<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------- ----------
</TABLE>
COMMISSION FILE NUMBER 0-24544
CYBERGUARD CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
FLORIDA 65-0510339
(State or jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
2101 WEST CYPRESS CREEK ROAD, FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (305) 974-1700
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /X/ No
------
The aggregate market value of voting stock held by nonaffiliates as of the
Registrant was approximately $46,979,789 (based upon the closing sale price of
$8.375 per share on the Nasdaq National Market System on September 26, 1996).
As of September 26, 1996, 6,753,280 shares of the Registrant's $0.01 par
value Common Stock were outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART II
ITEM 1. BUSINESS
OVERVIEW
CyberGuard Corporation (the "Company") is a leading developer and marketer
of commercial network security products designed to protect data on computer
networks from access by unauthorized users. The Company was among the first
companies to establish a business unit devoted to developing and marketing
network security products. As early as 1989 the Company had developed and begun
to market an integrated secure operating system and secure networking software
solution. With the announcement of its firewall application in 1994, the Company
began offering multi-level secure network security solutions to the commercial
market through its CyberGuard Firewall suite of products.
The Company is the former Computer Systems Division of Harris Corporation
("Harris") and was incorporated in August 1994 for the purposes of consolidating
such division's real-time and trusted computer businesses in a separate
corporate entity. On October 7, 1994, Harris effected a tax-free distribution,
on a pro rata basis to its shareholders, of all of the Company's issued and
outstanding capital stock. In May 1995 the Company separated its business
operations into two units: the Real-time Business and the Trusted Systems
Division, which developed network security products. Effective June 30, 1996,
the Company sold to Concurrent Computer Corporation ("Concurrent") the assets of
its real-time computer business. See "Recent Events, below." With the completion
of this transaction, the Company is now focused solely on the business of
developing and marketing firewalls and other network security products.
Unless otherwise indicated, references in this Item 1 to the "Company" with
respect to periods before the Real-time Sale (described below) are to the
Company's Trusted Systems Division.
RECENT EVENTS
Change of fiscal year end. In July 1996, the Company's board of directors
approved a proposal to change the Company's fiscal year end to June 30.
Sale of Real-time Business. In May 1995, the Company separated its
business operations into two units: the "Real-time Business," consisting of the
assets and liabilities associated with the manufacture and marketing of
real-time computer systems, and the "Trusted Systems Division," consisting of
the assets and liabilities of the Company's network security business described
herein. The Real-time Business represented approximately 80% of the assets of
the Company as of June 26, 1996 (the date of the Real-time Sale), and accounted
for 81%, 89% and 87% of the Company's sales for the nine-month periods ended
June 30, 1996, September 30, 1995 and June 30, 1994, respectively.
Effective June 30, 1996, the Company sold its Real-time Business and issued
683,187 shares of its Common Stock to Concurrent Computer Corporation
("Concurrent") in exchange for Concurrent common and preferred stock. (The sale
of the Real-time Business and the related issuance of shares of the Company's
Common Stock is referred to herein as the "Real-time Sale.") The Real-time Sale
consisted of the sale of the Company's Real-time Business and the issuance of
683,178 shares of its Common Stock to Concurrent in exchange for (i) 10,000,000
newly issued shares of common stock of Concurrent, par value $.01 per share;
(ii) 1,000,000 newly issued shares of convertible exchangeable preferred stock
of Concurrent with a 9% cumulative annual dividend payable quarterly in arrears
and a liquidation preference of $6.26 per share (subject to adjustment under
certain circumstances); and (iii) the assumption by Concurrent of certain (but
not all) of the liabilities of the Real-time Business. The Concurrent common
stock received by the Company represented approximately 23% of the Concurrent
common stock outstanding immediately following the Real-time Sale (29% if the
Concurrent preferred stock were to be converted into Concurrent common stock).
The Concurrent common and preferred stock received by the Company constituted in
the aggregate approximately 75% of the Company's assets on June 27, 1996 (the
date of the Real-time Sale.)
The Company has sold substantially all the Concurrent common stock to fund
cash requirements that in the past had been funded with working capital and cash
flows from the Real-time Business. The Company has
1
<PAGE> 3
retained, but does not intend to hold to maturity, the Concurrent preferred
stock received in the Real-time Sale. The Concurrent preferred stock, which has
a 9% cumulative annual dividend payable quarterly in arrears and a liquidation
preference of $6.26 per share (subject to adjustment under certain
circumstances), is convertible at the option of the holder into approximately
2,500,000 shares of concurrent common stock (or approximately 5.5% of the
current common stock that would be outstanding following such conversion. There
is no definitive public market for Concurrent preferred stock and it is not
anticipated that a trading market will ever develop. Due to the convertibility
of the Concurrent preferred stock into Concurrent common stock, the Concurrent
preferred stock is expected to fluctuate in value based on factors which are
substantially similar to those that influence the price of the Concurrent common
stock. Such factors include changes in the business, operations or prospects of
Concurrent, its ability to integrate the Real-time Business into its operations
and achieve related cost savings and operating efficiencies, restructuring
charges, including those related to the Real-time Sale, any continuing declines
in sales, any operating losses or shortfalls in liquidity, its success in
shifting from proprietary to open systems, regulatory considerations, general
market, economic and industry conditions and other factors.
Joint Development Agreement with IRE. In August 1996, the Company entered
into a joint Product Development and Marketing Agreement with Information
Resource Engineering, Inc. ("IRE") pursuant to which the Company and IRE have
agreed jointly to develop a series computer security products including a
Virtual Private Networking security solution for Internet use. This family of
security products will be marketed under the name "SafeNet Enterprise".
CyberGuard and IRE will also jointly market and manage a service offering for
the administration of security products including key management and certificate
processing.
INDUSTRY BACKGROUND
The Internet. Interest in computer networking changed dramatically in the
1990s with the rise in public access to the Internet. The Internet is a global
"network of networks," an interconnection of commercial, academic and
governmental computer networks and host computers. Computers connected to the
Internet use a variety of incompatible operating systems, and in order to
communicate with each other, data is transmitted back and forth between host
computers using a standard known as Transmission Control Protocol/Internet
Protocol or TCP/IP. As of September 1995, INPUT estimated that the number of
Internet users around the world will grow from more than 53 million in 1995 to
250 million in 2000. Much of the recent growth of the Internet has been
attributed to an increase in commercial Internet access providers and
organizations seeking to advertise or provide products or services to Internet
users as well as the commercial availability of PC-based World Wide Web ("WWW")
browser software such as Netscape's Navigator.
Intranets. In recent years, organizations have increasingly begun using
the TCP/IP protocol for their enterprise networks or using the Internet as an
inexpensive alternative to establishing their own wide area networks. An
enterprise network that uses the TCP/IP protocol is called an "intranet." An
intranet can extend internal information systems and enterprise applications to
geographically dispersed facilities, remote offices and mobile employees using
personal computers running on incompatible operating systems. Using any "web
browser," an employee can view electronic information notwithstanding the
incompatible operating systems utilized by the employee and the information
source. In many cases, different departments within the same organization can
create "home pages" used to share information among co-workers. The increasing
ability to interconnect with disparate enterprise units has increased the use of
mobile or "nomadic" computing by which users connect to enterprise networks from
remote offices and while traveling. The increasing use of the non-proprietary
TCP/IP network protocol for internal network communications is due, in large
part, to (i) the widely distributed nature of such protocol, (ii) the fact that
TCP/IP network protocol support is available on nearly all types of computer
systems currently manufactured, and (iii) cost considerations.
The Growth in the Market for Firewalls and Other Network Security
Products. Network security has historically been the focus of primarily those
businesses in security-sensitive industries such as healthcare, financial
services, insurance, telecommunications, government and others. Businesses in
these industries historically maintained a secure network environment by
isolating their networks privately and allowing only authorized users to connect
to their privately managed networks.
2
<PAGE> 4
As popularity and use of the Internet and intranets has increased,
companies have become increasingly concerned that data collected and stored
electronically by organizations might be vulnerable to access by unauthorized
users, including certain of a company's own employees. This concern is due in
part to the fact that the TCP/IP protocol is particularly susceptible to
penetration, and, as a result, interest in and purchases of firewall software to
protect enterprise networks have increased. In February 1996, International Data
Corporation ("IDC") estimated that the worldwide firewall market would grow from
$160 million in 1995 to an estimated $987 million in 2000. As of September 1995,
INPUT estimated that by 2000 the international market for firewall and software
services will grow from 28% of the total worldwide market to about half of the
worldwide market.
The Company believes that more than half of the firewall software and
services market is related to the use of firewalls within intranets. This is
because each intranet subnet can use a firewall to protect its data from the
numerous other subnets of the same intranet, whereas firewalls for Internet
access may protect only a small number of Internet connections, often only one.
The intranet-related firewall market is generally comprised of large, often
multinational corporations that typically segment their internal networks into a
number of subnets. The Company believes that worldwide demand for firewall
products will exceed the market growth rates expected in the United States.
Spectrum of Network Security Technologies. The network security market
consists of a large number of companies offering a range of network security
products using widely diverse technologies. Some of the broad categories of
network security products are depicted in the graphic presentation below. Each
of these approaches to network security provides varying degrees of protection,
with the most secure solution represented by having no external connections to
the network at all (depicted below as "no access") and the least secure being
one or more external connections with no attempt to provide network security
(depicted below as "full access").
[GRAPH]
Generally, these technologies build on each other so that the most secure
technologies can also perform the functions of the less secure ones and,
depending on price and other factors, can serve markets for such products. A
more detailed description of these technologies follows:
- Router-Based Packet Filtering. Routers can be configured with "packet
filters," that is, devices that determine the source and destination of
the communication between networks and the type of "service" requested
(e.g., file transfer, electronic mail ("e-mail")). Packet filters,
however, are not generally considered to provide a high level of security
because they make security decisions based on the address of the
communication packet, which can be easily "spoofed."
- Proxy Application Firewalls. A level of protection beyond that offered
by a packet filtering router is provided by a "firewall," which monitors
traffic between one network and another -- such as an intranet and the
Internet or between different segments of an intranet -- and blocks access
to data according to predefined security parameters. Most firewalls
operate using "proxy" applications that look beyond the source and
destination of a communication and also monitor certain details regarding
the communication's content. Proxy application firewalls can suffer from
performance-related problems, such as the inability to support the types
of network service and/or network protocol to be used, and degradation of
network throughput and performance.
- Hybrid Firewalls. A hybrid firewall is a proxy application firewall
offering other security options and features, such as encryption, token
authentication and others. Encryption refers to the alteration of data
such that during the transmission of the data an attacker is unable to see
the "original" information and instead only observes what would appear to
be a random sequence of information. Token authentica-
3
<PAGE> 5
tion refers to a system of dynamically changing passwords. Hybrid firewall
systems generally provide the packet filtering, proxy application,
encryption and token authentication features in an integrated firewall
security product, and, as a result, represent a more complete network
security solution.
- Hybrid Firewall with Secure Operating System. The most complete security
solution is provided by a hybrid firewall with a secure operating system
and secure networking software; the Company's CyberGuard Firewall is such
a system. A secure operating system and secure networking software form
the only network security solution that is self-protecting by requiring
network communications to pass through the firewall application and
preventing penetration through the operating system and networking
software.
THE CYBERGUARD SOLUTION
The Company's secure operating system and secure networking software
technologies allow it to position the CyberGuard product suite to address the
full range of the commercial network security market. Generically speaking, a
firewall consists of a firewall application, an operating system and networking
software, each playing an important role in the receipt and processing of data
through the firewall. In standard network security products, only the firewall
application has been designed to resist penetration by an attacker, leaving the
operating system and network software unsecure. Therefore, an attacker can
penetrate a standard firewall through the unsecure operating system or
networking software. The Company's CyberGuard Firewall uses a secure operating
system and secure networking software to prevent network penetration by
requiring network communication to pass through the firewall application.
The graphic presentation below depicts the three major components of a
firewall system and demonstrates the fundamental security deficiency of an
application-only solution as compared to the CyberGuard Firewall.
[GRAPH]
Both the secure operating system and secure networking software are based
on multi-level security ("MLS"), that is, they restrict access to information
based on the sensitivity of the information and the access authorization of
system users. In an MLS system, a user cannot read data that has been labeled at
a level more sensitive than the security level given the user and cannot create
or modify data having a different security label. The operating system and
programs reside at a protected level that cannot be read or modified by network
users.
The Company's secure operating system and networking software have been
rated by the NCSC at a B1 level. The NCSC ratings range from D (systems with
minimal security) to A1 (systems with assured security). Certain agencies of the
United States government have incorporated the NCSC ratings into their
4
<PAGE> 6
procurement requirements, and commercial users, while not having specific
NCSC-rating requirements, often look to an NCSC rating as an indication of the
product's proven reliability. The Company's CyberGuard Firewall is the only
commercially available firewall built on an integrated operating system and
networking software with a rating as high as B1. These components have also been
successfully evaluated by the Centre d'Electronique de l'Armement ("CELAR") in
France and are in evaluation in the United Kingdom against the European
Information Technology Security Evaluation Criteria ("ITSEC"). The Company's
product is currently in evaluation for the NCSC's higher B2 rating. The Company
believes that systems having a NCSC rating higher than B2 are impractical for
use in commercial firewall applications. The Company has substantially completed
a two-year evaluation process with Logica U.K. and expects to receive Logica's
E3 rating for its products which, in the Company's opinion, will increase the
marketability of the CyberGuard Firewall in international markets. Logica U.K.
is an international industry-sponsored agency.
The Company's CyberGuard Firewall also addresses the high performance end
of the commercial network security market because the underlying operating
system and networking software were designed for demanding security
environments. The Company's secure operating system is designed to function as a
high performance, real-time operating system able to process high levels of
throughput without time-consuming failures. This same operating system
technology underlies the Company's secure networking software and firewall
technology.
The CyberGuard Firewall product is the basis for the Company's ability to
offer a complete suite of enterprise-wide security products including mobile
security applications, secure data base application, and network access control
filters.
STRATEGY
The Company's strategy is to increase its sales and profits by broadening
its indirect marketing channels, capitalizing on its existing international
market penetration, concentrating on selected vertical markets, promoting the
CyberGuard Firewall's strengths beyond network security, and expanding its
product line to provide an enterprise-wide solution, support for other computer
platforms and networks, and software-only products. The key components of the
Company's strategy, many of which are interrelated, are as follows:
- Broaden Indirect Distribution Channel Coverage. The Company has
established a broad range of channels through which to market its products
in the United States and internationally, including more than 30 VARs,
distributors and manufacturers' representatives. The Company intends to
continue to expand its indirect channels by concentrating its marketing
through indirect distribution channels, including extensive VAR
relationships. The Company attracts resellers by providing them broad
support as part of what it believes is one of the most comprehensive
reseller programs in the network security industry. During the nine-month
period ended June 30, 1996, indirect sales channels accounted for
approximately 31% of the Company's sales; the Company's goal is to have
its indirect channels account for 75% of its sales by the end of fiscal
year 1997. The Company is actively seeking additional strategic marketing
partners in order to expand the geographic distribution of its products.
- Capitalize on Existing International Penetration. For the nine-month
period ended June 30, 1996, the Company's international channels accounted
for 47% of the Company's revenues. The Company intends to expand these
relationships with VARs in Western and Eastern Europe and Asia to address
the international commercial firewall market. The Company believes that
the international market represents a high-growth market.
- Pursue Selected Vertical Markets. The Company intends to continue to
focus its marketing efforts on selected vertical markets, such as
healthcare, financial services, insurance, telecommunications, and travel,
that the Company perceives as having a need for network security due to
the confidential nature of data they collect or due to the devastating
potential impact of computer "hacking." Early experience in these vertical
markets has given the Company insight necessary to address industry
specific security requirements. The Company intends to expand on its
strategic relationships, such as its alliance with Coopers & Lybrand LLP,
which has helped to accelerate sales of the CyberGuard Firewall within the
financial industry. The Company intends to pursue these selected vertical
markets both with its direct
5
<PAGE> 7
sales force and through indirect channels such as VARs and systems
integrators who already serve such markets.
- Broaden Product Platforms and Compatibility. The Company intends to
broaden the appeal of its CyberGuard Firewall by "porting" its secure
operating system, networking software and firewall application to the more
widely used Intel-based platforms currently available in a wide range of
multiprocessor systems. The Company further plans to introduce products
that are compatible with other network operating systems and protocols,
such as Microsoft Corporation's Windows NT and Novell Inc.'s NetWare, in
addition to TCP/IP. In moving to address the widely used Intel platform,
the Company believes its solutions will more closely match the
requirements and expectations of its customers.
- Introduce Software-only Product Offerings. The Company plans to
introduce a software-only version of the CyberGuard Firewall, consisting
of an integrated secure operating system, networking software and base
security software, on a variety of secure operating systems such as Unix
and Windows NT. This software-only product will allow the Company to
competitively position its CyberGuard Firewall product against
lower-priced competitors while increasing its gross margins. In addition,
the Company is actively seeking strategic alliances, particularly with
companies offering software-based products for applications such as
encryption, token authentication and virus detection, with which the
Company can develop new products or to enhance the features of its
existing products. The software-only product and any future firewall
product upgrades will be priced and sold separately.
- Provide an Enterprise-Wide Network Security Solution. The Company
intends to emphasize all of the CyberGuard Firewall's network security
capabilities for, among others, secure communication, access control,
encryption, mobile computing (both through remote network connections and
dial-up systems), and secure databases (through alliances such as with
Informix, Inc.) to provide an enterprise-wide solution, particularly for
enterprises in selected vertical markets. The Company believes that each
element of an enterprise-wide solution will broaden the appeal of its
products in these markets.
- Promote CyberGuard Beyond Network Security. The Company intends to
promote CyberGuard's MLS capabilities for additional applications such as
tracking network usage and other network management control functions. In
this regard, the Company intends to capitalize on its expertise in network
security by providing such tools to specific customers and targeted
markets, such as Internet service providers and Internet-based retailers
of subscription products and services.
PRODUCTS AND SERVICES
Products
The Company's products provide a comprehensive, secure and high-performance
network security solution. These products include the CyberGuard Firewall and
related products, products offered by the Company with its strategic partners,
and secure operating systems and secure networking software sold separately from
the CyberGuard Firewall. The table below contains a summary of the Company's
products, their respective dates of first shipment, and a brief description of
each. Additional information regarding each product follows the table.
<TABLE>
<CAPTION>
DATE OF FIRST
PRODUCT SHIPMENT DESCRIPTION
- ------------------------------------- ------------------- ---------------------------------------
(CALENDAR QUARTERS)
<S> <C> <C>
CyberGuard Firewall.................. Q4 1994 Commercial firewall built on an
evaluated secure operating system and
secure networking software
Packet Filtering..................... Q4 1994 Guarantees a basic level of security
for all network traffic
Security Auditing and Alarms......... Q4 1994 Real-time alarm capability
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
DATE OF FIRST
PRODUCT SHIPMENT DESCRIPTION
- ------------------------------------- ------------------- ---------------------------------------
(CALENDAR QUARTERS)
<S> <C> <C>
Application Proxies.................. Q3 1995 Enhanced security customized to network
applications
Remote Administration................ Q3 1995 Firewall administration from remote
site
Network Address Translation.......... Q4 1995 Hides internal network addresses to
complicate hacker attempts
Graphical User Interface............. Q1 1996 Point-and-click administration
Split Domain Name Service............ Q1 1996 Hides internal host names to complicate
hacker attempts
High Availability CyberGuard
Firewall........................... Q1 1996 Cyberguard feature designed to ensure
minimal network downtime
Virtual Private Networking........... Q4 1995 Encrypted firewall-to-firewall link
WebTrack URL Blocker................. Q1 1996 Monitors and controls access to
selected WWW sites
Token Authentication Devices
Enigma Logic....................... Q3 1995 Authenticates network users through use
of token authentication cards in place
of static password
Security Dynamics.................... Q2 1996
Informix Online/Client Server
Systems............................ Q4 1992 Secure database tool for server and
electronic commerce applications
CX/SX Secure Operating System........ Q2 1989 B1-evaluated secure operating system
LAN/SX Secure Networking Software.... Q3 1990 B1-evaluated secure networking Software
PowerSX Secure Operating System...... Q2 1994 Latest generation secure operating
system currently in evaluation by NCSC
for B2 rating
PowerProtocols Secure Networking
Software........................... Q2 1996 Latest generation secure networking
software currently in evaluation by
NCSC for B2 rating
</TABLE>
CyberGuard Firewall. The CyberGuard Firewall and related products build
upon the Company's B1-evaluated secure operating system and secure networking
software. The CyberGuard Firewall includes the following features:
- Packet Filtering. The CyberGuard Firewall implements packet filtering
technology allowing the firewall to expressly permit or deny connections
using criteria based upon source and destination host or network and the
type of network service being requested.
- Security Auditing and Alarms. The CyberGuard Firewall incorporates a
built-in auditing and alarm function that permits administrators to review
a chronological record of system activities allowing the reconstruction of
security sensitive activities. The CyberGuard Firewall can be configured
to dynamically process the security auditing information and, in
real-time, take explicit actions in response to actions deemed security
sensitive or possible attempts to attack the network or firewall.
- Application Proxies. The CyberGuard Firewall supports a number of
security enhanced application proxies for many network services, including
remote login ("rlogin"), terminal emulation ("Telnet"), file transfer
protocol ("FTP"), hypertext transport protocol ("HTTP") (used with the
WWW), network news transport protocol ("NNTP"), simple mail transport
protocol ("SMTP"), and simple network management protocol ("SNMP").
- Remote Administration. The CyberGuard Firewall supports the ability to
remotely monitor and administer a firewall from a "Network Operations
Center." Using this remote administration
7
<PAGE> 9
capability, a CyberGuard Firewall can be managed from a remote site as if
the system administrator were physically located with the firewall.
- Network Address Translation. The CyberGuard Firewall can be configured
to translate all internal addresses to the firewall's network address.
From the Internet, the firewall appears to be the only machine connected,
reducing the risk of possible penetration attacks against the internal
network.
- Graphical User Interface. The CyberGuard Firewall provides a Motif-based
graphical user interface, or "GUI," designed to facilitate system
configuration and administration. A GUI is generally considered easier to
use than the traditional command-line interface.
- Split Domain Name Service. The CyberGuard Firewall can function as a
Domain Name Service ("DNS") server. With Split DNS, the network responds
to queries differently depending on their source. For example, responses
to requests from the Internet might contain only the CyberGuard Firewall
information; responses from internal requests might contain a complete
list of hosts.
- Virtual Private Networking. The CyberGuard Firewall supports a variety
of Virtual Private Networking ("VPN") products, including the SafeNet
product offered jointly by the Company and by IRE. See "Recent Events."
VPN products provide a mechanism for establishing a logically separate
network between multiple CyberGuard Firewall systems. This logical network
supports fully encrypted communication among the machines of the network.
PVN supports high-performance encrypted communication between CyberGuard
Firewalls, distributed SafeNet/LANs and any of three remote user options.
Additionally, centralized security management of all encryption and
firewall products is offered with the option of outsourcing management
functions.
- High Availability CyberGuard Firewall. The CyberGuard Firewall supports
an optional High Availability configuration, which combines two firewalls
to operate as a single logical unit. If the primary firewall should fail,
the secondary firewall takes over to provide nearly continuous network
connectivity. For critical connections, such as electronic commerce sites,
this High Availability configuration minimizes the risk of loss network
connectivity.
In addition, through strategic alliances, the Company offers certain
network security products for use with the CyberGuard Firewall. These products
include:
WebTrack URL Blocking. Together with its CyberGuard Firewall, the
Company offers WebTrack, a product developed by Webster Network Strategies
(which has entered into an agreement to be acquired by Secure Computing).
WebTrack is a software product that monitors and controls access to non-
business related WWW sites such as pornography, hate speech, on-line
shopping, job searching and sports. The Company offers WebTrack through a
strategic alliance with Webster Network Strategies and the CyberGuard
Firewall is the only commercial firewall that supports WebTrack.
Token Authentication Products. With the CyberGuard Firewall, the
Company offers a number of third-party token authentication devices,
including those offered by the Company through alliances with Security
Dynamics and Enigma Logic, among others. Token authentication devices
provide for an alternative to the use of static passwords for user
authentication, resulting in reduced likelihood of system penetration
through the reuse of an old password.
Informix Online/Secure Client Server Systems. The Company, through a
strategic alliance with Informix, Inc. ("Informix"), offers the Informix
Online/Secure B1-evaluated secure relational database management system
("Online/Secure"). Online/Secure extends the Company's security policy into
the relational database product technology of Informix, providing a fully
secure, high-performance, multi-level secure database environment for
secure transaction processing and secure database applications.
Secure Operating Systems. The Company offers secure operating systems
based on Power PC and Motorola RISC technology. Additionally, the Company
will introduce a version of its secure operating system for Intel-based
machines based upon the UnixWare 2.0 release from SCO. The Company's
PowerSX product is a high assurance, secure multi-threaded operating system
based on UNIX System V Extended Security/Multi-Processing operating system
with additional security features developed by the
8
<PAGE> 10
Company. The Company's CX/SX operating system is a multi-threaded, fully
preemptive operating system for high performance, secure Unix-based
applications. The Company's CX/SX operating system has received rigorous
evaluation from the NCSC in the United States and CELAR in France. The NCSC
performed an evaluation of the Company's CX/SX operating system and
subsequently granted it a B1 security rating. The NCSC is currently
evaluating the Company's PowerSX operating system against the higher B2
security rating criteria. For information regarding NCSC security ratings,
see "The CyberGuard Solution" above. The Company anticipates it will submit
its latest secure operating system release based upon UnixWare 2.0, as well
as future releases for secure Windows NT-based systems, for similar U.S.
and international-based evaluations.
Secure Networking Software. The Company's LAN/SX product is a secure
network software product that provides a multi-level secure interface
between CX/SX and a heterogeneous networking environment. The Company's
PowerProtocols product is a secure network software product that provides a
multi-level secure interface between PowerSX and a heterogeneous networking
environment. The NCSC performed an evaluation of the Company's LAN/SX
operating system and subsequently granted it a B1 rating. The NCSC is
currently evaluating the Company's PowerProtocols networking software at
the higher B2 security rating criteria. For information regarding NCSC
security ratings, see "The CyberGuard Solution" above.
Services
System Integrations Services. The Company offers a number of systems
integration services, both directly and through strategic alliances, with the
purpose of offering customers network security expertise for their particular
networking environment. In addition, the Company markets several specific types
of pre-packaged consulting services relating to, among others, penetration
testing, Internet gateway security and technical evaluation, system security,
corporate data security policies and management control, network security policy
and management control, Internet security policy and management controls,
network security analysis, and information security training.
Key Management Services. The Company has announced and is currently
bidding service-type arrangements to outsource the setup and sustaining
operations for customers who wish to employ Virtual Private Networks and
encryption. The Company will manage network security products such as encryption
tokens and firewalls as a turn-key option through the partnership with IRE.
PRODUCT DEVELOPMENT
The following table shows the significant products and product enhancements
that the Company expects to introduce during the last quarter of calendar year
1996 and during calendar year 1997.
<TABLE>
<CAPTION> EXPECTED DATE OF
PRODUCT INTRODUCTION DESCRIPTION
- -------------------------------------- -------------------- --------------------------------------
(CALENDAR QUARTERS)
<S> <C> <C>
SafeNet/Remote........................ Q4 1996 Encrypted protection for PC and laptop
connections to host networks
Intel Pentium/Pentium Pro-compatible
CyberGuard Firewall................. Q4 1996 Low-cost, software-only CyberGuard
Firewall product
Virus Scanning........................ Q4 1996 Helps prevent viruses from infecting
host computers
RSA Encryption........................ Q1 1997 Largest commercially available
encryption product
CyberGuard Intranet Firewall.......... Q4 1996 Novell NetWare and Windows NT support
and other intranet-specific features
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
EXPECTED DATE OF
PRODUCT INTRODUCTION DESCRIPTION
- -------------------------------------- -------------------- --------------------------------------
(CALENDAR QUARTERS)
<S> <C> <C>
Multiple Virtual Secure Environments
("MVSE")............................ Q4 1996 Multi-level security applied
separately to the network and the
data, enabling data access to be
matched with user privileges;
ensures that data at a given level
of security only travels over
"virtual networks" created by the
CyberGuard Firewall at the same
level of security; prevents theft or
unauthorized access to highly
sensitive data via networks at lower
levels of security
SafeNet/Enterprise.................... Q4 1996 A product suite integrating IRE's
expertise in encryption technology and
central management with the
Company's CyberGuard Firewall
TerraMax ISP Solution................. Q4 1997 Multiple virtual firewalls
Fortezza Encryption................... Q2 1997 Government-sponsored encryption
process
X.400, X.500 and X.509 Secure Message
Handling............................ Q4 1997 Secure X.400, X.500 message support;
X.509 certificates
</TABLE>
The expected dates of introduction in the above table are forward looking
statements and are based on certain assumptions, including certain assumed
levels of staffing and capital resources, contractual arrangements with
suppliers, customers or strategic allies, market conditions, overall product
development costs and related sales and marketing expenses, the nature of
available competing and complementary technologies and products, and other
assumptions. Should these assumptions change or prove to be inaccurate, or
should the Company's plans change due to certain unforeseen factors, the
development of such products may be delayed or discontinued.
Development of new products and features is performed by the Company's
internal engineering staff and through third-party licensing. The Company has 30
employees devoted to product development and expects to increase this number
modestly during fiscal year 1997. The Company supplements the development staff
from time to time with contract engineers as needed to meet product demands in
the market. For the nine-month period ended June 30, 1996 and the fiscal years
ended September 30, 1995 and June 30, 1994, the Company spent $2.9 million, $1.5
million and $1.6 million, respectively, on research and development, an
equivalent of 40%, 31%, and 18% of total sales during such periods,
respectively. These amounts include software development costs that have been
capitalized during such periods.
JOINT PRODUCT DEVELOPMENT AND STRATEGIC ALLIANCES
The Company is jointly developing and marketing with IRE a family of
security products for Virtual Private Network applications on the Internet. This
suite of products, offered under the SafeNet/Enterprise name, offers advantages
in the cost and implementation of processing secure, encrypted information and
allows the Company to integrate more functionality in its turn-key secure
solution.
To complement CyberGuard Firewall product sales, the Company offers
consulting and security products through a series of strategic alliances with
prominent organizations. The Company has formed alliances with several
consulting partners world-wide, including with EG&G, Inc. and Coopers & Lybrand
Consulting since 1995 and with Coopers & Lybrand L.L.P. since February 1996.
Consulting services include network and on-site analysis services, network
penetration testing, security policy and management control, migration planning
and security training.
10
<PAGE> 12
The Company has alliances for the purpose of reselling the Company's
products with several strategic partners, including Lucent Technologies, Inc.
(formerly AT&T Corporation, now "Lucent") and Electronic Data Systems Corp.
("EDS"). The Company has additional strategic resellers outside the United
States, which include Nissin Electric Co., Ltd. (Japan) ("Nissin"), Lukon
Financial Industrial Company (Russia) and QPSX Communications Limited, a
subsidiary of Australia's Telstra Corporation.
The Company has also entered into product-related strategic alliances with
Enigma Logic, Inc., Security Dynamics, Inc., VASCO Corporation and CryptoCard to
offer a variety of identification and token authentication capabilities. In
March 1996, the Company announced a strategic alliance with Webster Network
Strategies to provide the WebTrack Internet monitoring and blocking service on
the CyberGuard Firewall. In April 1996, the Company announced strategic
alliances with Trend Micro, Inc and PC Security Limited to support virus
scanning and encrypted data tunneling, respectively. The Company also has
strategic alliances with Informix, Inc. and Oracle Corporation to provide
database or database proxy support on the Company's secure operating system.
The Company is actively seeking additional strategic alliances for product
development and sales and marketing purposes. The Company expects such alliances
to contribute to efforts to develop additional products or enhancements to its
existing product offerings, particularly those relating to encryption, token
authentication and virus detection. The Company is also actively pursuing sales
and marketing alliances, particularly with value added resellers and
distributors, in order to expand the geographic distribution of the Company's
products.
CUSTOMERS AND MARKETS
The Company's current and prospective commercial customers include medium
to large domestic and multinational companies and other commercial enterprises
that routinely create and store proprietary or highly sensitive information and
have high throughput requirements. These customers are likely to consider
network security and performance to be high priorities when purchasing a
firewall. During the nine-month period ended June 30, 1996 and the fiscal year
ended September 30, 1995, sales related to porting the Company's secure
operating system to Groupe Bull S.A.'s Escala line of computer systems accounted
for 5% and 14%, respectively, of the Company's sales.
The specific uses and applications of the CyberGuard Firewall and related
products vary significantly among market sectors and business organizations.
Examples of the uses of the Company's products by customers include:
- Southwest Airlines uses the CyberGuard to secure their "Home Gate" web
site, which allows customers to schedule flights and purchase tickets
on-line through the Internet. Ticket purchases include the required
transmission of credit card numbers, a process in which security is a
critical concern.
- A leading enterprise-wide software application developer distributes
enhancements and fixes to its maintenance customers using a CyberGuard
Firewall.
- A multi-national bank processes loan applications using the CyberGuard
Firewall's Virtual Private Network to communicate sensitive financial
information between branch offices and the bank's central approval
department.
- A Fortune 150 high technology conglomerate uses the CyberGuard Firewall
to allow controlled Internet access to nearly 12,000 employees. Data
traffic that could cause harm to the customer's internal management
information systems is blocked while allowing legitimate requests for
product descriptions.
- A major aircraft designer and manufacturer uses the CyberGuard Firewall
to strictly control access to human resource information on the customer's
intranet.
The Company's CyberGuard Firewall and related security products accounted
for 95% and 86%, respectively, of the Company's sales for the nine-month period
ended June 30, 1996 and the fiscal year ended
11
<PAGE> 13
September 30, 1995. The remaining portion of the Company's sales in each such
period are related to porting the Company's secure operating system to Groupe
Bull S.A.'s Escala line of computer systems.
The Company's customers represent a broad geographic distribution of the
Company's products with a relatively even concentration throughout the United
States and abroad. Of these, international sales accounted for 46% and 31%,
respectively, of the Company's sales in the nine-month period ended June 30,
1996 and the fiscal year ended September 30, 1995.
Sales of CyberGuard Firewalls and related products include
government-related customers, but are sold on the same terms and conditions as
to non-government-related commercial customers. During the nine-month period
ended June 30, 1996 and the fiscal year ended September 30, 1995, sales of
CyberGuard Firewalls and related products to agencies of the United States
government and its contractors accounted for 29% and 58%, respectively of
overall sales for such products. Sales of secure operating systems and secure
networking software sold separately from CyberGuard Firewalls have been
primarily to government agencies (both in the United States and
internationally), including the United States government and government
contractors. During the nine-month period ended June 30, 1996, total sales to
the British MOD were 8% of the Company's sales, and during the fiscal year ended
September 30, 1995, a single government-related customer accounted for 39% of
the Company's sales.
SALES AND MARKETING
The Company has established a broad range of indirect channels by which to
market its products in the United States and internationally, including VARs,
distributors and manufacturers' representatives, as well as direct sales
representatives. Within the last year, the Company has entered into contracts
with 30 VARs, distributors, and manufacturing representatives for its products,
including EDS, EMJ America, Inc., Lucent, QPSX Communications Limited, a
subsidiary of Australia's Telestra Corporation, Public IP Exchange Limited, a
U.K. subsidiary of UUnet Technologies, and Nissin Electric Co. Ltd (a member of
Japan's Sumitomo Group). During the nine-month period ended June 30, 1996, the
indirect marketing channels for the Company's products accounted for 31% of the
Company's sales. See "Strategic Alliances" above. The Company is seeking to
expand its indirect sales channels for the marketing of its products and has a
goal to have its indirect channels account for 75% of its sales by the end of
fiscal year 1997.
In May 1995, the Company established a sales force separate from that of
its former Real-time Business to focus on sales of its network security
products. The Company employs 15 sales representatives and maintains sales
offices in Atlanta, Georgia; Chicago, Illinois; Dayton, Ohio; Fort Lauderdale,
Florida; Houston, Texas; Los Angeles and San Francisco, California; New York,
New York; St. Louis, Missouri; Washington, D.C.; London, England; Paris, France;
Munich, Germany and Ottawa, Canada. The sales force focuses its sales and
marketing efforts towards customers and VARs in selected vertical markets such
as healthcare, financial services, insurance, telecommunications and travel. The
Company's sales staff also solicits prospective customers and provides technical
advice and support with respect to the Company's products.
In support of its sales efforts, the Company markets its products through
direct mail, advertising, seminars, trade shows, telemarketing, and on-going
customer and third-party communications programs. The Company has entered into
strategic marketing relationships with various vendors of communications,
security and network management products and consulting services. Certain of
these vendors recommend the Company's products along with their own solutions to
meet a customer's security needs. The Company also seeks to generate interest
in, and to educate potential customers about, computer and network security
through its speaking engagements, contributed articles, interviews and
documentaries.
The Company focuses its direct and indirect marketing efforts on, among
other things, selected vertical markets, such as healthcare, financial services,
insurance, telecommunication, and travel, that the Company perceives as having a
need for network security due to the sensitive nature of data they collect or
due to the devastating potential impact of computer "hacking." The Company
intends to address this market both with its direct sales force and through
indirect channels such as VARs and systems integrators who already serve
12
<PAGE> 14
such markets. The Company also believes its products are particularly well
suited to Internet service providers and Internet-based retailers of
subscription products and services.
COMPETITION
The market for network security products is intensely competitive and
characterized by frequent technological change. The Company believes that
competition in this market is likely to persist and to intensify if demand for
network security products increases.
In the market segments requiring the highest levels of security, the
Company competes with Secure Computing, which also offers a firewall with a
security enhanced operating system. The Company also competes with manufacturers
of proxy application firewalls and hybrid systems, such as Check Point Software
Technologies Ltd, ANS and Raptor, whose products lack a secure operating system
but might nonetheless be considered competing products by some consumers. The
Company competes with a number of manufacturers whose products consist mainly of
packet filtering systems or routers but whose products may be considered to be
alternatives to the Company's. In addition, companies such as IBM, DEC and Sun
sell products with similar features and functions that could be considered
competitors of the Company's. Several other companies offering other network and
other computer-related products, including Microsoft Corporation, are expected
to enter the commercial network security market in the near future. While the
Company believes that it does not compete against manufacturers of other classes
of security products, such as token authentication or encryption, due to the
complementary functions performed by such other classes, the Company's customers
may perceive such other companies as competitors of the Company.
Certain of the Company's competitors offer software-only products that will
compete with the Company's products. The Company believes that its customer base
will broaden as a result of the commercial introduction of an integrated
software-only version of the Company's operating system, networking software and
firewall application on platforms other than that of the Night Hawk. However,
there can be no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other competitive
resources. Certain of the Company's competitors may determine, for strategic
reasons, to consolidate, substantially lower the price of their network security
products or bundle their products with other products, such as hardware products
or other enterprise software products. In addition, current and potential
competitors have established or may establish financial or strategic
relationships among themselves, with existing or potential customers, resellers
or other third parties. For example, Compaq Computer Corporation recently
acquired a financial interest in Raptor and agreed to bundle Raptor's network
security software with certain of its product offerings and Secure Computing
recently finalized its acquisition of Borderware.
The Company believes that the principal competitive factors affecting the
market for computer and network security products include the product's level of
security, performance and reliability (particularly maximum levels of
throughput), technical features, ease of use, capabilities, customer service and
support, distribution channels and price. Based upon its understanding of the
features of the products and services offered by the Company's competitors, the
Company believes that its products currently compete favorably with respect to
such factors. Based upon its experience and understanding of the existing
network security market, the Company believes that potential purchasers of the
Company's security products who do not differentiate between the level of
security provided by competing security products are as likely to base their
purchasing decisions on price, ease of use, or other considerations as they are
to base such decisions on the level of security provided. In circumstances where
a potential purchaser's primary concern is the level of security provided by
products being considered, the Company, based upon its understanding of the
features in products and of the services offered by the Company's competitors,
believes that its products compete favorably.
Additionally, the Company believes a key competitive factor in the network
security market is a computer system's security rating by intelligence and other
government agencies such as the NCSC. The CyberGuard is the only commercially
available firewall built on an integrated secure operating system and secure
networking software components that are rated B1 by the NCSC. The Company's
secure operating
13
<PAGE> 15
system has also successfully completed evaluation by CELAR and is currently in
evaluation in the United Kingdom against ITSEC requirements. The Company's Power
PC-based operating system and networking products are designed for, and being
evaluated against, the B2 rating security requirements. Certain of the Company's
competitors have also submitted their commercial network firewall products for
evaluation by the NCSC, and certain of these products could receive B1 or higher
ratings upon completion of the evaluation process.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company relies upon license agreements with customers; trademark,
copyright and trade secret laws; employee conflict of interest and third-party
non-disclosure agreements and other methods to protect the trade secrets,
proprietary know-how and other proprietary rights on which the Company's
business depends. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or independently
developed by competitors. The Company currently does not hold any patents and
has no pending patent applications to cover any aspects of it technology. The
Company intends to introduce patent applications to protect aspects of its
technology; however, there can be no assurance that any future patent
applications will be granted or that any future patent applications will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company.
The Company is not aware of any patent infringement charge or any violation
of other proprietary rights claimed by any third party relating to the Company
or the Company's products. The computer technology market is characterized by
frequent and substantial intellectual property litigation. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict.
The Company has applied for registration in the United States, Canada and
certain other countries for its "CyberGuard Firewall" marks and its CyberGuard
logo.
REGULATION
The Company is not currently subject to direct regulation by any government
agency other than regulations applicable to businesses generally. Export
controls on cryptographic products may place limits on the export of the
Company's products to certain countries identified from time to time by the U.S.
Department of State. In addition, certain of the Company's government products
are subject to U.S. government contracting regulations and to the International
Trade in Arms Regulation ("ITAR"), which restricts the exports of certain
products affecting national security. These regulations could restrict the
Company's ability to sell its products to foreign governments and businesses
identified from time to time by the U.S. Department of State, creating delays in
the introduction of the Company's products in international markets.
There are currently few laws or regulations directly applicable to access
to or commerce on the Internet. The Communications Reform Act, which applies to,
among other things, communications over the Internet, has recently become
effective, and additional laws and regulations could be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. The Company believes that some regulations
could be addressed by application of the Company's Internet-related network
security products and that certain types of regulation would be beneficial to
the Company. However, the adoption of laws or regulations may decrease the
growth of the Internet, which could in turn decrease the demand for the
Company's products and increase the Company's cost of doing business or
otherwise have an adverse effect on the Company's business, operating results or
financial condition.
EMPLOYEES
At September 20, 1996, the Company employed 74 full-time employees.
Additionally, from time to time the Company employs contract engineers on a
temporary basis for software development or documentation. No employee of the
Company is represented by a labor union or is subject to a collective bargaining
14
<PAGE> 16
agreement. All employees are bound by agreements containing confidentiality and
conflict of interest provisions. The Company believes it maintains good
relations with its employees.
EXECUTIVE OFFICERS
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------
<S> <C> <C>
Robert L. Carberry............ 53 President, Chief Executive Officer and Chairman
of the Board of Directors
Patrick O. Wheeler............ 37 Vice President Finance and Chief Financial
Officer
Frank Gelbart................. 34 Vice President Marketing and Sales, North
America
Katherine K. Hutchison........ 38 Vice President Corporate Development
Bradley C. Lesher............. 60 Vice President International Operations
Robert F. Perks............... 52 Vice President North American Operations
Rick A. Siebenaler............ 33 Vice President Software Development
Brian Foremny................. 47 General Counsel and Secretary
</TABLE>
Robert L. Carberry. Mr. Carberry was appointed President of the Company's
Trusted Systems Division in April 1996 in anticipation of the Real-time Sale and
President and Chief Executive Officer of the Company upon the consummation of
the Real-time Sale. Before joining the Company, Mr. Carberry was Vice President,
New Technology of Blockbuster/Viacom Group and Vice President, Managing
Executive for Blockbuster Technology Holding Corporation from 1994 and, before
that, was President of Multimedia Investment Organization, a division of IBM. At
IBM, Mr. Carberry also held the positions of Vice President Technology/Business
Development for the Personal Computer Division; Director of the Large Systems
Programming Laboratory and IBM Corporate Director of Technology.
Patrick O. Wheeler. Mr. Wheeler was appointed Chief Financial Officer and
Vice President Finance of the Company's Trusted Systems Division in April 1996
in anticipation of the Real-time Sale and continues in such position for the
Company. Prior thereto, Mr. Wheeler held various positions with the Company
including Director of Accounting, Senior Account Manager and most recently,
Midwest Regional Sales Manager. Mr. Wheeler joined the Company following its
spin-off from Harris Corporation, which Mr. Wheeler joined in 1984 from Price
Waterhouse L.L.P.
Frank Gelbart. Mr. Gelbart joined the Company in June 1996. From November
1993 until he joined the Company, Mr. Gelbart was Director of Sales, Rest of
World at Cheyenne Software, Inc. From April 1992, Mr. Gelbart was Director of
Worldwide Sales and Director of International Sales for Equinox Systems, Inc., a
$21 million data communications hardware manufacturer in Plantation, Florida,
and from April 1989 to April 1992, was Vice President, Latin America and Vice
President Commercial Sales for Uniplex, Inc. a $30 million UNIX office
automation software company headquartered in Irving, Texas.
Katherine K. Hutchison. Ms. Hutchison was appointed Vice President
Marketing, of the Company's Trusted Systems Division in April 1996 in
anticipation of the Real-time Sale and continues in such position for the
Company. Prior thereto, Ms. Hutchison served in positions of increasing
responsibility, most recently as Director of Marketing for the Company's Trusted
Systems Division. Ms. Hutchison joined Harris Corporation in 1993 from a
position as Program Manager and Technical Marketing Manager in the Information
Technology Group of Texas Instruments.
Bradley C. Lesher. Mr. Lesher joined Harris Corporation in July 1994 from
IBM where he had been General Manager of Latin American Caribbean operations
since November 1991. From 1988 to 1991 Mr. Lesher served as Director of General
Business systems in IBM's Latin American Headquarters Operation where he was
responsible for developing and supporting a distribution channel network of over
200 dealer and agent organizations selling IBM PC's and mid-range proprietary
and UNIX-based open systems. He joined IBM in 1957 and has over 30 years of
diverse international management experience including 19 years of living abroad.
15
<PAGE> 17
Robert F. Perks. Mr. Perks was appointed Vice President North American
Operations of the Company in July 1996. Mr. Perks joined the Computer Systems
Division of Harris Corporation in 1977. He was employed by Real Time Products
Corporation from 1992 to 1995 as Director, Customer Support and rejoined the
Company in May 1995 as Director of Trusted Sales for the Company.
Rick A. Siebenaler. Mr. Siebenaler was appointed Vice President Software
Development of the Company's Trusted Systems Division in April 1996 in
anticipation of the Real-time Sale and continues in such position for the
Company. Prior thereto, Mr. Siebenaler served as Director of Software
Development of the Company's Trusted Systems Division from 1994 and, before
that, as Chief Engineer from 1991. Mr. Siebenaler joined Harris Corporation in
1991 from the NCSC where he was a Commercial Products Evaluator in the Trusted
Products Evaluation Division.
Brian Foremny. Mr. Foremny is an attorney and, since 1995, a partner with
the law firm of Holland & Knight where he maintains a law practice in addition
to his service as the Company's General Counsel. Prior thereto, Mr. Foremny was
a partner of the law firm of Kirkpatrick & Lockhart LLP beginning in 1983.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, development,
engineering, production and support facilities are located in Fort Lauderdale,
Florida. The Company is currently subleasing administrative and production
facilities from Concurrent and will be relocating to separate facilities within
12 months. The Company also leases its sales office locations in the United
States and abroad.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or any
of its subsidiaries is a party or to which any of the Company's or any of its
subsidiaries' property is subject. To the Company's knowledge, there are no
material legal proceedings to which any director, officer or affiliate of the
Company, or any beneficial owner of more than five percent (5%) of Common Stock,
or any associate of any of the foregoing, is a party adverse to the Company or
any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 26, 1996, a Special Meeting in lieu of an Annual Meeting of the
Company's Shareholders (the "Special Meeting") was held in Fort Lauderdale,
Florida. In connection therewith, the Company solicited proxies of its
shareholders by a Joint Proxy Statement dated May 23, 1993 and mailed to
shareholders of record as of May 14, 1996 (the "Proxy Statement"). At the
Special Meeting, the Company's shareholders considered and voted upon the
following proposals (with the votes (in person or by proxy) for, against and
abstaining following each description):
A. The approval of the Real-time Sale on substantially the terms and
conditions set forth in the Proxy Statement (see "Item 1.
Business -- Recent Events," above).
B.
<TABLE>
<CAPTION>
VOTES AGAINST BROKER
VOTES FOR OR WITHHELD ABSTENTIONS NON-VOTES
- --------- ------------- ----------- ---------
<S> <C> <C> <C>
3,293,784 33,745 30,870 1,394,878
</TABLE>
16
<PAGE> 18
2. On February 4, 1996, the Company's Board of Directors approved the an
amendment to the Company's Stock Incentive Plan to increase to 2,025,000 the
maximum number of shares of common stock that may be issued in the form of
restricted stock or pursuant to the exercise of options granted pursuant to the
Stock Incentive Plan, and amended the director's options provision of the Stock
Incentive Plan. At the Special Meeting, the Company's shareholders considered a
proposal to approve such amendments to the Stock Incentive Plan.
<TABLE>
<CAPTION>
VOTES AGAINST BROKER
VOTES FOR OR WITHHELD ABSTENTIONS NON-VOTES
- --------- ------------- ----------- ---------
<S> <C> <C> <C>
2,942,089 375,547 40,763 1,394,878
</TABLE>
3. An amendment to the Company's Articles of Incorporation to change the
Company's corporate name to CyberGuard Corporation.
<TABLE>
<CAPTION>
VOTES AGAINST BROKER
VOTES FOR OR WITHHELD ABSTENTIONS NON-VOTES
- --------- ------------- ----------- ---------
<S> <C> <C> <C>
4,662,368 76,818 13,224 867
</TABLE>
4. The election of the class of directors whose term ended at the Special
Meeting and, following their election, whose term will end at the 1998 Annual
Meeting of the Company's shareholders.
<TABLE>
<CAPTION>
VOTES AGAINST BROKER
NOMINEE VOTES FOR OR WITHHELD ABSTENTIONS NON-VOTES
------------------------------------ --------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Robert L. Carberry.................. 4,738,934 0 14,343 0
Brian Foremny....................... 4,739,869 0 13,408 0
</TABLE>
5. To adjourn the Special Meeting if adjournment should be proposed by the
Chairman of the Special Meeting (the Chairman made no such motion to adjourn).
<TABLE>
<CAPTION>
VOTES AGAINST BROKER
VOTES FOR OR WITHHELD ABSTENTIONS NON-VOTES
- ---------- ------------- ----------- ---------
<S> <C> <C> <C>
4,527,505 195,490 29,415 867
</TABLE>
6. The appointment of KPMG Peat Marwick LLP as the Company's independent
accountants for nine-month period 1996.
<TABLE>
<CAPTION>
VOTES AGAINST BROKER
VOTES FOR OR WITHHELD ABSTENTIONS NON-VOTES
- ---------- ------------- ----------- ---------
<S> <C> <C> <C>
4,737,628 5,867 9,728 0
</TABLE>
17
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted and traded on the Nasdaq/NMS under the
symbol "CYBG." There were approximately 7,464 holders of record of Common Stock
as of September 26, 1996. The table below sets forth, for the quarters
indicated, the high and low bid prices of the Company's Common Stock as reported
by the Nasdaq/NMS.
<TABLE>
<CAPTION>
BID PRICES(2)
------------------
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1995
Quarter Ended December 30, 1994(1)........................................ $ 5 11/64 $ 2 21/64
Quarter Ended March 31, 1995.............................................. 6 3 37/64
Quarter Ended June 30, 1995............................................... 5 53/64 4 5/64
Quarter Ended September 30, 1995.......................................... 5 3/4 3 53/64
FISCAL YEAR 1996
Quarter Ended December 31, 1995........................................... $ 5 1/2 $ 3 5/64
Quarter Ended March 31, 1996.............................................. 16 21/64 3 35/64
Quarter Ended June 30, 1996............................................... 23 1/4 13 1/2
</TABLE>
- ---------------
(1) Prior to October 1994, there was no established public trading market for
the Common Stock.
(2) Adjusted to reflect a three-for-one split of the Company's Common Stock
effective March 18, 1996.
The Company has never paid dividends on its Common Stock. The Company
intends to retain earnings, if any, to finance future operations and expansion
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future payment of dividends will depend upon the financial
condition, capital requirements and earnings of the Company, as well as upon
other factors that the Board of Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the nine months ended June 30, 1996 and
1995; and for the fiscal years ended September 30, 1995, and June 30, 1994, 1993
and 1992, selected historical consolidated financial data for the Company, which
combines the Trusted Systems Division (the operations of which continue to be
carried on by the Company) and the Real-time Business (which, effective June 30,
1996, was sold to Concurrent). The financial data for the nine-month period
ended June 30, 1996 and the fiscal year ended September 30, 1995 have been
derived from audited financial statements of the Company for such periods
audited by KPMG Peat Marwick LLP. Such data have been derived from, and should
be read in conjunction with, the audited financial statements and other
financial information, including the notes thereto, appearing elsewhere in this
Annual Report. The consolidated financial data that relate to the year ended
June 30, 1994 has been derived from consolidated financial statements audited by
Ernst & Young LLP. Financial data for the nine months ended June 1995 and the
two fiscal years ended June 30, 1993 have been derived from unaudited
consolidated financial statements that include all adjustments that the Company
considers necessary for a fair presentation of the financial data set forth
therein, in accordance with generally accepted accounting principles. Because
the Company did not become an independent entity until October 1994, the
18
<PAGE> 20
historical financial statements do not necessarily reflect the results of
operations or financial position that would have been attained if the Company
had been a separate, independent company.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NINE MONTHS ENDED ------------------------------------------
JUNE 30,(B) SEPTEMBER JUNE 30,
------------------ 30, ---------------------------
1996 1995 1995(A) 1994 1993 1992
-------- ------- ------------ ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 37,411 $36,404 $ 45,111 $64,640 $55,540 $60,368
Cost of Sales........................ 21,022 20,609 25,764 31,236 29,863 30,295
-------- ------- -------- ------- ------- -------
Gross Profit......................... 16,389 15,795 19,347 33,404 25,677 30,073
Selling, General and administrative
expenses........................... 19,030 15,739 22,984 19,791 19,770 20,458
Research and development............. 5,360 5,970 7,903 6,725 6,850 6,720
Write-off Capitalized Software....... 3,244 -- -- -- -- --
-------- ------- -------- ------- ------- -------
Operating Income (loss).............. (11,245) (5,914) (11,540) 6,888 (943) 2,895
Interest Income (expense), net....... 180 361 456 (4) -- (207)
Other Income (expense), net.......... 103 (232) (4) (1,271) (1,074) (1,215)
Loss on Sale of Real-time Business... (15,160) -- -- -- -- --
-------- ------- -------- ------- ------- -------
Net income (loss) before income
tax................................ (26,122) (5,785) (11,088) 5,613 (2,017) 1,473
Income tax expense (benefit)......... -- -- -- 1,086 (1,560) 175
-------- ------- -------- ------- ------- -------
Net income (loss) before cumulative
effect of change in accounting
principal.......................... (26,122) (5,785) (11,088) 4,527 (457) 1,298
Accumulative effect of change in
accounting principal............... -- -- -- (135) -- --
-------- ------- -------- ------- ------- -------
Net income (loss).................... $(26,122) $(5,785) $(11,088) $ 4,392 $ (457) $ 1,298
Loss per share....................... (4.32) (.98) (1.88) -- -- --
</TABLE>
- ---------------
(A) During fiscal year 1995, the Company changed its fiscal year end from June
30 to September 30.
(B) Coinciding with the sale of the Real-time Business to Concurrent on June
26, 1996, the Company elected to change its fiscal year end from September
30 to June 30.
(C) Calculations for fiscal years 1992 through 1994 are not presented because
such periods predate the Company's becoming an independent entity.
19
<PAGE> 21
The following table sets forth certain selected historical financial data
for the Company's Trusted Systems Division, which excludes the Company's
corporate assets and liabilities not specifically identifiable to the division.
The financial date for the fiscal year ended September 30, 1996 have been
derived from audited financial statements of the Company for such period audited
by KPMG Peat Marwick LLP. Financial data for the nine months ended June 30, 1996
and 1995 and for the fiscal years ended June 30, 1994 and 1993, has been derived
from unaudited financial statements that include all adjustments that the
Company considers necessary for a fair presentation of the financial data set
forth therein, in accordance with generally accepted accounting principles. The
financial data included herein may not necessarily reflect the results of
operations of the Company in the future or what the results of operations of the
Trusted Systems Division would have been had it been a separate, stand-alone
entity during the periods covered.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NINE MONTHS ENDED -----------------------------------
JUNE 30, JUNE 30,
------------------- SEPTEMBER 30, -----------------
1996 1995 1995 1994 1993
------- ------- ------------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 7,269 $ 3,920 $ 4,817 $8,464 $5,974
Cost of sales........................... 4,589 2,473 3,140 3,842 2,992
------- ------- ------- ------ ------
Gross profit............................ 2,680 1,447 1,677 4,622 2,982
Selling, general and administrative
expenses.............................. 6,670 2,713 3,999 3,677 2,467
Research and development................ 930 586 835 816 698
Write-off Capitalized software.......... 3,244 -- -- -- --
------- ------- ------- ------ ------
Operating income (loss)................. (8,164) (1,582) (3,157) 129 (183)
Interest income (expense), net.......... (21) 26 49 (1) --
Other income, net....................... -- -- -- 7 5
Net income (loss) before income tax..... (8,153) (1,826) (3,108) 135 (178)
Income tax expense (benefit)............ -- -- -- 26 (137)
------- ------- ------- ------ ------
Net income (loss)....................... $(8,153) $(1,826) $(3,108) $ 109 $ (41)
======= ======= ======= ====== ======
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. References to the
Company's results of operations from October 7, 1994 are to the Company's
Trusted Systems Division and, prior to such time, to the Company's network
security business and operations as part of the Computer Systems Division of
Harris Corporation. The following information should be read in conjunction with
the financial statements of the Company's appearing elsewhere in this Report.
OVERVIEW
The Company is a leading developer and marketer of commercial network
security products designed to protect data on computer networks from
unauthorized users. The Company began marketing its CX/SX secure operating
system in 1989 and its LAN/SX secure networking software in 1990. In 1993, these
products received a B1 rating from the NCSC, which qualified the products for a
number of government and civilian applications and resulted in increased
marketability of such products. Until the introduction of the CyberGuard
Firewall during the first quarter of fiscal year 1995, the Company's sales were
attributable exclusively to sales of its secure operating system and secure
networking software on Night Hawk computer platforms, and largely to government
customers. During fiscal year 1993 and 1994, the Company derived substantial
revenues from two contracts: a multi-unit government contract with the British
Ministry of Defense ("British MOD") and a secure operating system porting
contract with IBM.
In May 1995, in response to initial and anticipated market acceptance of
the CyberGuard Firewall, the Company established a sales force separate from the
sales force of its former Real-time Business to focus on the Company's network
security products. At the same time, the Company began an aggressive expansion
of indirect sales channels to market its products in the United States and
internationally and since May 1995 has
20
<PAGE> 22
formed relationships with more than 30 VARs, distributors and manufacturers'
representatives. As a result of these and other efforts since such time, which
coincided with greater market acceptance of firewall products in general, sales
of the Company's network security products have shown strong quarter-to-quarter
increases. See "Quarterly Comparisons" below. However, given the Company's short
operating history in the commercial network security market, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. The Company intends to increase its marketing staff to promote its
products and also to continue to invest a significant amount of resources in the
continued development of the CyberGuard technologies, including software-only
products that support other computer platforms and networks. The Company's
planned levels of investment are based on an expectation of higher revenue from
increased product sales. As a result, net income for a given period could be
disproportionately affected by any reductions in sales.
Prior to June 30, 1996, the Company's operations included the Real-time
Business, which provided significant cash flows and certain economies of scale
with respect to sales, general and administrative costs. Many of the Company's
sales and administrative personnel and facilities were transferred to Concurrent
in connection with the Real-time Sale. As a result, the Company expects to incur
significant costs typically associated with new operating companies. The Company
has entered into a Shared Services Agreement effective June 30, 1996 with
Concurrent, which expires June 30, 1997, pursuant to which Concurrent will
provide certain administrative and personnel-related services for the Company.
The Company believes that it receives these services at costs equal to or below
that which the Company would incur if the Company were to provide these services
itself. Upon expiration of the Shared Services Agreement, the Company will be
required to provide these services for itself, which may increase the Company's
operating expenses. Also, the Company currently leases its office and
development facilities from Concurrent at below-market rates. The lease
terminates at the earlier of June 1997 or upon 90 days' written notice from
Concurrent. Upon such termination the Company anticipates its lease costs to
increase. The Company expects such additional costs to be offset in part by
increased sales; however, there can be no assurance that such additional sales
will be generated. The failure of the Company to increase sales sufficiently to
offset these additional expenses would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company reported certain non-recurring charges in the nine months ended
June 30, 1996. The Company incurred a loss of approximately $15.2 million on the
sale of the Real-time Business (based on a market price of Concurrent Common
Stock of $1.70 per share); approximately $3.2 million for the write-off of
certain capitalized software; and approximately $1.0 million in additional
expenses related to the Company's canceled public stock offering.
In July 1996, the Company changed its fiscal year end to June. Accordingly,
the information contained herein relating to the nine-month period ended June
30, 1996 represents the Company's 1996 fiscal year. Such period has been audited
by the Company's independent auditors and the financial statements related
thereto are attached to this Annual Report.
RESULTS OF OPERATIONS
Quarterly Comparisons
In May, 1995, the Company separated the operations of its trusted systems
business into a separate Trusted Systems Division. The following table presents
selected financial information for the Division for the three-month periods
indicated. The information presented is derived from unaudited financial
information of the Company that, in the opinion of management, reflects all
adjustments necessary for a fair presentation of
21
<PAGE> 23
such data. Data for each quarter is not necessarily indicative of the results
that may be expected for any other quarterly period or for the entire fiscal
year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 29, MARCH 30, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product revenues
Domestic........................ $ 2,001 $ 210 $ 404 $ 663 $ 1,494 $ 1,433
International................... 777 137 426 1,082 938 1,288
------ ----- ------- ------- ------- -------
Total product revenues............ 2,778 347 830 1,745 2,432 2,721
Other/Services.................... 66 84 67 80 138 153
------ ----- ------- ------- ------- -------
Total sales....................... 2,844 431 897 1,825 2,570 2,874
Cost of sales
Product sales................... 1,636 328 635 1,084 1,739 1,604
Other........................... 33 42 32 36 56 70
------ ----- ------- ------- ------- -------
Total cost of sales............... 1,669 370 667 1,120 1,795 1,674
------ ----- ------- ------- ------- -------
Gross profit...................... 1,175 61 230 705 775 1,200
Operating expenses
Research and development........ 211 156 250 307 271 352
Selling, general and
administrative............... 1,382 834 1,285 1,602 1,728 3,340
Write off of capitalized
software........................ -- -- -- -- -- 3,244
------ ----- ------- ------- ------- -------
Total operating expenses.......... 1,593 990 1,535 1,909 1,999 6,936
------ ----- ------- ------- ------- -------
Operating loss.................... (418) (929) (1,305) (1,204) (1,224) (5,736)
Other income (expense)............ 5 (4) (1) -- (21) --
Interest income................... 11 8 23 13 13 6
------ ----- ------- ------- ------- -------
Net loss before income tax........ (402) (925) (1,283) (1,191) (1,232) (5,730)
Income tax expense (benefit)...... -- 173 -- -- -- --
------ ----- ------- ------- ------- -------
Net loss.......................... $ (402) $ (325) $(1,283) $ (1,191) $(1,232) $ (5,730)
====== ===== ======= ======= ======= =======
</TABLE>
Nine-month Period Ended June 30, 1996 Compared to Nine-month Period Ended June
30, 1995
Net Revenues. Net revenues consist primarily of Firewall Systems,
Real-time Computer Systems, system integration and support services and sales
relating to third party security products. Overall revenue increased by $1
million to $37.4 million for the nine months ended June 30, 1996 compared to the
nine months ended June 30, 1995. This overall increase in net sales is
attributable to an increase in firewall product sales for the Trusted Systems
Division which offset lower sales for Real-time related products. Specifically,
the Company shipped 184 turn-key firewall systems during the nine months ended
June 30, 1996 compared to 72 units for the same period in 1995. Firewall and
related security products revenues increased by 86% during the nine months ended
June 30, 1996 when compared to the nine months ended June 30, 1995. The nine
months ended June 30, 1995 included a $1.9 million sale (or 48% of total secure
revenues) to one government related customer for 43 units; the nine months ended
June 30, 1996 included sales to a single international customer of approximately
$.6 million or 8% of total secure revenues. There were no sales in the year
ended June 30, 1996 for more than five units to any one customer. The increase
in product sales is the result of increased acceptance in the commercial
marketplace for the CyberGuard Firewall. The Company also experienced a strong
increase in sales leads during the nine months ended June 30, 1996 as several
prominent periodicals and industry-based magazines rated the CyberGuard highly
based upon their published testing results. During the nine months ended June
30, 1996, 71% of the Company's sales were to commercial customers, compared to
39% for the same period in 1995.
Compared to the corresponding prior year period international secure
product revenues increased $2.2 million to $3.3 million for the nine months
ended June 30, 1996, and domestic sales increased $1.2 million to
22
<PAGE> 24
$4.0 million. The domestic sales figure for the year ended September 30, 1995
includes $1.9 million in sales to one domestic customer.
Gross Profit. The Company's overall gross profit increased $.6 million to
$16.4 million for the ninth months ended June 30, 1996 from the nine months
ended June 30, 1995. The Company's overall gross margin percentages remained
constant at approximately 43.5% for both periods. The gross margin percentages
for the CyberGuard and related security product sales remained constant at 37%
for the nine months ended June 30, 1995 and 1996.
Net Loss. The Company experienced a net loss of approximately $26.1
million for the nine-month period ended June 30, 1996, compared to a loss of
$5.8 million for nine-month period ended June 30, 1995. The Company's operating
expenses increased by $5.9 million from $21.7 million for the nine months ended
June 30, 1995 to $27.6 million for the nine months ended June 30, 1996. The 1996
results include several significant non-recurring charges, including the
write-off of approximately $3.2 million in previously capitalized software
developments costs (see Note 18 to the accompanying consolidated financial
statements) and a provision of approximately $1.0 million for costs associated
with the Company's canceled secondary stock offering (see Note 23 to the
accompanying consolidated financial statements). In addition to these one-time
charges, the Company also recognized a loss of $15.2 million on the sale of the
Real-time Business during the nine months ended June 30, 1996. The major
components of this loss were the change, between the date that the Real-time
Sale was approved by the Company and the transaction closing date, in the value
of the Company's common stock issued by the Company to Concurrent; the transfer
to Concurrent of $5.6 million-worth of capitalized software at a minimal cost to
Concurrent, and approximately $2.7 million in transaction-related expenses.
Reducing the June 30, 1996 net loss by these non-recurring charges results in an
adjusted net loss of $6.7 million compared to $5.8 million for the same period
in 1995. The increased net loss of $0.9 million for nine months ended June 30,
1996 is attributable to an increase in expenses to enhance the marketability of
the CyberGuard Firewall and to increase its features and functionality.
Additionally, the results for the nine-month period ended June 30, 1996 include
costs associated with the product definition, technical feasibility study, and
efforts related to the "porting" of the Company's Secure Unix Operating System
to an Intel-based P.C. running a secure version of Unix. No similar expenses
were incurred for the nine months ended June 30, 1995.
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended June 30,
1994
During fiscal year 1995, the Company operated both its Real-time Business
(which has been sold to Concurrent) and the Trusted System Division, the
operations of which are continued by the Company. During the fiscal year ended
September 30, 1995, the Company's principal products were the Night Hawk
real-time computer (the "real-time system"), the Power UX real-time operating
systems as sold on Motorola's PowerPC 604 CPU boards or computers, the Night
Hawk real-time computer as enhanced with either the Company's CX/SX or Power UX
secure real-time operating system (the "trusted system"), the commercial
CyberGuard Firewall product and maintenance and support of its installed
computer systems.
Net Sales, consolidated. During the year ended September 30, 1995, the
Company's net sales decreased to $45.1 million for fiscal year 1995 from $64.6
million for fiscal year 1994. Net product sales for fiscal year 1995 were $31.2
million as compared to $50.1 million for fiscal year 1994. Fiscal year 1995 net
sales attributable to real-time open systems were $26.4 million as compared to
$37.0 million for fiscal year 1994. Management believes that approximately $5.7
million of the decrease in revenue from real-time open systems was the result of
the implementation of the Company's income-recognition policies related to
real-time systems that were ordered in fiscal year 1994 but, due to delays in
receiving acceptable Motorola 88110 microprocessor chips, were not shipped until
fiscal year 1995. During fiscal year 1995, the Company also experienced a slow
down in real-time product sales due to the inability of IBM Corporation to
complete a secondary cache chip critical to the Company's real-time product.
Also, the Company was not successful in moving its real-time products to a more
commercial focus and as such experienced the delays inherent in the government
markets. Fiscal year 1995 net sales attributable to real-time proprietary
systems, reflecting sales for replacement or add-on parts for the Company's
installed base of proprietary systems, were $3.3 million as compared to $4.3
million for fiscal year 1994.
23
<PAGE> 25
Maintenance revenue decreased to $13.6 million for fiscal year 1995 from
$14.5 million for fiscal year 1994. This decrease was principally a result of
the shift in market demand to open systems. The Company's real-time open systems
required less maintenance as compared to proprietary systems, and open systems
could, in many cases, be serviced by the customers themselves. Maintenance
revenues also declined as the Company's installed base of proprietary systems
reached the end of its useful life.
During fiscal year 1995, the Company's net product sales to agencies of the
United States government and their prime contractors were $14.6 million and
maintenance revenue was $8.4 million. During fiscal year 1994, the comparable
net product sales were $25.7 million and the comparable maintenance revenue was
$7.4 million.
International net sales decreased to $11.9 million for fiscal year 1995
from $16.8 million for fiscal year 1994. This decrease is attributable
principally to the completion during fiscal year 1994 of a trusted systems
contract with a government contractor in the U.K., which had resulted in $4.9
million of revenue during fiscal year 1994.
Net Sales, Trusted Systems Division. The Company retains the operations of
its Trusted Systems Division following the June 1996 sale of the Real-time
Business. The Division's net sales decreased to $4.8 million for fiscal year
1995 compared to $8.5 million for fiscal year 1994. Sales in fiscal year 1994
included $5.4 million in sales of the Company's secure operating system to the
British MOD for a single project involving the deployment of secure office
automation systems and $1.6 million in sales of the Company's secure operating
system to IBM. Sales in fiscal year 1995 included sales of $1.9 million (or 39%
of total sales) to a government-related customer and sales of approximately $0.7
million (or 14% of total sales) related to porting the Company's secure
operating system to Groupe Bull S.A.'s Escala workstation. Sales of CyberGuard
Firewalls, introduced during the first quarter of fiscal year 1995, represented
$2.5 million in sales (including sales of $1.9 million to the government-related
customer). During the fiscal year ended September 30, 1995, sales to customers
in commercial markets accounted for 42% of the Division's sales.
For the Company's Trusted Systems Division, overall domestic sales were
$3.3 million and $3.0 million for the fiscal years 1995 and 1994, respectively.
International sales decreased $3.9 million to $1.5 million for fiscal year 1995.
The higher international sales for fiscal year 1994 were attributable to the
contract with the British MOD for sales of the Company's secure operating
system. International sales in fiscal year 1995 related primarily to sales of
the CyberGuard Firewall. International sales represented approximately 31% of
total sales, compared to approximately 64% in fiscal year 1994; the decrease is
attributable to the British MOD contract that ended during fiscal year 1994.
Gross Margin, consolidated. Gross margin for sales and rentals decreased
to 40.5% in fiscal year 1995 from 54.4% in fiscal year 1994 as a result of
decreased sales of Night Hawk Series computers and $2.4 million of inventory
reserve taken. Service and maintenance gross margins increased to 48.2% from
42.1% as a result of decrease in expenses as the product mix of service moves
more to the open system Night Hawk computer. Open systems are generally more
reliable and therefore require less service. International maintenance revenue
increased, which also resulted in improved gross margins.
Gross Margin, Trusted Systems Division. The Company's gross profit for its
Trusted Systems Division decreased $2.9 million to $1.7 million in fiscal year
1995. The corresponding gross margin decreased to 34.8% for fiscal year 1995
from 54.6% for fiscal year 1994. This decrease is the result of lower sales and
significantly lower profit margins for commercial CyberGuard Firewalls when
compared to sales of secure operating systems and secure networking software
installed separately as an added feature on real-time-oriented computer systems.
Indirect Expenses. Research, development, marketing, administrative and
general expenses for fiscal year 1995 increased by $4.4 million as the Company
invested to introduce its trusted product in the commercial market. The Company
also booked a reserve of $1.3 million for a shipment made to Lukon, a Russian
corporation, and the Company's joint venture partner. The Company is currently
working on a payment plan with Lukon.
24
<PAGE> 26
Net Income (Loss), consolidated. Net loss for fiscal year 1995 was $11.1
million compared to a profit of $4.4 million for fiscal year 1994. The decrease
was principally the result of the decrease in revenue experienced during fiscal
year 1995. Additions to the reserves for inventory and doubtful accounts
accounted for $4.0 million of the loss. See "Fiscal Year Ended June 30, 1995
Compared to Fiscal Year Ended June 30, 1994 -- Net Sales." The Company received
interest income of $0.5 million on its cash and marketable securities compared
to a slight charge for fiscal year 1994. The Company paid no income taxes during
fiscal year 1995 and is currently operating with a tax loss carry forward in all
of its operations.
Net Income, Trusted Systems Division The Company experienced a net loss of
$3.1 million for fiscal year 1995, compared to net income of $0.1 million for
fiscal year 1994. The net loss is the result of lower product sales and gross
margins and increased operating expenses incurred to establish sales and
marketing programs for the commercial introduction of the CyberGuard Firewall.
Change in Fiscal Year. The Company changed its fiscal year end from June
30 to September 30 effective the year beginning October 1, 1994. Revenue for the
three months ending September 30, 1994 was $7.7 million. Sales were lower than
expected due in part to the protracted nature of the spin-off from Harris
Corporation and its effects on product sales focus by management. The loss after
tax for the period was $7.6 million compared to a profit of $375,000 for the
quarter ending September 30, 1993. The loss for the period was impacted by a
$1.3 million charge for restructuring, $2.5 million pre-tax and $2.4 million of
after-tax charges for expenses relating to the spin-off from Harris Corporation
and a $1.7 million charge in connection with the repatriation of cash from the
Company's German subsidiary.
Fiscal Year Ended June 30, 1994 Compared to Fiscal Year Ended June 30, 1993
During fiscal year 1993 and 1994, the Company's trusted business did not
operate as a separate Trusted Systems Division; rather, the Company's trusted
operations were carried out as part of the Company's overall Real-time Business.
The Trusted Systems Division was created in April 1995. However, because the
Company continues the operation of the Trusted Systems Business, certain
information relating to such business is described in the following paragraphs.
Net Sales, consolidated Net sales increased to $64.6 million for fiscal
year 1994 from $55.5 million for fiscal year 1993. During fiscal year 1994, net
product sales were $50.1 million as compared to $39.4 million for fiscal year
1993. Fiscal year 1994 net sales attributable to real-time open systems were
$37.0 million as compared to $29.0 million for fiscal year 1993. The increase in
revenue from real-time open systems was the result of the delayed completion and
delivery of 5800 Series computers ordered by customers in fiscal year 1993 but
shipped in fiscal year 1994 as described above. Fiscal year 1994 net sales
attributable to real-time proprietary systems, reflecting sales for replacement
or add-on parts for the Company's installed base of proprietary systems, were
$4.3 million as compared to $4.2 million for fiscal year 1993.
Maintenance revenue decreased to $14.5 million for fiscal year 1994 from
$16.1 million for fiscal year 1993. This decrease was principally a result of
the continuing shift in market demand to open systems, which require less
maintenance and support as compared to proprietary systems. Maintenance revenues
are also declining as the Company's installed base of proprietary systems
reaches the end of its useful life.
During fiscal year 1994, the Company's net product sales to agencies of the
United States government and their prime contractors were $25.7 million and
maintenance revenue was $7.4 million. During fiscal year 1993, the comparable
net product sales were $15.4 million and the comparable maintenance revenue was
$8.6 million. During fiscal year 1994, the Company's net product sales to the
United States Department of Defense or to other contractors for integration into
systems for the Department of Defense were $13.9 million and maintenance revenue
was $2.5 million. During fiscal year 1993, the comparable Department of Defense
net product sales were $1.0 million and maintenance revenue was $3.2 million.
The increase stems in part from the completion and delivery of the 5800 Series
computers ordered in fiscal year 1993 but shipped in fiscal year 1994. Also, the
Company increased its sales of trusted products as a result of the NCSC B1-level
certification of these products.
25
<PAGE> 27
Net Sales, trusted systems. Net sales for the Company's trusted business
increased to $8.5 million for fiscal year 1994 from $6.0 million for fiscal year
1993. Sales in fiscal years 1994 and 1993 precede the introduction of the
CyberGuard Firewall and are primarily attributable to the contract with the
British MOD ($5.4 million and $4.3 million in fiscal years 1994 and 1993,
respectively) and the contract with IBM ($1.6 million and $1.0 million in fiscal
years 1994 and 1993, respectively). Sales to domestic customers increased to
$3.0 million from approximately $1.6 million in fiscal year 1993. During fiscal
year 1994, the NCSC rated the Company's secure operating system and networking
software at a B1 level, which contributed in large part to the increase in
sales. The Company's contract with IBM accounted for approximately $0.6 million
of the increase in domestic sales. International sales increased to $5.4 million
from $4.3 million as product shipments increased to complete the British MOD
contract.
Gross Margin, consolidated. Gross margin for sales and rentals increased
to 54.4% in fiscal year 1994 from 48.7% in fiscal year 1993 as a result of
increased sales of Night Hawk 5800 Series computers having higher gross margins.
The Company believes this increase in gross margin is an aberration that arose
from the delays until 1994 of recognizing revenues from sales of 5800 Series
computers ordered in fiscal year 1993 but shipped in fiscal year 1994. See
"-- Fiscal Year Ended June 30, 1994 Compared to Fiscal Year Ended June 30,
1993 -- Net Sales, above." Historically, the Company's gross margins had been
relatively stable, primarily because the Company and its competitors priced
their products based on product characteristics and service and not through
discounting or other pricing policies. Service and maintenance gross margins
increased to 42.1% from 40.1% as a result of decreased start up expenses for the
Night Hawk 5800 Series computers.
Gross Margin, trusted system. Gross profit for trusted systems increased
$1.6 million from approximately $3.0 million in fiscal year 1993 to $4.6 million
in fiscal year 1994. Gross margin increased to 54.6% from 49.9% as a result of
increased sales. The increase in gross margin is also attributable to the
initial contract start-up expenses for the IBM and British MOD contracts that
were incurred during fiscal year 1993.
Net Income (Loss). Net income for fiscal year 1994 increased to $4.4
million from a loss of $0.5 million for fiscal year 1993. Fiscal year 1994
operating profit attributable to domestic operations increased to $3.8 million
from a loss of $2.3 million in fiscal year 1993. The increase was principally
the result of recognizing revenue during fiscal year 1994 from upgrades of the
Company's real-time computers that were ordered in fiscal year 1993. Management
believes that operating profit attributable to domestic operations would have
increased to break even in fiscal year 1993 but for such recognition of revenue.
The increase in net income is also due to an increase in operating profit
attributable to European operations of $1.0 million for fiscal year 1994 from
$0.3 million for fiscal year 1993. That increase is the result of increasing
product revenues and decreasing costs relating to European operations. The
increase in profitability also offset a decrease in tax benefit of $2.6 million
from fiscal year 1993 to fiscal year 1994.
The fiscal year 1994 results include a $135,000 after-tax adjustment
reflecting Harris Corporation's adoption of Statement of Financial Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
The Company has not incurred any substantial expense for interest during
any of the periods under consideration. Interest expense results from direct
borrowings of the business. See "Liquidity and Capital Resources".
Net Income, trusted systems. Total indirect expenses attributed to trusted
systems increased $1.3 million to $4.5 million for fiscal year 1994 from $3.2
million for fiscal year 1993. Selling, general and administrative expenses
increased $1.2 million to $3.7 million for fiscal year 1994 as the Company
marketed its certified product to government agencies and prime contractors
around the world. The increase in sales offset by an increase in selling,
general and administrative expenses increased net income to $0.1 million from a
net loss of $41,000 in fiscal year 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical uses of cash have been to fund net losses from
operations, machinery and equipment acquisitions and software development costs.
Capital expenditures for the nine-month period ended
26
<PAGE> 28
June 30, 1996 and the fiscal year ended September 30, 1995 were $1.8 million and
$1.9 million respectively. Software development costs were $3.7 million and $2.3
million, respectively, during the respective periods. Cash expenditures relating
to the Real-time Sale were $2.8 million, and expenditures related to the
Company's proposed public offering, which was canceled in August 1996, were
approximately $1 million.
Prior to the Real-time Sale, the Company funded its cash requirements from
its working capital and cash flow provided from its Real-time Business.
Subsequent to the Real-time Sale, the company sold substantially all its
investment in the common stock of Concurrent. The funds provided from this stock
sale were used to pay off the Company's existing balance of approximately $3.3
million on its line of credit, and to provide the necessary working capital to
support the operations of the Company.
The Company anticipates certain one-time expenditures approximating $0.3
million for leasehold improvements and related expenses as the Company relocates
to a new facility prior to June 1997. Leasehold expense and general and
administrative expenses also may increase upon the termination of a shared
services agreement with Concurrent.
The future liquidity of the Company will be affected by numerous factors,
including sales volumes, gross margins, the levels of selling, general and
administrative expenses required to fully implement product sales to commercial
customers, levels of required capital expenditures and access to external
sources of financing. The Company expects expenditures to increase commensurate
with increased development and marketing of CyberGuard Firewalls and other
network security products. The Company may elect to sell the preferred stock of
Concurrent that the Company received in the Real-time Sale. The timing of such
sale and the price at which such stock may be sold may be affected by other
factors beyond the Company's control, such as the absence of a trading market of
such stock, the value of the underlying Concurrent common stock, and changes in
the business, operations or prospects of Concurrent. The Company may also elect
to renew its line of credit by pledging certain current assets as collateral for
the line. Additionally, the Company may seek additional equity financing in the
future to support expansion plans or acquisition of key technologies.
If adequate funds are not available, the Company may be required to curtail
certain activities, including product development, marketing and sales
activities. There can be no assurance that additional financing will be
available to the Company on acceptable terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following items are attached and incorporated into this Item 8.
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.................................... F-1
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and September 30, 1995................ F-3
Consolidated Statements of Operations for the Nine-month period ended June 30, 1996,
the year ended September 30, 1995, the Three-month period ended September 30, 1994
and the year ended June 30, 1994.................................................... F-4
Statement of Cash Flows for the Nine-month period ended June 30, 1996, the year ended
September 30, 1995, the Three-month period ended September 30, 1994 and the year
ended June 30, 1994................................................................. F-5
Consolidated Statements of Shareholders' Equity....................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required by this item is contained in part under the
caption "Executive Officers" in PART I hereof, and the remainder will be
contained in the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders expected to be mailed to stockholders on or before October 28,
1996.
27
<PAGE> 29
Officers are selected on an annual basis and serve at the discretion of the
Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
1996 Proxy Statement and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
1996 Proxy Statement and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
1996 Proxy Statement and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. The Financial Statements filed as part of this report are
listed separately in the index to Financial Statements beginning on page F-1 of
this report.
(b) The Company filed an 8-K on April 10, 1996 reporting in Item 5 therein
a description of the Company's then proposed transaction with Concurrent
Computer Corporation.
The Company filed an 8-K/A on June 23, 1996, amending the Company's 8-K
dated April 10, 1996, reporting in Item 5 therein the following:
Harris Computer Systems Corporation and Subsidiaries Pro Forma
Condensed Consolidated Statement of Operations Six Months Ended March 30,
1996
Harris Computer Systems Corporation and Subsidiaries Pro Forma
Condensed Consolidated Statement of Operations Year Ended September 30,
1995
Harris Computer Systems Corporation and Subsidiaries Notes to Pro
Forma Condensed Consolidated Statements of Operations
Harris Computer Systems Corporation and Subsidiaries Pro Forma
Condensed Consolidated Balance Sheet March 30, 1996
Harris Computer Systems Corporation and Subsidiaries Notes to Pro
Forma Condensed Consolidated Balance Sheet
Audited Consolidated Financial Statements of Concurrent Computer
Corporation, and Notes, thereto, for the years ended June 30, 1995, 1994
and 1993.
Concurrent Computer Corporation's Management's Discussion and Analysis
of Financial Condition and Results of Operations for the fiscal years ended
June 30, 1995, 1994 and 1993.
Unaudited Consolidated Financial Statements of Concurrent Computer
Corporation, and Notes thereto, at March 31, 1996 and for the three-month
and the nine month periods then ended.
Concurrent Computer Corporation's Management's Discussion and Analysis
of Financial Condition and Results of Operations for the three-month and
the nine-month periods ended March 31, 1996 and 1995.
Pro Forma Condensed Consolidated Financial Statements of Concurrent
Computer Corporation for the year ended June 30, 1995 and nine-month period
ended March 31, 1996.
28
<PAGE> 30
The following exhibits are included in this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
2.01 -- Restated Purchase and Sale Agreement between Concurrent Computer Corporation and
the Company dated May 23, 1996*
3.01 -- Articles of Incorporation of the Company, as amended
3.02 -- Bylaws of the Company**
4.01 -- Form of Common Stock Certificate*****
4.02 -- Form of Stockholder Rights Plan**
4.04 -- Form of Share Holding Agreement between Concurrent Computer Corporation and the
Company*****
10.01 -- Employment Agreement dated March 5, 1996 between the Company and Robert L. Carberry
10.02 -- Employment Agreement dated July 1, 1996 between the Company and Patrick O. Wheeler
10.03 -- Employment Agreement dated May 28, 1996 between the Company and Frank Gelbart
10.04 -- Employment Agreement dated July 1, 1996 between the Company and Katherine K.
Hutchison
10.05 -- Employment Agreement dated July 1, 1996 between the Company and Rick A. Siebenaler
10.06 -- Employment Agreement dated October 1, 1994 between the Company and Bradley C.
Lesher****
10.07 -- Employment Agreement dated March 1, 1996 between the Company and Brian Foremny
10.08 -- Joint Development and Marketing Agreement between the Company and Information
Resource Engineering, Inc.
10.09 -- Employee Stock Incentive Plan*******
10.10 -- Amendment to Employee Stock Incentive Plan********
10.11 -- Employee Savings Plan******
16.01 -- Letter addressed to the Securities and Exchange Commission from Ernst & Young LLP
regarding the change in certifying accountant***
23.01 -- Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants
23.02 -- Consent of Ernst & Young LLP, Independent Certified Public Accountants
27.01 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Incorporated by reference to Annex A of the Registrant's Definitive
Proxy Statement as filed with the Commission on May 24, 1996
** Filed with Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form 10, dated September 29, 1994, File No.
0-24544 and incorporated herein by reference.
*** Filed with the Company's Current Report on Form 8-K dated November 11,
1994 and incorporated herein by reference.
**** Filed with the Company's Quarterly Report on Form 10-Q for the period
ending December 30, 1994 and incorporated herein by reference.
***** Filed with the Company's Registration Statement on Form S-3 dated May
23, 1996 (File No. 333-04407) and incorporated herein by reference.
****** Incorporated by reference from Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Commission File Number 33-88446)
filed on January 13, 1995.
******* Incorporated by reference from Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Commission File Number 33-88448)
filed on January 13, 1995.
******** Incorporated by reference to Annex E of the Registrant's Definitive
Proxy Statement as filed with the Commission on May 24, 1996.
29
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.
CYBERGUARD CORPORATION
By: /s/ ROBERT L. CARBERRY
------------------------------------
Robert L. Carberry
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- -------------------
<C> <S> <C>
/s/ ROBERT L. CARBERRY Chairman, President and October 1, 1996
- --------------------------------------------- Chief Executive Officer
Robert L. Carberry and Director (Principal
Executive Officer)
/s/ PATRICK O. WHEELER Vice President Finance and October 1, 1996
- --------------------------------------------- Chief Financial Officer
Patrick O. Wheeler (Principal Financial and
Principal Accounting
Officer)
/s/ BRIAN FOREMNY Secretary, General Counsel October 1, 1996
- --------------------------------------------- and Director
Brian Foremny
/s/ C. SHELTON JAMES Director October 1, 1996
- ---------------------------------------------
C. Shelton James
/s/ MICHAEL F. MAGUIRE Director October 1, 1996
- ---------------------------------------------
Michael F. Maguire
/s/ RICHARD P. RIFENBURGH Director October 1, 1996
- ---------------------------------------------
Richard P. Rifenburgh
</TABLE>
30
<PAGE> 32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Harris Corporation:
We have audited the accompanying consolidated statements of operations and
cash flows of Harris Computer Systems Business for the period ended June 30,
1994. These financial statements are the responsibility of the Business'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Harris Computer Systems Business for the year ended June 30, 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 14 to the financial statements, effective July 1, 1993
the Business changed its method of accounting for postretirement benefits other
than pensions.
ERNST & YOUNG LLP
Orlando, Florida
July 13, 1994
F-1
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CyberGuard Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of CyberGuard
Corporation and subsidiaries, formerly Harris Computer Systems Corporation and
subsidiaries, as of June 30, 1996 and September 30, 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the nine months ended June 30, 1996, the year ended September 30, 1995 and the
three months ended September 30, 1994. These consolidated financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CyberGuard
Corporation and subsidiaries as of June 30, 1996 and September 30, 1995, and the
results of their operations and their cash flows for the nine months ended June
30, 1996, the year ended September 30, 1995 and the three months ended September
30, 1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
September 11, 1996
F-2
<PAGE> 34
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
-------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. 3,617 $ 8,265
Accounts and notes receivable, less allowance for uncollectible
accounts of $318 and $1,513 at June 30, 1996 and September 30, 1995,
respectively
(Note 11)........................................................... 3,668 9,994
Inventories (Note 9).................................................. 134 9,080
Prepaid expenses...................................................... 565 530
Securities available for sale (Note 1)................................ 13,600 --
-------- --------
Total current assets........................................ 21,584 27,869
Machinery and equipment, net (Note 11)................................ 1,152 5,947
Capitalized computer software development costs, less accumulated
amortization of $6,870 at September 30, 1995 (Note 3 and 18)........ -- 6,734
Investment in Concurrent preferred stock (Note 1)..................... 3,853 --
Non-compete Agreement (Note 17)....................................... 1,120 --
Other assets.......................................................... 3 881
-------- --------
Total assets................................................ $ 27,712 $ 41,431
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Accounts payable...................................................... -- 3,493
Deferred revenue...................................................... 44 401
Accrued expenses (Note 10)............................................ 6,223 5,441
Loan payable (Note 5)................................................. 3,200 --
-------- --------
Total current liabilities................................... 9,467 9,335
Total liabilities........................................... 9,467 9,335
Shareholders' equity (Note 13)
Common stock par value $0.01 authorized 20,000,000 shares; issued
and outstanding 6,709,371 shares and 5,911,437 shares at June 30,
1996 and September 30, 1995, respectively........................ 67 59
Additional paid in capital.......................................... 56,152 43,662
Accumulated deficit................................................. (37,210) (11,088)
Cumulative translation adjustment................................... (764) (537)
-------- --------
Total shareholders' equity.................................. 18,245 32,096
-------- --------
Total liabilities and shareholders' equity.................. $ 27,712 $ 41,431
======== ========
</TABLE>
See notes to the accompanying consolidated financial statements
F-3
<PAGE> 35
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1995 1994 1994
----------- ------------- ------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Sales
Equipment.................................... $ 24,958 $ 31,184 $ 4,242 $ 50,146
Services..................................... 12,453 13,927 3,506 14,494
---------- ---------- ---------- -------
37,411 45,111 7,748 64,640
Cost of sales
Equipment.................................... 13,360 18,550 3,443 22,842
Services..................................... 7,662 7,214 2,023 8,394
---------- ---------- ---------- -------
21,022 25,764 5,466 31,236
Gross income................................... 16,389 19,347 2,282 33,404
Operating expenses
Research and development..................... 5,360 7,903 1,517 6,725
Selling, general and administrative.......... 18,021 22,984 4,836 19,791
Write-off of capitalized computer software
development costs (Note 18)............... 3,244 -- -- --
Costs relating to canceled secondary offering
(Note 23)................................. 1,009 -- -- --
Restructuring (Note 6)....................... -- -- 1,256 --
---------- ---------- ---------- -------
Total other operating expenses....... 27,634 30,887 7,609 26,516
---------- ---------- ---------- -------
Operating income (loss)........................ (11,245 ) (11,540) (5,327) 6,888
Harris Corporate expense allocation............ -- -- -- (1,324)
Transaction costs relating to spin off (Note
6)........................................... -- -- (2,500) --
Interest income (expense), net................. 180 456 (69) (4)
Other income (expense), net.................... 103 (4) (72) 53
Loss on sale of Real-Time Business (Note 1).... (15,160 ) -- -- --
---------- ---------- ---------- -------
(14,877 ) 452 (2,641) (1,275)
Net income (loss) before income tax provision
(benefit) and cumulative effect of change in
accounting principle......................... (26,122 ) (11,088) (7,968) 5,613
Income tax provision (benefit)................. -- -- (378) 1,086
---------- ---------- ---------- -------
Net income (loss) before cumulative effect of
change in accounting principle............... (26,122 ) (11,088) (7,590) 4,527
Cumulative effect of change in accounting
principle (Note 15).......................... -- -- -- (135)
---------- ---------- ---------- -------
Net income (loss).............................. $ (26,122 ) $ (11,088) $ (7,590) $ 4,392
========== ========== ========== =======
Loss per common share.......................... $ (4.32 ) $ (1.88) $ (1.28)
========== ========== ==========
Weighted average number of shares
outstanding.................................. 6,046,182 5,911,437 5,911,437
========== ========== ==========
</TABLE>
See notes to the accompanying consolidated financial statements.
F-4
<PAGE> 36
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS YEAR ENDED ENDED YEAR ENDED
ENDED JUNE SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
30, 1996 1995 1994 1994
----------- ------------- -------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................ $ (26,122) $ (11,088) $ (7,590) $ 4,392
Adjustment to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation.............................. 2,121 3,446 1,134 3,223
Amortization.............................. 1,735 1,305 326 1,396
Compensation and benefits................. 500 -- -- (309)
Write-off of capitalized software
development costs....................... 3,244 -- -- --
Loss on sale of Real-Time Computing
Business (Non-cash)..................... 12,490 -- -- --
Changes in assets and liabilities, net of
effect of sale of Real-time Computing
Business Receivables.................... (3,569) 1,393 12,333 (4,122)
Due from Harris Corporation............. -- 6,369 (6,369) --
Inventories............................. 3,537 4,998 (863) (1,370)
Accounts payable........................ (2,049) (1,201) 2,142 (1,654)
Accrued expenses........................ 2,675 (1,051) 1,502 334
Deferred revenue........................ 392 (383) (344) (4,044)
Deferred income taxes................... -- (166) (1,075) 28
Prepaid expenses and other assets....... (265) 827 (510) --
Other................................... (227) 391 257 (1,819)
-------- -------- ------- -------
Net cash provided (used) by operating
activities................................... (5,538) 4,840 943 (3,945)
-------- -------- ------- -------
Cash flows from investing activities
Additions to machinery and equipment......... (1,818) (1,900) (1,151) (3,336)
Cash included with sale of Real-Time
Computing Business........................ (420) -- -- --
Software development costs -- capitalized.... (3,688) (2,324) (569) (2,780)
-------- -------- ------- -------
Net cash used by investing activities.......... (5,926) (4,224) (1,720) (6,116)
-------- -------- ------- -------
Cash flows from financing activities
Proceeds from short term borrowings.......... 3,200 -- -- --
Proceeds from sale of Concurrent stock....... 3,400 -- -- --
Equity contributions......................... 216 -- -- 18,484
-------- -------- ------- -------
Net cash provided by financing activities...... 6,816 -- -- $ 18,484
-------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................. (4,648) 616 (777) 8,423
-------- -------- ------- -------
Cash and cash equivalents at beginning of the
period....................................... 8,265 7,649 8,426 3
-------- -------- ------- -------
Cash and cash equivalents at end of the
period....................................... $ 3,617 $ 8,265 $ 7,649 $ 8,426
======== ======== ======= =======
Supplemental cash flow disclosure:
Interest paid................................ $ 5 $ -- $ -- $ 1,613
======== ======== ======= =======
</TABLE>
See notes to the accompanying consolidated financial statements.
F-5
<PAGE> 37
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK $.01 NET
PAR ADDITIONAL CUMULATIVE INVESTMENT
------------------ PAID IN ACCUMULATED TRANSLATION BY FORMER
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT PARENT TOTAL
--------- ------ ---------- ----------- ----------- ---------- -------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1994............ -- -- -- -- (1,185) 51,311 50,126
Net loss to distribution date
(Note 1)....................... -- -- -- -- -- (7,590) (7,590)
Issuance of common stock to
Harris stockholders............ 5,911,437 $ 59 43,662 -- -- (43,721) --
Translation adjustments.......... -- -- -- -- 257 -- 257
--------- --- ------- -------- ------- -------- --------
Balance September 30, 1994....... 5,911,437 $ 59 43,662 -- (928) -- 42,793
Net loss......................... -- -- -- (11,088) -- -- (11,088)
Translation adjustments.......... -- -- -- -- 391 -- 391
--------- --- ------- -------- ------- -------- --------
Balance September 30, 1995....... 5,911,437 $ 59 43,662 (11,088) (537) -- 32,096
Net loss......................... (26,122) (26,122)
Translation adjustments.......... -- -- -- -- (227) -- (227)
Issuance of common stock relating
to the sale of the Real-Time
Computing Business............. 683,178 7 11,778 -- -- -- 11,785
Issuance of common stock,
other.......................... 114,756 1 712 -- -- -- 713
--------- --- ------- -------- ------- -------- --------
Balance June 30, 1996............ 6,709,371 $ 67 56,152 (37,210) (764) -- 18,245
========= === ======= ======== ======= ======== ========
</TABLE>
See notes to the accompanying consolidated financial statements.
F-6
<PAGE> 38
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) BACKGROUND
CyberGuard Corporation and Subsidiaries (the "Company"), formerly Harris
Computer Systems Corporation and Subsidiaries, became an independent company
effective September 29, 1994 (the "Distribution Date") when Harris Corporation
("Former Parent") spun off its Computer Systems Division. In connection with the
spin-off, one share of the Company's common stock, together with the associated
preferred stock purchase rights (Note 13), was issued for every twenty shares of
Harris Corporation common stock, outstanding to shareholders of record on
October 7, 1994. The terms of the spin-off resulted in net assets of $43,721
being transferred from Harris Corporation to the Company. The Company has two
divisions, one which develops real-time computer systems, and another that
develops multi-level secure computer systems, solutions and software for
commercial and government markets.
On March 26, 1996, the Company and Concurrent Computer Corporation
("Concurrent") signed a Purchase and Sale Agreement effective as of that date
and amended and restated as of May 23, 1996 ("Agreement"). This Agreement was
approved by the shareholders of both companies on June 27, 1996 and the
transaction was closed effective June 30, 1996 . Under the Agreement, the
Company sold the net assets of its Real-Time computing business with a book
value of $21,561 and issued 683,178 shares of its common stock valued at $11,785
to Concurrent (the "Transaction") in exchange for (i) 10 million newly issued
shares of Concurrent common stock, par value $0.01 per share valued at $17,000,
and (ii) convertible exchangeable preferred stock of Concurrent paying a 9%
cumulative annual dividend quarterly in arrears with a liquidation preference of
approximately $6,264. The Preferred Stock is redeemable by Concurrent when the
current market price of Concurrent common stock exceeds $3.75, and is
mandatorily redeemable on June 27, 2006, at the liquidation preference plus
accrued and accumulated unpaid dividends. The Preferred Stock is reflected at
its estimated market value of $3,853 which was calculated using a discount rate
of 14% and assuming that no dividends will be paid until the mandatory
redemption date.
The Company has recorded a loss of $15,160 as a result of the sale of the
Real-time computing business, including transaction costs of approximately
$2,667. Immediately following the Real-time sale, the Company sold 2,000,000
shares of the Concurrent common stock for $3,400.
(2) LIQUIDITY
The Company's historical uses of cash have been to fund net losses from
operations, machinery and equipment acquisitions and software development costs.
Capital expenditures for the nine months ended June 30, 1996 and for the fiscal
year ended September 30, 1995 were $1.8 million and $1.9 million respectively.
Software development costs were $3.7 million and $2.3 million respectively for
the same periods.
Prior to the Transaction, the Company funded its cash requirements from its
working capital and cash flow provided from the Real-Time business. The Company
sold substantially all its investment in the common stock of Concurrent and has
used the funds provided from this stock sale to pay off its existing line of
credit, and to establish the necessary support working capital to support the
operations. (See Note 23 for further details).
The future liquidity of the Company will be affected by numerous factors,
including sales volumes, gross margins, the levels of selling, general and
administrate expenses required to fully implement product sales to commercial
customers, and access to external sources of financing. The Company may elect to
sell the preferred stock of Concurrent that the Company received in the
Transaction. The timing of such sale and the price at which such stock may be
sold may be affected by other factors beyond the Company's control, such as the
absence of a trading market of such stock, the value underlying Concurrent
common stock, and changes in the business, operations or prospects of
Concurrent. If the Company determines that additional funding is
F-7
<PAGE> 39
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required to support its on-going or strategic requirements, it may elect to
renew its line of credit by pledging certain assets as collateral.
Although there can be no assurance that external sources of financing will
be available or that, if available, such financing will be on acceptable terms,
the Company believes that such funding should be available if required.
(3) SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- For periods prior to the spin-off, the financial
statements include the historical accounts and operations of the former Parent
divisions (Harris Computer Systems Business) that now comprise CyberGuard.
Corporate expense allocations charged by Former Parent were based on a
percentage of the CyberGuard net sales. Interest expense was provided on direct
borrowings of CyberGuard. Interest expense of the Former Parent was not
allocated to CyberGuard. It is not practicable to estimate what the net
investment by Former Parent would have been if CyberGuard had operated as an
unaffiliated entity. In the opinion of management, the allocation methods used
were reasonable.
The consolidated financial statements subsequent to the Distribution Date
include those of CyberGuard Corporation and its wholly-owned subsidiaries. All
intercompany transactions between entities have been eliminated.
Inventories -- Inventories are carried at the lower of cost, determined by
the First-In-First-Out (FIFO) method, or market.
Machinery and Equipment -- Machinery and equipment is carried on the basis
of cost. Depreciation is computed by the straight-line method using the
estimated useful lives of the assets.
Software Development Costs -- The Company capitalizes costs related to the
development of certain software products. Capitalization begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Software development costs incurred
prior to technological feasibility are considered research and development costs
and are expensed as incurred. Capitalized costs are amortized as the greater of
the amount computed using the ratio that current gross revenues for a product
bear to the total current and anticipated future gross revenues for that product
or the straight-line method over five years. Software development costs
capitalized were $3,688 in 1996, $2,324 in 1995, $569 for the three months ended
September 30, 1994 and $2,780 for the year ended June 30, 1994, respectively.
Software amortization expenses were $1,735 in 1996, $1,305 in 1995; $326 for the
three months ended September 30, 1994 and $1,396 for the year ended June 30,
1994. Effective June 30, 1996, the Company sold its Real-Time Computing Business
to Concurrent. As a result of this Transaction, management made the decision to
move from the Night Hawk based platform for its secure operating systems and
related trusted products to an Intel PC-based platform resulting in a loss in
value of the related software development costs. Such costs were written-off in
the nine month period ended June 30, 1996. See Note 18 for further details.
Revenue Recognition -- Revenue is recognized from sales when a product is
shipped, from rentals as they accrue, and from services and maintenance when
performed. Unearned income on service contracts is amortized by the
straight-line method over the term of the contracts. Revenue from long-term
software contracts is accounted for by the percentage of completion method
whereby income is recognized based on the estimated stage of completion of
individual contracts using costs incurred as a percentage of total estimated
costs at completion. Losses on long-term contracts are recognized in the period
in which such losses are determined.
Foreign Currency Translation -- The assets and liabilities of the foreign
operations are translated using the local currency as the functional currency.
F-8
<PAGE> 40
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes -- Prior to the Distribution Date, the Company followed the
liability method of accounting for income taxes and was included with its Former
Parent, in a consolidated federal income tax return. The Former Parent required
each of its companies to provide taxes on financial statement pre-tax income or
loss at applicable statutory tax rates. Amounts receivable or payable for
current and prior years' income taxes were treated as intercompany transactions
in accordance with the Former Parent policy and, accordingly, flowed through the
net investment by the Former Parent. Deferred income taxes resulting from
temporary differences between the financial statements and the tax basis of
assets and liabilities were separately classified on the balance sheets.
Certain items of revenue and expense are reported for Federal income tax
purposes in different periods than for financial reporting purposes and are
accounted for under the asset and liability method as required by the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS No. 109").
FAS No. 109 requires the asset and liability method of accounting for
income taxes. Under the asset and liability method, a deferred tax asset or
liability is recognized for temporary differences between financial reporting
and income tax bases of assets and liabilities, tax credit carryforwards and
operating loss carryforwards. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that such deferred tax assets
will not be realized.
The Former Parent and the Company have entered into a tax disaffiliation
agreement based on the principle that Former Parent will be responsible for all
current tax liabilities generated through the Distribution Date with the Company
being responsible for all tax liabilities generated after the Distribution Date.
Cash Equivalents -- The Company considers all investments purchased with an
original maturity of three months or less, and approximately $3.4 million of
cash in transit at June 30, 1996, to be cash equivalents.
Marketable Securities -- In the current year, the Company adhered to the
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with the provisions of SFAS No. 115, marketable securities, which
have been classified by the Company as available for sale, are carried at market
value, with the unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. The Company sold substantially all marketable
securities subsequent to June 30, 1996. (See Note 23).
Loss Per Common Share -- Loss per common share is calculated by dividing
the net loss by the weighted-average number of common shares outstanding during
the period. Common stock equivalents are excluded due to their anti-dilutive
effect.
Use Of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
F-9
<PAGE> 41
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) CHANGE IN FISCAL YEAR
The Company changed its fiscal year end from June 30 to September 30,
effective in the year beginning October 1, 1994. The three-month transition
period ended September 30, 1994, is presented within the body of the Company's
basic financial statements. Comparative condensed income statement data is shown
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994 1993
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Sales............................................. $ 7,748 $ 14,160
------- -------
Gross margin...................................... 2,282 7,131
------- -------
Income (loss) before income taxes................. (7,968) 378
Income tax provision (benefit).................... (378) 3
------- -------
Net earnings (loss)............................... $ (7,590) $ 375
======= =======
</TABLE>
In addition, in connection with the sale of the Real-Time Computing
Business (Note 1), the Company changed its fiscal year end from September 30, to
June 30, effective in the year beginning October 1, 1995. Comparative condensed
income statement data for the nine months ended June 30, 1996 and 1995 is shown
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Sales............................................... $37,411 36,404
------- -------
Gross margin........................................ 16,389 15,795
======= =======
Loss before income taxes............................ 26,122 5,785
Income tax benefit.................................. -- --
------- -------
Net loss............................................ $26,122 5,785
======= =======
</TABLE>
(5) LOAN PAYABLE
On April 1, 1996, the Company entered into a loan and security agreement
with Foothill Capital Corporation ("Foothill") pursuant to which Foothill agreed
to make revolving advances to the Company on an amount of up to $5 million
subject to certain borrowing base requirements and at an interest rate equal to
the prime or reference rate announced by Norwest Bank Minnesota, National
Association, plus two percent. On June 27, 1996, this agreement was amended to,
among other things, extend the maturity date to the earlier of (a) September 30,
1996 or (b) the date on which the Company consummates a secondary common stock
offering. As collateral for the loan, the Company granted Foothill a security
interest in its assets (including 7,000,000 shares of the Concurrent common
stock and all of the preferred stock received by the Company in connection with
the Transaction).
In addition, the Company granted Foothill warrants to purchase 100,000
shares of common stock at a price equal to the lower of the price of a share of
common stock issued to the public pursuant to a registration statement or $17.00
per share. The warrant is exerciseable in whole or in part from the date that is
the earlier of August 1, 1996 or five days after the closing of a public
offering through June 27, 2001.
Subsequent to June 30, 1996, the Company fulfilled its entire obligation
with Foothill by paying-off the amount withdrawn up to that date. See Note 23
for further details.
(6) RESTRUCTURING CHARGES AND SPIN-OFF COSTS
Restructuring charges of $1,256 were accrued for during the period ended
September 30, 1994, due to significant workforce reduction actions which were
taken to streamline and centralize the Company's
F-10
<PAGE> 42
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations. The number of employees terminated under this plan was 44. All
amounts were paid as of September 30, 1995.
Costs associated with the spin-off totaled $2.5 million. These costs relate
to investment banking, legal and public accounting fees, and employee retention
and incentive costs incurred directly related to the spin-off.
(7) STOCK SPLIT
On March 5, 1996, the Board of Directors declared a three-for-one common
stock split distributable on March 29, 1996 to shareholders of record at the
close of business on March 18, 1996. All applicable share and per share data
have been retroactively restated for the stock split.
(8) INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER YEAR ENDED
JUNE 30, SEPTEMBER 30, 30, JUNE 30
1996 1995 1994 1994
----------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Current:
United States........................ -- -- (1,833) 367
International........................ -- -- -- 721
State and local................... -- -- (157) 74
Tax on dividend from German
subsidiary...................... -- -- 1,739 --
------ ------ ------ ------
Current Total................ -- -- (251) 1,162
Deferred:
United States........................ -- -- (127) (78)
International........................ -- -- -- --
State and local...................... -- -- -- 2
------ ------ ------ ------
Total........................ -- -- (378) 1,086
====== ====== ====== ======
</TABLE>
The components of deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
-------- -------------
<S> <C> <C>
Charitable contributions..................................... 275 --
Inventory valuations......................................... 2 1,705
Depreciation................................................. (16) (247)
Capitalized software......................................... -- (2,357)
Restructuring costs.......................................... 19 24
Accrued vacation............................................. 62 259
Net operating losses available for carryforwards............. 11,043 4,288
All other -- net............................................. 154 198
Valuation allowance.......................................... (11,539) (3,870)
------- ------
Net deferred income tax liability............................ -- --
======= ======
</TABLE>
F-11
<PAGE> 43
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the effective income tax rate and the statutory United
States income tax rate follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1995 1994 1994
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Statutory U.S. income tax rate.......... (34.0%) (34.0%) (34.0%) 35.0%
State taxes............................. -- -- (1.9%) .9%
Capitalized restructuring costs......... -- -- 9.3% --
Operating loss carryforwards............ 28.9% 32.2% -- (8.8%)
Payment of tax to Former Parent on
German dividend....................... -- -- 21.8 --
Contributions........................... -- -- -- (7.5%)
Other items............................. 5.1% 1.8% .1% (.3%)
----- ----- ----- ----
Effective income tax rate............... 0 0 (4.7)% 19.3%
===== ===== ===== ====
</TABLE>
Prior to the Distribution Date, United States income taxes has not been
provided on the undistributed earnings of international subsidiaries because the
Company has intended to reinvest these earnings. If the Company distributes
international earnings, a U.S. tax would be provided in future periods. As of
June 30, 1996, the Company does not intend to distribute international earnings,
therefore, no U.S. tax has been projected. The determination of the amount of
these undistributed earnings and any related unrecognized deferred U.S. tax
liability is not practicable.
As of June 30, 1996, the Company has U.S. net operating loss carryforwards
of approximately $33 million. The Company's net operating loss carryforwards
begin to expire in 2010.
Pretax income (loss) from European operations was ($1,464) for the
nine-months ended June 30, 1996; ($3,136) for the year ended September 30, 1995;
($664) for the three months ended September 30, 1994; and $1,860 for the year
ended June 30, 1994.
(9) INVENTORIES
Inventories consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
-------- -------------
<S> <C> <C>
Finished goods.................................................. 134 356
Work In Process................................................. -- 7,416
Raw materials................................................... -- 5,702
---- -------
134 13,474
Reserves for obsolete and slow-moving inventory................. -- (4,394)
---- -------
Net inventory................................................... $134 $ 9,080
==== =======
</TABLE>
F-12
<PAGE> 44
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
-------- -------------
<S> <C> <C>
Salaries, wages and other compensation........................ $ 656 $ 4,009
Accrued interest and sundry taxes............................. 180 706
Other......................................................... 1,747 726
Secondary offering expenses................................... 398 --
Non-compete agreement (Note 16)............................... 1,400 --
Expenses for the sale of Real-Time Computing Business......... 1,842 --
------ ------
$6,223 $ 5,441
====== ======
</TABLE>
(11) MACHINERY AND EQUIPMENT, NET
Machinery and equipment, net is summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
JUNE 30, SEPTEMBER 30, LIFE (IN
1996 1995 YEARS)
-------- ------------- ----------
<S> <C> <C> <C>
Buildings and leasehold improvements................. -- 96 3-5
Machinery and equipment.............................. 1,553 25,504 5-10
Loan equipment and service parts..................... 634 4,976 1-5
------- --------
Gross machinery and equipment........................ 2,187 30,576
Less: Accumulated depreciation....................... (1,035) (24,629)
------- --------
Net machinery and equipment.......................... 1,152 5,947
======= ========
</TABLE>
(12) ALLOWANCES FOR UNCOLLECTIBLE ACCOUNTS
Changes in the allowance for uncollectible accounts follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1995 1994 1994
----------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of year........... 1,513 213 213 631
Additions charged to expense........... 421 1,660 -- 100
Effects of foreign currency
translation.......................... -- -- -- 17
Less net write offs of uncollectible
accounts............................. (355) (360) -- (535)
Less allowance transferred in the sale
of the real-time business............ (1,261) -- -- --
------ ----- --- ----
Balance at end of year................. 318 1,513 213 213
====== ===== === ====
</TABLE>
Bad debt expense is included in "Selling, general, and administrative
expenses" in the consolidated statement of operations.
(13) SHAREHOLDERS EQUITY
Each share of the Company's common stock has attached to it one right. Each
right entitles its registered holder to purchase from the Company after the
"Separation Time", as hereinafter defined, one-hundredth of a share of
Participating Preferred Stock, par value $.01 per share, for an amount
calculated in accordance with the Agreement. The rights will not trade
separately from the common stock unless and until the Separation
F-13
<PAGE> 45
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time. The Separation Time is defined as the earlier of the tenth business day
after the date on which any person commences a tender or exchange offer which,
if consummated, would result in an acquisition, and the first date of public
announcement by the Company of such offering. In the event of any voluntary, or
involuntary liquidation of the Company, the holders of the Preferred Stock shall
be paid an amount as calculated in accordance with the Preferred Stock
Agreement.
Effective October 8, 1994, the Company adopted a Stock Incentive Plan which
permits the issuance of stock options, stock appreciation rights, performance
awards, restricted stock and/or other stock based awards to directors and
salaried employees. On February 4, 1996, the Board of Directors approved an
amendment to the plan to reserve 2,025,000 shares of common stock for grant. The
option price shall be determined by the Board Committee effective on the Grant
Date. The option price shall not be less than one hundred percent of the Fair
Market Value of a share of common stock on the Grant Date. If Incentive Stock
Options are granted to a participant who on the Grant Date is a ten percent
holder, such price shall be not less than one hundred and ten percent of the
Fair Market Value of a share of common stock on the Grant Date. All options
become immediately exercisable upon the occurrence of a Change in Control of the
Company. Vesting of these options occurs based on years of service. It begins at
33% after one year, 66% after two years, and 100% after the third year of
service.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 "Accounting for Stock-Based Compensation," the adoption of
which is required for fiscal years beginning after December 15, 1995. The new
standard encourages companies to use the fair value method of accounting for
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to FASB Statement No. 123, companies are also permitted
to continue to account for such transactions under Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," but would be
required to disclose in a note to the financial statements pro forma net income
and per share amounts as if the Company had applied the new method of
accounting. Additionally, FASB Statement No. 123 requires increased disclosure
for stock-based compensation arrangements regardless of the method chosen to
measure and recognize compensation for employee stock-based arrangements.
The Company currently accounts for such transactions under APB Opinion No.
25 and has not yet determined if it will elect to change its method of
accounting for the issuance of stock options and other equity instruments to the
fair value method, nor has it determined the effect the new standard will have
on its operating results should it elect to make such a change.
Information relating to the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OPTION PRICE
---------- ------------
<S> <C> <C>
Shares under option at September 30, 1995................ 715,200 $2.58 -- 4.25
Granted................................................ 645,300 3.54 -- 5.50
Exercised.............................................. (84,630) 2.58 -- 3.71
Forfeited.............................................. (25,206) 2.58
--------- ------------
Shares under option at June 30, 1996..................... 1,250,664 $2.58 -- 5.50
--------- ------------
Shares exercisable at June 30, 1996...................... 803,163 $2.58 -- 4.71
========= ============
</TABLE>
On October 28, 1994, the Company granted restricted stock awards for 52,800
shares of common stock at an option price of $2.58 per share, pursuant to the
Stock Incentive Plan, to two employees, E. Courtney Siegel and Daniel S.
Dunleavy, President and Chief Financial Officer, respectively. None of the
restricted shares may be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of for the "Restricted Period."
F-14
<PAGE> 46
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Original Restricted Period is from October 28, 1994 (date of the agreement)
until the earlier of 21 months from the date of the agreement or upon the
occurrence of a change in control. The Original Restricted Period ended upon the
sale of the Real-Time Computing Business.
In connection with the sale of the Real-Time Computing Business, the
Company entered into an agreement with the Chairman of the Board, President and
Chief Executive Officer. The contract provides for annual salaries, additional
compensation in the form of bonuses, a long term incentive plan as well as a
restricted stock option grant of 339,000 shares of common stock at an exercise
price of $10.67 (market value at the date of grant) per share that become
exerciseable in three equal annual installments beginning March 5, 1997. These
shares are not part of the above summary.
(14) EMPLOYEE BENEFIT PLANS
Prior to the Distribution Date, the Former Parent provided retirement
benefits to substantially all United States-based employees, primarily through a
retirement plan having profit-sharing and savings elements. Contributions to the
retirement plan were based on the Company's profits and employees' savings with
no other funding requirements. Related retirement plan expense was $431 for the
three months ended September 30, 1994; and $2,201 for the year ended June 30,
1994.
Subsequent to the Distribution Date, the Company began a 401(k) Savings
Plan ("the Plan") which covers the eligible employees of CyberGuard Corporation,
and any related company. An employee is eligible to participate in the Plan on
the date he completes one-year of service. Effective July 1, 1996, the Company
waived this one year requirement. The amount of profit-sharing contributions
made by the Company into the Plan is discretionary and shall be determined based
on a percentage of the Company s adjusted net income before taxes. Each
participant may contribute up to 12% of his compensation into the Plan. The
Company makes a matching contribution on behalf of each participant for the
first 6% of their individual contribution. Participant's profit-sharing and
matching contribution vests over a seven year period. The Company contributions
to the Plan were $738 for the nine months ended June 30, 1996 and $966 for the
year ended September 30, 1995.
(15) POSTRETIREMENT HEALTH CARE BENEFITS
Prior to the Distribution Date, CyberGuard adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". Health care benefits were provided on a limited
cost-sharing basis to domestic-based retirees who had 10 or more years of
service. This adoption resulted in a one-time charge of $135, net of income tax
credits of $83. The on-going expense of this plan was not material and the
liability for these benefits had not been funded. Subsequent to the Distribution
Date, CyberGuard canceled this post retirement health care plan.
(16) CONTINGENCIES
Certain claims have been filed or are pending against the Company. It is
management's opinion that all matters are without merit or are of such kind, or
involve such amounts, as would not have a material effect on the consolidated
financial position of the Company if disposed of unfavorably.
(17) NON-COMPETE AGREEMENTS
In connection with the Transaction, the Company entered into non-compete
agreements for a period of five years with two former officers of the Company.
In consideration for these non-compete agreements, these officers received
91,800 shares of the Company's Common Stock on June 28, 1996. The shares were
valued at the market value as of the date the agreements were entered into and
the amounts are amortized over a five-year period from the date of grant.
F-15
<PAGE> 47
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) WRITE-OFF OF CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
After the Transaction, a decision was made by new management of the Company
to move from the Night Hawk based platform to an Intel-PC based platform running
on the UnixWare operating system which the Company licenses from Santa Cruz
Operations. The Company had capitalized computer software development costs,
which relate to the Night Hawk based systems of the Trusted Systems Division, of
approximately $3,244 at June 30, 1996. As a result of new management's decision
to move to a different platform, such capitalized computer software development
costs became worthless and accordingly have been charged to operations during
the nine months ended June 30, 1996.
(19) LEASE COMMITMENTS
Rent expense was $1,382 for the nine months ended June 30, 1996, $1,814 for
the year ended September 30, 1995, $478 for the three months ended September 30,
1994, and $1,897 for the year ended June 30, 1994, including $828, $238, and
$1,085, respectively, paid to Former Parent.
Total future minimum rental commitments under non-cancelable operating
leases, primarily for buildings and equipment, amounted to $24 for the year
ended June 30, 1997. Such amount excludes any amounts payable to Concurrent
under the Shared Services Agreement (See Note 23).
(20) CONCENTRATIONS OF CREDIT RISK AND RELATED PARTY TRANSACTIONS
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents,
trade receivables, and securities. The Company holds any excess cash in
short-term investments consisting of commercial paper. Concentrations of credit
risk with respect to receivables are limited due to the Company's large number
of customers. Credit risk with respect to securities consist of Concurrent stock
received in connection with the sale of the Real-Time Computing Business and is
limited due to the fact that the Company sold all of this stock subsequent to
June 30, 1996 (See Note 21).
The Company sells products to its Former Parent and its subsidiaries. Sales
to these operations were $768 for the nine months ended June 30, 1996; $439 for
the year ended September 30, 1995; $644 for the three months ended September 30,
1994; and $4,013 for the year ended June 30, 1994.
(21) GEOGRAPHIC INFORMATION
The Company operates exclusively in the computer systems industry.
Substantially all revenues result from the sale of computer systems and related
software and services. Major customers during 1996, 1995 and 1994 include the
United States Government, Boeing Company, Flight Safety International, and
Lockheed Martin Corporation/Loral Corporation (On May 1996, Lockheed acquired
Loral, hence sales to both companies have been combined). Combined sales to
these four customers represented 26% of total sales for the nine months ended
June 30, 1996. These customers relate primarily to the Real-time computing
business. No other customers individually represented more than 5% of total
sales.
In many cases, agencies of the United States Government are the ultimate
purchasers of the Company's products. Sales to the United States Government
combined with sales for which the Company acted as subcontractor on government
projects have represented approximately 41%, 51%, and 43% of total sales during
1996, 1995, and 1994, respectively. Sales made to Boeing Company as a percentage
of total sales were 7%, 4% and 14% for the same referenced periods. Sales to
Flight Safety International amounted to 5% during 1996 whereas sales in 1995 and
1994 did not represent more than 5% of total sales. Sales to Lockheed Martin
Corporation/Loral Corporation as a percentage of total sales were 13% for both
1996 and 1995, and 10% for 1994. All intercompany revenues and expenses are
eliminated in computing revenues and operating income.
F-16
<PAGE> 48
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's operations by geographic area is summarized
below:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1995 1994 1994
----------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
United States Operations
Net sales............................ 31,402 36,138 6,647 51,188
Net income (loss) before income tax
provision (benefit) and cumulative
effect of change in accounting
principle......................... (25,124) (7,952) (7,304) 3,753
Identifiable assets.................. 22,756 33,658 47,650 47,506
European Operations
Net sales............................ 6,009 8,973 1,101 13,452
Net income (loss) before income tax
provision (benefit) and cumulative
effect of change in accounting
principle......................... (998) (3,136) (664) 1,860
Identifiable assets.................. 4,956 8,186 10,333 14,586
</TABLE>
US Export Sales were $3,812 for the nine months ended June 30, 1996; $2,945
for the year ended September 30, 1995; $605 for the three months ended September
30, 1994; and $3,316 for the year ended June 30, 1994.
(22) SHARED SERVICE AGREEMENT
On June 30, 1996, the Company entered into a Shared Services Agreement
("Shared Agreement") with Concurrent pursuant to which Concurrent will provide
certain administrative and personnel-related services for the Company. It is
management belief that the Company will receive these services at costs equal to
or below that which the Company would incur if it were to provide these services
itself. The services to be provided by Concurrent will be invoiced monthly to
the Company for services performed. The monthly service bill will total $56
which will consist of accounting fees, human resources fees, management
information services, order processing and rental of facilities.
The term of the Shared Agreement is twelve months from its effective date.
The Company has the option to terminate the Shared Agreement at any time by
giving Concurrent thirty days written notice. Any extensions, however, requires
the prior written consent of both parties.
CyberGuard Reseller Agreement
A reseller agreement, effective June 27, 1996, also exists between the
Company and Concurrent which allows Concurrent to act as a reseller of
CyberGuard products. For each product sold, Concurrent shall pay the Company a
predetermined fee. The initial term of this agreement is for a period of twelve
months from the effective date and may be renewed for two additional terms of
twelve months each with the written consent of both parties.
NightHawk Supplier Agreement
A supplier agreement, effective June 27, 1996, exists between the Company
and Concurrent which allows the latter to act as an independent contractor and
supplier of NightHawks to the Company. This agreement calls for the Company to
pay Concurrent a fee of $5 per month during the term of this agreement. The
initial term of this agreement is for a period of twelve months from the
effective date and may be renewed for two additional terms of twelve months each
with the written consent of both parties.
F-17
<PAGE> 49
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(23) SUBSEQUENT EVENTS
Issuance of Stock Warrants
On July 19, 1996, the Company established a program to enable a major
strategic foreign distributor to earn up to 100,000 shares of stock warrants at
an exercise price of fifteen dollars per share which exceeded the market value
of the common stock at the date of the agreement, and are to be vested over the
period from July 1, 1996 through December 31, 1998. The warrants are exercisable
during the vesting period based upon the distributor achieving yearly revenue
goals totaling $15 million over the period.
Cancellation of the Secondary Public Offering
On August 5, 1996, the Company decided to withdraw its previously announced
secondary offering of common stock due to unfavorable market conditions.
Expenses associated with the cancellation of this stock offering amounted to
approximately $1 million and appears on the Company's consolidated statements of
operations.
Joint Development and Marketing Agreement
On August 6, 1996, the Company entered into a Joint Development and
Marketing Agreement ("Joint Agreement") with Information Resources Engineering,
Inc. ("IRE") whereas the Company and IRE will jointly develop and market a
product offering consisting of a combination of the CyberGuard Firewall and IRE
SafeNet products in an interoperable centrally managed system configured for use
with a virtual private network ("VPN") and in applications that combine VPN's
with public Internet and/or legacy network use.
Subject to the terms and conditions of this Joint Agreement, the Company
and IRE agree to cooperate with and assist each other in the joint design and
development of any product.
Sale of Stock and Payment of Line of Credit
On August 12, 1996, the Company sold 7,900,000 shares of the Concurrent
common stock at a price of approximately $1 per share, which resulted in a loss
of approximately $5,530. A portion of the proceeds from this sale were used to
pay off the Foothill loan discussed in Note (4).
F-18
<PAGE> 1
EXHIBIT 3.01
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CYBERGUARD CORPORATION
In compliance with the requirements of Chapter 607.1007 of the Florida
Business Corporation Act, CYBERGUARD CORPORATION, a Florida corporation, hereby
adopts the following Amended and Restated Articles of Incorporation:
ARTICLE I. NAME.
The name of the Corporation is CyberGuard Corporation.
ARTICLE II. ADDRESS.
The mailing address of this Corporation shall be 2101 West Cypress Creek
Road, Fort Lauderdale, Florida 33309.
ARTICLE III. DURATION.
The duration of the Corporation shall be perpetual.
ARTICLE IV. PURPOSE.
The purpose of this Corporation, until such time as these Articles of
Incorporation are amended, shall be to engage in any activities or business
permitted under the laws of the United States and the State of Florida.
ARTICLE V. CAPITAL STOCK.
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 25,000,000, of which 20,000,000 shares of the
par value of $0.01 per share shall be designated as Common Stock and 5,000,000
shares of the par value of $0.01 per share shall be designated as Preferred
Stock. Shares of Preferred Stock may be issued in series from time to time by
the Board of Directors, and the Board of Directors is expressly authorized to
fix by resolution or resolutions the designations, relative rights,
preferences, and limitations of the shares of each series of Preferred Stock,
including without limitation the following:
(a) the distinctive designation of such series which shall
distinguish it from other series;
(b) the number of shares included in such series, which number may
be increased or decreased from time to time by the Board of Directors
unless otherwise provided by the Board of Directors in the resolution or
resolutions providing for the issue of such series;
(c) the rate of dividends (or method of determining such dividends)
payable to the holders of the shares of such series, any conditions on
the payment of such dividends, and the date or dates (or method of
determining the date or dates) upon which such dividends shall be payable;
1
<PAGE> 2
(d) whether dividends on the shares of such series shall be
cumulative and, in the case of shares of any series having cumulative
dividend rights, the date or dates (or method of determining the date or
dates) from which dividends on the shares of such series shall be
cumulative;
(e) the amount or amounts which shall be payable out of the assets
of the Corporation to the holders of the shares of such series upon
voluntary or involuntary liquidation, dissolution or winding up the
Corporation;
(f) the price or prices (or method of determining such price or
prices) at which, the form of payment of such price or prices for which,
the period or periods within which, and the other terms and conditions
upon which, the shares of such series may be redeemed, in whole or in
part, at the option of the Corporation or at the option of the holder or
holders thereof or upon the happening of a specified event or events;
(g) the obligation, if any, of the corporation to purchase or redeem
shares of such series pursuant to a sinking fund or otherwise and the
price or prices at which, the period or periods within which, and the
other terms and conditions upon which, the shares of such series shall be
purchased or redeemed, in whole or in part, pursuant to such obligation;
(h) provisions, if any, for the conversion or exchange of the shares
of such series, at any time or times at the option of the holder or
holders thereof or at the option of the Corporation or upon the happening
of a specified event or events, into shares of any other class or classes
or any other series of the same or any other class or classes of stock of
the Corporation, and the price or prices or rate or rates of exchange or
conversion and any adjustments applicable thereto;
(i) the voting rights, if any, of the holders of the shares of such
series, which may include multiple votes per share; and
(j) the manner in which any facts ascertainable outside the
resolution or resolutions providing for the issue of such series shall
operate on the relative rights, preferences, and limitations of the
shares of each series of Preferred Stock.
ARTICLE VI. REGISTERED OFFICE AND AGENT.
The street address of the Corporation's registered office shall be 201
South Biscayne Boulevard, Suite 2000, Miami, Florida 33131, and the registered
agent for the corporation at that address shall be Brian Foremny, Esq.
ARTICLE VII. BY-LAWS.
The Board of Directors of the Corporation is expressly authorized to
adopt, amend or repeal the by-laws of the Corporation. The holders of shares
of stock of all classes or series of the Corporation entitled generally to vote
in the election of Directors ("Voting Stock") shall, to the extent such power
is at the time conferred on them by applicable law, also have the power, by the
affirmative vote of not less than 80 percent of the votes entitled to be cast
by all then outstanding Voting Stock, voting as a single class, to make, alter,
amend or repeal (i) the by-laws of the corporation or (ii) this Article VII of
these Amended and Restated Articles of Incorporation.
ARTICLE VIII. ELECTIONS OF DIRECTORS.
Elections of directors need not be by written ballot except and to the
extent provided in the by-laws of the Corporation.
ARTICLE IX. NUMBER AND CLASSIFICATION OF DIRECTORS.
The number of directors of the Corporation shall be determined from time
to time exclusively by resolution adopted by the affirmative vote of a majority
of the entire Board of Directors; provided, however, that in no event shall the
2
<PAGE> 3
number of directors be less than three (3) or more than fifteen (15); and,
provided further, that no such vote shall affect the terms of office of
then-existing directors. In the absence of a determination of such number by
the Board of Directors, the number of directors shall be five (5). The
directors of the Corporation shall be divided into three (3) classes, as nearly
equal in number as reasonably possible, as determined by the Board of
Directors. The initial term of office of the first class of such directors
shall expire at the first annual meeting of shareholders thereafter. The
initial term of office of the second class of such directors shall expire at
the second annual meeting of shareholders thereafter. The initial term of
office of the third class of such directors shall expire at the third annual
meeting of shareholders thereafter. Notwithstanding the foregoing, directors
shall hold office until their successors have been duly elected and qualified.
At each annual meeting of shareholders following such initial classification
and election, directors elected to succeed the directors whose terms expire at
such annual meeting shall be elected to hold office for a term expiring at the
annual meeting of shareholders in the third year following the year of their
election or until their successors have been duly elected and qualified. If
the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain or attain a number of directors
in each class as nearly equal as reasonably possible, but no decrease in the
number of directors may shorten the term of any incumbent director. Any
director, or the entire Board of Directors, may be removed from office only for
cause and only by the affirmative vote of not less than a majority of the votes
entitled to be cast by the holders of all the then outstanding shares of Voting
Stock, voting together as one class. Whenever the holders of any class or
series of stock are entitled to elect one or more directors, the provisions of
the preceding sentence as applied to the removal of such director or directors
shall apply to the vote of the holders of the outstanding shares of that class
or series and not to the vote of the outstanding shares as a whole.
In the event that the holders of any class or series of stock of the
Corporation shall be entitled, voting separately as a class, to elect any
directors of the Corporation, then the number of directors that may be elected
by such holders shall be in addition to the number fixed by the Board of
Directors or as otherwise provided in this Article IX and, except as otherwise
expressly provided in the terms of such class or series, the terms of the
directors elected by such holders shall expire at the annual meeting of
shareholders next succeeding their election without regard to the
classification of the remaining directors.
ARTICLE X. SHAREHOLDER ACTION.
Unless otherwise required or permitted by law, these Restated Articles of
Incorporation, or any stock designation, shareholders
of any class or series of stock of the Corporation may take no action,
including but not limited to the election of directors, except for action as
may be properly taken, with prior notice and with a vote, at an annual or
special meeting of the shareholders.
ARTICLE XI. SPECIAL MEETINGS OF SHAREHOLDERS.
The Corporation shall hold a special meeting of shareholders only (i)
pursuant to a notice approved by the Chairman of the Board of Directors, the
Chief Executive Officer of the Corporation or a majority of the Board of
Directors or (ii) upon delivery of one or more written demands for a meeting
describing the purpose or purposes for the meeting and signed and dated by the
holders of not less than 50 percent of all holders of shares of all classes or
series of the Corporation, voting as a class, entitled to vote on the issues
proposed to be considered at such special meeting.
ARTICLE XII. DIRECTOR LIABILITY.
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except to the extent that such exemption from liability or
limitation thereof is not permitted under the Florida Business Corporation Act
as currently in effect or as the same may hereafter be amended. No amendment,
modification or repeal of this Article XII (including any amendment or repeal
of this Article XII made by virtue of any change in the Florida Business
Corporation Act after the date hereof) shall adversely affect any right or
protection of a director that exists at the time of such amendment,
modification or repeal on account of any action taken or any failure to act by
such director prior to such time.
3
<PAGE> 4
ARTICLE XIII. DIRECTORS' RECOMMENDATIONS.
In addition to any other consideration that the Board of Directors may
lawfully take into account in determining whether to take or to refrain from
taking corporate action on any matter, including making or declining to make
any recommendation to the shareholders of the Corporation, the Board of
Directors may in its discretion consider the long-term as well as short-term
best interests of the Corporation (including the possibility that these
interests may be best served by the continued independence of the Corporation),
taking into account and weighing as the directors deem appropriate, the effects
of such action on employees, suppliers and customers of the Corporation and its
subsidiaries and the effect upon communities in which offices or other
facilities of the Corporation are located, and any other factors the directors
consider pertinent.
ARTICLE XIV. AMENDMENTS.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Restated Articles of Incorporation, and any other
provisions authorized by the laws of the State of Florida at the time in force
may be added or inserted, in the manner now or hereafter provided herein or by
statute, and all rights, preferences and privileges of whatsoever nature
conferred upon shareholders, directors or any other persons whomsoever by and
pursuant to these Restated Articles of Incorporation in its present form or as
amended are granted subject to the rights reserved in this Article.
4
<PAGE> 1
EXHIBIT 10.01
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of the 5th day of March, 1996 by and between HARRIS COMPUTER SYSTEMS
CORPORATION, a Florida corporation ("Company"), and ROBERT L. CARBERRY
("Employee").
WHEREAS, the Company, through its Board of Directors, desires to
retain the services of Employee, and Employee desires to be retained by the
Company, on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee
hereby accepts employment, as President, Chief Executive Officer and Chairman
of the Board of the Company upon the terms of and subject to this Agreement.
2. TERM. The term ("Term") of this Agreement shall commence and
this Agreement shall become effective on the 12th day of April 1996 (the
"Effective Date") and shall continue until otherwise terminated by either party
at any time in accordance with the terms hereof.
3. DUTIES. During his employment hereunder, Employee initially
will be appointed President and General Manager of the Trusted Systems Division
of Harris Computer Systems Corporation, reporting to Corky Siegel, until
closing ("Closing") under the Purchase and Sale Agreement that is currently
under negotiations between the Company and Concurrent Computer Corporation
providing for the sale to Concurrent of the assets of the Company's real-time
computer business. The anticipated date of Closing is June, 1996. After the
Closing, Employee will serve as the President, Chief Executive Officer and
Chairman of the Board of the Company and the Company will take such actions as
necessary to cause his nomination as a member of the Board of Directors of the
Company. Employee shall have general and active charge of the business and
affairs of the Company and, in such capacity, shall have responsibility for the
day-to-day operations of the Company, subject to the authority and control of
the Board of Directors of the Company.
-1-
<PAGE> 2
Employee shall report directly to the Board of Directors of the Company.
Throughout the term of employment hereunder, the Employee shall devote his full
time and undivided attention during normal business hours to the business and
affairs of the Company, as appropriate to his duties and responsibilities
hereunder, except for reasonable vacations and illness or other disability, but
nothing in this Agreement shall preclude the Employee from devoting reasonable
periods required for serving as a director or member of any advisory committee
of not more than two (at any time) "for profit" organizations involving no
conflict of interest with the interests of the Company (subject to approval by
the Board of Directors, which approval shall not be unreasonably withheld), or
from engaging in charitable and community activities, or from managing his
personal investments, provided such activities do not materially interfere with
the performance of his duties and responsibilities under this Agreement.
4. COMPENSATION.
a. Salary: During his employment hereunder, Employee
shall be paid a as follows, payable in equal installments not less than
monthly: two hundred thousand dollars ($200,000.00) per annum for the first
twelve month period; two hundred twenty-five thousand dollars ($225,000.00) per
annum for the second twelve month period; two hundred fifty thousand dollars
($250,000) per annum for the third twelve month period. Thereafter, the
Employee's salary shall be reviewed at least annually by the Board of Directors
or any Committee of the Board delegated the authority to review executive
compensation.
b. Stock Option/Bonus: In addition to salary, Employee
shall be entitled to participate in the Company's Stock Option Plan (the "Stock
Option Plan") and Employee shall be initially granted, as of the date of this
Agreement (such grant subject to Employee's actually joining the Company as an
employee), an option to purchase 339,000 post-March 1996 three-for-one split
shares of common stock of the Company ("Common Stock") (such number to be
subject to further adjustment as provided in the Stock Option Plan). The per
share exercise price of the option shall be the fair market value of the
Company's Common Stock as of the date of this Agreement (which is $10.67 per
share), and the option shall vest in three equal annual installments over the
three-year period beginning on the first anniversary of the Effective Date;
upon a "Change of Control" (as defined below), the option shall become
immediately fully vested and exercisable in full. The Employee shall be
additionally granted, as of the Effective Date, long-term incentive
compensation as described on the attached Schedule A, with vesting based on the
achievement of Company performance objectives. The objectives for each year of
such long-term incentive compensation plan, and other terms and conditions of
the long-term incentive compensation plan, shall be
-2-
<PAGE> 3
established by the Board of Directors or a committee thereof. Further,
Employee will be provided with an annual bonus opportunity representing 50% of
Employee's annual salary as set forth in Paragraph 4.a above, (initially,
$100,000.00) (hereafter the "Executive Bonus Plan"), the actual amount to be
paid depending upon the degree of achievement of various objectives. The
objectives for each year and other terms and conditions of the Executive Bonus
Plan shall be established by the Board of Directors or a committee thereof and
shall be reasonably consistent with the business plan of the Company for such
year, or portion thereof, established in advance.
c. Insurance: During his employment hereunder, Employee
shall be entitled to participate in such health, life, disability and other
insurance programs, if any, that the Company may offer to other key executive
employees of the Company from time to time.
d. Other Benefits: During his employment hereunder,
Employee shall be entitled to such other benefits, if any, that the Company may
offer to other key executive employees of the Company from time to time.
e. Vacation: Employee shall be entitled to four weeks
vacation leave (in addition to holidays) in each calendar year during the Term,
or such additional amount as may be set forth in the vacation policy that the
Company shall establish from time to time.
f. Expense Reimbursement: Employee shall, upon
submission of appropriate supporting documentation, be entitled to
reimbursement of reasonable out-of-pocket expenses incurred in the performance
of his duties hereunder in accordance with policies established by the Company.
Such expenses shall include, without limitation, reasonable entertainment
expenses, gasoline and toll expenses and cellular phone use charges, if such
charges are directly related to the business of the Company.
5. GROUNDS FOR TERMINATION. The Board of Directors of the
Company may terminate this Agreement for Cause. As used herein, "Cause" shall
mean any of the following: (a) the Employee has committed a willful serious act
against the Company intended to enrich himself at the expense of the Company,
such as embezzlement, or has been convicted of a felony involving moral
turpitude; or (b) Employee has (i) willfully and grossly neglected his duties
hereunder, or (ii) intentionally failed to observe specific directives or
policies of the Board of Directors, which directives or policies were
consistent with his positions, duties and responsibilities hereunder, and which
failure had, or continuing failure will have, a material adverse effect on the
Company. Prior to any such termination, Employee shall be given written notice
by the Board of Directors that the Company intends to terminate his employment
for Cause under this
-3-
<PAGE> 4
Section 5, which written notice shall specify the particular acts or omissions
on the basis of which the Company intends to so terminate Employee's
employment, and Employee (with his counsel, if he so chooses) shall be given
the opportunity, within 15 days of his receipt of such notice, to have a
meeting with the Board of Directors to discuss such acts or omissions and be
given reasonable time to remedy the situation. In the event of such
termination, the Employee shall be promptly furnished written specification of
the basis therefor in reasonable detail.
6. TERMINATION BY EMPLOYEE. Employee may terminate this
Agreement at any time with Good Reason. "Good Reason" shall exist if:
a. the Company demotes or otherwise elects or appoints
the Employee to lesser offices than set forth in Section 3, or fails to elect
or appoint him to such positions;
b. the Company causes a material change in the nature or
scope of the authorities, powers, functions, duties or responsibilities
attached to the Employee's positions as described in Section 3;
c. at any time the Employee is required, without his
written consent, to relocate his office more than seventy-five miles from the
location of the Company's current corporate headquarters;
d. the Company decreases the Employee's compensation
below the levels provided for by the terms of Section 4 (taking into account
increases made from time to time in accordance with Section 4);
e. the Company materially reduces the Employee's
benefits under any employee benefit plan, program or arrangement of the Company
(other than a change that affects all employees similarly situated) from the
level in effect upon the Employee's commencement or participation;
f. the Company commits any other material breach of the
provisions of this Agreement (except those set forth in Paragraph 4.a.) and
Employee provides at least 15 days' prior written notice to at least two
members of the Company's Board of Directors of the existence of such breach and
his intention to terminate this Agreement (no such termination shall be
effective if such breach is cured during such period);
g. the Company fails to comply with the provisions of
Paragraph 4.a. for an uninterrupted 10 day period; or
h. the Closing fails to occur on or before September 30,
1996; provided, however, that if the Closing has not occurred by September 30,
1996 but an officer of the Company delivers a notice to Employee stating that
there are no unresolved material issues between the Company and Concurrent
-4-
<PAGE> 5
Computer Corporation and that the Closing is expected to occur no later than
November 15, 1996, then Good Reason shall not exist unless the Closing shall
not have occurred by such date.
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. In the event Employee's employment with the Company
(including its subsidiaries) is terminated by the Company for Cause as provided
in Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7.a shall apply. These same
provisions shall apply if the Employee terminates his employment other than for
Good Reason in accordance with the provisions of Paragraph 6 hereof.
i. Compensation: The Company shall pay in a
lump sum to Employee such amount of compensation due Employee for services
rendered to the Company, as well as compensation for unused vacation time, as
has accrued but remains unpaid. Any and all other rights to compensation of
any kind granted to Employee under this Agreement shall terminate as of the
date of termination, except as may be otherwise required by statute.
ii. Noncompetition/Nonsolicitation Period: The
provisions of Paragraphs 13 and 14 shall continue to apply with respect to
Employee for a period of one year following the date of termination.
b. In the event Employee's employment with the Company
(including its subsidiaries) is terminated by the Company for any reason other
than for Cause as provided in Paragraph 5 and other than as a consequence of
Employee's death, disability, or normal retirement under the Company's
retirement plans and practices, then the following provisions apply. These
same provisions shall apply if Employee terminates his employment with Good
Reason in accordance with the provisions of Paragraph 6 hereof.
i. Salary and Bonus Payments: On or before
Employee's last day of employment with the Company, the Company shall promptly
pay in a lump sum to Employee as compensation for services rendered to the
Company a cash amount equal to twice the amount of Employee's annual base
salary and twice the target bonus under the Executive Bonus Plan as in effect
immediately prior to his date of termination. At the election of the Company,
the cash amount referred to in this subparagraph 7.b.i may be paid to Employee
in periodic installments in accordance with the normal salary payment
procedures of the Company.
-5-
<PAGE> 6
ii. Vesting of Options and Rights:
Notwithstanding the vesting period provided for in the Stock Option Plan and
related stock option agreements between the Company and Employee for stock
options ("options") and stock appreciation rights ("rights") granted Employee
by the Company, all options and stock appreciation rights that are exercisable
at the date of termination of employment or within one year thereafter shall be
exercisable upon termination. In addition, Employee will have the right to
exercise such options and rights for the shorter of (a) one year following his
termination of employment or (b) with respect to each option, the remainder of
the period of exercisability under the terms of the appropriate documents that
grant such options.
iii. Benefit Plan Coverage: The Company shall
maintain in full force and effect for Employee and his dependents for two years
after the date of termination, all life, health, accident, and disability
benefit plans and other similar employee benefit plans, programs and
arrangements in which Employee or his dependents were entitled to participate
immediately prior to the date of termination, in such amounts as were in effect
immediately prior to the date of termination, provided that such continued
participation is possible under the general terms and provisions of such
benefit plans, programs and arrangements. In the event that participation in
any benefit plan, program or arrangement described above is barred, or any such
benefit plan, program or arrangement is discontinued or the benefits thereunder
materially reduced, the Company shall arrange to provide Employee and his
dependents for two years after the date of termination with benefits
substantially similar to those that they were entitled to receive under such
benefit plans, programs and arrangements immediately prior to the date of
termination. If immediately prior to the date of termination the Company
provided Employee with any club memberships, Employee will be entitled to
continue such memberships at his sole expense. Notwithstanding any time period
for continued benefits stated in this subparagraph 7.b.iii, all benefits in
this subparagraph 7.b.iii will terminate on the date that Employee becomes an
employee of another employer and eligible to participate in the employee
benefit plans of such other employer. To the extent that Employee was required
to contribute amounts for the benefits described in this subparagraph 7.b.iii
prior to his termination, he shall continue to contribute such amounts for such
time as these benefits continue in effect after termination.
iv. Savings and Other Plans: Except as otherwise
more specifically provided herein or under the terms of the respective plans
relating to termination of employment, Employee's active participation in any
applicable savings, retirement, profit sharing or supplemental employee
retirement plans or any deferred compensation or similar plan of the Company or
any of its subsidiaries shall continue only
-6-
<PAGE> 7
through the last day of his employment. All other provisions, including any
distribution and/or vested rights under such plans, shall be governed by the
terms of those respective plans.
v. Noncompetition/Nonsolicitation Period: The
provisions of Paragraph 13 and 14 shall continue, beyond the time periods set
forth in such paragraphs, to apply with respect to employee for the shorter of
(x) twenty-four (24) months following the date of termination or (y) until such
time as the Company has failed to comply with the provisions of subparagraph
7.b.i for an uninterrupted 10-day period and such failure is not cured within
15 days after written notice of such failure is delivered to at least two
non-employee directors of the Company.
c. The provisions of this Paragraph 7.b shall apply if
Employee's employment is terminated prior to a Change of Control or more than
one year after the occurrence of a Change of Control (as defined in Paragraph
8.c). From the occurrence of any Change of Control until the first anniversary
of such Change of Control, the provisions of Paragraph 8 shall apply in place
of this Paragraph 7.b; provided, further, that in the event after a change of
Control, Company terminates Employee for Cause or Employee terminates his
employment without Good Reason, then the provisions of Paragraph 8 hereof shall
not apply and the provisions of Paragraph 7.a. shall apply. Termination upon
death, disability and retirement are covered by Paragraphs 9, 10 and 11,
respectively.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANGE OF CONTROL.
a. Salary, Performance Award and Bonus Payments: In the
event Employee's employment with the Company is terminated within one year
following the occurrence of a Change of Control (other than as a consequence of
his death or disability, or of his normal retirement under the Company's
retirement plans and practices) either (x) by the Company for any reason other
than for Cause in accordance with Paragraph 5, or (y) by Employee for Good
Reason in accordance with the provisions of Paragraph 6 hereof, then Employee
shall be entitled to receive from the Company, the following:
i. Base Salary: Employee's annual base salary
as in effect at the date of termination, multiplied by three, shall be paid on
the date of termination;
ii. Target Bonus: The amount of the Employee's
target bonus under the Executive Bonus Plan for the fiscal year in which the
date of termination occurs, multiplied by three, shall be paid on the date of
termination; and
iii. Other Benefits: All benefits under
Paragraphs 7.b.ii, 7.b.iii and 7.b.iv shall be extended to Employee as
described in such paragraphs, except that notwithstanding the vesting period
-7-
<PAGE> 8
provided for in the Stock Option Plan and any related stock option agreements
between the Company and Employee for stock options ("options") and stock
appreciation rights ("rights") granted Employee by the Company, all options and
rights shall be fully vested and exercisable upon a Change of Control, and upon
termination of employment the period for exercise of options and rights
described in the last sentence of Paragraph 7.b.ii shall be the shorter of (a)
three years following his termination of employment or (b) with respect to each
option, the remainder of the period of exercisability under the terms of the
appropriate documents that grant such options.
b. Noncompetition/Nonsolicitation Period: In the event
of a termination under Paragraph 8.a within one year after a Change of Control
the provisions of Paragraphs 13 and 14 shall be in effect as stated in
Paragraph 7.b.v
c. For purposes of this Agreement, the term "Change of
Control" shall mean:
i. The acquisition, other than from the Company,
by any individual, entity or group (within the meaning of Rule 13d-3
promulgated under the Exchange Act or any successor provision)(any of the
foregoing described in this Paragraph 8.c.i hereafter a "Person") of 50% or
more of either (a) the then outstanding shares of Capital Stock of the Company
(the "Outstanding Capital Stock") or (b) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"), provided, however, that any
acquisition by (x) the Company or any of its subsidiaries, or any employee
benefit plan (or related trust) sponsored or maintained by the Company or any
of its subsidiaries or (y) any Person that is eligible, pursuant to Rule
13d-1(b) under the Exchange Act, to file a statement on Schedule 13G with
respect to its beneficial ownership of Voting Securities, whether or not such
Person shall have filed a statement on Schedule 13G, unless such Person shall
have filed a statement on Schedule 13D with respect to beneficial ownership of
50% or more of the Voting Securities or (z) any corporation with respect to
which, following such acquisition, more than 60% of, respectively, the then
outstanding shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Capital Stock and Voting Securities immediately prior to such acquisition in
substantially the same proportion as their ownership, immediately prior to such
acquisition, of the Outstanding Capital Stock and Voting Securities, as the
case may be, shall not constitute a Change of Control; or
-8-
<PAGE> 9
ii. Individuals who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board, provided that any individual becoming a
director subsequent to the date hereof whose election or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office is in connection with an actual or threatened election contest relating
to the election of the Directors of the Company (as such terms are used in Rule
14a-11 of Regulation 14A, or any successor section, promulgated under the
Exchange Act); or
iii. Approval by the shareholders of the Company
of a reorganization, merger or consolidation (a "Business Combination"), in
each case, with respect to which all or substantially all holders of the
Outstanding Capital Stock and Voting Securities immediately prior to such
Business Combination do not, following such Business Combination, beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from the Business
Combination; or
iv. (a) a complete liquidation or dissolution of
the Company or (b) a sale or other disposition of all or substantially all of
the assets of the Company other than to a corporation with respect to which,
following such sale or disposition, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors is then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such sale or disposition in substantially the same
proportion as their ownership of the Outstanding Capital Stock and Voting
Securities, as the case may be, immediately prior to such sale or disposition.
Notwithstanding the foregoing, the currently contemplated transaction
with Concurrent Computer Corporation (including any modifications to such
transaction) shall not constitute a Change of Control.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while
employed by the Company both prior to termination of employment and during the
effective term of this Agreement, all Employee's rights under this Agreement
shall terminate with the payment of such amounts of annual base salary as have
-9-
<PAGE> 10
accrued but remain unpaid and a prorated amount of targeted bonus under the
Executive Bonus Plan through the month in which his death occurs, plus six
additional months of the fixed salary and targeted bonus. All benefits under
Paragraphs 7.b.ii and 7.b.iv shall be extended to Employee's estate as
described in such paragraphs. In addition, Employee's eligible dependents
shall receive continued benefit plan coverage under Paragraph 7.b.iii for six
months from the date of Employee's death.
10. TERMINATION BY DISABILITY. Employee's employment hereunder
may be terminated by the Company for disability. In such event, all Employee's
rights under this Agreement shall terminate with the payment of such amounts of
annual base salary as have accrued but remain unpaid as of the thirtieth (30th)
day after such notice is given except that all benefits under Paragraphs
7.b.ii, 7.b.iii and 7.b.iv shall be extended to Employee as described in such
paragraphs, provided, however, that, with respect to Paragraph 7.b.iii, the
period for continued benefit plan coverage shall be limited to six months from
the date of termination. In addition, the noncompetition and nonsolicitation
provisions of Paragraphs 13 and 14 shall continue to apply for a period of six
months from the date of termination for disability. For purposes of this
Agreement, "disability" is defined to mean that, as a result of Employee's
incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an
officer of the Company on a substantially full-time basis for six (6)
consecutive months: and
b. Within thirty (30) days after the Company notifies
Employee in writing that it intends to replace him, Employee shall not have
returned to the performance of his duties as an officer for the Company on a
full-time basis. Such notice may be given by the Company at any time after
Employee has been absent for a total of four consecutive months.
11. RETIREMENT. Employee shall be entitled to participate in the
Company's Retirement Savings Plan and any other retirement plan hereafter made
available to senior executive officers of the Company in accordance with the
provisions thereof as in effect from time to time.
12. INDEMNIFICATION. If litigation shall be brought to enforce or
interpret any provision contained herein, the non-prevailing party shall
indemnify the prevailing party for reasonable attorney's fees (including those
for negotiations, trial and appeals) and disbursements incurred by the
prevailing party in such litigation, and hereby agrees to pay prejudgment
interest on any money judgment obtained by the
-10-
<PAGE> 11
prevailing party calculated at the generally prevailing Nations Bank of
Florida, N.A. base rate of interest charged to its commercial customers in
effect from time to time from the date that payment(s) to him should have been
made under this Agreement.
13. NONCOMPETITION.
a. At all times during Employee's employment hereunder,
and for such additional periods as may otherwise be set forth in this Agreement
in reference to this Paragraph 13, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner, operator,
shareholder, director, partner, creditor, consultant, agent or any capacity
whatsoever that manufactures products designed to compete directly with
products of the Company or markets such products anywhere in the world where
the Company (i) is engaged in business or (ii) has evidenced an intention of
engaging in business. Employee acknowledges that he has read the foregoing and
agrees that the nature of the geographical restrictions are reasonable given
the international nature of the Company's business. In the event that these
geographical or temporal restrictions are judicially determined to be
unreasonable, the parties agree that these restrictions shall be judicially
reformed to the maximum restrictions which are reasonable.
b. Notwithstanding the provisions of the preceding
Subparagraph, the Employee may accept employment with a company that would be
deemed to be a competitor of the Company as described in the previous
subparagraph ("Competitor"), so long as (i) the Competitor has had annual
revenues of at least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition with
the Company do not exceed 50% of its total revenues, and (iii) the Employee's
responsibilities are solely for divisions or subsidiaries of the Competitor
that do not compete with the Company.
14. NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times
during the Employee's employment hereunder, and for such additional periods as
may otherwise be set forth in this Agreement, in reference to this Paragraph
14, the Employee shall not, directly or indirectly, for himself or for any
other person, firm, corporation, partnership, association or other entity (a)
attempt to employ, employ or enter into any contractual arrangement with any
employee or former employee of the Company, its affiliates, subsidiaries or
predecessors in interest, unless such employee or former employee has not been
employed by the Company, its affiliates, subsidiaries or predecessors in
interest, during the six months prior to the
-11-
<PAGE> 12
Employee's attempt to employ him, or (b) call on or solicit any of the actual
or targeted prospective customers of the Company or its affiliates,
subsidiaries or predecessors in interest with respect to any matters related to
or competitive with the business of the Company.
15. CONFIDENTIALITY.
a. Nondisclosure: The Employee acknowledges and agrees
that the Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection with
the performance of his duties hereunder, the Employee shall not at any time
during or subsequent to the term of his employment hereunder disclose, directly
or indirectly, to any person, firm, corporation, partnership, association or
other entity any proprietary or confidential information relating to the
Company or any information concerning the Company's financial condition or
prospects, the Company's customers, the design, development, manufacture,
marketing or sale of the Company's products or the Company's methods of
operating its business (collectively, "Confidential Information").
Confidential Information shall not include information which, at the time of
disclosure, is known or available to the general public by publication or
otherwise through no act or failure to act on the part of Employee.
b. Return of Confidential Information: Upon termination
of Employee's employment, for whatever reason and whether voluntary or
involuntary, or at any time at the request of the Company, Employee shall
promptly return all Confidential Information in the possession or under the
control of Employee to the Company and shall not retain any copies or other
reproductions or extracts thereof. Employee shall at any time at the request
of the Company destroy or have destroyed all memoranda, notes, reports, and
documents, whether in "hard copy" form or as stored on magnetic or other media,
and all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the foregoing
materials have in fact been returned or destroyed.
c. Books and Records: All books, records and accounts
whether prepared by Employee or otherwise coming into Employee's possession,
shall be the exclusive property of the Company and shall be returned
immediately to the Company upon termination of Employee's employment hereunder
or upon the Company's request at any time.
16. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges
that a breach of any of the provisions of Paragraphs 13, 14, or 15 hereof would
result in immediate and irreparable injury to the
-12-
<PAGE> 13
Company which cannot be adequately or reasonably compensated at law.
Therefore, Employee agrees that the Company shall be entitled, if any such
breach shall occur or be threatened or attempted, to a decree of specific
performance and to a temporary and permanent injunction, enjoining and
restraining such breach by Employee or his agents, either directly or
indirectly, and that such right to injunction shall be cumulative to whatever
other remedies for actual damages to which the Company is entitled. Employee
further agrees that the Company may set off against or recoup from any amounts
due under this Agreement to the extent of any losses incurred by the Company as
a result of any breach by Employee of the provisions of Paragraphs 13, 14 or 15
hereof.
17. SEVERABILITY. Any provision in this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective only to the extent of such prohibition or unenforceability
without invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
18. SUCCESSORS. This Agreement shall be binding upon Employee and
inure to the benefit of the Company and any permitted successor of the Company.
Neither this Agreement nor any rights arising hereunder may be assigned or
pledged by Employee or anyone claiming through Employee; or by the Company,
except to any corporation which is the successor in interest to the Company by
reason of a merger, consolidation or sale of substantially all of the assets of
the Company. The foregoing sentence shall not be deemed to have any effect
upon the rights of Employee upon a Change of Control.
19. CONTROLLING LAW. This Agreement shall in all respects be
governed by, and construed in accordance with, the laws of the State of
Florida.
20. NOTICES. Any notice required or permitted to be given
hereunder shall be written and sent by registered or certified mail,
telecommunicated or hand delivered at the address set forth herein or to any
other address of which notice is given:
TO THE COMPANY: HARRIS COMPUTER SYSTEMS CORPORATION
2101 WEST CYPRESS CREEK ROAD
FORT LAUDERDALE, FLORIDA 33309
-13-
<PAGE> 14
TO THE EMPLOYEE: ROBERT L. CARBERRY
6494 N.W. 32ND WAY
BOCA RATON, FL 33496
21. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto on the subject matter hereof and may not
be modified without the written agreement of both parties hereto.
22. WAIVER. A waiver by any party of any of the terms and
conditions hereof shall not be construed as a general waiver by such party.
23. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original and both of which together shall
constitute a single agreement.
24. INTERPRETATION. In the event of a conflict between the
provisions of this Agreement and any other agreement or document defining
rights and duties of Employee or the Company upon Employee's termination, the
rights and duties set forth in this Agreement shall control.
25. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7.b. provides that
certain payments and other benefits shall be received by Employee upon the
termination of Employee by the Company other than for Cause and states that
these same provisions shall apply if Employee terminates his employment in
accordance with the provisions of Paragraph 6 hereof. It is the intention of
this Agreement that if the Company terminates Employee other than for Cause
(and other than as a consequence of Employee's death, disability or normal
retirement) or if Employee terminates his employment in accordance with the
provisions of Paragraph 6 hereof, then the payments and other benefits set
forth in Paragraph 7.b. shall constitute the sole and exclusive remedies of
Employee. This Paragraph 25 shall have no effect upon the provisions of
Paragraph 8 of this Agreement.
26. OTHER BOARD APPOINTMENTS. The Company currently intends to
increase the size of the Board by two directors. Nominations for election for
these two additional directors shall be made based upon recommendations made by
Employee, subject to approval by the Company's Board of Directors.
-14-
<PAGE> 15
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
HARRIS COMPUTER SYSTEMS CORP. EMPLOYEE
- -------------------------------------- -------------------------------------
E. Courtney Siegel Robert L. Carberry
Chairman, President and
Chief Executive Officer
-15-
<PAGE> 16
SCHEDULE A
LONG TERM INCENTIVE PLAN ("LTIP")
The LTIP will initially be a three year plan, consisting of a stock
option granted in each of such first three years under the LTIP (each annual
option is referred to herein as a "LTIP Option"). Each LTIP Option shall be
granted on an amount of shares of Company Common Stock equal to 150% of the
Employee's base salary divided by the "Exercise Price" for that LTIP Option.
The "Exercise Price" shall be the fair market value of the Company's Common
Stock on the date of grant of each LTIP Option. Each LTIP Option shall become
exercisable on the third anniversary of that LTIP Option (the anniversary date
of each LTIP Option shall be determined by the Board). Each LTIP Option's
vesting shall also be further subject to achieving objectives that are to be
set by the Board.
-16-
<PAGE> 1
EXHIBIT 10.02
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
July 1, 1996 by and between CyberGuard Corporation, a Florida corporation (the
"Company"), and Patrick O. Wheeler ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain
the services of Employee, and Employee desires to be retained by the Company,
on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment, as Chief Financial Officer and Vice President Finance of
the Company upon the terms of and subject to this Agreement.
2. TERM. The term (the "Term") of this Agreement shall commence on July
1, 1996, and shall continue until terminated in accordance with the terms
hereof.
3. DUTIES. During his employment hereunder, Employee will serve in such
capacity and with such duties as shall be assigned from time to time by the
Chief Executive Officer of the Company. Employee shall diligently perform such
duties and shall devote his entire business skill, time and effort to his
employment and his duties hereunder and shall not during the Term, directly or
indirectly, alone or as a member of a partnership, or as an officer, director,
employee or agent of any other person, firm or business organization engage in
any other business activities or pursuits requiring his personal service that
materially conflict with his duties hereunder or the diligent performance of
such duties.
4. COMPENSATION.
a. SALARY. During his employment hereunder, Employee shall be paid a
salary of $100,000 year, payable in equal installments not less than
monthly ("Base Salary"). The Employee's Base Salary shall be reviewed at
least annually by the Board of Directors or any Committee of the Board
delegated the authority to review executive compensation.
b. OPTION AND BONUS. In addition to salary, Employee shall be entitled
to participate in the Company's Stock Incentive Plan as adopted by the
Board of Directors of the Company on September 14, 1994 and effective on
October 8, 1994 (the "Stock Incentive Plan"). In addition, Employee shall
participate in a Management Bonus Program anticipated to be established by
the Company with an initial annual targeted bonus equal to 40% of
Employee's Base Salary (hereafter the "Management Bonus Program").
c. INSURANCE. During his employment hereunder, Employee shall be
entitled to participate in all such health, life, disability and other
insurance programs, if any, that the Company may offer to other key
executive employees of the Company from time to time.
1
<PAGE> 2
d. OTHER BENEFITS. During his employment hereunder, Employee shall be
entitled to all such other benefits, if any, that the Company may offer to
other key executive employees of the Company from time to time.
e. VACATION. Employee shall be entitled to that number of weeks'
vacation leave (in addition to holidays) in each calendar year during the
Term in accordance with the Company's vacation policy for executives as it
may be in effect from time to time. Except with respect to vacation time
unused as the result of a request by the Company to postpone a vacation,
any unused vacation from one calendar year shall not carry-over to any
subsequent calendar year.
f. EXPENSE REIMBURSEMENT. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in the performance of his duties
hereunder in accordance with policies established by the Company. Such
expenses shall include, without limitation, reasonable entertainment
expenses, gasoline and toll expenses and cellular phone use charges, if
such charges are directly related to the business of the Company.
5. GROUNDS FOR TERMINATION. The Board of Directors of the Company may
terminate this Agreement for Cause. As used herein, "Cause" shall mean any of
the following: (i) an act of willful misconduct or gross negligence by Employee
in the performance of his material duties or obligations to the Company; if
such act is capable of cure, Employee shall be given written notice and such
act shall not be deemed a basis for Cause if cured within 60 days after written
notice is received by Employee specifying the alleged failure in reasonable
detail (and during such 60 day period, Employee shall continue to be employed
by the Company at full pay), or (ii) conviction of Employee of a felony
involving moral turpitude or (iii) a material act of dishonesty or breach of
trust on the part of Employee resulting or intended to result directly or
indirectly in personal gain or enrichment at the expense of the Company.
6. TERMINATION BY EMPLOYEE. Employee may terminate this Agreement with
Good Reason. In the event of termination by Employee for Good Reason, Employee
shall be entitled to the benefits of Paragraph 7b. of this Agreement. "Good
Reason" means:
a. A material breach of the provisions of this Agreement by the Company
(except those set forth in Paragraph 4a.) and Employee provides at least
15 days' prior written notice to the Company of the existence of such
breach and his intention to terminate this Agreement (no such termination
shall be effective if such breach is cured during such period); or
b. The failure of the Company to comply with the provisions of
Paragraph 4a. or to pay any amounts due under the Management Bonus Program
provisions of Paragraph 4b. for an uninterrupted 10 day period.
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in
Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7a. shall apply. These same
provisions shall
2
<PAGE> 3
apply if Employee terminates his employment without Good Reason as
described in Paragraph 6.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company shall
pay in a lump sum to Employee at the time of Employee's termination such
amount of compensation due Employee for services rendered to the Company,
as well as compensation for unused vacation time and earned bonus, as has
accrued but remains unpaid. Any and all other rights granted to Employee
under this Agreement shall terminate as of the date of termination.
ii. NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period of up
to one year following the date of termination, so long as the Company:
(x) provides a written notice to Employee within 5 business days after
Employee's termination that the Company wishes to exercise its right to
require that Employee not compete and not solicit in accordance with
Paragraphs 14 and 15 hereof; and (y) Company thereafter pays to Employee
in periodic installments, without interest, in accordance with the
regular salary payment practices of the Company an amount equal to (.1)
the amount of Employee's annual Base Salary as in effect immediately
prior to Employee's date of termination, multiplied by (.2) the number of
months that the Company is requiring the non-competition and
non-solicitation covenants to remain in place, divided by 12. The first
such installment of Base Salary and target bonus shall be paid on or
before the delivery of the notice described in the prior sentence of this
Paragraph 7a(ii). The non-competition and non-solicitation provisions of
this Agreement shall no longer apply to Employee if the Company fails to
pay the amounts required under this Section 7a(ii) for an uninterrupted
10-day period and such failure is not cured with 5 days after written
notice of such failure is delivered to the Company.
b. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for any reason other than for
Cause as provided in Paragraph 5 and other than as a consequence of
Employee's death, disability, or normal retirement under the Company's
retirement plans and practices, then the following provisions apply. These
same provisions shall apply if Employee terminates his employment with Good
Reason as described in Paragraph 6. In addition to the amounts stated
below, Employee shall be paid any other amounts by the Company to which he
is entitled.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. On or before
Employee's last day of employment with the Company, the Company shall pay
in a lump sum to Employee as compensation for services rendered to the
Company a cash amount equal to the amount of Employee's annual Base
Salary and the greater of (x) the target bonus under the Management Bonus
Program as in effect immediately prior to his date of termination or (y)
the amount of the bonus under the Management Bonus Program to which he is
entitled but which remains unpaid. At the election of the Company, the
cash amount referred to in this Paragraph 7b.i. may be paid to Employee
in periodic installments, without interest, in accordance with the
regular salary payment practices of the Company, with the first such
installment to be paid on or before Employee's last day of employment
with the Company, and no interest shall be paid with respect to any
amount not paid on the Employee's date of termination.
3
<PAGE> 4
ii. VESTING OF OPTIONS AND RIGHTS. Notwithstanding the vesting
period provided for in the Stock Incentive Plan and any related stock
option agreements between the Company and Employee for stock options
("options") and stock appreciation rights ("rights") granted Employee by
the Company, all options and stock appreciation rights that were
exercisable at the date of termination or within 12 months thereafter
shall be immediately exercisable upon termination of employment. In
addition, Employee will have the right to exercise all such options and
rights for the shorter of (a) six months following his termination of
employment or (b) with respect to each option, the remainder of the
period of exercisability under the terms of the appropriate documents
that grant such options.
iii. BENEFIT PLAN COVERAGE. The Company shall maintain in full
force and effect for Employee and his dependents for six months after the
date of termination, all life, health, accident, and disability benefit
plans and other similar employee benefit plans, programs and arrangements
in which Employee or his dependents were entitled to participate
immediately prior to the date of termination, in such amounts as were in
effect immediately prior to the date of termination, provided that such
continued participation is possible under the general terms and
provisions of such benefit plans, programs and arrangements.
In the event that participation in any benefit plan, program or
arrangement described above is barred, or any such benefit plan, program
or arrangement is discontinued or the benefits thereunder materially
reduced, the Company shall arrange to provide Employee and his dependents
for six months after the date of termination with benefits substantially
similar to those that they were entitled to receive under such benefit
plans, programs and arrangements immediately prior to the date of
termination. Notwithstanding any time period for continued benefits
stated in this Paragraph 7b.iii., all benefits in this Paragraph 7b.iii.
will terminate on the date that Employee becomes an employee of another
employer and eligible to participate in the employee benefit plans of
such other employer. To the extent that Employee was required to
contribute amounts for the benefits described in this Paragraph 7b.iii.
prior to his termination, he shall continue to contribute such amounts
for such time as these benefits continue in effect after termination.
iv. OTHER COMPENSATION. Any awards previously made to Employee
under any of the Company's compensation plans or programs and not
previously paid shall immediately vest on the date of his termination and
shall be paid on that date and included as compensation in the year paid.
v. SAVINGS AND OTHER PLANS. Except as otherwise more specifically
provided herein or under the terms of the respective plans relating to
termination of employment, Employee's active participation in any
applicable savings, retirement, profit sharing or supplemental employee
retirement plans or any deferred compensation or similar plan of the
Company or any of its subsidiaries shall continue only through the last
day of his employment. All other provisions, including any distribution
and/or vested rights under such plans, shall be governed by the terms of
those respective plans.
4
<PAGE> 5
vi. NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall continue, beyond the time periods set forth in
such paragraphs, to apply with respect to Employee for six (6) months
following the date of termination, and at the end of such six (6) month
period, the Company shall have the right to extend the time period of
noncompetition and nonsolicitation for an additional six (6) months by
giving written notice to Employee of such extension and paying to
Employee an amount equal to one-half the amount of Employee's annual Base
Salary and one-half the target bonus under the Management Bonus Program
as in effect immediately prior to his date of termination. At the
election of the Company, the cash amount referred to in the prior
sentence of this Paragraph 7b.vi. may be paid to Employee in periodic
installments in accordance with the regular salary payment practices of
the Company, with the first such installment to be paid on or before the
delivery of the notice described in the first sentence of this Paragraph
7b.vi., and no interest shall be paid with respect to any amount paid in
installments. The noncompetition and nonsolicitation provisions of this
Agreement shall no longer apply to Employee if the Company fails to pay
the amounts required under the provisions of Paragraph 7b.i. or the
first two sentences of this Paragraph 7b.vi. for an uninterrupted 10-day
period and such failure is not cured within 5 days after written notice
of such failure is delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior to or more than one year after the
occurrence of a Change of Control (as defined in Paragraph 8c.). From the
occurrence of any Change of Control until the first anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of
this Paragraph 7, except that in the event that Employee's employment is
terminated by Employee after a Change of Control without Good Reason, then
the provisions of Paragraph 8 shall not apply and the provisions of
Paragraph 7a. shall apply. Termination upon death, disability and
retirement are covered by Paragraphs 9, 10, and 11, respectively.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANGE OF CONTROL.
a. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. In the event
Employee's employment with the Company is terminated within one year
following the occurrence of a Change of Control (other than as a
consequence of his death or disability, or of his normal retirement under
the Company's retirement plans and practices) either (i) by the Company
for any reason whatsoever or (ii) by Employee with Good Reason as provided
in Paragraph 6, then Employee shall be entitled to receive from the
Company, the following:
i. BASE SALARY. An amount equal to twice the Employee's annual Base
Salary as in effect at the date of termination shall be paid on the date
of termination;
ii. TARGET BONUS. An amount equal to twice the Employee's target
bonus under the Management Bonus Program for the fiscal year in which the
date of termination occurs shall be paid on the date of termination; and
iii. OTHER BENEFITS. All benefits under Paragraphs 7b.i, 7.b.ii.,
7b.iii. 7b.iv. and 7b.v. shall be extended to Employee as described in
such paragraphs, except that all options and rights shall be immediately
5
<PAGE> 6
exercisable and the period for exercise of options and rights described
in the last sentence of Paragraph 7b.ii and benefit plan coverage as
described in Paragraph 7.b.iii shall be one year.
b. NONCOMPETITION/NONSOLICITATION PERIOD. In the event of a
termination under the circumstances described in Paragraph 8a., the
provisions of Paragraphs 14 and 15 shall be without force and effect and
shall not apply to Employee.
c. For purposes of this Agreement, the term "Change of Control" shall
mean:
i. The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or Section
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) (any of the foregoing described
in this Paragraph hereafter a "Person") of 30% or more of either (a) the
then outstanding shares of Capital Stock of the Company (the "Outstanding
Capital Stock") or (b) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"), provided, however, that
any acquisition by (x) the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any of its subsidiaries or (y) any Person that is eligible,
pursuant to Rule 13d-1(b) under the Exchange Act, to file a statement on
Schedule 13G with respect to its beneficial ownership of Voting
Securities, whether or not such Person shall have filed a statement on
Schedule 13G, unless such Person shall have filed a statement on Schedule
13D with respect to beneficial ownership of 30% or more of the Voting
Securities or (z) any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares
of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock and Voting Securities immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding Capital Stock
and Voting Securities, as the case may be, shall not constitute a Change
of Control; or
ii. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the Company
(as such terms are used in Rule 14a-11 of Regulation 14A, or any
successor section, promulgated under the Exchange Act); or
6
<PAGE> 7
iii. Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with
respect to which all or substantially all holders of the Outstanding
Capital Stock and Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company or (b)
a sale or other disposition of all or substantially all of the assets of
the Company other than to a corporation with respect to which, following
such sale or disposition, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors is then owned beneficially, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Capital Stock and
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding
Capital Stock and Voting Securities, as the case may be, immediately
prior to such sale or disposition.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while employed
by the Company both prior to termination of employment and during the effective
term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have
accrued but remain unpaid and a prorated amount of targeted bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus three additional months of the fixed salary and targeted bonus. All
benefits under 7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate
as described in such paragraphs. In addition, Employee's eligible dependents
shall receive continued benefit plan coverage under Paragraph 7b.iii. for three
months from the date of Employee's death.
10. TERMINATION BY DISABILITY. Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given except that all benefits under Paragraphs 7b.ii, 7b.iii,
7b.iv. and 7b.v. shall be extended to Employee as described in such paragraphs.
In addition, the noncompetition and nonsolicitation provisions of Paragraphs
14 and 15 shall continue to apply to Employee for a period of one year from the
date of termination.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an officer of the
Company on a substantially full-time basis for six (6) consecutive months;
and
7
<PAGE> 8
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
11. RETIREMENT. Retirement by Employee, whether occurring as a result of
a voluntary termination by Employee or an involuntary termination as the result
of reaching the age retirement as set forth in the Company's retirement
policies, shall be treated as a voluntary termination without Good Reason and
the provisions of Paragraph 7a. shall apply. If during the Term or any
extension thereof, the Company adopts a retirement plan with respect to
executive officers of the Company, Employee shall have the right to participate
in such policy and the provisions of such policy shall supersede the provisions
of the preceding sentence.
12. INDEMNIFICATION. If litigation shall be brought, in the event of
breach or to enforce or interpret any provision contained herein, the
non-prevailing party shall indemnify the prevailing party for reasonable
attorney's fees (including those for negotiations, trial and appeals) and
disbursements incurred by the prevailing party in such litigation, and hereby
agrees to pay prejudgment interest on any money judgment obtained by the
prevailing party calculated at the generally prevailing NationsBank of Florida,
N.A. base rate of interest charged to its commercial customers in effect from
time to time from the date that payment(s) to him should have been made under
this Agreement.
13. (Omitted Intentionally)
14. NONCOMPETITION.
a. At all times during Employee's employment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner,
operator, shareholder, director, partner, creditor, consultant, agent or
any capacity whatsoever that manufactures products designed to compete
directly with products of the Company or markets such products anywhere in
the world where the Company (i) is engaged in business or (ii) has
evidenced an intention of engaging in business. Employee acknowledges
that he has read the foregoing and agrees that the nature of the
geographical restrictions are reasonable given the international nature of
the Company's business.
In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions
which are reasonable.
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to
be a competitor of the Company as described in the previous sentence
("Competitor"), so long as (i) the Competitor has had annual revenues of at
least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition
with the Company does not exceed 50% of its total revenues and (iii)
Employee's responsibilities are solely for divisions or subsidiaries of the
Competitor that do not compete with the Company.
8
<PAGE> 9
15. NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times during
Employee's employment hereunder, or for such additional periods as may
otherwise be set forth in this Agreement in reference to this Paragraph 15,
Employee shall not, directly or indirectly, for himself or for any other
person, firm, corporation, partnership, association or other entity (a) attempt
to employ, employ or enter into any contractual arrangement with any employee
or former employee of the Company, its affiliates, subsidiaries or predecessors
in interest, unless such employee or former employee has not been employed by
the Company, its affiliates, subsidiaries or predecessors in interest during
the twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
matters related to or competitive with the business of the Company.
16. CONFIDENTIALITY.
a. NONDISCLOSURE. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity any proprietary or confidential information
relating to the Company or any information concerning the Company's
financial condition or prospects, the Company's customers, the design,
development, manufacture, marketing or sale of the Company's products or
the Company's methods of operating its business (collectively "Confidential
Information"). Confidential Information shall not include information
which, at the time of disclosure, is known or available to the general
public by publication or otherwise through no act or failure to act on the
part of Employee.
b. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and
all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the
foregoing materials have in fact been returned or destroyed.
c. BOOKS AND RECORDS. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company upon termination of Employee's employment hereunder or upon the
Company's request at any time.
17. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately
or reasonably compensated at law. Therefore, Employee agrees that the Company
shall be entitled, if any such breach shall occur or be threatened or
attempted, to a decree of specific performance and to a temporary and permanent
injunction,
9
<PAGE> 10
without the posting of a bond, enjoining and restraining such breach by
Employee or his agents, either directly or indirectly, and that such right to
injunction shall be cumulative to whatever other remedies for actual damages to
which the Company is entitled. Employee further agrees that the Company may
set off against or recoup from any amounts due under this Agreement to the
extent of any losses incurred by the Company as a result of any breach by
Employee of the provisions of Paragraphs 14, 15 or 16 hereof.
18. SEVERABILITY. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
19. SUCCESSORS. This Agreement shall be binding upon Employee and inure
to his and his estate's benefit, and shall be binding upon and inure to the
benefit of the Company and any permitted successor of the Company. Neither
this Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the Company.
The foregoing sentence shall not be deemed to have any effect upon the rights
of Employee upon a Change of Control.
20. CONTROLLING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
21. NOTICES. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309
Attention: President
To Employee: Patrick O. Wheeler
1421 Jefferson Avenue
Akron, Ohio 44313
22. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
23. WAIVER. A waiver by any party of any of the terms and conditions
hereof shall not be construed as a general waiver by such party.
24. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
10
<PAGE> 11
25. INTERPRETATION. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties
of Employee or the Company upon Employee's termination, the rights and duties
set forth in this Agreement shall control.
26. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason.
It is the intention of this Agreement that if the Company terminates Employee
other than for Cause (and other than as a consequence of Employee's death,
disability or normal retirement) or if Employee terminates his employment with
Good Reason, then the payments and other benefits set forth in Paragraph 7b.
shall constitute the sole and exclusive remedies of Employee.
27. SURVIVAL. Notwithstanding the provisions of Paragraph 2, the
provisions of Paragraphs 14, 15, and 16 shall survive the expiration or early
termination of this Agreement.
11
<PAGE> 12
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY:
CYBERGUARD CORPORATION
By:
Its:
EMPLOYEE:
Patrick O. Wheeler
12
<PAGE> 1
EXHIBIT 10.03
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
May 28, 1996 by and between Harris Computer Systems Corporation, a Florida
corporation (the "Company"), and Frank Gelbart ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain
the services of Employee, and Employee desires to be retained by the Company,
on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Employment. The Company hereby employs Employee, and Employee hereby
accepts employment, as Vice President, U.S. Marketing and Sales of the Company
upon the terms of and subject to this Agreement.
2. Term. The term (the "Term") of this Agreement shall commence on June
1, 1996 and shall continue until terminated in accordance with the terms
hereof.
3. Duties. During his employment hereunder, Employee will serve in such
capacity and with such duties as shall be assigned from time to time by the
Chief Executive Officer of the Company. Employee shall diligently perform such
duties and shall devote his entire business skill, time and effort to his
employment and his duties hereunder and shall not during the Term, directly or
indirectly, alone or as a member of a partnership, or as an officer, director,
employee or agent of any other person, firm or business organization engage in
any other business activities or pursuits requiring his personal service that
materially conflict with his duties hereunder or the diligent performance of
such duties.
4. Compensation.
a. Salary. During his employment hereunder, Employee shall be paid a
salary of $115,500 per year, payable in equal installments not less than
monthly ("Base Salary"). The Employee's Base Salary shall be reviewed at
least annually by the Board of Directors or any Committee of the Board
delegated the authority to review executive compensation.
b. Option and Bonus. In addition to salary, Employee shall be entitled
to participate in the Company's Stock Incentive Plan as adopted by the
Board of Directors of the Company on September 14, 1994 and effective on
October 8, 1994 (the "Stock Incentive Plan"). Employee shall receive the
following awards under the Stock Incentive Plan: (i) 2,000 shares of
Company Common Stock ("Common Stock") as a restricted stock grant, with
restrictions lapsing on December 31, 1996; and (ii) a five year option to
purchase 100,000 shares of Common Stock, at an exercise price equal to the
closing price of the Common Stock on May 28, 1996, becoming exercisable in
one-third increments on each of
1
<PAGE> 2
the first, second and third anniversaries of the first day of employment
hereunder. In addition, Employee shall participate in a Management Bonus
Program anticipated to be established by the Company with an initial annual
targeted bonus equal to 50% of Employee's Base Salary (hereafter the
"Management Bonus Program"). The Management Bonus Program shall provide
for quarterly payments of earned bonus and a draw against the quarterly
bonus payment in the amount of $2,000 per month.
c. Insurance. During his employment hereunder, Employee shall be
entitled to participate in all such health, life, disability and other
insurance programs, if any, that the Company may offer to other key
executive employees of the Company from time to time.
d. Other Benefits. During his employment hereunder, Employee shall be
entitled to all such other benefits, if any, that the Company may offer to
other key executive employees of the Company from time to time.
e. Vacation. Employee shall be entitled to four weeks' vacation leave
(in addition to holidays) in each calendar year during the Term, or such
additional amount as may be set forth in the vacation policy that the
Company shall establish from time to time. Except with respect to vacation
time unused as the result of a request by the Company to postpone a
vacation, any unused vacation from one calendar year shall not carry-over
to any subsequent calendar year.
f. Expense Reimbursement. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in the performance of his duties
hereunder in accordance with policies established by the Company. Such
expenses shall include, without limitation, reasonable entertainment
expenses, gasoline and toll expenses and cellular phone use charges, if
such charges are directly related to the business of the Company.
5. Grounds for Termination.
The Board of Directors of the Company may terminate this Agreement for
Cause. As used herein, "Cause" shall mean any of the following: (i) an act of
willful misconduct or gross negligence by Employee in the performance of his
material duties or obligations to the Company; if such act is capable of cure,
Employee shall be given written notice and such act shall not be deemed a basis
for Cause if cured within 60 days after written notice is received by Employee
specifying the alleged failure in reasonable detail (and during such 60 day
period, Employee shall continue to be employed by the Company at full pay), or
(ii) conviction of Employee of a felony involving moral turpitude or (iii) a
material act of dishonesty or breach of trust on the part of Employee resulting
or intended to result directly or indirectly in personal gain or enrichment at
the expense of the Company.
6. Termination by Employee.
Employee may terminate this Agreement with Good Reason. In the event
of termination by Employee for Good Reason, Employee shall be entitled to
the benefits of Paragraph 7b. of this Agreement. "Good Reason" means:
2
<PAGE> 3
a. A material breach of the provisions of this Agreement by the Company
(except those set forth in Paragraph 4a.) and Employee provides at least 15
days' prior written notice to the Company of the existence of such breach
and his intention to terminate this Agreement (no such termination shall be
effective if such breach is cured during such period); or
b. The failure of the Company to comply with the provisions of
Paragraph 4a. or the Management Bonus Program provisions of Paragraph 4b.
for an uninterrupted 10 day period.
7. Payment and Other Provisions Upon Termination.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in
Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7a. shall apply. These same
provisions shall apply if Employee terminates his employment without Good
Reason as described in Paragraph 6.
i. Salary, Performance Award, and Bonus Payments: The Company shall
pay in a lump sum to Employee at the time of Employee's termination such
amount of compensation due Employee for services rendered to the Company,
as well as compensation for unused vacation time and earned bonus, as has
accrued but remains unpaid. Any and all other rights granted to Employee
under this Agreement shall terminate as of the date of termination.
ii. Noncompetition/Nonsolicitation Period: The provisions of
Paragraphs 14 and 15 shall continue to apply with respect to Employee for a
period of one year following the date of termination.
b. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for any reason other than for
Cause as provided in Paragraph 5 and other than as a consequence of
Employee's death, disability, or normal retirement under the Company's
retirement plans and practices, then the following provisions apply. These
same provisions shall apply if Employee terminates his employment with Good
Reason as described in Paragraph 6. In addition to the amounts stated
below, Employee shall be paid any other amounts by the Company to which he
is entitled.
i. Salary, Performance Award, and Bonus Payments: On or before
Employee's last day of employment with the Company, the Company shall pay
in a lump sum to Employee as compensation for services rendered to the
Company a cash amount equal to one-half the amount of Employee's annual
Base Salary and the greater of (x) one-half the target bonus under the
Management Bonus Program as in effect immediately prior to his date of
termination or (y) the amount of the bonus under the Management Bonus
Program to which he is entitled but which remains unpaid. At the
election of the Company, the cash amount referred to in this Paragraph
7b.i. may be paid to Employee in periodic installments in accordance with
the regular salary payment practices of the Company, with the first such
installment to be paid on or before Employee's last day of employment
with the Company, and no interest shall be paid with respect to any
amount not paid on the Employee's date of termination.
3
<PAGE> 4
ii. Vesting of Options and Rights: Notwithstanding the vesting
period provided for in the Stock Incentive Plan and any related stock
option agreements between the Company and Employee for stock options
("options") and stock appreciation rights ("rights") granted Employee by
the Company, all options and stock appreciation rights that were
exercisable at the date of termination or within 12 months thereafter
shall be immediately exercisable upon termination of employment. In
addition, Employee will have the right to exercise all such options and
rights for the shorter of (a) six months following his termination of
employment or (b) with respect to each option, the remainder of the
period of exercisability under the terms of the appropriate documents
that grant such options. Further, all restrictions on the stock granted
in Paragraph 4b.i. hereunder shall lapse notwithstanding the period
during which such restrictions would otherwise be in place as provided in
Paragraph 4b.i. or in any related restricted stock agreement between the
Company and Employee.
iii. Benefit Plan Coverage: The Company shall maintain in full
force and effect for Employee and his dependents for six months after the
date of termination, all life, health, accident, and disability benefit
plans and other similar employee benefit plans, programs and arrangements
in which Employee or his dependents were entitled to participate
immediately prior to the date of termination, in such amounts as were in
effect immediately prior to the date of termination, provided that such
continued participation is possible under the general terms and
provisions of such benefit plans, programs and arrangements.
In the event that participation in any benefit plan, program or
arrangement described above is barred, or any such benefit plan, program
or arrangement is discontinued or the benefits thereunder materially
reduced, the Company shall arrange to provide Employee and his dependents
for six months after the date of termination with benefits substantially
similar to those that they were entitled to receive under such benefit
plans, programs and arrangements immediately prior to the date of
termination. Notwithstanding any time period for continued benefits
stated in this Paragraph 7b.iii., all benefits in this Paragraph 7b.iii.
will terminate on the date that Employee becomes an employee of another
employer and eligible to participate in the employee benefit plans of
such other employer. To the extent that Employee was required to
contribute amounts for the benefits described in this Paragraph 7b.iii.
prior to his termination, he shall continue to contribute such amounts
for such time as these benefits continue in effect after termination.
iv. Other Compensation: Any awards previously made to Employee
under any of the Company's compensation plans or programs and not
previously paid shall immediately vest on the date of his termination and
shall be paid on that date and included as compensation in the year paid.
v. Savings and Other Plans: Except as otherwise more specifically
provided herein or under the terms of the respective plans relating to
termination of employment, Employee's active participation in any
applicable savings, retirement, profit sharing or supplemental employee
retirement plans or any deferred compensation or similar plan of the
Company or any of its subsidiaries shall continue only through the last
day of his employment. All other provisions, including any distribution
and/or
4
<PAGE> 5
vested rights under such plans, shall be governed by the terms of those
respective plans.
vi. Noncompetition/Nonsolicitation Period. The provisions of
Paragraphs 14 and 15 shall continue, beyond the time periods set forth in
such paragraphs, to apply with respect to Employee for six (6) months
following the date of termination, and at the end of such six (6) month
period, the Company shall have the right to extend the time period of
noncompetition and nonsolicitation for an additional six (6) months by
giving written notice to Employee of such extension and paying to
Employee an amount equal to one-half the amount of Employee's annual Base
Salary and one-half the target bonus under the Management Bonus Program
as in effect immediately prior to his date of termination. At the
election of the Company, the cash amount referred to in the prior
sentence of this Paragraph 7b.vi. may be paid to Employee in periodic
installments in accordance with the regular salary payment practices of
the Company, with the first such installment to be paid on or before the
delivery of the notice described in the first sentence of this Paragraph
7b.vi., and no interest shall be paid with respect to any amount paid in
installments. The noncompetition and nonsolicitation provisions of this
Agreement shall no longer apply to Employee if the Company fails to pay
the amounts required under the provisions of Paragraph 7b.i. or the first
sentence of this Paragraph 7b.vi. for an uninterrupted 10-day period and
such failure is not cured within 5 days after written notice of such
failure is delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior to or more than one year after the
occurrence of a Change of Control (as defined in Paragraph 8c.). From the
occurrence of any Change of Control until the first anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of
this Paragraph 7, except that in the event that Employee's employment is
terminated by Employee after a Change of Control without Good Reason, then
the provisions of Paragraph 8 shall not apply and the provisions of
Paragraph 7a. shall apply. Termination upon death, disability and
retirement are covered by Paragraphs 9, 10, and 11, respectively.
8. Payment and Other Provisions after Change of Control.
a. Salary, Performance Award, and Bonus Payments: In the event
Employee's employment with the Company is terminated within one year
following the occurrence of a Change of Control (other than as a
consequence of his death or disability, or of his normal retirement under
the Company's retirement plans and practices) either (i) by the Company
for any reason whatsoever or (ii) by Employee with Good Reason as provided
in Paragraph 6, then Employee shall be entitled to receive from the
Company, the following:
i. Base Salary. An amount equal to one and one-half times employee's
annual Base Salary as in effect at the date of termination shall be paid
on the date of termination;
ii. Target Bonus. An amount equal to one and one-half times the
Employee's target bonus under the Management Bonus Program for the fiscal
year in which the date of termination occurs shall be paid on the date of
termination; and
5
<PAGE> 6
iii. Other Benefits. All benefits under Paragraphs 7b.i, 7.b.ii.,
7b.iii. 7b.iv. and 7b.v. shall be extended to Employee as described in
such paragraphs, except that all options and rights shall be immediately
exercisable and the period for exercise of options and rights described
in the last sentence of Paragraph 7b.ii and benefit plan coverage as
described in Paragraph 7.b.iii shall be one year.
b. Noncompetition/Nonsolicitation Period. In the event of a
termination under the circumstances described in Paragraph 8a., the
provisions of Paragraphs 14 and 15 shall be without force and effect and
shall not apply to Employee.
c. For purposes of this Agreement, the term "Change of Control" shall
mean:
i. The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or Section
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) (any of the foregoing described
in this Paragraph hereafter a "Person") of 30% or more of either (a) the
then outstanding shares of Capital Stock of the Company (the "Outstanding
Capital Stock") or (b) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"), provided, however, that
any acquisition by (x) the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any of its subsidiaries or (y) any Person that is eligible,
pursuant to Rule 13d-1(b) under the Exchange Act, to file a statement on
Schedule 13G with respect to its beneficial ownership of Voting
Securities, whether or not such Person shall have filed a statement on
Schedule 13G, unless such Person shall have filed a statement on Schedule
13D with respect to beneficial ownership of 30% or more of the Voting
Securities or (z) any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares
of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock and Voting Securities immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding Capital Stock
and Voting Securities, as the case may be, shall not constitute a Change
of Control; or
ii. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the
6
<PAGE> 7
election of the Directors of the Company (as such terms are used in Rule
14a-11 of Regulation 14A, or any successor section, promulgated under the
Exchange Act); or
iii. Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with
respect to which all or substantially all holders of the Outstanding
Capital Stock and Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company or (b)
a sale or other disposition of all or substantially all of the assets of
the Company other than to a corporation with respect to which, following
such sale or disposition, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors is then owned beneficially, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Capital Stock and
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding
Capital Stock and Voting Securities, as the case may be, immediately
prior to such sale or disposition.
9. Termination by Reason of Death: If Employee shall die while employed
by the Company both prior to termination of employment and during the effective
term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have
accrued but remain unpaid and a prorated amount of targeted bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus three additional months of the fixed salary and targeted bonus. All
benefits under 7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate
as described in such paragraphs. In addition, Employee's eligible dependents
shall receive continued benefit plan coverage under Paragraph 7b.iii. for three
months from the date of Employee's death.
10. Termination by Disability: Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given except that all benefits under Paragraphs 7b.ii, 7b.iii,
7b.iv. and 7b.v. shall be extended to Employee as described in such paragraphs.
In addition, the noncompetition and nonsolicitation provisions of Paragraphs
14 and 15 shall continue to apply to Employee for a period of one year from the
date of termination.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
7
<PAGE> 8
a. Employee shall have been absent from his duties as an officer of the
Company on a substantially full-time basis for six (6) consecutive months;
and
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
11. Retirement: Retirement by Employee, whether occurring as a result of
a voluntary termination by Employee or an involuntary termination as the result
of reaching the age retirement as set forth in the Company's retirement
policies, shall be treated as a voluntary termination without Good Reason and
the provisions of Paragraph 7a. shall apply. If during the Term or any
extension thereof, the Company adopts a retirement plan with respect to
executive officers of the Company, Employee shall have the right to participate
in such policy and the provisions of such policy shall supersede the provisions
of the preceding sentence.
12. Indemnification: If litigation shall be brought, in the event of
breach or to enforce or interpret any provision contained herein, the
non-prevailing party shall indemnify the prevailing party for reasonable
attorney's fees (including those for negotiations, trial and appeals) and
disbursements incurred by the prevailing party in such litigation, and hereby
agrees to pay prejudgment interest on any money judgment obtained by the
prevailing party calculated at the generally prevailing NationsBank of Florida,
N.A. base rate of interest charged to its commercial customers in effect from
time to time from the date that payment(s) to him should have been made under
this Agreement.
13. (Omitted Intentionally)
14. Noncompetition.
a. At all times during Employee's employment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner,
operator, shareholder, director, partner, creditor, consultant, agent or
any capacity whatsoever that manufactures products designed to compete
directly with products of the Company or markets such products anywhere in
the world where the Company (i) is engaged in business or (ii) has
evidenced an intention of engaging in business. Employee acknowledges
that he has read the foregoing and agrees that the nature of the
geographical restrictions are reasonable given the international nature of
the Company's business.
In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions
which are reasonable.
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to be a
competitor of the Company as described in the previous sentence
("Competitor"), so long as (i) the Competitor has had annual revenues of at
least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition
with the Company does not exceed 50% of its total revenues and (iii)
Employee's
8
<PAGE> 9
responsibilities are solely for divisions or subsidiaries of the
Competitor that do not compete with the Company.
15. Nonsolicitation of Employees and Customers. At all times during
Employee's employment hereunder, or for such additional periods as may
otherwise be set forth in this Agreement in reference to this Paragraph 15,
Employee shall not, directly or indirectly, for himself or for any other
person, firm, corporation, partnership, association or other entity (a) attempt
to employ, employ or enter into any contractual arrangement with any employee
or former employee of the Company, its affiliates, subsidiaries or predecessors
in interest, unless such employee or former employee has not been employed by
the Company, its affiliates, subsidiaries or predecessors in interest during
the twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
matters related to or competitive with the business of the Company.
16. Confidentiality:
a. Nondisclosure. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity any proprietary or confidential information
relating to the Company or any information concerning the Company's
financial condition or prospects, the Company's customers, the design,
development, manufacture, marketing or sale of the Company's products or
the Company's methods of operating its business (collectively "Confidential
Information"). Confidential Information shall not include information
which, at the time of disclosure, is known or available to the general
public by publication or otherwise through no act or failure to act on the
part of Employee.
b. Return of Confidential Information. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and
all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the
foregoing materials have in fact been returned or destroyed.
c. Books and Records. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately
to the Company upon termination of Employee's employment hereunder or upon
the Company's request at any time.
17. Injunction/Specific Performance Setoff. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately or
9
<PAGE> 10
reasonably compensated at law. Therefore, Employee agrees that the Company
shall be entitled, if any such breach shall occur or be threatened or
attempted, to a decree of specific performance and to a temporary and permanent
injunction, without the posting of a bond, enjoining and restraining such
breach by Employee or his agents, either directly or indirectly, and that such
right to injunction shall be cumulative to whatever other remedies for actual
damages to which the Company is entitled. Employee further agrees that the
Company may set off against or recoup from any amounts due under this Agreement
to the extent of any losses incurred by the Company as a result of any breach
by Employee of the provisions of Paragraphs 14, 15 or 16 hereof.
18. Severability: Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
19. Successors: This Agreement shall be binding upon Employee and inure
to his and his estate's benefit, and shall be binding upon and inure to the
benefit of the Company and any permitted successor of the Company. Neither
this Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the
Company.
The foregoing sentence shall not be deemed to have any effect upon the rights
of Employee upon a Change of Control.
20. Controlling Law: This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
21. Notices. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: Harris Computer Systems Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309
Attention: President
To Employee: Frank Gelbart
3000 Island Blvd. #402
N. Miami Beach, FL 33160
22. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
23. Waiver. A waiver by any party of any of the terms and conditions
hereof shall not be construed as a general waiver by such party.
10
<PAGE> 11
24. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
25. Interpretation. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties
of Employee or the Company upon Employee's termination, the rights and duties
set forth in this Agreement shall control.
26. Certain Limitations on Remedies. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason.
It is the intention of this Agreement that if the Company terminates Employee
other than for Cause (and other than as a consequence of Employee's death,
disability or normal retirement) or if Employee terminates his employment with
Good Reason, then the payments and other benefits set forth in Paragraph 7b.
shall constitute the sole and exclusive remedies of Employee.
27. Survival. Notwithstanding the provisions of Paragraph 2, the
provisions of Paragraphs 14, 15, and 16 shall survive the expiration or early
termination of this Agreement.
11
<PAGE> 12
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY:
HARRIS COMPUTER SYSTEMS
CORPORATION
By:
Its:
EMPLOYEE:
Frank Gelbart
12
<PAGE> 1
1
EXHIBIT 10.04
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
July 1, 1996 by and between CyberGuard Corporation, a Florida corporation (the
"Company"), and Katherine K. Hutchison ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain
the services of Employee, and Employee desires to be retained by the Company,
on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment, as Vice President Corporate Development of the Company upon
the terms of and subject to this Agreement.
2. TERM. The term (the "Term") of this Agreement shall commence on July
1, 1996, and shall continue until terminated in accordance with the terms
hereof.
3. DUTIES. During his employment hereunder, Employee will serve in such
capacity and with such duties as shall be assigned from time to time by the
Chief Executive Officer of the Company. Employee shall diligently perform such
duties and shall devote his entire business skill, time and effort to his
employment and his duties hereunder and shall not during the Term, directly or
indirectly, alone or as a member of a partnership, or as an officer, director,
employee or agent of any other person, firm or business organization engage in
any other business activities or pursuits requiring his personal service that
materially conflict with his duties hereunder or the diligent performance of
such duties.
4. COMPENSATION.
a. SALARY. During his employment hereunder, Employee shall be paid a
salary of $90,000 year, payable in equal installments not less than monthly
("Base Salary"). The Employee's Base Salary shall be reviewed at least
annually by the Board of Directors or any Committee of the Board delegated
the authority to review executive compensation.
b. OPTION AND BONUS. In addition to salary, Employee shall be entitled
to participate in the Company's Stock Incentive Plan as adopted by the
Board of Directors of the Company on September 14, 1994 and effective on
October 8, 1994 (the "Stock Incentive Plan"). In addition, Employee shall
participate in a Management Bonus Program anticipated to be established by
the Company with an initial annual targeted bonus equal to 50% of
Employee's Base Salary (hereafter the "Management Bonus Program").
c. INSURANCE. During his employment hereunder, Employee shall be
entitled to participate in all such health, life, disability and other
insurance programs, if any, that the Company may offer to other key
executive employees of the Company from time to time.
1
<PAGE> 2
d. OTHER BENEFITS. During his employment hereunder, Employee shall be
entitled to all such other benefits, if any, that the Company may offer to
other key executive employees of the Company from time to time.
e. VACATION. Employee shall be entitled to that number of weeks'
vacation leave (in addition to holidays) in each calendar year during the
Term in accordance with the Company's vacation policy for executives as it
may be in effect from time to time. Except with respect to vacation time
unused as the result of a request by the Company to postpone a vacation,
any unused vacation from one calendar year shall not carry-over to any
subsequent calendar year.
f. EXPENSE REIMBURSEMENT. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in the performance of his duties
hereunder in accordance with policies established by the Company. Such
expenses shall include, without limitation, reasonable entertainment
expenses, gasoline and toll expenses and cellular phone use charges, if
such charges are directly related to the business of the Company.
5. GROUNDS FOR TERMINATION. The Board of Directors of the Company may
terminate this Agreement for Cause. As used herein, "Cause" shall mean any of
the following: (i) an act of willful misconduct or gross negligence by Employee
in the performance of his material duties or obligations to the Company; if
such act is capable of cure, Employee shall be given written notice and such
act shall not be deemed a basis for Cause if cured within 60 days after written
notice is received by Employee specifying the alleged failure in reasonable
detail (and during such 60 day period, Employee shall continue to be employed
by the Company at full pay), or (ii) conviction of Employee of a felony
involving moral turpitude or (iii) a material act of dishonesty or breach of
trust on the part of Employee resulting or intended to result directly or
indirectly in personal gain or enrichment at the expense of the Company.
6. TERMINATION BY EMPLOYEE. Employee may terminate this Agreement with
Good Reason. In the event of termination by Employee for Good Reason, Employee
shall be entitled to the benefits of Paragraph 7b. of this Agreement. "Good
Reason" means:
a. A material breach of the provisions of this Agreement by the Company
(except those set forth in Paragraph 4a.) and Employee provides at least 15
days' prior written notice to the Company of the existence of such breach
and his intention to terminate this Agreement (no such termination shall be
effective if such breach is cured during such period); or
b. The failure of the Company to comply with the provisions of
Paragraph 4a. or to pay any amounts due under the Management Bonus Program
provisions of Paragraph 4b. for an uninterrupted 10 day period.
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in
Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7a. shall apply. These same
provisions shall
2
<PAGE> 3
apply if Employee terminates his employment without Good Reason as
described in Paragraph 6.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company shall
pay in a lump sum to Employee at the time of Employee's termination such
amount of compensation due Employee for services rendered to the Company,
as well as compensation for unused vacation time and earned bonus, as has
accrued but remains unpaid. Any and all other rights granted to Employee
under this Agreement shall terminate as of the date of termination.
ii. NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period of up
to one year following the date of termination, so long as the Company:
(x) provides a written notice to Employee within 5 business days after
Employee's termination that the Company wishes to exercise its right to
require that Employee not compete and not solicit in accordance with
Paragraphs 14 and 15 hereof; and (y) Company thereafter pays to Employee
in periodic installments, without interest, in accordance with the
regular salary payment practices of the Company an amount equal to (.1)
the amount of Employee's annual Base Salary as in effect immediately
prior to Employee's date of termination, multiplied by (.2) the number of
months that the Company is requiring the non-competition and
non-solicitation covenants to remain in place, divided by 12. The first
such installment of Base Salary and target bonus shall be paid on or
before the delivery of the notice described in the prior sentence of this
Paragraph 7a(ii). The non-competition and non-solicitation provisions of
this Agreement shall no longer apply to Employee if the Company fails to
pay the amounts required under this Section 7a(ii) for an uninterrupted
10-day period and such failure is not cured with 5 days after written
notice of such failure is delivered to the Company.
b. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for any reason other than for
Cause as provided in Paragraph 5 and other than as a consequence of
Employee's death, disability, or normal retirement under the Company's
retirement plans and practices, then the following provisions apply. These
same provisions shall apply if Employee terminates his employment with Good
Reason as described in Paragraph 6. In addition to the amounts stated
below, Employee shall be paid any other amounts by the Company to which he
is entitled.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. On or before
Employee's last day of employment with the Company, the Company shall pay
in a lump sum to Employee as compensation for services rendered to the
Company a cash amount equal to one-half the amount of Employee's annual
Base Salary and the greater of (x) one-half the target bonus under the
Management Bonus Program as in effect immediately prior to his date of
termination or (y) the amount of the bonus under the Management Bonus
Program to which he is entitled but which remains unpaid. At the
election of the Company, the cash amount referred to in this Paragraph
7b.i. may be paid to Employee in periodic installments, without interest,
in accordance with the regular salary payment practices of the Company,
with the first such installment to be paid on or before Employee's last
day of employment with the Company, and no interest shall be paid with
respect to any amount not paid on the Employee's date of termination.
3
<PAGE> 4
ii. VESTING OF OPTIONS AND RIGHTS. Notwithstanding the vesting period
provided for in the Stock Incentive Plan and any related stock option
agreements between the Company and Employee for stock options
("options") and stock appreciation rights ("rights") granted Employee by
the Company, all options and stock appreciation rights that were
exercisable at the date of termination or within 12 months thereafter
shall be immediately exercisable upon termination of employment. In
addition, Employee will have the right to exercise all such options and
rights for the shorter of (a) six months following his termination of
employment or (b) with respect to each option, the remainder of the
period of exercisability under the terms of the appropriate documents
that grant such options.
iii. BENEFIT PLAN COVERAGE. The Company shall maintain in full
force and effect for Employee and his dependents for six months after the
date of termination, all life, health, accident, and disability benefit
plans and other similar employee benefit plans, programs and arrangements
in which Employee or his dependents were entitled to participate
immediately prior to the date of termination, in such amounts as were in
effect immediately prior to the date of termination, provided that such
continued participation is possible under the general terms and
provisions of such benefit plans, programs and arrangements.
In the event that participation in any benefit plan, program or
arrangement described above is barred, or any such benefit plan, program
or arrangement is discontinued or the benefits thereunder materially
reduced, the Company shall arrange to provide Employee and his dependents
for six months after the date of termination with benefits substantially
similar to those that they were entitled to receive under such benefit
plans, programs and arrangements immediately prior to the date of
termination. Notwithstanding any time period for continued benefits
stated in this Paragraph 7b.iii., all benefits in this Paragraph 7b.iii.
will terminate on the date that Employee becomes an employee of another
employer and eligible to participate in the employee benefit plans of
such other employer. To the extent that Employee was required to
contribute amounts for the benefits described in this Paragraph 7b.iii.
prior to his termination, he shall continue to contribute such amounts
for such time as these benefits continue in effect after termination.
iv. OTHER COMPENSATION. Any awards previously made to Employee under
any of the Company's compensation plans or programs and not previously
paid shall immediately vest on the date of his termination and shall be
paid on that date and included as compensation in the year paid.
v. SAVINGS AND OTHER PLANS. Except as otherwise more specifically
provided herein or under the terms of the respective plans relating to
termination of employment, Employee's active participation in any
applicable savings, retirement, profit sharing or supplemental employee
retirement plans or any deferred compensation or similar plan of the
Company or any of its subsidiaries shall continue only through the last
day of his employment. All other provisions, including any distribution
and/or vested rights under such plans, shall be governed by the terms of
those respective plans.
4
<PAGE> 5
vi. NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall continue, beyond the time periods set forth in
such paragraphs, to apply with respect to Employee for six (6) months
following the date of termination, and at the end of such six (6) month
period, the Company shall have the right to extend the time period of
noncompetition and nonsolicitation for an additional six (6) months by
giving written notice to Employee of such extension and paying to
Employee an amount equal to one-half the amount of Employee's annual Base
Salary and one-half the target bonus under the Management Bonus Program
as in effect immediately prior to his date of termination. At the
election of the Company, the cash amount referred to in the prior
sentence of this Paragraph 7b.vi. may be paid to Employee in periodic
installments in accordance with the regular salary payment practices of
the Company, with the first such installment to be paid on or before the
delivery of the notice described in the first sentence of this Paragraph
7b.vi., and no interest shall be paid with respect to any amount paid in
installments. The noncompetition and nonsolicitation provisions of this
Agreement shall no longer apply to Employee if the Company fails to pay
the amounts required under the provisions of Paragraph 7b.i. or the first
two sentences of this Paragraph 7b.vi. for an uninterrupted 10-day period
and such failure is not cured within 5 days after written notice of such
failure is delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior to or more than one year after the
occurrence of a Change of Control (as defined in Paragraph 8c.). From the
occurrence of any Change of Control until the first anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of
this Paragraph 7, except that in the event that Employee's employment is
terminated by Employee after a Change of Control without Good Reason, then
the provisions of Paragraph 8 shall not apply and the provisions of
Paragraph 7a. shall apply. Termination upon death, disability and
retirement are covered by Paragraphs 9, 10, and 11, respectively.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANGE OF CONTROL.
a. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. In the event
Employee's employment with the Company is terminated within one year
following the occurrence of a Change of Control (other than as a
consequence of his death or disability, or of his normal retirement under
the Company's retirement plans and practices) either (i) by the Company
for any reason whatsoever or (ii) by Employee with Good Reason as provided
in Paragraph 6, then Employee shall be entitled to receive from the
Company, the following:
i. BASE SALARY. An amount equal to one and one-half the Employee's
annual Base Salary as in effect at the date of termination shall be paid
on the date of termination;
ii. TARGET BONUS. An amount equal to one and one-half the Employee's
target bonus under the Management Bonus Program for the fiscal
year in which the date of termination occurs shall be paid on the date of
termination; and
iii. OTHER BENEFITS. All benefits under Paragraphs 7b.i, 7.b.ii.,
7b.iii. 7b.iv. and 7b.v. shall be extended to Employee as described in
such
5
<PAGE> 6
paragraphs, except that all options and rights shall be immediately
exercisable and the period for exercise of options and rights described
in the last sentence of Paragraph 7b.ii and benefit plan coverage as
described in Paragraph 7.b.iii shall be one year.
b. NONCOMPETITION/NONSOLICITATION PERIOD. In the event of a
termination under the circumstances described in Paragraph 8a., the
provisions of Paragraphs 14 and 15 shall be without force and effect and
shall not apply to Employee.
c. For purposes of this Agreement, the term "Change of Control" shall
mean:
i. The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or Section
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) (any of the foregoing described
in this Paragraph hereafter a "Person") of 30% or more of either (a) the
then outstanding shares of Capital Stock of the Company (the "Outstanding
Capital Stock") or (b) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"), provided, however, that
any acquisition by (x) the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any of its subsidiaries or (y) any Person that is eligible,
pursuant to Rule 13d-1(b) under the Exchange Act, to file a statement on
Schedule 13G with respect to its beneficial ownership of Voting
Securities, whether or not such Person shall have filed a statement on
Schedule 13G, unless such Person shall have filed a statement on Schedule
13D with respect to beneficial ownership of 30% or more of the Voting
Securities or (z) any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares
of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock and Voting Securities immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding Capital Stock
and Voting Securities, as the case may be, shall not constitute a Change
of Control; or
ii. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the Company
(as such terms are used in Rule 14a-11 of Regulation 14A, or any
successor section, promulgated under the Exchange Act); or
6
<PAGE> 7
iii. Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with
respect to which all or substantially all holders of the Outstanding
Capital Stock and Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company or (b)
a sale or other disposition of all or substantially all of the assets of
the Company other than to a corporation with respect to which, following
such sale or disposition, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors is then owned beneficially, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Capital Stock and
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding
Capital Stock and Voting Securities, as the case may be, immediately
prior to such sale or disposition.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while employed
by the Company both prior to termination of employment and during the effective
term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have
accrued but remain unpaid and a prorated amount of targeted bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus three additional months of the fixed salary and targeted bonus. All
benefits under 7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate
as described in such paragraphs. In addition, Employee's eligible dependents
shall receive continued benefit plan coverage under Paragraph 7b.iii. for three
months from the date of Employee's death.
10. TERMINATION BY DISABILITY. Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given except that all benefits under Paragraphs 7b.ii, 7b.iii,
7b.iv. and 7b.v. shall be extended to Employee as described in such paragraphs.
In addition, the noncompetition and nonsolicitation provisions of Paragraphs
14 and 15 shall continue to apply to Employee for a period of one year from the
date of termination.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an officer of the
Company on a substantially full-time basis for six (6) consecutive months;
and
7
<PAGE> 8
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
11. RETIREMENT. Retirement by Employee, whether occurring as a result of
a voluntary termination by Employee or an involuntary termination as the result
of reaching the age retirement as set forth in the Company's retirement
policies, shall be treated as a voluntary termination without Good Reason and
the provisions of Paragraph 7a. shall apply. If during the Term or any
extension thereof, the Company adopts a retirement plan with respect to
executive officers of the Company, Employee shall have the right to participate
in such policy and the provisions of such policy shall supersede the provisions
of the preceding sentence.
12. INDEMNIFICATION. If litigation shall be brought, in the event of
breach or to enforce or interpret any provision contained herein, the
non-prevailing party shall indemnify the prevailing party for reasonable
attorney's fees (including those for negotiations, trial and appeals) and
disbursements incurred by the prevailing party in such litigation, and hereby
agrees to pay prejudgment interest on any money judgment obtained by the
prevailing party calculated at the generally prevailing NationsBank of Florida,
N.A. base rate of interest charged to its commercial customers in effect from
time to time from the date that payment(s) to him should have been made under
this Agreement.
13. (Omitted Intentionally)
14. NONCOMPETITION.
a. At all times during Employee's employment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner,
operator, shareholder, director, partner, creditor, consultant, agent or
any capacity whatsoever that manufactures products designed to compete
directly with products of the Company or markets such products anywhere in
the world where the Company (i) is engaged in business or (ii) has
evidenced an intention of engaging in business. Employee acknowledges
that he has read the foregoing and agrees that the nature of the
geographical restrictions are reasonable given the international nature of
the Company's business.
In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions
which are reasonable.
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to be a
competitor of the Company as described in the previous sentence
("Competitor"), so long as (i) the Competitor has had annual revenues of at
least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition
with the Company does not exceed 50% of its total revenues and (iii)
Employee's responsibilities are solely for divisions or subsidiaries of the
Competitor that do not compete with the Company.
8
<PAGE> 9
15. NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times during
Employee's employment hereunder, or for such additional periods as may
otherwise be set forth in this Agreement in reference to this Paragraph 15,
Employee shall not, directly or indirectly, for himself or for any other
person, firm, corporation, partnership, association or other entity (a) attempt
to employ, employ or enter into any contractual arrangement with any employee
or former employee of the Company, its affiliates, subsidiaries or predecessors
in interest, unless such employee or former employee has not been employed by
the Company, its affiliates, subsidiaries or predecessors in interest during
the twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
matters related to or competitive with the business of the Company.
16. CONFIDENTIALITY.
a. NONDISCLOSURE. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity any proprietary or confidential information
relating to the Company or any information concerning the Company's
financial condition or prospects, the Company's customers, the design,
development, manufacture, marketing or sale of the Company's products or
the Company's methods of operating its business (collectively "Confidential
Information"). Confidential Information shall not include information
which, at the time of disclosure, is known or available to the general
public by publication or otherwise through no act or failure to act on the
part of Employee.
b. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and
all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the
foregoing materials have in fact been returned or destroyed.
c. BOOKS AND RECORDS. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately
to the Company upon termination of Employee's employment hereunder or upon
the Company's request at any time.
17. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately
or reasonably compensated at law. Therefore, Employee agrees that the Company
shall be entitled, if any such breach shall occur or be threatened or
attempted, to a decree of specific performance and to a temporary and permanent
injunction,
9
<PAGE> 10
without the posting of a bond, enjoining and restraining such breach by
Employee or his agents, either directly or indirectly, and that such right to
injunction shall be cumulative to whatever other remedies for actual damages to
which the Company is entitled. Employee further agrees that the Company may
set off against or recoup from any amounts due under this Agreement to the
extent of any losses incurred by the Company as a result of any breach by
Employee of the provisions of Paragraphs 14, 15 or 16 hereof.
18. SEVERABILITY. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
19. SUCCESSORS. This Agreement shall be binding upon Employee and inure
to his and his estate's benefit, and shall be binding upon and inure to the
benefit of the Company and any permitted successor of the Company. Neither
this Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the Company.
The foregoing sentence shall not be deemed to have any effect upon the rights
of Employee upon a Change of Control.
20. CONTROLLING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
21. NOTICES. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309
Attention: President
To Employee: _____________________________
_____________________________
_____________________________
22. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
23. WAIVER. A waiver by any party of any of the terms and conditions
hereof shall not be construed as a general waiver by such party.
24. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
10
<PAGE> 11
25. INTERPRETATION. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties
of Employee or the Company upon Employee's termination, the rights and duties
set forth in this Agreement shall control.
26. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason.
It is the intention of this Agreement that if the Company terminates Employee
other than for Cause (and other than as a consequence of Employee's death,
disability or normal retirement) or if Employee terminates his employment with
Good Reason, then the payments and other benefits set forth in Paragraph 7b.
shall constitute the sole and exclusive remedies of Employee.
27. SURVIVAL. Notwithstanding the provisions of Paragraph 2, the
provisions of Paragraphs 14, 15, and 16 shall survive the expiration or early
termination of this Agreement.
11
<PAGE> 12
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY:
CYBERGUARD CORPORATION
By:
Its:
EMPLOYEE:
Katherine K. Hutchison
12
<PAGE> 1
EXHIBIT 10.05
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
July 1, 1996 by and between CyberGuard Corporation, a Florida corporation (the
"Company"), and Rick A. Siebenaler ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain
the services of Employee, and Employee desires to be retained by the Company,
on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment, as Vice President Software Development of the Company upon
the terms of and subject to this Agreement.
2. TERM. The term (the "Term") of this Agreement shall commence on July
1, 1996, and shall continue until terminated in accordance with the terms
hereof.
3. DUTIES. During his employment hereunder, Employee will serve in such
capacity and with such duties as shall be assigned from time to time by the
Chief Executive Officer of the Company. Employee shall diligently perform such
duties and shall devote his entire business skill, time and effort to his
employment and his duties hereunder and shall not during the Term, directly or
indirectly, alone or as a member of a partnership, or as an officer, director,
employee or agent of any other person, firm or business organization engage in
any other business activities or pursuits requiring his personal service that
materially conflict with his duties hereunder or the diligent performance of
such duties.
4. COMPENSATION.
a. SALARY. During his employment hereunder, Employee shall be paid a
salary of $90,000 year, payable in equal installments not less than monthly
("Base Salary"). The Employee's Base Salary shall be reviewed at least
annually by the Board of Directors or any Committee of the Board delegated
the authority to review executive compensation.
b. OPTION AND BONUS. In addition to salary, Employee shall be entitled
to participate in the Company's Stock Incentive Plan as adopted by the
Board of Directors of the Company on September 14, 1994 and effective on
October 8, 1994 (the "Stock Incentive Plan"). In addition, Employee shall
participate in a Management Bonus Program anticipated to be established by
the Company with an initial annual targeted bonus equal to 40% of
Employee's Base Salary (hereafter the "Management Bonus Program").
c. INSURANCE. During his employment hereunder, Employee shall be
entitled to participate in all such health, life, disability and other
insurance programs, if any, that the Company may offer to other key
executive employees of the Company from time to time.
1
<PAGE> 2
d. OTHER BENEFITS. During his employment hereunder, Employee shall be
entitled to all such other benefits, if any, that the Company may offer to
other key executive employees of the Company from time to time.
e. VACATION. Employee shall be entitled to that number of weeks'
vacation leave (in addition to holidays) in each calendar year during the
Term in accordance with the Company's vacation policy for executives as it
may be in effect from time to time. Except with respect to vacation time
unused as the result of a request by the Company to postpone a vacation,
any unused vacation from one calendar year shall not carry-over to any
subsequent calendar year.
f. EXPENSE REIMBURSEMENT. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in the performance of his duties
hereunder in accordance with policies established by the Company. Such
expenses shall include, without limitation, reasonable entertainment
expenses, gasoline and toll expenses and cellular phone use charges, if
such charges are directly related to the business of the Company.
5. GROUNDS FOR TERMINATION. The Board of Directors of the Company may
terminate this Agreement for Cause. As used herein, "Cause" shall mean any of
the following: (i) an act of willful misconduct or gross negligence by Employee
in the performance of his material duties or obligations to the Company; if
such act is capable of cure, Employee shall be given written notice and such
act shall not be deemed a basis for Cause if cured within 60 days after written
notice is received by Employee specifying the alleged failure in reasonable
detail (and during such 60 day period, Employee shall continue to be employed
by the Company at full pay), or (ii) conviction of Employee of a felony
involving moral turpitude or (iii) a material act of dishonesty or breach of
trust on the part of Employee resulting or intended to result directly or
indirectly in personal gain or enrichment at the expense of the Company.
6. TERMINATION BY EMPLOYEE. Employee may terminate this Agreement with
Good Reason. In the event of termination by Employee for Good Reason, Employee
shall be entitled to the benefits of Paragraph 7b. of this Agreement. "Good
Reason" means:
a. A material breach of the provisions of this Agreement by the Company
(except those set forth in Paragraph 4a.) and Employee provides at least 15
days' prior written notice to the Company of the existence of such breach
and his intention to terminate this Agreement (no such termination shall be
effective if such breach is cured during such period); or
b. The failure of the Company to comply with the provisions of
Paragraph 4a. or to pay any amounts due under the Management Bonus Program
provisions of Paragraph 4b. for an uninterrupted 10 day period.
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in
Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7a. shall apply. These same
provisions shall
2
<PAGE> 3
apply if Employee terminates his employment without Good Reason as
described in Paragraph 6.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company shall
pay in a lump sum to Employee at the time of Employee's termination such
amount of compensation due Employee for services rendered to the Company,
as well as compensation for unused vacation time and earned bonus, as has
accrued but remains unpaid. Any and all other rights granted to Employee
under this Agreement shall terminate as of the date of termination.
ii. NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period of up
to one year following the date of termination, so long as the Company:
(x) provides a written notice to Employee within 5 business days after
Employee's termination that the Company wishes to exercise its right to
require that Employee not compete and not solicit in accordance with
Paragraphs 14 and 15 hereof; and (y) Company thereafter pays to Employee
in periodic installments, without interest, in accordance with the
regular salary payment practices of the Company an amount equal to (.1)
the amount of Employee's annual Base Salary as in effect immediately
prior to Employee's date of termination, multiplied by (.2) the number of
months that the Company is requiring the non-competition and
non-solicitation covenants to remain in place, divided by 12. The first
such installment of Base Salary and target bonus shall be paid on or
before the delivery of the notice described in the prior sentence of this
Paragraph 7a(ii). The non-competition and non-solicitation provisions of
this Agreement shall no longer apply to Employee if the Company fails to
pay the amounts required under this Section 7a(ii) for an uninterrupted
10-day period and such failure is not cured with 5 days after written
notice of such failure is delivered to the Company.
b. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for any reason other than for
Cause as provided in Paragraph 5 and other than as a consequence of
Employee's death, disability, or normal retirement under the Company's
retirement plans and practices, then the following provisions apply. These
same provisions shall apply if Employee terminates his employment with Good
Reason as described in Paragraph 6. In addition to the amounts stated
below, Employee shall be paid any other amounts by the Company to which he
is entitled.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. On or before
Employee's last day of employment with the Company, the Company shall pay
in a lump sum to Employee as compensation for services rendered to the
Company a cash amount equal to one-half the amount of Employee's annual
Base Salary and the greater of (x) one-half the target bonus under the
Management Bonus Program as in effect immediately prior to his date of
termination or (y) the amount of the bonus under the Management Bonus
Program to which he is entitled but which remains unpaid. At the
election of the Company, the cash amount referred to in this Paragraph
7b.i. may be paid to Employee in periodic installments, without interest,
in accordance with the regular salary payment practices of the Company,
with the first such installment to be paid on or before Employee's last
day of employment with the Company, and no interest shall be paid with
respect to any amount not paid on the Employee's date of termination.
3
<PAGE> 4
ii. VESTING OF OPTIONS AND RIGHTS. Notwithstanding the vesting
period provided for in the Stock Incentive Plan and any related stock
option agreements between the Company and Employee for stock options
("options") and stock appreciation rights ("rights") granted Employee by
the Company, all options and stock appreciation rights that were
exercisable at the date of termination or within 12 months thereafter
shall be immediately exercisable upon termination of employment. In
addition, Employee will have the right to exercise all such options and
rights for the shorter of (a) six months following his termination of
employment or (b) with respect to each option, the remainder of the
period of exercisability under the terms of the appropriate documents
that grant such options.
iii. BENEFIT PLAN COVERAGE. The Company shall maintain in full
force and effect for Employee and his dependents for six months after the
date of termination, all life, health, accident, and disability benefit
plans and other similar employee benefit plans, programs and arrangements
in which Employee or his dependents were entitled to participate
immediately prior to the date of termination, in such amounts as were in
effect immediately prior to the date of termination, provided that such
continued participation is possible under the general terms and
provisions of such benefit plans, programs and arrangements.
In the event that participation in any benefit plan, program or
arrangement described above is barred, or any such benefit plan, program
or arrangement is discontinued or the benefits thereunder materially
reduced, the Company shall arrange to provide Employee and his dependents
for six months after the date of termination with benefits substantially
similar to those that they were entitled to receive under such benefit
plans, programs and arrangements immediately prior to the date of
termination. Notwithstanding any time period for continued benefits
stated in this Paragraph 7b.iii., all benefits in this Paragraph 7b.iii.
will terminate on the date that Employee becomes an employee of another
employer and eligible to participate in the employee benefit plans of
such other employer. To the extent that Employee was required to
contribute amounts for the benefits described in this Paragraph 7b.iii.
prior to his termination, he shall continue to contribute such amounts
for such time as these benefits continue in effect after termination.
iv. OTHER COMPENSATION. Any awards previously made to Employee
under any of the Company's compensation plans or programs and not
previously paid shall immediately vest on the date of his termination and
shall be paid on that date and included as compensation in the year paid.
v. SAVINGS AND OTHER PLANS. Except as otherwise more specifically
provided herein or under the terms of the respective plans relating to
termination of employment, Employee's active participation in any
applicable savings, retirement, profit sharing or supplemental employee
retirement plans or any deferred compensation or similar plan of the
Company or any of its subsidiaries shall continue only through the last
day of his employment. All other provisions, including any distribution
and/or vested rights under such plans, shall be governed by the terms of
those respective plans.
4
<PAGE> 5
vi. NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall continue, beyond the time periods set forth in
such paragraphs, to apply with respect to Employee for six (6) months
following the date of termination, and at the end of such six (6) month
period, the Company shall have the right to extend the time period of
noncompetition and nonsolicitation for an additional six (6) months by
giving written notice to Employee of such extension and paying to
Employee an amount equal to one-half the amount of Employee's annual Base
Salary and one-half the target bonus under the Management Bonus Program
as in effect immediately prior to his date of termination. At the
election of the Company, the cash amount referred to in the prior
sentence of this Paragraph 7b.vi. may be paid to Employee in periodic
installments in accordance with the regular salary payment practices of
the Company, with the first such installment to be paid on or before the
delivery of the notice described in the first sentence of this Paragraph
7b.vi., and no interest shall be paid with respect to any amount paid in
installments. The noncompetition and nonsolicitation provisions of this
Agreement shall no longer apply to Employee if the Company fails to pay
the amounts required under the provisions of Paragraph 7b.i. or the first
two sentences of this Paragraph 7b.vi. for an uninterrupted 10-day period
and such failure is not cured within 5 days after written notice of such
failure is delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior to or more than one year after the
occurrence of a Change of Control (as defined in Paragraph 8c.). From the
occurrence of any Change of Control until the first anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of
this Paragraph 7, except that in the event that Employee's employment is
terminated by Employee after a Change of Control without Good Reason, then
the provisions of Paragraph 8 shall not apply and the provisions of
Paragraph 7a. shall apply. Termination upon death, disability and
retirement are covered by Paragraphs 9, 10, and 11, respectively.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANGE OF CONTROL.
a. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. In the event
Employee's employment with the Company is terminated within one year
following the occurrence of a Change of Control (other than as a
consequence of his death or disability, or of his normal retirement under
the Company's retirement plans and practices) either (i) by the Company
for any reason whatsoever or (ii) by Employee with Good Reason as provided
in Paragraph 6, then Employee shall be entitled to receive from the
Company, the following:
i. BASE SALARY. An amount equal to one and one-half the Employee's
annual Base Salary as in effect at the date of termination shall be paid
on the date of termination;
ii. TARGET BONUS. An amount equal to one and one-half the Employee's
target bonus under the Management Bonus Program for the fiscal year in
which the date of termination occurs shall be paid on the date of
termination; and
iii. OTHER BENEFITS. All benefits under Paragraphs 7b.i, 7.b.ii.,
7b.iii. 7b.iv. and 7b.v. shall be extended to Employee as described in
such
5
<PAGE> 6
paragraphs, except that all options and rights shall be immediately
exercisable and the period for exercise of options and rights described
in the last sentence of Paragraph 7b.ii and benefit plan coverage as
described in Paragraph 7.b.iii shall be one year.
b. NONCOMPETITION/NONSOLICITATION PERIOD. In the event of a
termination under the circumstances described in Paragraph 8a., the
provisions of Paragraphs 14 and 15 shall be without force and effect and
shall not apply to Employee.
c. For purposes of this Agreement, the term "Change of Control" shall
mean:
i. The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or Section
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) (any of the foregoing described
in this Paragraph hereafter a "Person") of 30% or more of either (a) the
then outstanding shares of Capital Stock of the Company (the "Outstanding
Capital Stock") or (b) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"), provided, however, that
any acquisition by (x) the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any of its subsidiaries or (y) any Person that is eligible,
pursuant to Rule 13d-1(b) under the Exchange Act, to file a statement on
Schedule 13G with respect to its beneficial ownership of Voting
Securities, whether or not such Person shall have filed a statement on
Schedule 13G, unless such Person shall have filed a statement on Schedule
13D with respect to beneficial ownership of 30% or more of the Voting
Securities or (z) any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares
of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock and Voting Securities immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding Capital Stock
and Voting Securities, as the case may be, shall not constitute a Change
of Control; or
ii. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the Company
(as such terms are used in Rule 14a-11 of Regulation 14A, or any
successor section, promulgated under the Exchange Act); or
6
<PAGE> 7
iii. Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with
respect to which all or substantially all holders of the Outstanding
Capital Stock and Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company or (b)
a sale or other disposition of all or substantially all of the assets of
the Company other than to a corporation with respect to which, following
such sale or disposition, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors is then owned beneficially, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Capital Stock and
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding
Capital Stock and Voting Securities, as the case may be, immediately
prior to such sale or disposition.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while employed
by the Company both prior to termination of employment and during the effective
term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have
accrued but remain unpaid and a prorated amount of targeted bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus three additional months of the fixed salary and targeted bonus. All
benefits under 7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate
as described in such paragraphs. In addition, Employee's eligible dependents
shall receive continued benefit plan coverage under Paragraph 7b.iii. for three
months from the date of Employee's death.
10. TERMINATION BY DISABILITY. Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given except that all benefits under Paragraphs 7b.ii, 7b.iii,
7b.iv. and 7b.v. shall be extended to Employee as described in such paragraphs.
In addition, the noncompetition and nonsolicitation provisions of Paragraphs
14 and 15 shall continue to apply to Employee for a period of one year from the
date of termination.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an officer of the
Company on a substantially full-time basis for six (6) consecutive months;
and
7
<PAGE> 8
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
11. RETIREMENT. Retirement by Employee, whether occurring as a result of
a voluntary termination by Employee or an involuntary termination as the result
of reaching the age retirement as set forth in the Company's retirement
policies, shall be treated as a voluntary termination without Good Reason and
the provisions of Paragraph 7a. shall apply. If during the Term or any
extension thereof, the Company adopts a retirement plan with respect to
executive officers of the Company, Employee shall have the right to participate
in such policy and the provisions of such policy shall supersede the provisions
of the preceding sentence.
12. INDEMNIFICATION. If litigation shall be brought, in the event of
breach or to enforce or interpret any provision contained herein, the
non-prevailing party shall indemnify the prevailing party for reasonable
attorney's fees (including those for negotiations, trial and appeals) and
disbursements incurred by the prevailing party in such litigation, and hereby
agrees to pay prejudgment interest on any money judgment obtained by the
prevailing party calculated at the generally prevailing NationsBank of Florida,
N.A. base rate of interest charged to its commercial customers in effect from
time to time from the date that payment(s) to him should have been made under
this Agreement.
13. (Omitted Intentionally)
14. NONCOMPETITION.
a. At all times during Employee's employment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner,
operator, shareholder, director, partner, creditor, consultant, agent or
any capacity whatsoever that manufactures products designed to compete
directly with products of the Company or markets such products anywhere in
the world where the Company (i) is engaged in business or (ii) has
evidenced an intention of engaging in business. Employee acknowledges
that he has read the foregoing and agrees that the nature of the
geographical restrictions are reasonable given the international nature of
the Company's business.
In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions
which are reasonable.
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to be a
competitor of the Company as described in the previous sentence
("Competitor"), so long as (i) the Competitor has had annual revenues of at
least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition
with the Company does not exceed 50% of its total revenues and (iii)
Employee's responsibilities are solely for divisions or subsidiaries of the
Competitor that do not compete with the Company.
8
<PAGE> 9
15. NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times during
Employee's employment hereunder, or for such additional periods as may
otherwise be set forth in this Agreement in reference to this Paragraph 15,
Employee shall not, directly or indirectly, for himself or for any other
person, firm, corporation, partnership, association or other entity (a) attempt
to employ, employ or enter into any contractual arrangement with any employee
or former employee of the Company, its affiliates, subsidiaries or predecessors
in interest, unless such employee or former employee has not been employed by
the Company, its affiliates, subsidiaries or predecessors in interest during
the twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
matters related to or competitive with the business of the Company.
16. CONFIDENTIALITY.
a. NONDISCLOSURE. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity any proprietary or confidential information
relating to the Company or any information concerning the Company's
financial condition or prospects, the Company's customers, the design,
development, manufacture, marketing or sale of the Company's products or
the Company's methods of operating its business (collectively "Confidential
Information"). Confidential Information shall not include information
which, at the time of disclosure, is known or available to the general
public by publication or otherwise through no act or failure to act on the
part of Employee.
b. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and
all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the
foregoing materials have in fact been returned or destroyed.
c. BOOKS AND RECORDS. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately
to the Company upon termination of Employee's employment hereunder or upon
the Company's request at any time.
17. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately
or reasonably compensated at law. Therefore, Employee agrees that the Company
shall be entitled, if any such breach shall occur or be threatened or
attempted, to a decree of specific performance and to a temporary and permanent
injunction,
9
<PAGE> 10
without the posting of a bond, enjoining and restraining such breach by
Employee or his agents, either directly or indirectly, and that such right to
injunction shall be cumulative to whatever other remedies for actual damages to
which the Company is entitled. Employee further agrees that the Company may
set off against or recoup from any amounts due under this Agreement to the
extent of any losses incurred by the Company as a result of any breach by
Employee of the provisions of Paragraphs 14, 15 or 16 hereof.
18. SEVERABILITY. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
19. SUCCESSORS. This Agreement shall be binding upon Employee and inure
to his and his estate's benefit, and shall be binding upon and inure to the
benefit of the Company and any permitted successor of the Company. Neither
this Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the Company.
The foregoing sentence shall not be deemed to have any effect upon the rights
of Employee upon a Change of Control.
20. CONTROLLING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
21. NOTICES. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309
Attention: President
To Employee: Rick A. Siebenaler
11019 N.W. 19th Street
Coral Springs, Florida 33071
22. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
23. WAIVER. A waiver by any party of any of the terms and conditions
hereof shall not be construed as a general waiver by such party.
24. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
10
<PAGE> 11
25. INTERPRETATION. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties
of Employee or the Company upon Employee's termination, the rights and duties
set forth in this Agreement shall control.
26. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason.
It is the intention of this Agreement that if the Company terminates Employee
other than for Cause (and other than as a consequence of Employee's death,
disability or normal retirement) or if Employee terminates his employment with
Good Reason, then the payments and other benefits set forth in Paragraph 7b.
shall constitute the sole and exclusive remedies of Employee.
27. SURVIVAL. Notwithstanding the provisions of Paragraph 2, the
provisions of Paragraphs 14, 15, and 16 shall survive the expiration or early
termination of this Agreement.
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY:
CYBERGUARD CORPORATION
By:
Its:
EMPLOYEE:
Rick A. Siebenaler
11
<PAGE> 1
EXHIBIT 10.07
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of February 4, 1996 by and between Harris Computer Systems Corporation, a
Florida corporation (the "Company") and BRIAN FOREMNY ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain
the services of Employee, and Employee desires to be retained by the Company, on
the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained, herein, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Employment. The Company hereby employs Employee, and Employee
hereby accepts employment, as General Counsel of the Company upon the terms
subject to this Agreement.
2. Term. The term (the "Term") of this Agreement shall commence on
March 1, 1996 and end on March 1, 1998, subject to the extension of such term
as hereinafter provided and earlier expiration of such term as otherwise
provided herein. After the expiration of this initial Term, this Agreement
shall automatically be renewed for successive one-year terms ("Additional
Terms") until either the Board of Directors of the Company (the "Board"), on
behalf of the Company, or Employee gives written notice to the other, at least
60 days prior to the expiration of any Additional Term, that the Term shall not
be so extended.
3. Duties. During his employment hereunder, Employee will serve as
the General Counsel of the Company. Employee shall report directly to the Chief
Executive Officer of the Company and, within the discretion of the Board,
directly to the Board, and shall serve at the Chief Executive's and the Board's
direction. Employee shall perform services as assigned by the Chief Executive
Officer or the Board of the Company consistent with the title of General
Counsel. Employee shall diligently perform such duties and shall devote his
business skill, time and effort to his employment and his duties hereunder as
follows: Employee shall work part time, as least twenty hours per week for the
Company.
4. Compensation.
a. Salary. During his employment hereunder, Employee shall be
paid an initial salary of $120,000 per year, payable in equal installments not
less than monthly. If Employee works at the rate of more than twenty hours per
week during any pay period (the "Standard Hours"), then he shall be paid for
that pay period an additional amount equal to this then annual salary, divided
by one thousand, for each additional hour worked during such pay period. It is
expected that Employee shall be paid at least the Standard Hours in each pay
period, but if Employee is not available to work at least the Standard Hours in
any given pay period, the Company may claim a credit for that pay period equal
to Employee's then annual
<PAGE> 2
salary, divided by one thousand, for each hour less than the Standard Hours
Employee was available to work. The Employee's salary shall be reviewed at
least annually by the Board or any Committee of the Board delegated the
authority to review compensation.
b. Option/Bonus. In addition to salary, Employee is hereby granted
an option ("Stock Option") to purchase 24,000 shares of the Company's Common
Stock at an exercise price of $16.50 per share. The Stock Option shall be
further defined in an option agreement to be entered into between the Employee
and the Company, which shall contain anti-dilution provisions substantially
similar to those other in option agreements for officers of the Company (but
the failure to so enter into such an additional agreement shall not affect the
binding nature of the Stock Option as of the date hereof). The Option shall be
exercisable one-third on March 1, 1996, one-third on March 1, 1997 and
one-third on March 1, 1998. Each installment of the Stock Option shall
continue to be exercisable for five years after the first date such installment
first becomes exercisable. Employee shall be entitled to participate in the
Company's Management Bonus Program anticipated to be established by the Company
with an initial targeted bonus of $20,000 (or, if higher, 16.7% of Employee's
actual base compensation paid to Employee for the prior twelve months)
(hereafter the "Management Bonus Program").
c. Insurance. During his employment hereunder, Employee shall only
be entitled to participate in health, life, disability and other insurance
programs of the Company to the extent that he is eligible based upon hours
worked and length of service.
d. Vacation. Employee shall be entitled to four weeks' (two weeks
with pay and two without pay) vacation leave (in addition to holidays) in each
calendar year during the Term, or such additional amount as may be set forth in
the vacation policy that the Company shall establish from time to time. Except
with respect to vacation time unused as the result of a request by the Company
to postpone a vacation, any unused vacation from one calendar year shall not
carry-over to any subsequent calendar year.
e. Expense Reimbursement. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of reasonable
out-of-pocket expenses incurred in the performance of his duties hereunder in
accordance with policies established by the Company. Such expenses shall
include, without limitation, reasonable entertainment expenses, gasoline and
toll expenses and cellular phone use charges, if such charges are directly
related to the business of the Company.
5. Grounds for Termination.
The Board of Directors of the Company may terminate this Agreement for
Cause. As used herein, "Cause" shall mean any of the following: (i) an act of
willful misconduct or gross negligence by Employee in the performance of his
material duties or obligations to the Company; if such act is capable of cure,
Employee shall be given notice and such act shall not be deemed a basis for
Cause if cured within 60 days after written notice is received by
2
<PAGE> 3
Employee specifying the alleged failure in reasonable detail, or (ii) conviction
of Employee of a felony involving moral turpitude or (iii) a material act of
dishonesty or breach of trust on the part of Employee resulting or intended to
result directly or indirectly in personal gain or enrichment at the expense of
the Company.
6. Termination by Employee.
Employee may terminate this Agreement with Good Reason. "Good Reason"
means:
a. Without Employee's express written consent, the assignment to
Employee of duties inconsistent with Employee's positions with the Company as
set forth in this Agreement (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as contemplated by
Paragraph 3; or
b. A material breach of the provisions of this Agreement by the
Company (except those set forth in Paragraph 4.a) and Employee provides at least
15 days' prior written notice to at least two members of the Company's board
of Directors (other than Employee) of the existence of such breach and his
intention to terminate this Agreement (no such termination shall be effective if
such breach is cured during such period); or
c. The failure of the Company to comply with the provisions of
Paragraph 4.a for an uninterrupted 10 day period.
7. Payment and Other Provisions Upon Termination.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in Paragraph 5
then, on or before Employee's last day of employment with the Company, the
provisions of this Paragraph 7.a shall apply. These same provisions shall apply
if Employee terminates his employment without Good Reason as described in
Paragraph 6.
i. Salary, Performance Award, and Bonus Payments: The Company
shall pay in a lump sum to Employee such amount of compensation due
Employee for services rendered to the Company, as well as compensation
for unused vacation time, as has accrued but remains unpaid. Any and all
other rights granted to Employee under this Agreement shall terminate as
of the date of termination.
b. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for any reason other than for Cause
as provided in Paragraph 5 and other than as a consequence of Employee's death,
disability, or normal retirement under the Company's retirement plans and
practices, then the following provisions apply. These same provisions shall
apply if Employee terminates his employment with Good Reason as described in
Paragraph 6.
3
<PAGE> 4
i. Salary, Performance Award, and Bonus Payments: On or before
Employee's last day of employment with the Company, the Company shall
pay in a lump sum to Employee as compensation for services rendered to
the Company a cash amount equal to the amount of Employee's annual base
salary (or, if higher, Employee's actual base compensation paid to
Employee for the prior twelve months) and the amount of the target bonus
under the Management Bonus Program as in effect immediately prior to his
date of termination. So long as the members of the Company's Board of
Directors on the date hereof continue to comprise at least a majority of
the Board, then, at the Company's election, the lump sum payment referred
to in this section 7b.i may be paid in equal installments over a six
month period.
ii. Vesting of Options and Rights: Notwithstanding the vesting
period provided for in Employee's Stock Option contained herein, in the
Stock Incentive Plan and any related stock option agreements between the
Company and Employee for stock options ("options") and stock appreciation
rights ("rights") granted Employee by the Company, all options and stock
appreciation rights shall be immediately exercisable upon termination of
employment. In addition, Employee will have the right to exercise all
options and rights for the shorter of (a) one year following his
termination of employment or (b) with respect to each option, the
remainder of the period of exercisability under the terms of the
appropriate documents that grant such options.
c. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior of a Change of Control (as defined in Paragraph
8) or more than three years after the occurrence of a Change of Control. From
the occurrence of any Change of Control until the third anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of this
Paragraph 7, except that in the event that Employee's employment is terminated
by Employee after a Change of Control without Good Reason, then the provisions
of Paragraph 8 shall not apply and the provisions of Paragraph 7.b shall apply.
Termination upon death and disability and are covered by Paragraphs 9 and 10,
respectively.
8. Payment and Other Provisions after Change of Control.
a. Salary, Performance Award, and Bonus Payments: In the event
Employee's employment with the Company is terminated within three years
following the occurrence of a Change of Control (other than as a consequence of
this death or disability, or of his normal retirement under the Company's
retirement plans and practices) either (i) by the Company for any reason
whatsoever or (ii) by Employee with Good Reason as provided in Paragraph 6, then
Employee shall be entitled to receive from the Company, the following:
i. Base Salary. Employee's annual base salary (or, if higher,
Employee's actual base compensation paid to Employee for the prior twelve
months) as in effect at the date of termination, multiplied by two, shall
be paid on the date of termination; and
4
<PAGE> 5
ii. Target Bonus. The amount of the Employee's target bonus
under the Management Bonus Program for the fiscal year in which the date
of termination occurs, multiplied by two, shall be paid on the date of
termination.
iii. Other Benefits. All benefits under Paragraphs 7.b.ii shall
be extended to Employee as described in such paragraph, except that the
period for exercise of the Stock Option and any other options and rights
described in Paragraph 7.b.ii (a) shall be two years.
b. For purposes of this Agreement, the term "Change of Control" shall
mean:
i. The acquisition, other than from the Company, by an
individual, entity or group (within the meaning of sec. 13(d)(3) or sec.
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) any of the foregoing described
in this Paragraph 8.b.i, 12 hereafter a "Person") of 15% or more of
either (a) the then outstanding shares of Capital Stock of the Company
(the "Outstanding Capital Stock") or (b) the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Voting Securities"),
provided, however, that any acquisition by (x) the Company or any of it
subsidiaries, or any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its subsidiaries or (y) any Person
that is eligible, pursuant to Rule 13d-1(b) under the Exchange Act, to
file a statement on Schedule 13G with respect to its beneficial
ownership of Voting Securities, whether or not such Person shall have
filed a statement on Schedule 13G, unless such Person shall have filed a
statement on Schedule 13D with respect to beneficial ownership of 15% or
more of the Voting Securities or (z) any corporation with respect to
which, following such acquisition, more than 60% of, respectively, the
then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition of
the Outstanding Capital Stock and Voting Securities, as the case may be,
shall not constitute a Change of Control; or
ii. Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least
a majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, or such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the
5
<PAGE> 6
Company (as such terms are used in rule 14a-11 of Regulation 14A, or any
successor section, promulgated under the Exchange Act); or
iii. Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in
each case, with respect to which all or substantially all holders of the
Outstanding Capital Stock and Voting Securities immediately prior to such
Business Combination do not, following such Business Combination,
beneficially own, directly or indirectly, more than 60% of, respectively,
the then outstanding shares of common stock and the combined voting power
of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company or
(b) a sale or other disposition of all or substantially all of the assets
of the Company other than to a corporation with respect to which,
following such sale or disposition, more than 60% of, respectively, the
then outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in the
election of directors is then owned beneficially, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Capital Stock and
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding
Capital Stock and Voting Securities, as the case may be immediately prior
to such sale or disposition.
9. Termination by Reason of Death: If Employee shall die while
employed by the Company both prior to termination of employment and during the
effective term of this Agreement, all Employee's rights under this Agreement
shall terminate with the payment of such amounts of annual base salary as have
accrued but remain unpaid and a prorated amount of targeted bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus six additional months of the fixed salary and targeted bonus. All benefits
under Paragraphs 7.b.ii. shall be extended to Employee's estate as described in
such paragraph.
10. Termination of Disability: Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
base salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given except that all benefits under Paragraph 7.b.ii shall be
extended to Employee as described in such paragraph. For purposes of this
Agreement, "disability" is defined to mean that, as a result of Employee's
incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as General
Counsel of the Company substantially all the time otherwise required of
him hereunder for six (6) consecutive months; and
6
<PAGE> 7
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned
to the performance of his duties for the Company on a full-time basis.
This thirty-day notice may be given by the Company at anytime after
Employee has been absent for more than four months from performing his
duties in accordance with paragraph 10.a.
11. Indemnification: a. If litigation shall be brought to enforce or
interpret any provision contained herein, the non-prevailing party shall
indemnify the prevailing party for reasonable attorney's fees (including those
for negotiations, trial and appeals) and disbursements incurred by the
prevailing party in such litigation, and hereby agrees to pay prejudgment
interest on any money judgment obtained by the prevailing party calculated at
the generally prevailing NationsBank of Florida, N.A. base rate of interest
charged to its commercial customers in effect from time to time from the date
that payment(s) to him should have been made under this Agreement.
b. Employee shall be indemnified by the Company as General Counsel of the
Company to the fullest extent provided by law, under the same terms and
conditions as the most favorable indemnification provisions accorded to any
officer or director of the Company. This indemnification provision shall
include, without limitation, all terms and provisions of the most favorable
indemnification provided to any officer or director, including, without
limitation the right to advancement of expenses.
12. Payment Obligations Absolute: The provisions of this Paragraph 12
shall apply only within the three year period immediately following a Change of
Control. The Company's obligation to pay Employee the compensation and to make
the arrangements provided herein shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense, duty to mitigate, or other right
that the Company may have against him or anyone else. The amount shall not be
reduced by reason of Employee's securing other employment or for any other
reason. All amounts payable by the Company hereunder shall be paid without
notice or demand, and in no event later than seven business days after such
payments become due. Except as expressly provided herein, the Company waives
all rights that it may now have or may hereafter have conferred upon it, by
statute or otherwise, to terminate, cancel or rescind this Agreement in whole or
in part. Each and every payment made hereunder by the Company shall be final
and the Company will not seek to recover all or any part of such payment from
Employee or from whomsoever may be entitled thereto, for any reason whatsoever.
The Company may withhold for income tax purposes any amounts required to be
withheld under applicable tax statutes and regulations. This Paragraph 12 shall
not be used for interpretive purposes with respect to any other provision of
this Agreement other than in connection with a Change of Control.
7
<PAGE> 8
13. Confidentiality:
a. Nondisclosure: Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset for the Company's business. Accordingly, except in
connection with the performance of his duties hereunder, Employee shall
not at any time during or for any one year subsequent to the term of his
employment hereunder disclose, directly or indirectly, to any person,
firm, corporation, partnership, association or other entity any
proprietary or confidential information relating to the Company or any
information concerning the Company's financial condition or prospects, the
Company's customers, the design, development, manufacture, marketing or
sale of the Company's products or the Company's methods of operating its
business (collectively "Confidential Information"). Confidential
Information shall not include information which, at the time of
disclosure, is known or available to the general public by publication or
other wise through no act or failure to act on the part of Employee.
b. Return of Confidential Information. Upon termination of
Employee's employment, for whatever reason and whether voluntary or
involuntary, or at any time at the request of the Company, Employee shall
promptly return all Confidential Information in the possession or under the
control of Employee to the Company and shall not retain any copies or other
reproductions or extracts thereof. Employee shall at any time at the
request of the Company destroy or have destroyed all memoranda, notes,
reports, and documents, whether in "hard copy" form or as stored on
magnetic or other media, and all copies and other reproductions and
extracts thereof, prepared by Employee and shall provide the Company with
a certificate that the foregoing materials have in fact been returned or
destroyed.
c. Books and Records. All books, records and accounts whether
prepared by Employee or otherwise coming into Employee's possession, shall
be the exclusive property of the Company and shall be returned immediately
to the Company upon termination of Employee's employment hereunder or upon
the Company's request at any time.
14. Injunction/Specific Performance Setoff. Employee acknowledges that a
breach of any of the provisions of Paragraph 13 hereof would result in immediate
and irreparable injury to the Company which cannot be adequately or reasonably
compensated at law. Therefore, Employee agrees that the Company shall be
entitled, if any such breach shall occur or be threatened or attempted, to a
decree of specific performance and to a temporary and permanent injunction,
without the posting of a bond, enjoining and restraining such breach by Employee
or his agents either directly or indirectly, and that such right to injunction
shall be cumulative to whatever other remedies for actual damages to which the
Company is entitled. Employee further agrees that, except as other provided in
Paragraph 12 hereof, the Company may set off against or recoup from any amounts
due under this Agreement to the extent of any losses incurred by the Company as
a result of any breach by Employee of the provisions of Paragraph 13 hereof.
15. Severability: Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such
8
<PAGE> 9
prohibition or unenforceability without invalidating or affecting the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other other jurisdiction.
16. Successors: This Agreement shall be binding upon Employee and inure
to his and his estate's benefit, and shall be binding upon and inure to the
benefit of the Company and any permitted successor of the Company. Neither this
Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the Company.
The foregoing sentence shall not be deemed to have any effect upon the rights of
Employee upon a Change of Control.
17. Controlling Law: This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
18. Notices. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other of which notice is
given:
To the Company: Harris Computer Systems Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309
To Employee: Brian Foremny
3500 N. 37 Street
Hollywood, FL 33021
19. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
20. Waiver. A waiver by any party of any of the terms and conditions
hereof shall not be construed as a general waiver by such party.
9
<PAGE> 10
21. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
22. Interpretation. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties of
Employee or the Company upon Employee's termination, the rights and duties set
forth in this Agreement shall control.
23. Certain Limitations on Remedies. Paragraph 7.b provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee of the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason. It
is the intention of this Agreement that if the Company terminates Employee other
than for Cause (and other than as a consequence of Employee's death, or
disability) or if Employee terminates his employment with Good Reason, then the
payments and other benefits set forth in Paragraph 7.b shall constitute the sole
and exclusive remedies of Employee. This Paragraph 23 shall have no effect upon
the provisions of Paragraph 8 of this Agreement.
24. Miscellaneous. The parties hereto agree that if the proposed
transaction with Concurrent Computer Corporation is not consummated
substantially as set forth in the Purchase and Sale Agreement between the
Company and Concurrent dated as of March 26, 1996 ("Concurrent Transaction"),
then the Company will have the right to determine whether there is a need for
the Employee's services with the Company. If the Concurrent Transaction is not
consummated, then the Company shall have the right to terminate this Agreement,
including the Option, in which case: (i) the Option shall be reduced to the same
number of shares as were granted in February 1996 to the outside directors of
the Company; (ii) Employee shall be paid an amount equal to his then current
hourly billing rate, less $120 per hour, times the number of hours worked under
this Agreement; and (iii) this Agreement shall terminate in full.
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY: EMPLOYEE:
HARRIS COMPUTER SYSTEMS
CORPORATION
By:
--------------------------- ----------------------------
E. Courtney Siegel Brian Foremny
Chairman, President and CEO
10
<PAGE> 1
EXHIBIT 10.08
JOINT DEVELOPMENT AND MARKETING AGREEMENT
This Agreement, made and entered into as of the 6th day of August,
1996, by and between CyberGuard Corporation, a Florida corporation
("CyberGuard"), whose address is 2101 West Cypress Creek Road, Fort Lauderdale,
Florida 33309; and Information Resource Engineering, Inc., a Delaware
corporation ("IRE"), whose address is 8029 Corporate Drive, Baltimore, Maryland
21236:
WHEREAS, CyberGuard designs, manufactures and markets network security
products, including the CyberGuard(TM) Firewall, for Internet, intranet and
commercial networking environments;
WHEREAS, IRE has developed, manufactures and markets encrypting
modem-related hardware, software and documentation, and key management services
through its SafeNet Security Center ("S/SC")(TM);
WHEREAS, CyberGuard and IRE desire to jointly develop and market a
proposed product offering consisting of a combination of the CyberGuard
Firewall and IRE SafeNet(TM) products in an interoperable centrally managed
system configured for use with a virtual private network ("VPN") and in
applications that combine VPNs with public Internet access and/or legacy
network use;
NOW THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, and intending to be legally bound, CyberGuard
and IRE enter into this Agreement in order to provide for the initial phase of
joint development and marketing activities for the proposed joint product
offering.
1. Definitions
As used herein, the following words or phrases have the following
meanings:
1.1 "CyberGuard Products" shall mean the software and manuals to be
incorporated with an Intel-based personal computer to be supplied by a third
party vendor.
1.2 "CyberGuard Property" means any and all Intellectual Property owned by
CyberGuard as of the Effective Date or developed thereafter solely by or on
behalf of CyberGuard, and expressly excludes any IRE Property.
1.3 "CyberGuard Firewall" shall mean a product comprised of an Intel-based
personal computer to be supplied by a third party vendor and software and
manuals supplied by CyberGuard.
1.4 "Effective Date" means August 6th, 1996.
1.5 "Hereof," "herein, and "hereunder" when used in this Agreement shall
refer to the Agreement as a whole, unless the context otherwise requires.
1.6 "Intellectual Property" means any and all inventions, improvements,
enhancements, methods, designs, know-how, trade secrets, software, hardware,
circuits, products, documentation, mask works, layouts, ornamental designs,
trademarks, service marks, trade dress, company names, brand names, logos, and
fictitious names, together with any and all worldwide vested and/or inchoate
rights in and to any or all of the foregoing under any issued, pending and/or
later filed applications for patent or copyright registration, trademark and/or
service mark registration, utility models and/or any other form of protection
of various forms of intellectual and/or industrial
2
<PAGE> 2
property recognized anywhere in the world including any and all rights of
domestic and/or foreign priority, the right to sue and recover damages for
infringements including, without limitation, any past infringements.
1.7 "IRE Property" means any and all Intellectual Property owned by IRE as
of the Effective Date or developed thereafter solely by or on behalf of IRE, and
expressly excludes any CyberGuard Property.
1.8 "IRE/SafeNet Products" shall consist of the SafeNet/Dial, SafeNet/LAN,
SafeNet/Security Center and SafeNet/Security Services.
1.9 "Joint Developments" means any and all Intellectual Property written,
invented, developed or otherwise created jointly by CyberGuard and IRE in the
course of the Project during the Term of this Agreement. Joint Developments
shall not include any CyberGuard Property or any IRE Property.
1.10 "Prepaid License Fee" shall have the meaning as set forth in Section of
this Agreement.
1.11 "Product" or "Products" shall mean any combination of the CyberGuard
Firewall and IRE/SafeNet Products, developed in accordance with this Agreement,
having an interoperable centrally managed system configured for use with a VPN
and for use in applications that combine VPNs with public Internet access
and/or legacy network use and having the characteristics set forth in the
Specifications.
1.12 "Project" means all activity relating to the design, development,
implementation, testing, modification and/or improvement of any Product and/or
components thereof, whether hardware, software, electronic, mechanical or
otherwise.
1.13 "Proprietary Information" means proprietary rights in, and to, all
computer programs, source code, algorithms, software routines, microcode and
other similar data pertaining to CyberGuard Products, the IRE/SafeNet Products,
or the Product, as the case may be.
1.14 "Specifications" means the criteria for and description of the Product
set forth on Exhibit A hereto.
1.15 "Term" means the period from the Effective Date through the Termination
Date.
1.16 "Termination Date" means any date upon which this Agreement shall
terminate in accordance with the terms hereof, or two years from the Effective
Date, whichever is earlier.
2. Joint Development; Prepaid License
2.1 Development of the Product. Subject to the terms and conditions of
this Agreement, CyberGuard and IRE agree to cooperate with and assist each
other in the joint design and development of the Product. The Product is
intended to address the markets and include the functionalities in accordance
with Exhibits A and B attached hereto.
2.2 Enhancements to the Product. IRE and CyberGuard each acknowledge that
from time to time it may be advantageous to develop enhancements to their
respective product offerings that are components of the Product. Each of the
parties hereto agrees that, at the request of the other party, it will work
with the other party to jointly develop enhancements or revisions to the
CyberGuard Firewall and/or the IRE SafeNet products. In the event that the
parties hereto fail to agree on the timing, extent or nature of such
enhancements and/or revisions, or on the sharing of expense with respect to
such enhancements and/or revisions, the party that does not wish to proceed
with such enhancements and/or revisions shall provide to the other party a price
quotation (on an actual time and materials basis) and schedule for implementing
such enhancements or revision. Such enhancements and/or revisions shall be
effectuated upon acceptance of such proposal by the party requesting the
enhancements and/or revisions. In the event that such enhancements and/or
revisions result in any new Intellectual Property, such Intellectual Property
shall become the property of the party or parties which fund(s) the
enhancements and/or revisions.
2
<PAGE> 3
2.3 Prepaid License. CyberGuard acknowledges that IRE, on the Effective
Date, has paid to CyberGuard a prepaid license fee in the amount of $1 million
("Prepaid License Fee"). The Prepaid License Fee shall represent a prepayment
of the amounts that will become due under Section hereof, and shall be
credited to the account of IRE on a dollar-for-dollar basis against such
amounts that otherwise would become due to CyberGuard under Section hereof.
In the event that this Agreement is terminated prior to such credit aggregating
the $1 million, then CyberGuard shall repay to IRE the balance of the $1
million prepaid license fee within one year of the date of such termination,
with interest at the prime rate of interest as is in effect as of the date of
such termination and announced by The Chase Bank, N.A.
3. Manufacture and Assembly
3.1 Delivery of CyberGuard Products to IRE.
3.1.1 Subject to the terms and conditions hereof, CyberGuard shall use
commercially reasonable efforts to supply to IRE such number of
CyberGuard Products as may be required during the term of this
Agreement to fill orders for the Product.
3.1.2 CyberGuard shall sell CyberGuard Products, F.O.B. CyberGuard's
place of business in Fort Lauderdale, Florida, at the prices set forth
on Exhibit C. Payment terms are net 30 days from the date of IRE
shipment to its customers for CyberGuard Products sold.
3.1.3 All prices quoted by CyberGuard are exclusive of all excise,
sales and similar taxes of whatever jurisdiction and of any other
taxes, customs, duties, fees or charges that may be imposed on the
sale of CyberGuard Products to IRE.
3.2 Manufacture of the Product. IRE shall assemble and configure the
Product by integrating the CyberGuard Firewall and IRE/SafeNet Products in
accordance with the Specifications, as such Specifications may be modified or
supplemented in a writing agreed to by the parties hereto from time to time.
The parties agree that the PC platform and the vendor that will supply the
platform will be selected by IRE, from time to time, so long as such selection
meets the technical requirements of CyberGuard. The parties agree that for
this purpose the Intel-based PC platform manufactured by Advanced Logic
Research, Inc. is acceptable to both IRE and CyberGuard.
3.3 Costs of Manufacture. All costs and expenses, including taxes, related
to the assembly and configuration as described in Section of the Product shall
be borne solely by IRE.
3.4 No License Fee. Except for the Prepaid License Fee, the fees payable
in accordance with Section 3.1.2 hereof and a fee payable under the license
described in Exhibit D hereto, no license fee under this Agreement shall be
payable by either IRE or CyberGuard with respect to CyberGuard Products or
IRE/SafeNet Products incorporated into the Product for sale in accordance with
this Agreement.
4. Marketing and Sales
4.1 Terms and Conditions of Sales. The parties agree to negotiate in good
faith and to reach agreement on the following matters within 15 days after the
Effective Date: the initial List Prices for the Product, the discounts that
will be available to the various sales channels, the other terms and conditions
of the sales of the Product to third parties, and the terms, conditions and
pricing under which CyberGuard will act as reseller of the Product. IRE and
CyberGuard agree to cooperate in the future to establish different List Prices
and discounts as needed to address cost changes or market conditions. All
other terms and conditions of sales of the Product that are not addressed in
the mutually agreed-to terms shall be set by IRE.
4.2 Marketing Assistance/Assignment of Sales Personnel. IRE and CyberGuard
shall cooperate in marketing and selling the Product. For each sales lead
generated by or becoming known to a party hereto, the parties agree that for a
preliminary time period to be agreed upon by IRE and CyberGuard, each of them
will use reasonable best efforts to jointly assign a sales team consisting of a
representative from each corporation (consisting of a sales representative from
one corporation and a customer support representative from the other) to pursue
such leads
3
<PAGE> 4
with a view toward generating a sale.
4.3 Marketing Fees. In consideration of the sales support to be provided
by CyberGuard under Section hereof, for each Product sold, in addition to the
payment for CyberGuard Products as set forth in Section hereof, IRE shall pay
CyberGuard a marketing fee as set forth in Exhibit C hereto. The marketing fee
shall be paid monthly based upon payments received by IRE from the purchasers
of the Product during the previous month.
4.4 Order Flow and Fulfillment. Orders for the Product, whether generated
by CyberGuard or IRE, shall be submitted to IRE for fulfillment. IRE shall have
the sole discretion to determine whether to extend credit to any potential
purchaser of a Product. IRE shall process orders for shipment in accordance
with commercially reasonable standards. IRE shall submit invoices to
purchasers for products shipped and shall be responsible for collection of such
invoices. IRE shall provide to CyberGuard written monthly reports that describe
the identity of the purchasers, the Products sold, quantities, discounts and
prices for all sales of Products. Revenue from sales of Product shall be
considered solely the revenue of IRE for all accounting and other purposes.
4.5 Compliance With Laws and Business Practices. It is expressly
understood and agreed that this Agreement, and any exports, sales, transfers, or
any other disposition of CyberGuard Products or IRE/SafeNet Products, to the
extent incorporated in the Product, are subject to the laws and regulations of
the United States. Specifically, contracts and orders placed for the Product
may require advance U.S. Government Export approval or licensing, and, therefore
all such contracts and orders are subject to the receipt of any necessary
approvals and licenses. The parties hereto agree to solicit orders, and IRE
agrees to process and ship orders, in accordance with all applicable laws and
regulations.
5. Customer Support
5.1 Initial Contact. IRE shall be the initial point of contact for
customer support of the Product and shall establish and maintain support
facilities sufficient to provide primary support for the Product. Primary
support requires that IRE provide all necessary resources to provide initial
diagnosis of both hardware and software problems and providing reasonable
assistance to purchasers to resolve problems with the Product.
5.2 Maintenance. Following receipt of support requests from a customer
and an assessment by IRE of the customer's additional support requirements, if
it is determined that the customer requires maintenance services, CyberGuard
shall provide such maintenance for CyberGuard Products and IRE shall provide
such maintenance in all other instances. Each party hereto agrees to maintain
support services sufficient to discharge the duty set forth in the preceding
sentence, and shall provide such services in its usual and customary manner, and
at customary rates, as provided to other customers (which, in all cases, shall
be a commercially reasonable manner and rate). Each party agrees to maintain
the availability of support services for a period of at least two years after
the termination of this Agreement. The term "support," for purposes of this
section , means verifying, diagnosing and resolving hardware and software
problems and delivery of software patches and applicable release notes.
6. Intellectual Property Rights
6.1 Ownership of Intellectual Property; Property Tradename.
6.1.1 CyberGuard Property. Subject to the provisions of Section , the
parties acknowledge and agree that all CyberGuard Property is and shall
remain at all times the exclusive property of CyberGuard, its
successors and assigns.
6.1.2 IRE Property. Subject to the provisions of Section , the
parties acknowledge and agree that all IRE Property is and shall
remain at all times the exclusive property of IRE, its successors and
assigns.
6.1.3 Joint Developments. Joint Developments shall be owned jointly
by CyberGuard and IRE, their successors and assigns, as tenants in
common.
4
<PAGE> 5
6.1.4 Property Tradename. CyberGuard and IRE agree that the Product
shall be branded with a name or names and marks that are acceptable to
both IRE and CyberGuard (the "Product Tradename"). The Product
Tradename shall be used only for purposes of marketing and selling the
Product. Notwithstanding the foregoing, there shall be no restriction
with respect to IRE's use of the "SafeNet" mark for any and all
purposes. The parties agree that the Product Tradename shall be
solely and exclusively IRE Property; provided, however, that
CyberGuard shall have the right to use the Product Tradename to the
limited extent necessary to act as a seller of the Product.
6.2 Cross License. Subject to the terms and conditions contained herein,
CyberGuard hereby grants to IRE a nontransferable, non-exclusive license to use
the CyberGuard Property solely to the extent as is required to develop,
manufacture and market the Product. Subject to the terms and conditions
contained herein, IRE hereby grants to CyberGuard a nontransferable,
non-exclusive license to use the IRE/SafeNet Property solely to the extent as
is required to develop, manufacture and market the Product. Each party hereto
acknowledges and agrees that the other has expended considerable time, effort
and funds in developing and generating the Intellectual Property owned by it,
and has and will continue to have a substantial proprietary interest and
valuable trade secret therein. The license granted by each party to the other
herein is granted as part of the consideration of entering into this Agreement.
6.3 Limitation. CyberGuard shall have no interest in any of the trademarks,
service marks, trade dress, company names, or logos of IRE or the Product;
without limiting the generality of the foregoing clause of this sentence,
CyberGuard shall have no rights with respect to the tradename "SafeNet" and
related tradenames, except to the limited extent necessary to act as a seller
of the Product. IRE shall have no interest in any of the trademarks, service
marks, trade dress, company names, or logos of CyberGuard; without limiting the
generality of the foregoing clause of this sentence, IRE shall have no rights
with respect to the tradename "CyberGuard" and related tradenames, except to
the limited extent necessary to act as a seller of the Product.
6.4 Protection of Intellectual Property.
6.4.1 Each of the parties hereto agrees to make full and complete
disclosure to the other of all Joint Developments it believes may be
copyrightable, patentable or of commercial value.
6.4.2 With respect to all Joint Developments believed by either party
to be copyrightable, patentable or of commercial value, the parties
agree to decide jointly whether and where to apply for copyright,
patent or other appropriate forms of protection. To the extent the
parties agree to protect a Joint Development, the parties shall do so
at their joint expense using counsel as mutually agreed.
6.4.3 In the event the parties elect not to jointly pursue protection
of any Joint Development, either party (the "Electing Party") may seek
such protection in its own name and at its sole expense using counsel
of its choice. As to Joint Developments with respect to which the
Electing Party elects to seek protection, the non-electing party shall
assign its intellectual property rights in and to such Joint
Development to the Electing Party and the Electing Party shall grant
to the non-electing party a fully paid-up, worldwide, extendible,
non-exclusive perpetual license to use the Joint Development and any
and all Intellectual Property therein for any and all purposes.
6.4.4 All expenses of renewing and or maintaining intellectual
property protection of any Joint Development shall be borne by the
party seeking protection, or, in the case of protection sought jointly
by the parties hereto, by both parties sharing equally in such
expenses.
6.5 Enforcement of Intellectual Property Rights.
6.5.1 CyberGuard shall be solely responsible for enforcing any and all
CyberGuard Property, and IRE shall be solely responsible for enforcing
any and all IRE Property, whether or not such CyberGuard Property or
IRE Property is incorporated into the Product. In the event that it is
unclear whether CyberGuard Property or IRE Property is being infringed
upon, the parties shall treat such infringement as if the infringement
were on a Joint Development in accordance with the provisions below.
5
<PAGE> 6
6.5.2 Each party agrees promptly to advise the other of suspected or
known infringements on any Joint Development.
6.5.3 The parties agree to consult as to the appropriate action to be
taken with respect to any infringement of any Joint Development. If
the parties agree to settle or jointly prosecute any claim for
misappropriation and/or infringement, the parties shall share equally
in the costs and expenses, including attorney's fees, incurred in
connection with such prosecution and shall share equally in any
settlements or other recoveries thereon.
6.5.4 If one of the parties hereto does not agree to be responsible
for its full share of the costs and expenses of prosecuting an
infringement claim jointly, then either party may sue it its own name
and at its sole expense and, in such case, the other party agrees to
be joined as a plaintiff for standing purposes and to cooperate as
reasonably requested in prosecuting such action (subject to
reimbursement for reasonable costs, expenses, and attorneys' fees).
In such event, any recovery shall inure to the party prosecuting the
infringement and not to the other, whether or not such other party
joins as a plaintiff as provided herein.
6.6 Defense of Intellectual Property.
6.6.1 CyberGuard shall be solely responsible for defending any and all
claims of third parties against CyberGuard Products for infringement,
and IRE shall be solely responsible for defending any and all claims
of third parties against IRE/SafeNet Products for infringement,
whether or not the CyberGuard Product or IRE/SafeNet Product at issue
in any claim is incorporated into the Product.
6.6.2 Each party agrees promptly to advise the other of claims of
infringement brought or threatened against any Joint Development.
6.6.3 The parties agree to consult as to the appropriate action to be
taken with respect to any claims of infringement by any Joint
Development. If the parties agree to jointly defend any claim for
misappropriation and/or infringement, the parties shall share equally
in the costs and expenses, including attorney's fees, incurred in
connection with such defense. Each party shall bear only such damages
as are awarded against it.
6.6.4 If one of the parties hereto does not agree to be responsible
for its full share of the costs and expenses of defending an
infringement claim jointly, then the other party may defend at its
sole expense and the defending party shall have a lien upon the
Intellectual Property of the other in the full amount of damages and
costs and expenses of defense.
7. Warranties of the Parties to the Other
7.1 Ownership of CyberGuard Products. CyberGuard warrants to IRE that it owns
or otherwise holds all rights necessary to make, use, sell, offer for sale,
advertise and distribute the CyberGuard Products free and clear from all
claims, liens and encumbrances of third parties, except for the obligations
under those agreements and licenses listed on Exhibit D hereto.
7.2 Ownership of IRE Products. IRE warrants to CyberGuard that it owns or
otherwise holds all rights necessary to make, use, sell, offer for sale,
advertise and distribute the IRE/SafeNet Products free and clear from all
claims, liens and encumbrances of third parties.
7.3 Warranty. CyberGuard hereby warrants to IRE that under normal use and
service, CyberGuard Products are free from defects in design and workmanship.
IRE hereby warrants to CyberGuard that under normal use and service,
IRE/SafeNet Products are free from defects in design and workmanship. Each
party warrants to the other that the products delivered by such party for use
in connection with the Product will be complete and in conformity with the
products regularly supplied by each to purchasers and lessees of its products.
CyberGuard's warranty under this Section shall not include a warranty for the
Intel-based PC that is a component of the CyberGuard
6
<PAGE> 7
Firewall and is supplied by a third party vendor.
7.4 Product Warranty. The Product shall be sold with a warranty to be agreed
upon between the parties hereto, essentially to the effect that the Product
will be free from defects in design, workmanship and material, with a time
period (not to exceed one year) and on such other terms and conditions as are
to be agreed upon between the parties. Subject to the limitations on warranty
contained in this Agreement, CyberGuard agrees to assume all liability for
breach of such warranty to the extent that a breach of warranty relates solely
to CyberGuard Products incorporated into the Product. Subject to the
limitations on warranty contained in this Agreement, IRE agrees to assume all
liability for breach of such warranty to the extent that such breach relates to
the assembly or configuration of the Product or solely to IRE/SafeNet Products.
CyberGuard and IRE agree to jointly assume all liability for breach of such
warranty to the extent that a breach of warranty relates to the design of the
Product or other matters that are not covered by either of the two preceding
sentences.
7.5 Limitation on Warranty. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN AND
EXCEPT FOR WARRANTY OF TITLE, NEITHER PARTY MAKES ANY OTHER WARRANTIES, EXPRESS
OR IMPLIED TO THE OTHER WITH RESPECT TO ITS PRODUCTS. EXCEPT AS OTHERWISE
EXPRESSLY SET FORTH HEREIN, THERE ARE NO WARRANTIES OR ANY AFFIRMATIONS OF FACT
OR PROMISES BY EITHER PARTY HERETO AS TO MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, INFRINGEMENT OR OTHERWISE. USE OF SUCH PRODUCTS
CONSTITUTES THE CONSENT OF THE OTHER PARTY HERETO TO ASSUME ALL RISKS OF SUCH
USE AND TO HOLD THE OTHER HARMLESS FOR ANY DAMAGES OR CLAIM OF DAMAGES ARISING
IN ANY MANNER FROM SUCH USE. THE EMPLOYEES OR AGENTS OF NEITHER PARTY HAVE ANY
AUTHORITY TO MAKE ANY WARRANTY OR REPRESENTATION REGARDING THE MANNER OR
BENEFITS OF USE OF ANY PRODUCT OTHER THAN THOSE EXPRESSLY SET FORTH IN THE
SPECIFICATION FOR SUCH PRODUCT.
8. Termination
8.1 Conditions for Termination. This Agreement shall terminate upon any of the
conditions contained in this Section .
8.1.1 This Agreement shall terminate upon the occurrence of a
material breach of this Agreement by either party hereto, provided:
8.1.1.1 The breaching party is given notice by the other party
hereto containing a claim of breach and setting forth the
nature of the breach and circumstances giving rise to such a
claim; and
8.1.1.2 The party to whom notice is given fails to remedy such
circumstances within sixty days after receipt of the notice.
8.1.2 This Agreement shall terminate upon the written notice of either
party to the other that such party is unable to perform as provided
hereunder due to labor disputes, fire, casualties and accidents, acts
of the elements, acts of a public enemy, sovereign acts or regulations
and any other causes beyond the control of such party, its agents,
employees or officers.
8.1.3 This Agreement shall terminate if any of the following events
occur as to one party hereto and the other party does not provide
written notice within thirty days after it becomes aware of such event
that it intends to waive termination of this Agreement: a party makes
an assignment for the benefit of its creditors, requests or permits a
proposal, arrangement or reorganization under or, as an insolvent
debtor, takes the benefit of any legislation now or hereafter in force
for bankrupt or insolvent debtors; a receiver or other officer with
like powers is appointed for a party for a substantial part of its
assets; a lienholder takes possession of a substantial part of a
party's property; or an order is made for the winding up, liquidation,
revocation, or cancellation of incorporation of a party; or a party
ceases carrying on its business as a going concern.
7
<PAGE> 8
8.1.4 This Agreement shall terminate at the expiration of two years
from its Effective Date.
8.2 Effects of Termination/Liability.
8.2.1 If this Agreement is terminated for reasons set forth in
Section 8.1, then a breaching party shall indemnify the non-breaching
party from and against all actual costs and expenses incurred or
resulting from the breach, including reasonable attorneys' fees and
costs of dispute resolution (collectively "Damages"); provided,
however, that neither party hereto shall be liable under any
circumstances, for indirect, special, incidental or consequential
damages; and provided further that the amount of Damages payable by
either party hereto to the other shall be limited to the amount that
the party entitled to such Damages has incurred in connection with the
performance of its obligations under this Agreement or to enforce the
obligations of the other party hereunder.
8.2.2 Except as set forth herein, neither party shall be liable to
the other for any claims, damages, costs, expenses or other charges
incurred in connection with the entering into, performance, breach, or
termination of this Agreement unless specifically provided for herein.
8.2.3 Notwithstanding the Termination Date of this Agreement, the
provisions of Sections 5.2, 6.1, and 9.2 shall survive the Termination
Date indefinitely, and the provisions of Article and Section shall
survive until the second anniversary of the Termination Date. Without
limiting the generality of the foregoing sentence, for two years after
the Termination Date, CyberGuard shall continue to use commercially
reasonable efforts to supply to IRE such number of CyberGuard Products
as may be required for IRE to fulfill its orders for the Product and
IRE shall continue to use commercially reasonable efforts to assemble
and configure the number of Products as may be required for CyberGuard
to fulfill its orders for the Product. The prices to be charged by IRE
and CyberGuard to the other in fulfillment of the obligations stated in
the foregoing sentence are described in Exhibit C and Section hereto.
8.2.4 The parties hereto agree to deposit with mutually agreeable
escrow agents in the case of (i) CyberGuard, a current version of its
software source code which incorporates all necessary and appropriate
improvements, revisions, enhancements, or updates for the source code
for the CyberGuard Products so that at all times, such source code will
correspond with the software actually in use by CyberGuard (subject to
the rights of Santa Cruz Operation, Inc. as set forth in the licenses
and agreements described in Exhibit D hereto); (ii) IRE, all necessary
schematics, diagrams and source code for the IRE/SafeNet Products
(excluding SafeNet/Services) and all documentation reasonably necessary
to manufacture the Product so that at all times, the source code,
schematics and diagrams will correspond with the products and software
actually in use by IRE. The parties hereto agree to negotiate and
enter into escrow agreements to effectuate the purposes of the
foregoing and to place the source codes and, as the case may be,
schematics and diagrams for the CyberGuard Products and IRE/SafeNet
Products in escrow so as to provide each party with access to such
information in the event that the other party does not perform its
obligations under this Agreement.
9. Miscellaneous Provisions
9.1 Assignment. Neither party shall assign this Agreement or any interest
therein without the prior written consent of the other party.
9.2 Confidentiality. Neither party hereto shall, without the express written
consent of the other, provide, disclose, transfer or otherwise make available
any Proprietary Information, or parts or copies thereof, to any third party.
Each party shall ensure that it, its employees and third party agents having
access to any Proprietary Information, or to the CyberGuard Products or
IRE/SafeNet Products of the other, will restrict and control the use, copying,
modification, disclosure, transfer, protection and security of such items, in
accordance with these provisions. Each party hereto agrees to protect all
Proprietary Information with the same standard of care that it uses to protect
its own like information.
8
<PAGE> 9
9.3 Nonsolicitation. The parties hereto agree that they will not, at any time
during the term this Agreement and for a period of one year thereafter,
directly or indirectly, for itself or for any other person, firm, corporation,
partnership, association or other entity, attempt to employ, employ or enter
into any contractual arrangement with any employee or former employee of the
other party, its subsidiaries or predecessors in interest, unless such employee
or former employee has not been employed by the other party, its subsidiaries
or its predecessors in interest, for a period in excess of six months.
9.4 Publicity. The parties hereto agree to cooperate in the drafting of any
press releases or other public disclosure that relates to the Project. Neither
shall make any public disclosure relating to the Project or the other party
without the consent of such other party. Notwithstanding the foregoing, in the
event that a party hereto (the "Disclosing Party") is advised by counsel that
public disclosure relating to the Project or the other party is required, the
Disclosing Party shall provide to the other party a copy of the proposed
disclosure in advance of its public release and shall use all reasonable
efforts to seek the comments of the other party prior to its publication.
9.5 Notices. All notices permitted or required hereunder shall be effective:
upon receipt if delivered personally; on the third business after sending if
sent via registered or certified U.S. mail, return receipt requested; on the
second business day after sending, charges prepaid for next day delivery, via a
nationally recognized overnight delivery service (Federal Express, Purolator
Courier, DHL and UPS are acceptable for these purposes); and upon
acknowledgment of receipt by the party to be charged with notice if sent via
any other means. Notice shall be given to the following address or to such
other address as to which a party shall give notice:
If to CyberGuard:
CyberGuard Corporation
2101 W. Cypress Creek Road
Ft. Lauderdale, FL 33309
Attention: President
If to IRE:
Information Resource Engineering, Inc.
8029 Corporate Drive
Baltimore, MD 21236
Attention: Chairman
9.6 Disputes.
9.6.1 Any controversy or claim related to or arising out of this
Agreement shall be settled by binding arbitration conducted under the
Commercial Arbitration Rules of the American Arbitration Association.
Judgment on the arbitrator's award may be entered and enforced in any
court of competent jurisdiction. Neither party will be precluded from
seeking provisional remedies in the courts including, but not limited
to, temporary restraining orders and preliminary injunctions, to
protect its rights and interests, but such relief will not be sought
as a means to avoid or stay arbitration.
9.6.2 This Section provides the sole recourse for the settlement of
any dispute arising under or in connection with this Agreement. In any
arbitration between the parties, the prevailing party shall be entitled
to reasonable attorneys' fees and all costs of proceedings incurred in
enforcing this Agreement in addition to any other amount of recovery
ordered in such arbitration.
9.6.3 IRE and CyberGuard each agree that if either of them determine
to begin an arbitration action, then such action may be brought only
in the city or county in which the corporate headquarters of the
defendant to such action is located, and each agree that venue is
proper in such location.
9.7 Relationship of the Parties. The parties hereto agree that no agency,
employment, partnership, joint venture or franchise relationship is created or
shall be deemed to be created hereunder. Neither party shall have, and
9
<PAGE> 10
neither shall represent to have, any power, right or authority to bind the other
or to assume or create any obligation or responsibility, express or implied, on
behalf of the other party or in the other party's name, except as herein
expressly permitted.
9.8 Entire Agreement. This Agreement constitutes the entire agreement and
supersedes any prior agreements or understandings between the parties hereto
regarding the subject matter hereof, and no amendment, alteration or waiver of
this Agreement shall be valid or binding unless made in writing and signed by
both parties.
9.9 Governing Law. This Agreement shall be governed by, and interpreted and
construed in accordance with the laws of the State of New York.
9.10 Further Agreements. The parties hereto agree to enter into good faith
negotiations for the purposes of executing and delivering an appropriate
agreement or agreements providing for CyberGuard's ability to resell the IRE
SafeNet family of products and for IRE's ability to resell the CyberGuard
Firewall family of products, now or hereafter developed during the term of this
Agreement.
9.11 Severability. Any provision in this Agreement found to be void, voidable
or unenforceable shall not affect the validity or enforceability of any other
provision in this Agreement. In the event that any provision of this Agreement
shall be declared void, voidable or unenforceable by a court of competent
jurisdiction, said provision shall be deemed to be amended to provide the party
seeking to enforce this Agreement the greatest protection available under law.
10
<PAGE> 11
IN WITNESS WHEREOF the undersigned have executed and delivered this
Agreement as of the date and year first above written.
INFORMATION RESOURCE CYBERGUARD CORPORATION
ENGINEERING, INC.
By: By:
------------------------------ ----------------------------------
Anthony A. Caputo Robert L. Carberry
Its: Chairman, Chief Executive Its: Chairman, President
Officer and President and Chief Executive Officer
EXHIBIT C
PRICING
TO BE AGREED UPON
11
<PAGE> 12
EXHIBIT D
THIRD PARTY AGREEMENTS/LICENSES
CyberGuard's rights to its secure operating system are subject to a
license from Santa Cruz Operation, Inc. ("SCO"), which is the successor to
Novell, Inc. with respect to the operating system. The principal licenses and
agreements under which CyberGuard's rights arise are the following (although
there are 41 supplements to these agreements spanning a 12-year period
concerning the procurement and license of various versions of the operating
system):
License Transfer Agreement between Novell, Inc. and Harris Computer
Systems Corporation dated September 15, 1995.
Software Agreement No. SOFT-000173 between AT&T Technologies, Inc. and
Harris Corporation signed by the parties on October 31, 1984 and October 11,
1984, respectively.
Software Agreement Supplements to Software Agreement No. SOFT-000173
between Harris Corporation and UNIX Systems Laboratories, Inc.
Software Cooperation Agreement between Novell, Inc. and Harris dated
November 30,1994.
12
<PAGE> 13
LIST OF EXHIBITS
EXHIBIT A Product Specifications
EXHIBIT B Joint Marketing Plan
EXHIBIT C CyberGuard Products Price List and Marketing Fees
EXHIBIT D Third Party Agreements/Licenses
13
<PAGE> 1
EXHIBIT 23.01
The Board of Directors
CyberGuard Corporation:
We consent to incorporation by reference in the registration statement (No.
333-06253) on Form S-3 of CyberGuard Corporation of our report dated September
11, 1996, relating to the consolidated balance sheets of CyberGuard Corporation
and subsidiaries as of June 30, 1996 and September 30, 1995 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the nine months ended June 30, 1996, the year ended September 30, 1995, and the
three months ended September 30, 1994, which report appears in the June 30,
1996, annual report on Form 10-K of CyberGuard Corporation.
KPMG Peat Marwick LLP
Miami, Florida
September 30, 1996
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Selected
Financial Data" and to the use of our report dated July 13, 1994 in the Annual
Report (Form 10-K) of Harris Computer Systems Business.
We further consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 333-06253) of Cyberguard Corporation pertaining to the
Post-Effective Amendment No. 1 to register 341,589 shares of its Common Stock
and in the Registration Statement (Form S-8) pertaining to the Stock Incentive
Plan and Employee Savings Plan of Harris Computer Systems Corporation of our
report dated July 13, 1994, with respect to the consolidated financial
statements of Harris Computer Systems Business included in the Annual Report
(Form 10-K) for the year ended June 30, 1996.
ERNST & YOUNG LLP
Orlando, Florida
September 30, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996 AND CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,617
<SECURITIES> 13,600
<RECEIVABLES> 3,986
<ALLOWANCES> 313
<INVENTORY> 134
<CURRENT-ASSETS> 21,584
<PP&E> 2,187
<DEPRECIATION> 1,035
<TOTAL-ASSETS> 27,712
<CURRENT-LIABILITIES> 9,467
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 18,178
<TOTAL-LIABILITY-AND-EQUITY> 18,245
<SALES> 24,958
<TOTAL-REVENUES> 37,411
<CGS> 13,360
<TOTAL-COSTS> 21,022
<OTHER-EXPENSES> 27,634
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (26,122)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,122)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,122)
<EPS-PRIMARY> (4.32)
<EPS-DILUTED> (4.32)
</TABLE>
