, as hereinafter defined.
Any claim, demand, right or, defense by Tenant that arises out of this
Lease or the negotiations that preceded this Lease shall be barred unless Tenant
commences an action thereon, or interposes a defense by reason thereof, within
six (6) months after the date of the inaction, omission, event, or action that
gave rise to such claim, demand, right, or defense.
26. TENANT'S ESTOPPEL. Tenant shall, from time to time, on not less than
-----------------
ten (10) days' prior written request by Landlord, execute, acknowledge, and
deliver to Landlord a written statement substantially as set forth in Exhibit B
hereof, certifying that the Lease is unmodified
21
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and in full force and effect, or that the Lease is in full force and effect as
modified and listing the instruments of modification; the dates to which the
rents and charges have been paid; and, whether or not to the best of Tenant's
knowledge Landlord is in default hereunder, and if so, specifying the nature of
the default. It is intended that any such statement delivered pursuant to this
Paragraph 25 may be relied upon by a prospective purchaser of Landlord's
interest or mortgagee of Landlord's interest or assignee of any mortgage of
Landlord's interest.
27. HOLDOVER TENANCY. If Tenant holds possession of the Premises after the
----------------
term of this Lease, Tenant shall become a tenant from month to month under the
provisions herein provided, but at a monthly basic rental of two hundred (200%)
percent of the basic rent for the last month of the term or any renewal term,
payable in advance on the first day of each month, and such tenancy shall
continue until terminated by Landlord, or until Tenant shall have given to
Landlord a written notice at least sixty (60) days prior to the intended date of
termination, of intent to terminate such tenancy.
28. HVAC SYSTEM. The performance by Landlord of its obligations under
-----------
Paragraph 21(A) is subject to Tenant's compliance with the conditions of
occupancy and connected load established by Landlord. In no event shall Landlord
be responsible for the failure of any the HVAC systems if such failure results
from the occupancy of the Premises with more than an average of one person for
each 100 useable square feet or if Tenant installs and operates machines and
appliances, the installed electrical load of which when combined with the load
of all lighting fixtures, exceeds six watts per square foot of floor area in any
one room or other area. If use of the Premises exceeds the aforementioned
occupancy and electrical load criteria, or rearrangement of partitioning after
the initial preparation of the Premises, interferes with normal operation of the
HVAC System in the Premises or the Building results, necessitating changes in
the system servicing the Premises or the Building, such changes shall be made by
Landlord upon written notice to Tenant at Tenant's sole cost and expense.
29. RIGHT TO SHOW PREMISES/RIGHT TO RELOCATE. Landlord may show the
----------------------------------------
Premises to prospective purchasers and mortgagees; and, during the nine (9)
months prior to termination of this Lease, to prospective tenants, during
business hours on reasonable notice to Tenant. At any time during the term of
this Lease, on thirty (30) days prior written notice delivered to Tenant,
Landlord shall have the right to relocate Tenant to a different location within
the Building, provided Landlord, at its sole cost and expense, finishes the new
space in accordance with Tenant's Plans and further, provided that Landlord pays
for all relocation expenses incurred by Tenant in moving into a new space. Said
relocation shall be accomplished by Landlord with minimal interruption to
Tenant's business with no change in the rental rate and Tenant shall have the
right to make reasonable changes to its floor plan in order to properly utilize
such new space.
30. WAIVER OF TRIAL BY JURY. To the extent such waiver is permitted by
-----------------------
law, the parties waive trial by jury in any action or proceeding brought in
connection with this Lease or the Premises.
22
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31. LATE CHARGE. Anything in this Lease to the contrary notwithstanding,
-----------
at Landlord's option, Tenant shall pay a "Late Charge" of five (5%) percent of
any installment of rent or additional rent paid more than five (5) days after
the due date thereof, to cover the extra expense involved in handling delinquent
payments.
32. NO OTHER REPRESENTATIONS. No representations or promises shall be
------------------------
binding on the parties hereto except those representations and promises
contained herein or in some future writing signed by the party making such
representation(s) or promise(s).
33. QUIET ENJOYMENT. Landlord covenants that if, and so long as, Tenant
---------------
pays the rent, and any additional rent as herein provided, and performs the
covenants hereof, Landlord shall do nothing to affect Tenant's right to
peaceably and quietly have, hold and enjoy the Premises for the term herein
mentioned, subject to the provisions of this Lease.
34. TENANT'S INSURANCE. Tenant covenants to provide on or before the
------------------
Commencement Date a comprehensive policy of general liability insurance, with
contractual liability endorsements, naming the Landlord as an additional named
insured, insuring Tenant and Landlord against any liability commonly insured
against and occasioned by accident resulting from any act or omission on or
about the Premises and any appurtenances thereto. Such policy is to be written
by an insurance company qualified to do business in the State of New Jersey
reasonably satisfactory to Landlord. The policy shall be with limits not less
than two million and no/100 ($2,000,000.00) dollars in respect of any one
person, in respect of any one accident, and in respect of property damage. Said
limits shall be subject to periodic review and Landlord reserves the right to
increase said coverage limits, if in the reasonable opinion of Landlord, said
coverage becomes inadequate and is less than that commonly maintained by tenants
in similar buildings in the area by tenants making similar uses. At least
fifteen (15) days prior to the expiration or termination of any policy, the
Tenant shall deliver a renewal or replacement policy with proof of the payment
of the premium therefor.
35. PARAGRAPH HEADINGS. The paragraph headings in this Lease and
------------------
position of its provisions are intended for convenience only and shall not be
taken into consideration in any construction or interpretation of this Lease or
any of its provisions.
36. APPLICABILITY TO HEIRS AND ASSIGNS. The provisions of this
----------------------------------
Lease shall apply to, bind and inure to the benefit of Landlord and Tenant, and
their respective heirs, successors, legal representatives and assigns. It is
understood that the term "Landlord" as used in this Lease means only the owner,
a mortgagee in possession or a term lessee of the Building, so that in the event
of any sale of the Building or of any lease thereof, or if a mortgagee shall
take possession of the Premises, the Landlord named herein shall be and hereby
is entirely freed and relieved of all covenants and obligations of Landlord
hereunder accruing thereafter, and it shall be deemed without further agreement
that the purchaser, the term lessee of the Building, or the
23
<PAGE>
mortgagee in possession has assumed and agreed to carry out any and all
covenants and obligations of Landlord hereunder.
37. PARKING SPACES. Tenant's occupancy of the Demised Premises shall
--------------
include the use of eighty (80) parking spaces only, all of which will be
unassigned and unpoliced.
38. LANDLORD'S LIABILITY FOR LOSS OF PROPERTY. Tenant hereby covenants and
-----------------------------------------
agrees that all of its property in or about the Premises and Office Building
Area shall be left, stored and maintained at its sole risk and Landlord shall
not be liable for any loss of property (including loss of use resulting
therefrom) from any cause whatsoever, including but not limited to, theft or
burglary from the Demised Premises, and Tenant covenants and agrees to make no
claim for any such loss at any time.
39. BROKER. Tenant represents and warrants to Landlord that Jacobson,
------
Goldfarb & Tanzman Associates, L.L.C. is the sole broker with whom Tenant has
negotiated in bringing about this Lease and Tenant agrees to indemnify and hold
Landlord harmless from any and all claims of other brokers and expenses in
connection therewith arising out of in connection with the negotiation of or the
entering into this Lease by Landlord and Tenant.
40. PERSONAL LIABILITY. Notwithstanding anything to the contrary provided
------------------
in this Lease, it is specifically understood and agreed, such agreement being a
primary consideration for the execution of this Lease by Landlord, that there
shall be absolutely no personal liability on the part of the Landlord, its
partners, agents, employees, or its or their successors, assigns or any
mortgagee in possession (for the purposes of this Paragraph, collectively
referred to as "Landlord"), with respect to any of the terms, covenants and
conditions of the Lease and with respect to any act, omission or negligence of
Landlord, and that Tenant shall look solely to the equity of Landlord in the
Building for the satisfaction of each and every remedy of Tenant in the event of
any breach by Landlord of any of the terms, covenants and conditions of this
Lease to be performed by Landlord or any act, omission or negligence of
Landlord, such exculpation of liability to be absolute and without any
exceptions whatsoever.
41. NO OPTION. The submission of this Lease Agreement for examination
---------
does not constitute a reservation of, or option for, the Premises, and this
Lease Agreement becomes effective as a Lease Agreement only upon execution and
delivery thereof by Landlord and Tenant.
42. DEFINITIONS.
-----------
(A) PROPORTIONATE SHARE. Tenant's Proportionate Share, wherever that
-------------------
phrase is used, shall be 28.80%, which the parties agree is the percentage
allocated to the Premises as it relates to the Building as a whole is not meant,
nor shall it be construed, as a representation by Landlord of the rentable or
useable square footage of the Premises.
24
<PAGE>
Landlord shall also have the right to construct additional buildings in the
Office Building Area for such purposes as Landlord may deem appropriate, and
subdivide the lands for that purpose if necessary, and upon so doing, the Office
Building Area shall become the subdivided lot on which the Building in which the
Demised Premises is located. However, if any service provided for in Paragraph
24(A) or any utility provided for in Paragraph 24(B) is separately billed or
separately metered within the Building, then the square footage so billed or
metered shall be subtracted from the denominator (the Building's total of gross
square feet) and the Tenant's Proportionate Share for such service and/or
utility shall be separately computed, and the base for such item shall not
include any charges attributable to said square footage.
(B) COMMON FACILITIES. Common facilities shall mean the non-assigned
-----------------
parking areas; lobby; elevator(s); fire stairs; public hallways; public
lavatories; and all other general Building facilities that service all Building
tenants; air conditioning rooms; fan rooms; janitor's closets; electrical
closets; telephone closets; elevator shafts and machine rooms; flues; stacks;
pipe shafts and vertical ducts with their enclosing walls.
(C) FORCE MAJEURE. Force majeure shall mean and include those situations
-------------
beyond Landlord's control, including by way of example and not by way of
limitation, acts of God; accidents; repairs; strikes; shortages of labor,
supplies or materials; inclement weather; or where applicable, the passage of
time while waiting for an adjustment of insurance proceeds.
(D) BUILDING HOURS. As used in this Lease the "Building Hours" shall be
--------------
Monday through Friday, 8:00 a.m. to 6:00 p.m., excluding federal and state legal
holidays.
43. GENERAL PROVISIONS. The laws of the State of New Jersey shall govern
------------------
the validity, performance and enforcement of this Lease. If any lessor or
mortgagee of the Building or Office Building Area shall require any
modification(s) of this Lease, Tenant shall, at Landlord's request, promptly
execute and deliver to Landlord such instruments effecting such modification(s)
as Landlord shall require, provided that such modification(s) do not adversely
affect in any material respect any of Tenant's rights hereunder. Any
apportionment or proration of basic rent or additional rent to be made under
this Lease shall be computed on the basis of a 360 day year, with 12 months of
30 days each. If any provision of this Lease or the application thereof to any
person or circumstance shall, for any reason and to any extent, be invalid or
unenforceable, the remainder of this Lease and the application of that provision
to other persons or circumstances shall not be affected but rather shall be
enforced to the extent permitted by law. This Lease shall be construed without
regard to any presumption or other rule requiring construction against the party
causing this Lease to be drafted. Each covenant, agreement, obligation or other
provision of this Lease on Tenant's part to be performed, shall be deemed and
construed as a separate and independent covenant of Tenant, not dependent on any
other provision of this Lease. The failure of either party to insist in any one
or more instances upon the strict performance of any one or more provisions of
this Lease, or to exercise any right, remedy or election herein contained, shall
not be construed as a waiver or relinquishment for the future of the performance
of such one or more provisions of this Lease or of the right to exercise such
25
<PAGE>
election, but the same shall continue and remain in full force and effect with
respect to any subsequent breach, act or omission.
Tenant acknowledges and agrees with Landlord that, except as may be
expressly set forth elsewhere in this Lease, neither Landlord, nor any employee
or Landlord, nor other party claiming to act on Landlord's behalf, has made any
representation, warranty, estimation, or promise of any kind or nature
whatsoever relating to the physical condition of the Building housing the
Premises or the land under the Building, including, by way of example only, the
fitness of the Premises for Tenant's intended use or the actual dimensions of
the Premises or Building.
44. NOTICES. Any notice by either party to the other shall be in writing
-------
and shall be deemed to have been duly given only if delivered personally or sent
by Federal Express or a like service, or by registered mail or certified mail in
a postpaid envelope addressed, if to Tenant, at the above described Building; if
to Landlord, at Landlord's address as set forth above; or, to either at such
address as Tenant or Landlord, respectively, may designate in writing. Notice
shall be deemed to have duly given, if delivered personally, on delivery
thereof, and if mailed, upon the 3rd day after the mailing thereof.
45. TENANT'S INDEMNIFICATION.
-------------------------
Anything in this Lease to the contrary notwithstanding, and without
limiting the Tenant's obligation to provide insurance pursuant to this Lease,
the Tenant covenants and agrees that it will indemnify, defend and save harmless
the Landlord against and from all liabilities, obligations, damages, penalties,
claims, costs, charges and expenses ("Damages"), including, without limitation,
reasonable attorneys' fees, which may be imposed upon or incurred by Landlord by
reason of any of the following occurring during the term of this Lease:
(i) any matter, cause or thing occurring in Demised Premises or any
part thereof;
(ii) any negligence or willful misconduct on the part of the Tenant or
any of its agents, contractors, servants or employees;
(iii) any failure on the part of Tenant to perform or comply with any of
the covenants, agreements, terms or conditions contained in this
Lease on its part to be performed or complied with.
Notwithstanding anything to the contrary contained herein, the foregoing
indemnification and hold harmless obligations shall not apply where the Damages
are covered by Landlord's insurance or where the Damages arise out of the
negligence or willful misconduct of Landlord, its agents, servants or employees.
The indemnity specified herein shall be insured by Tenant's liability policy
required to be maintained by Tenant pursuant to this Lease. Landlord shall
promptly notify Tenant of any such claim asserted against it and shall promptly
sent to Tenant
26
<PAGE>
copies of all papers or legal process served upon it in connection with any
action or proceeding brought against Landlord by reason of any such claim.
Landlord shall indemnify and hold harmless Tenant against and from any
liabilities, damages, penalties, claims, costs and expenses, paid, suffered or
incurred as a result of a willful breach by Landlord or Landlord's agents or
employees of any covenant or condition of this Lease on the part of Landlord to
be complied with or the willful negligence or willful misconduct of Landlord, or
Landlord's agents, contractors or employees.
46. AFTER-HOURS USE. Tenant shall be entitled to make use of the
---------------
HVAC System beyond the Building Hours, at Tenant's sole cost and expense. During
the first two (2) lease years of this Lease, Landlord's charge for overtime HVAC
services shall be $45.00 per hour. Following the first two (2) lease years,
Tenant shall pay Landlord's then established charge therefor. In no event shall
the Tenant pay less than the sum indicated above per hour for such aforesaid
overtime use.
47. RENEWAL OPTION. Tenant is hereby granted one option to renew
--------------
this Lease for one period upon the following terms and conditions:
(A) At the time of the exercise of the option to renew and at the time of
said renewal, the Tenant shall not be in default in accordance with the
terms and provisions of this Lease, and shall be in possession of the
Premises pursuant to this Lease.
(B) Notice of the exercise of the option shall be sent to the Landlord in
writing at least six (6) months before the expiration of the immediately
preceding term.
(C) The renewal term shall be for a period of three (3) years to commence
at the expiration of the immediately preceding term, and all of the terms
and conditions of this Lease, other than the basic rent, shall apply during
any such renewal term.
(D) Subject to the last sentence of this paragraph, the annual basic rent
to be paid during the renewal term shall equal the fair marker rental value
of the Premises if the same were available for lease to the public. If the
parties are unable to agree on the fair marker rental value of the
Premises, the parties shall each appoint one appraiser who shall in turn
appoint a third independent appraiser and the determination of said three
appraisers shall be binding on the parties. In no event, however, shall the
annual basic rent payable by Tenant during the renewal period be less than
the annual non-discounted annual basic rent paid by Tenant during the
immediately preceding term.
27
<PAGE>
48. SIGNS. Tenant may use as many listings on the interior building
-----
directory as Tenant reasonably requires. Further, Tenant may have its name
and/or logo, at its expense, affixed to any exterior monument sign, if one is
provided by Landlord, in such form, size, style and location as shall be
approved by the Landlord, which approval shall not be unreasonably withheld.
49. SUBMISSION NOT BINDING. Submission by the Landlord of the within
----------------------
Lease for execution by the Tenant shall confer no rights nor impose any
obligations on either party, unless and until both the Landlord and Tenant shall
have executed this Lease and duplicate originals thereof shall have been
delivered to the respective parties.
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals the day and year first above written.
HOCROFT ASSOCIATES, LANDLORD
Attest: By: S/K Hocroft Corp., General Partner
/s/ Mark Schenkman By: /s/ Eugene Schenkman
- ------------------------------- ----------------------------------
Mark Schenkman. Asst. Sec'y Eugene Schenkman, Vice President
Attest: DSET CORPORATION, TENANT
/s/ Diane F. Romano By:/s/ Alex Kuo
- ------------------------------- ---------------------------------
EXECUTIVE VICE PRESIDENT
28
<PAGE>
HOCROFT ASSOCIATES
981 US Highway 22
PO Box 6872
Bridgewater, NJ 08807
Tel. (908) 725-8100 Fax (908) 725-7127
August 16, 1996
Mr. Jeffrey Schneider
DSET Corporation
l0ll US Highway 22
Suite 100
Bridgewater NJ 08807
RE: Lease dated November 20, 1995 between
Hocroft Associates and DSET Corporation
1011 US Highway 22
Bridgewater, New Jersey
Dear Jeff:
Pursuant to our telephone conversation, Article 46 of the above-captioned Lease
is hereby amended to reduce the HVAC after hours charge to $35 per hour from $45
per hour charge set forth in the Lease, commencing August 1, 1996 and expiring
December 14, 1997.
All other terms and conditions of the Lease remain in full force and effect.
Very truly yours,
HOCROFT ASSOCIATES
By: S/K Hocroft Corp., General Partner
By: /s/ Jeffrey Persky
-----------------------------
Jeffrey Persky
JP/ms
<PAGE>
HOCROFT ASSOCIATES
981 US Highway 22
P.O. Box 6872
Bridgewater, NJ 08807
Tel. (908) 725-8100 Fax (908) 725-7127
April 8, 1997
Mr. Paul Lipari
DSET Corporation
1011 Route 22
Bridgewater, NJ 08807
Re: Additional space at l0ll Route 22 3rd floor
Dear Paul:
Thank you for your prompt return of the signed First Lease Amendment. Enclosed
please find two fully executed copies for your files.
Cordially yours,
HOCROFT ASSOCIATES
By: S/K Hocroft Corp., General Partner
By: /s/ Jeffrey Persky
-----------------------------
Jeffrey Persky
JP:ep
Enclosures
<PAGE>
FIRST LEASE AMENDMENT
---------------------
THIS AMENDMENT is made and entered into this 7 day of April, 1997, by and
between
HOCROFT ASSOCIATES, whose address is 981 Route 22, P.O. Box 6872,
Bridgewater, New Jersey 08807 (the "Landlord"),
and
DSET CORPORATION, whose address is 1011 Route 22, Bridgewater, New Jersey
08807, (the "Tenant").
W I T N E S S E T H:
WHEREAS, the parties hereto entered into a Lease dated November 20, 1995
(the "Lease") for 15,857 rentable square feet of office space on the 1st and 2nd
floors of the building located at 1011 Route 22, Bridgewater, New Jersey 08807
(the "Premises"), and
WHEREAS, Tenant now desires to lease an additional 3,898 rentable square
feet of office space on the 3rd floor of the building at 1011 Route 22,
Bridgewater, New Jersey 08807 ("Additional Space"), as is shown on "Exhibit A-
lA" annexed hereto.
NOW, THEREFORE, in consideration of the Lease, the parties hereto covenant
and agree that the Lease is amended as follows:
1. The total square footage of the Premises under the Lease is
increased by 3,898 square feet for a total of 19,755 square feet.
2. The Tenant's Proportionate Share of the rentable area, as defined
in Article 42A, shall be increased by 7.08% to 35.88%.
3. The Lease Term as set forth in the Lease dated November 20, 1995
is hereby confirmed to provide that the Lease Term for the original space
shall terminate on May 31, 1999 and the Term for the Additional Space shall
commence on May 15, 1997 and terminate on May 31, 1999.
4. The Tenant shall pay to the Landlord during the Additional Space
Term additional Basic Rent for the Additional Space, as follows:
(a) During the lease term, $131,313.87 payable in equal monthly
installments of $5,359.75, except for the period May 15-31, 1997 which
shall be $2,679.88
<PAGE>
payable in such coin or currency of the United States of America as at the
time of payment shall be legal tender for the payment of public and private
debts. The Basic Rent for the Additional Space, shall be payable in advance
as of the first day of each calendar month, as noted herein, and in
accordance with the provisions of the Lease herein set forth.
5. Parking Spaces as noted in Article 37 shall be increased by 15
spaces for a total of 95 parking spaces.
6. Tenant acknowledges that it accepts the Additional Space in its
"as is" condition.
All of the remaining terms and conditions of the Lease shall remain in full
force and effect as if more particularly set forth herein unaffected or
restricted by any other provisions of this First Lease Amendment.
IN WITNESS HEREOF, the parties have hereunto set their hands and seals the
day and year first above written.
HOCROFT ASSOCIATES, Landlord
By S/K Hocroft Corp., General Partner
Witness:
___________________ By:/s/ Eugene Schenkman
------------------------------------
Eugene Schenkman, Vice President
DSET CORPORATION, Tenant
Attest:
___________________ By:/s/ Paul Lipari
------------------------------------
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT dated as of the 1st day of October, 1996 (the "Effective
Date") by and between DSET Corporation, a New Jersey corporation with its
principal place of business at 1011 Rt. 22 West, Bridgewater, New Jersey 08807
(the "Company"), and S. Daniel Shia (the "Executive").
WITNESSETH:
WHEREAS, the Company desires to secure the employment of the Executive in
accordance with the provisions of this Agreement; and
WHEREAS, the Executive desires and is willing to accept employment with the
Company in accordance herewith.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Term. The Company hereby agrees to employ the Executive and the
----
Executive hereby agrees to serve the Company pursuant to the terms and
conditions of this Agreement as President and Chief Executive Officer of the
Company for a term commencing on the Effective Date and expiring on the fifth
anniversary thereof. Such term shall be automatically renewed for successive
one-year terms, unless either party gives notice to the other of the intent to
terminate this Agreement at the end of the initial term hereunder or a
subsequent one-year term. Such notice shall be given at least 180 days prior to
the end of the applicable term hereunder.
2. Positions and Duties. The Executive's duties hereunder shall be those
--------------------
which shall be prescribed from time to time by the Board of Directors in
accordance with the bylaws of the Company and shall include such executive
duties, powers and responsibilities as customarily
<PAGE>
attend the office of President and Chief Executive Officer of a company
comparable to the Company. The Executive will hold, in addition to the office of
President and Chief Executive Officer of the Company, such other executive
offices in the Company and its subsidiaries to which he may be elected,
appointed or assigned by the Board of Directors from time to time and will
discharge such executive duties in connection therewith. During the employment
period, the Executive's position (including status, offices and reporting
requirements), authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned immediately preceding the Effective Date. The Executive
shall devote his full working time, energy and skill (reasonable absences for
vacations and illness excepted), to the business of the Company as is necessary
in order to perform such duties faithfully, competently and diligently;
provided, however, that notwithstanding any provision in this Agreement to the
contrary, the Executive shall not be precluded from devoting reasonable periods
of time required for serving as a member of boards of companies or organizations
which have been approved by the Board of Directors of the Company so long as
such memberships or activities do not interfere with the performance of the
Executive's duties hereunder.
3. Compensation. During the term of this Agreement, the Executive shall
------------
receive, for all services rendered to the Company hereunder, the following
(hereinafter referred to as "Compensation"):
(a) Base Salary. For the term hereof, the Executive shall be
-----------
compensated by an annual base salary equal to two hundred thousand dollars
($200,000). Such salary shall be paid in accordance with the Company's then
current payroll schedule. Such base salary shall be reviewed, and any revisions
in the amount thereof shall be determined, by the Board of Directors or
2
<PAGE>
a compensation committee formed by the Board of Directors (the "Compensation
Committee") at the end of each calendar year during the term hereof. This
provision shall be effective October 1, 1996. Such compensation shall be pro
rated for any partial calendar year during the term hereof.
(b) Bonuses. The Executive shall be eligible for and may receive
-------
bonuses as determined by the Board of Directors or, if formed, the Compensation
Committee thereof. The Company shall pay to the Executive an annual bonus in
accordance with the following formula:
Bonus Amount = (Base Bonus Amount) x (Actual year-end pre-tax profit/Budgeted
year-end pre-tax profit)
where Base Bonus Amount is 50% of the applicable annual salary of the Executive
and Budgeted year-end pre-tax profit is determined by the Board of Directors or,
if formed, the Compensation Committee thereof. This provision shall be
effective October 1, 1996. Such bonus shall be pro rated for any partial
calendar year during the term hereof.
(c) Incentive Compensation. The Executive shall be eligible for
----------------------
awards from the Company's incentive compensation plans, including without
limitation any stock option plans, applicable to high level executive officers
of the Company or to key employees of the Company or its subsidiaries, in
accordance with the terms thereof and on a basis commensurate with his position
and responsibilities. The Company hereby grants to the Executive stock options
to purchase 240,000 shares of Common Stock in accordance with the Company's
stock option plan at an exercise price of $3.27 per share. Such options shall
vest over a four-year period, with 50% vesting on the second anniversary of the
date hereof and 25% vesting on each anniversary thereafter until fully vested.
(d) Benefits. The Company shall provide the Executive and his
--------
"dependents," as that term may be defined under the applicable benefit plan(s)
of the Company, with a family health insurance plan, which plan shall be the
same as that provided to the other members of
3
<PAGE>
senior management of the Company. The Company agrees to pay all premiums in
connection with such plan. The Company also agrees to provide the Executive with
a life insurance policy in the amount of $50,000, with the beneficiary to be
selected by the Executive. The Company agrees to pay all premiums in connection
with such life insurance. To the extent eligible thereunder, the Executive shall
be included in any and all plans, programs and policies which provide benefits
for employees and their dependents. Such plans, programs and policies may
include health care insurance, 401(k), long-term disability plans, life
insurance, supplemental disability insurance, supplemental life insurance,
holidays and other similar or comparable benefits made available to the
Company's employees.
(e) Expenses. Subject to and in accordance with the Company's
--------
policies and procedures, the Executive hereby is authorized to incur, and, upon
presentation of itemized accounts, shall be reimbursed by the Company for, any
and all reasonable and necessary business-related expenses, which expenses are
incurred by the Executive on behalf of the Company or any of its subsidiaries.
4. Absences. The Executive shall be entitled to vacations, absences
--------
because of illness or other incapacity, and such other absences, whether for
holiday, personal time, or for any other purpose, as set forth in the Company's
employment manual or current procedures and policies, as the case may be, as
same may be amended from time-to-time.
5. Termination. In addition to the events of termination and expiration
-----------
of this Agreement provided for in Section 1 hereof, the Executive's employment
hereunder may be terminated only as follows:
4
<PAGE>
(a) Without Cause. The Company may terminate the Executive's
-------------
employment hereunder without cause only upon action by the Board of Directors,
and upon no less than thirty (30) days prior written notice to the Executive.
The Executive may terminate employment hereunder without cause upon no less than
thirty (30) days prior written notice to the Company.
(b) For Cause, by the Company. The Company may terminate the
-------------------------
Executive's employment hereunder for cause immediately without notice to the
Executive. "Cause" for termination shall include the following conduct of the
Executive:
(1) Conviction of, or pleading guilty or no contest to, a felony
or crime involving moral turpitude;
(2) Material breach of any provision of this Agreement or any
applicable non-competition, non-disclosure or inventions assignment agreement by
the Executive, including without limitation the Noncompetition, Nondisclosure
and Developments Agreement dated December 21, 1995, a copy of which is attached
hereto (the "Noncompetition Agreement"), which breach shall not have been cured
by the Executive within thirty (30) days of receipt of written notice of said
breach;
(3) Unjustified refusal to perform the duties assigned to the
Executive under or pursuant to this Agreement or failure to perform such duties
diligently (other than merely failing to meet a business plan or projections);
or
(4) Commission of fraud, embezzlement, misappropriation of
funds, breach of fiduciary duty or other act of dishonesty against the Company
resulting or intended to result, directly or indirectly, in gain or personal
enrichment of the Executive at the expense of the Company.
5
<PAGE>
(c) Death. The period of active employment of the Executive hereunder
-----
shall terminate automatically in the event of his death.
(d) Disability. In the event that the Executive shall be unable to
----------
perform duties hereunder for a period of one hundred twenty (120) consecutive
calendar days by reason of disability as a result of illness, accident or other
physical or mental incapacity or disability, the Company may, in its discretion,
by giving written notice to the Executive, terminate the Executive's employment
hereunder as long as the Executive is still disabled on the effective date of
such termination.
(e) Mutual Agreement. This Agreement may be terminated at any time by
----------------
mutual agreement of the Executive and the Company.
(f) For Good Reason, by the Executive. The Executive may terminate
---------------------------------
employment hereunder for good reason immediately and with prompt notice to the
Company. "Good reason" for termination by the Executive shall include the
following conduct of the Company:
(1) Failure to maintain the Executive in a position commensurate
with that referred to in Section 2 of this Agreement;
(2) The assignment to the Executive of any duties inconsistent
with the Executive's position, authority, duties or responsibilities as
contemplated by Section 2 of this Agreement, or any other action by the Company
which results in a diminution of such position, authority, duties or
responsibilities, excluding for this purpose any isolated action not taken in
bad faith and which is promptly remedied by the Company after receipt of notice
thereof given by the Executive; or
6
<PAGE>
(3) Material failure of the Company to pay the agreed upon
compensation hereunder to the Executive.
It is understood and agreed that it shall not be "good reason"
for termination by the Executive pursuant to clauses (1) and/or (2) above if a
new President and Chief Executive Officer is hired by the Company and such
hiring is approved by the Executive in his capacity as a director of the
Company.
6. Compensation in the Event of Termination. In the event that the
----------------------------------------
Executive's employment pursuant to this Agreement terminates prior to the end of
the term of this Agreement for a reason provided in Section 5 hereof, the
Company shall pay the Executive compensation as set forth below:
(a) By Company For Cause or by Executive Without Good Reason. In the
--------------------------------------------------------
event that (i) the Company shall terminate the Executive's employment hereunder
for cause pursuant to Section 5(b) hereof or (ii) the Executive shall terminate
his employment hereunder without good reason pursuant to Section 5(f) hereof,
the Company shall not be obligated to pay the Executive any compensation except
for salary and other Compensation which may have been earned and are due and
payable but which have not been paid as of the date of termination.
(b) By Executive for Good Reason or By Company Without Cause. In the
--------------------------------------------------------
event that the Executive's employment hereunder is terminated (i) by the
Executive for good reason pursuant to Section 5(f) hereof or (ii) by the Company
without cause, then the Company shall continue to pay or provide, as applicable,
the following compensation to the Executive:
(1) Annual base salary as set forth in Section 3(a) hereof; and
7
<PAGE>
(2) Continuing coverage, but only to the extent required by law,
for the Executive and his eligible dependents under all of the Company's benefit
plans, programs and policies in effect as of the date of termination.
Such compensation shall continue to be paid or provided, as
applicable, in the same manner as before termination, and for a period of two
years after the date of termination of employment. The Executive shall not be
required to mitigate the amount of any payment provided for in this Section 6(b)
by seeking employment or otherwise, nor shall any amounts received from
employment or otherwise by the Executive offset in any manner the obligations of
the Company hereunder.
7. Termination Obligations. Except as otherwise set forth in Section 6
-----------------------
hereof, in the event of expiration or early termination of this Agreement as
provided herein, neither the Company nor the Executive shall have any remaining
duties or obligations hereunder except that:
(a) The Company shall:
(1) Pay the Executive's accrued salary, plus interest thereon,
and any other accrued benefits under Section 3 hereof;
(2) Reimburse the Executive for expenses already incurred in
accordance with Section 3(e) hereof; and
(3) To the extent required by law, pay or otherwise provide for
any benefits, payments or continuation or conversion rights in accordance with
the provisions of any benefit plan of which the Executive or any of his
dependents is or was a participant.
(b) The Executive shall remain bound by the terms of any applicable
non-competition, non-disclosure or inventions assignment agreement, including
without limitation
8
<PAGE>
the Noncompetition Agreement; provided, however, in the event the Executive's
employment hereunder is terminated (i) by the Executive for good reason pursuant
to Section 5(f) hereof or (ii) by the Company without cause, the Noncompetition
Agreement shall be effective for a period equal to the period during which the
Company agrees to pay severance to the Executive pursuant to Section 6(b)
hereof.
8. Resolution of Differences Over Breaches of Agreement. Except as
----------------------------------------------------
otherwise provided herein, any controversy or claim arising out of, or relating
to, this Agreement, or the breach hereof, shall be reviewed in the first
instance in accordance with the Company's internal review procedures, if any,
with recourse thereafter to the courts having jurisdiction thereof.
9. Waiver. The waiver by a party hereto of any breach by the other party
------
hereto of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach by a party hereto.
10. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly assume its obligations
hereunder. This Agreement shall inure to the benefit of and be enforceable by
the Executive or his legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. The Executive may not
assign any of his duties, responsibilities, obligations or positions hereunder
to any person and any such purported assignment by him shall be void and of no
force and effect.
11. Notices. Any notices required or permitted to be given under this
-------
Agreement shall be sufficient if in writing, and if personally delivered or when
sent by first class certified or registered mail, postage prepaid, return
receipt requested--in the case of the Executive, to his
9
<PAGE>
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth above, in care of the
Board of Directors--or to such other person or at such other address with
respect to each party as such party shall notify the other in writing.
12. Construction of Agreement.
-------------------------
(a) Governing Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the internal laws of the
State of New Jersey without reference to its principles regarding conflicts of
law.
(b) Severability. In the event that any one or more of the provisions
------------
of this Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality or enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several paragraphs of
--------
this Agreement are inserted for convenience of reference only and shall not
constitute a part of this Agreement.
13. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties concerning the Executive's employment and all promises, representations,
understandings, arrangements and prior agreements on such subject are merged
herein and superseded hereby. The provisions of this Agreement may not be
amended, modified, repealed, waived, extended or discharged except by an
agreement in writing signed by the party against whom enforcement of any
amendment, modification, repeal, waiver, extension or discharge is sought. No
person acting other than pursuant to a resolution of the Board of Directors
shall have authority on behalf of the Company to agree to amend, modify, repeal,
waive, extend or discharge any provision of this
10
<PAGE>
Agreement or anything in reference thereto or to exercise any of the Company's
rights to terminate or to fail to extend this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and attested by its duly authorized officer, and the Executive has set his hand,
all as of the day and year first above written.
DSET CORPORATION
By: /s/ Bruce R. Evans
-----------------------------------------
Bruce R. Evans, on behalf of the
Board of Directors
EMPLOYEE
/s/ S. Daniel Shia
----------------------------------------------
S. Daniel Shia
Address: 105 Old Driftway
------------------------------------
Lebanon, NJ 08833
------------------------------------
------------------------------------
11
<PAGE>
EXHIBIT 10.6
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this "Amendment") made
effective as of the 10th day of January 1998 (the "Effective Date") by and
between DSET Corporation, a New Jersey corporation, with its principal place of
business at 1011 Rt. 22 West, Bridgewater, New Jersey 08807 (the "Company"), and
S. Daniel Shia (the "Executive").
WITNESSETH:
WHEREAS, the Company and the Executive are parties to that certain
Employment Agreement dated as of October 1, 1996 (the "Employment Agreement");
and
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement to reflect the mutually agreed upon revised terms of employment of the
Executive in accordance with the provisions of this Amendment; and
WHEREAS, the Executive desires and is willing to accept continued
employment with the Company in accordance herewith.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions.
-----------
Capitalized terms used herein, but not otherwise defined, shall have
the meanings ascribed to them in the Employment Agreement.
2. Amendments.
----------
(a) All references to "President and Chief Executive Officer" in the
Employment Agreement shall be amended to refer to "Chairman of the Board and
Chief Technical Officer."
<PAGE>
(b) The last sentence of Section 3(c) of the Agreement shall be amended
in its entirety to provide as follows: "Such options shall vest over a four-year
period, with 25% vesting on each anniversary of the date hereof until fully
vested."
(c) The address of the Executive for purposes of Section 11 of the
Agreement shall be 5553 Perugia Circle, San Jose, California 95138.
3. Reference to and Effect on the Employment Agreement.
---------------------------------------------------
(a) On and after the Effective Date, each reference to "this
Agreement", "hereunder", "hereof", "herein", or words of like import shall mean
and be a reference to the Employment Agreement as amended hereby. No reference
to this Amendment need be made in any instrument or document at any time
referring to the Employment Agreement, a reference to the Employment Agreement
in any of such instrument or document to be deemed to be a reference to the
Employment Agreement as amended hereby.
(b) Except as expressly amended by this Amendment, the Employment
Agreement shall remain in full force and effect.
4. Governing Law.
-------------
This Amendment shall be governed by and its provisions construed and
enforced with the internal laws of the State of New Jersey without reference to
its principles regarding conflicts of laws.
5. Counterparts.
------------
This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute a
single instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed
and attested by its duly authorized officers, and the Executive has set his
hand, all as of the day and year first above written.
DSET CORPORATION
By: /s/ William P. McHale, Jr.
-----------------------------------
William P. McHale, Jr., President
and Chief Executive Officer
EXECUTIVE
/s/ S. Daniel Shia
---------------------------------------
S. Daniel Shia
-3-
<PAGE>
EXHIBIT 10.8
DSET CORPORATION
1011 US Route 22 West
Bridgewater, NJ 08807
Phone (908) 526-7500
Fax (908) 526-3435
Personal & Confidential
January 3, 1997
Mr. William P. McHale, Jr.
12R N. Commons Rd.
Lincoln, MA 01773
Dear Bill:
It is with great pleasure that I extend an invitation to you to join our senior
management team as President/Chief Operating Officer (COO). In this capacity,
you will be actively involved in developing the overall business strategy and be
responsible for the company's sales, marketing, product and customer support
activities to support DSET's growth objectives. You will be reporting to me,
CEO of DSET, directly.
Salary and Bonus
The cash component of your compensation plan will be paid monthly at a rate of
$13,333 with a performance bonus of up to 50% of salary based on your individual
and company's performance. Such bonus, if any, will be payable within 60 days
after the end of each fiscal year. Such bonus will be pro-rated for 1997.
Incentive Stock Options
You will receive upon your first day of employment, Incentive Stock Options
(ISOs) to purchase approximately 2.5% (around 150,000, to be confirmed with our
CFO) shares of the Company's common stock. The exercise price of these ISOs
will be $4.93 per share, if you accept our offer before January 6, 1997. These
options shall vest over a four-year period in accordance with DSET's Incentive
Stock Option Plan.
Change of Control
In the event of a merger, acquisition, or major change of ownership which causes
a change of control in DSET, either (1) you will be provided with an offer for
continued employment at your current salary, bonus and substantially equivalent
substitute options (subject to applicable conversion rates), or (2) in the event
that the acquiring entity decides that your services are not required, then all
of your ISO and NQSO options will vest immediately and shall be exercisable,
including without limitation through a cashless exercise thereof, for a
reasonable period (not less than 30 days) prior to the applicable merger or
acquisition. You will also be provided a
<PAGE>
severance package equal to six months of salary. The Company agrees to promptly
provide you with notice of the execution of any agreement which could cause a
change of control in DSET.
Severance Benefits
In the event DSET terminates your employment for any reason other than Change of
Control or good cause, DSET will provide you with a severance package up to six
months of salary. In the event that you accept a new position during that 6
months period, this severance benefit will be terminated as of the date you
accepted the position. For purposes of this agreement "good cause" shall mean
(i) your failure to perform your duties or to follow reasonable directions of
the CEO of DSET and/or the Board of Directors of DSET within 10 business days
after receipt of written notice by you of such failure, (ii) willful misconduct
by you in connection with your employment, including but not limited to:
misappropriating any funds or property of the Company; attempting to willfully
obtain any personal profit from any transaction in which you have an interest
which is adverse to the interests of the Company; or any other intentional act
or omission which substantially impairs the Company's ability to conduct its
ordinary business in its usual manner, (iii) your conviction of, or plea of nolo
contendere to, any crime constituting a felony under the laws of the United
States or any State thereof, or any crime constituting a misdemeanor under any
such law involving moral turpitude, (iv) your material breach of the
Noncompetition, Nondisclosure and Developments Agreement, which breach you have
failed to cure within 10 business days after receipt of written notice by you of
such breach.
Non-Qualified Stock Options (NQSO)
NQSO will be provided in accordance with company policy.
Relocation
DSET will provide a Relocation Package in the amount of $50,000 to cover
transportation of household goods, temporary living expenses, commuting, closing
costs, income taxes, and all other costs connected with the relocation. In
addition upon request, DSET will provide a temporary bridge loan up to $150,000
when you begin to build your new home in New Jersey, using its available line of
credit. The cost and interest of such a loan arrangement will be paid by you as
a deduction from salary.
Other Benefits
Other fringe benefits, including medical, insurance, and 401k will be offered in
accordance with DSET's company policy.
Non-Compete
The execution of a Noncompetition, Nondisclosure and Developments Agreement is a
condition to your employment by DSET.
DSET is an equal opportunity employer and is committed to recruit, hire,
transfer, assign, promote, and train employees on the basis of the individual
qualifications for each job opening, and with respect to all matters affecting
employment, compensation and advancement will not discriminate against any
employee of applicant for employment because of race, creed, color,
<PAGE>
sex, age, handicap, national origin, sexual orientation, or political
affiliation. You understand and agree that your employment with the Company is
at will.
Bill, it gives me great pleasure to confirm this offer of employment on behalf
of DSET. This position is vital to the future success of DSET. I look forward
to your becoming a key part of our management team. If the foregoing is
acceptable, please execute one copy and return it to me.
Sincerely yours,
/s/ S. Daniel Shia
----------------------------
Dan Shia
CEO/President
ACCEPTED
/s/ William P. McHale, Jr.
- --------------------------
William P. McHale, Jr.
Date: January 4, 1997
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 2, 1998,
relating to the financial statements of DSET Corporation, which appears in
such Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus. However, it should
be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."
Price Waterhouse LLP
Morristown, New Jersey
February 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
FINANCIAL STATEMENTS AUDITED BY PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS,
INCLUDING THE BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997 AND THE RELATED
STATEMENTS OF INCOME, OF CHANGES IN CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) AND OF CASH FLOWS FOR THE THREE YEARS
ENDED DECEMBER 31, 1997 AND NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,081,846
<SECURITIES> 1,123,795
<RECEIVABLES> 7,689,946
<ALLOWANCES> 125,504
<INVENTORY> 0
<CURRENT-ASSETS> 11,172,647
<PP&E> 2,493,098
<DEPRECIATION> 932,150
<TOTAL-ASSETS> 13,315,228
<CURRENT-LIABILITIES> 4,896,993
<BONDS> 0
11,603,996
0
<COMMON> 1,661,971
<OTHER-SE> (9,999,997)
<TOTAL-LIABILITY-AND-EQUITY> 13,315,228
<SALES> 19,364,787
<TOTAL-REVENUES> 19,364,787
<CGS> 4,678,839
<TOTAL-COSTS> 11,166,427
<OTHER-EXPENSES> 22,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,194
<INCOME-PRETAX> 3,646,002
<INCOME-TAX> 1,177,396
<INCOME-CONTINUING> 2,468,606
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,468,606
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.30
</TABLE>
