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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1996
REGISTRATION NO.333-04407
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CYBERGUARD CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C>
FLORIDA 65-510339
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
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2101 WEST CYPRESS CREEK ROAD
FORT LAUDERDALE, FLORIDA 33309
(954) 974-1700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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ROBERT L. CARBERRY
2101 WEST CYPRESS CREEK ROAD
FORT LAUDERDALE, FLORIDA 33309
(954) 974-1700
(Name, Address Including Zip Code, and Telephone Number, Including Area Code, of
Agent For Service)
COPIES TO:
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<S> <C>
BRIAN FOREMNY, ESQ. ANDREW R. KELLER, ESQ.
CYBERGUARD CORPORATION SIMPSON THACHER & BARTLETT
2101 WEST CYPRESS CREEK ROAD 425 LEXINGTON AVENUE
FORT LAUDERDALE, FLORIDA 33309 NEW YORK, NEW YORK 10017
(954) 974-1700 (212) 455-2000
TELECOPIER NO. (954) 463-2030 TELECOPIER NO. (212) 455-2502
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are offered pursuant to
dividend or interest reinvestment plans, please check the following box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS.
SUBJECT TO COMPLETION, DATED JULY 15, 1996
PROSPECTUS
2,400,000 SHARES
[CYBERGUARD LOGO]
COMMON STOCK
------------------------------
Of the 2,400,000 shares (the "Shares") of Common Stock, par value $.01 per
share ("Common Stock," which term includes a Right (as defined herein)), of
CyberGuard Corporation (the "Company") offered hereby, 1,803,489 shares are
being offered by the Company and 596,511 shares are being offered by certain
shareholders of the Company (the "Selling Shareholders"). The Company will not
receive any proceeds from the sale of Shares by the Selling Shareholders. See
"Principal and Selling Shareholders."
The Common Stock is included for quotation on the Nasdaq National Market
under the symbol "CYBG." On July 12, 1996, the last reported sale price of the
Common Stock as reported by the Nasdaq National Market was $11 1/2 per share.
See "Price Range of Common Stock."
THE SECURITIES OFFERED HEREBY REPRESENT A SIGNIFICANT DEGREE OF RISK.
INVESTORS SHOULD CAREFULLY CONSIDER CERTAIN RISKS AND OTHER CONSIDERATIONS
RELATING TO THE COMMON STOCK AND THE COMPANY. SEE "RISK FACTORS" COMMENCING ON
PAGE 8.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share................................... $ $ $ $
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Total(3).................................... $ $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting respective expenses of the offering of approximately
$ payable by the Company.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 360,000 additional shares of
Common Stock solely to cover over-allotments, if any. See "Underwriting." If
all such shares are purchased, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Shareholders will be $ , $ , $ and $ ,
respectively.
------------------------------
The Shares are offered subject to prior sale, when, as and if delivered and
accepted by the Underwriters and subject to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify the offer and
reject orders in whole or in part. It is expected that delivery of the Shares
will be made against payment therefor on or about , 1996 at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
FURMAN SELZ
THE DATE OF THIS PROSPECTUS IS JULY , 1996.
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[PHOTO]
Network Security technologies are deposited from left to right with an
arrow indicating full access as "last secure" and no access as "host secure."
Two boxes representing firewalls are deposited, each with three levels: a
firewall application, an operating system and a networking software level. In
the left box, the data path flow through the firewall passing by each level but
permitting a "hacker path" where data flow across the levels, bypassing the
firewall. In the right box, traffic only goes across in the firewall level,
demonstrating a "block" on the other two levels where hackers corrupt the
software to permit access.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR IN THE
OVER-THE-COUNTER-MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere and incorporated by reference
in this Prospectus. Unless otherwise indicated, all share information has been
adjusted to give retroactive effect to a three-for-one split of the Company's
Common Stock effective March 18, 1996 and no effect is given in this Prospectus
to the exercise of outstanding options or warrants to purchase Common Stock,
including the Underwriters' over-allotment option. Unless otherwise indicated,
references to the Company's business and operations with respect to periods
prior to October 7, 1994 refer to the Company's network security business and
operations as part of the Computer Systems Division of Harris Corporation and,
with respect to periods thereafter but prior to June 30, 1996 to the Company's
Trusted Systems Division, which carried on the network security business
described herein. See "Recent Events" below and "Certain Transactions." This
Prospectus 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. Factors that might cause
such a difference include those discussed in Risk Factors, including, but not
limited to, those discussed in "Risk Factors -- Limited Operating History in the
Commercial Network Security Market; Unpredictability of Operating Results,"
" -- Liquidity and Capital Requirements; Dependence on Offering Proceeds;
Possible Need for Additional Financing," "-- Dependence on Principal Product;
Uncertainty of Product Acceptance," " -- Dependence on the Internet and
Intranets," "-- Changes in Technology and Industry Standards; Significant
Research and Development Expenditures," " -- Competition" and "-- Dependence on
Resellers; Need to Establish Collaborative Marketing Arrangements."
THE COMPANY
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 has combined its secure operating system and secure networking
software with its firewall application to produce the CyberGuard Firewall, which
provides a barrier to unauthorized access to a customer's enterprise networks,
including unauthorized access from (i) the Internet, (ii) networks of other
enterprises or (iii) other intranet users within the same enterprise network.
The CyberGuard Firewall's secure operating system and secure networking software
are designed to protect the firewall itself from attack, a distinction not
shared by most commercially available firewall products. The CyberGuard Firewall
is the only commercially available firewall built on integrated secure operating
system and secure networking software components that are rated B1 by the
National Computer Security Center ("NCSC"). For information regarding NCSC
security ratings, see "Business -- The CyberGuard Solution."
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 Company's research and development efforts are
focused in the near term on porting the Company's secure operating system,
secure networking software and firewall application from a Motorola
microprocessor-based Night Hawk platform to the more widely used Intel
PC-compatible computer platform. The Company plans to make the CyberGuard
Firewall available on such platform by December 1996.
The Company has established a broad range of distribution channels through
which to market its products in the United States and internationally, including
more than 30 value added resellers ("VARs"), distributors and manufacturers'
representatives, as well as direct sales representatives. During the six months
ended March 30, 1996, indirect channels accounted for approximately 40% of the
Company's sales of
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CyberGuard Firewalls and related network security products. 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'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% of the
Company's sales in the six months ended March 30, 1996 and 31% of sales in
fiscal year ended September 30, 1995. Of sales to international customers during
such periods, 55% and 49%, respectively, represented sales of the Company's
CyberGuard Firewall and related products. 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 six months ended March 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 26% and 58%,
respectively of overall sales for such products.
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'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. The Company intends to
expand its 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." The Company intends to expand on
its strategic relationships to pursue these selected vertical markets
both with its direct sales force and through indirect channels such as
VARs and systems integrators who already serve such markets.
- Broaden Product Platforms and Compatibility. In addition to "porting"
is secure operating system, networking software and firewall application
to the more widely used Intel-based PC compatible platforms currently
available in a wide range of multiprocessor systems, the Company further
plans to introduce products that are compatible with other network
protocols.
- Introduce Software-only and Other Product Offerings. The Company plans
to introduce a software-only version of the CyberGuard Firewall,
consisting of an integrated operating system, networking software and
base security software by December 1996, and to offer upgrades to be
priced and sold separately. This software-only product will allow the
Company to competitively position its CyberGuard Firewall product against
lower-priced competitors while maintaining or increasing its
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gross margins. In addition, the Company is actively seeking strategic
alliances through which the Company can develop new products or enhance
the features of its existing products.
- 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 and secure databases to provide an
enterprise-wide solution, particularly for enterprises in selected
vertical markets.
- Promote CyberGuard Beyond Network Security. The Company intends to
promote CyberGuard's multi-level secure ("MLS") capabilities for
additional applications and intends to capitalize on its expertise in
network security by providing such tools to specific customers and
targeted markets.
RECENT EVENTS
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. See "Business." The
Real-time Business represented approximately 82% of the assets of the Company as
of March 30, 1996, and accounted for 83%, 89% and 87% of the Company's sales for
the six months ended March 30, 1996 and the fiscal years ended September 30,
1995 and June 30, 1994, respectively. Effective June 30, 1996, the Company has
sold its Real-time Business and issued 683,178 shares of its Common Stock to
Concurrent Computer Corporation ("Concurrent") in exchange for Concurrent common
and preferred stock. See "Certain Transactions." 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." Immediately following the Real-time
Sale, the Company owned approximately 22% of the outstanding common stock of
Concurrent (28% if the preferred stock the Company received were to be converted
into common stock) and Concurrent owned approximately 10% of the outstanding
common stock of the Company (341,589 shares of which are offered hereby).
The Company expects to rely on the sale of Concurrent securities (subject
to the terms of a Share Holding Agreement between the Company and Concurrent
relating to such securities), together with the proceeds of this offering and
any line of credit the Company may obtain to provide liquidity and fund its cash
requirements, which in the past were funded with working capital and cash flows
from the Real-time Business. The Company does not intend to be a long-term
holder of Concurrent securities. On June 27, 1996, the Company sold 2,000,000
shares of Concurrent common stock at an aggregate price of $3,500,000. The value
of Concurrent securities, over which the Company has no control, is expected to
vary from time to time based on conditions affecting the market for such stock.
See "Risk Factors."
The Company's address is 2101 West Cypress Creek Road, Fort Lauderdale,
Florida 33309. The Company's telephone number is (954) 974-1700. The Company's
Internet home page is
www.cyberguardcorp.com.
INVESTMENT IN CONCURRENT
Concurrent securities owned by the Company would have comprised
approximately 65% of the Company's assets on a pro forma basis as of March 30,
1996 (based on a market price for Concurrent Common Stock of $1.25 per share as
of July 10, 1995). Concurrent is engaged in the business of providing and
servicing high-performance real-time computer systems, including (upon
consummation of the Real-time Sale) the Night Hawk. Concurrent's revenues were
$77 million during the nine months ended March 31, 1996 and $140 million, $179
million and $220 million for the fiscal years ended June 30, 1995, 1994 and
1993, respectively. Concurrent reported net losses of $5.7 million, $2.0 million
and $39.8 million and net income of $3.9 million for such periods, respectively.
Concurrent expects that its revenues for the quarter ending June 30, 1996 will
be the lowest quarterly revenues for its fiscal year. In addition, Concurrent
expects to take a material pre-tax charge and to adjust negative goodwill, as
appropriate, in the quarter ended June 30, 1996 to cover costs related to the
Real-time Sale and other business integration costs. As of the date hereof, the
estimated
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aggregate charge for these items is in the range of $29 million to $32 million,
approximately $18 million of which is expected to be paid out in cash in the
next two years. See "Risk Factors."
THE OFFERING
Common Stock Offered by:
The Company.............. 1,803,489 shares
Selling Shareholders..... 596,511 shares
Total................. 2,400,000 shares
Common Stock Outstanding
after
the Offering............. 8,773,983 shares(1)
Use of Proceeds............ The net proceeds of the offering are intended to be
used (i) to expand the Company's research and
development efforts; (ii) to expand the Company's
sales and marketing efforts; (iii) to repay
outstanding short-term borrowings; and (iv) for
working capital and other general corporate
purposes. A portion of the proceeds may be used in
the future for strategic acquisitions; however, the
Company has no current agreements or commitments
for any such acquisition and is not currently
engaged in any negotiations for any such
acquisition.
Nasdaq Symbol(2)........... CYBG
Risk Factors............... Investment in the Shares represents a significant
degree of risk. See "Risk Factors."
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(1) Assumes the Underwriters' over-allotment option is not exercised and
excludes an aggregate of 1,651,342 shares of Common Stock issuable upon
exercise of currently outstanding options and warrants to purchase Common
Stock. See "Shares Eligible for Future Sale."
(2) The Common Stock is included for quotation on the Nasdaq National Market.
THIRD QUARTER REVENUES
The Company's revenues for the fiscal quarter ended June 30, 1996 were
approximately $2.9 million, compared to approximately $431,000 for the fiscal
quarter ended June 30, 1995.
The Company attributes this increase in revenue in part to an increase in
sales through indirect distribution channels and further penetration of targeted
vertical markets. Value added resellers and manufacturer's representatives
accounted for approximately 45% of revenues during the quarter, with
approximately 26% of the Company's revenue attributable to Nissin Electric (a
Japanese distributor) and Electronic Data Systems. International sales during
this quarter accounted for approximately 40% of Company sales.
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SUMMARY FINANCIAL DATA
The following table sets forth (i) summary financial data derived from the
financial statements of the Company's Trusted Systems Division and the Company
appearing elsewhere or incorporated by reference in this Prospectus and (ii)
summary pro forma data derived from the pro forma financial statements of the
Company appearing elsewhere in this Prospectus. The data should be read in
conjunction with such financial statements and any notes thereto and other
financial information herein.
The Company expects to report certain charges in the quarter ended June 30,
1996. The Company estimates that it will incur a loss of approximately $8.5
million on the sale of the Real-time Business (based on an assumed market price
of Concurrent Common Stock of $2.14 per share); approximately $0.4 million in
charges related to certain grants of Common Stock; and approximately $1.4
million in additional expenses related to the Real-time Sale.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------
FISCAL YEAR
SIX MONTHS ENDED ENDED
-------------------------------- JUNE 30,
MARCH 30, MARCH 31, FISCAL YEAR ENDED ---------------
1996 1995 SEPTEMBER 30, 1995(1) 1994 1993
----------------- ------------ --------------------- ------ ------
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STATEMENT OF OPERATIONS DATA(2):
Sales........................... $ 4,395 $ 3,489 $ 4,817 $8,464 $5,974
Cost of sales................... 2,915 2,103 3,140 3,842 2,992
Gross profit.................... 1,480 1,386 1,677 4,622 2,982
Operating expenses.............. 3,908 2,309 4,834 4,493 3,165
Operating income (loss)......... (2,428) (923) (3,157) 129 (183)
Net income (loss)............... $ (2,423) $ (727) $ (3,108) $ 109 $ (41)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED
MARCH 30, 1996 SEPTEMBER 30, 1995
----------------- ------------------
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA(3):
Sales..................................... $ 4,395 $ 4,817
Cost of sales............................. 2,915 3,140
Gross profit.............................. 1,480 1,677
Operating expenses........................ 4,763 5,142
Operating loss............................ (3,283) (3,465)
Net loss.................................. $ (3,347) $ (5,063)
Net loss per common share................. $ (.50) $ (.77)
Weighted average number of common
shares outstanding...................... 6,631 6,595
</TABLE>
<TABLE>
<CAPTION>
MARCH 30, 1996
-----------------------------------------------------
ACTUAL(4) PRO FORMA(5) AS ADJUSTED(6)
----------------- ------------ ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 1,307 $ --
Working capital.................... 14,271 22,311
Total assets....................... 38,552 35,080
Total liabilities.................. 9,412 3,595
Total shareholders' equity......... $ 29,140 $ 31,485
</TABLE>
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(1) In 1994, the Company changed its fiscal year end from June 30 to September
30.
(2) Includes only financial information attributable to the Company's Trusted
Systems Division and the Company's network security business and operations
as part of the Computer Systems Division of Harris Corporation prior to
October 7, 1994 and excludes the Company's corporate assets and liabilities
not specifically identifiable to the division.
(3) Assumes the Real-time Sale had occurred at the beginning of each such
period.
(4) Represents Harris Computer Systems Corporation historical consolidated
financial information.
(5) Assumes the Real-time Sale had occurred as of such date.
(6) Adjusted to give effect to the sale of 1,803,489 shares of Common Stock
offered by the Company hereby, at an assumed offering price of $
per share, after deducting underwriting discounts and estimated offering
expenses of the Company. See "Use of Proceeds," "Capitalization" and
"Underwriting."
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RISK FACTORS
Investment in the Shares offered hereby involves a high degree of risk. In
addition to the other information contained in this Prospectus and incorporated
by reference herein, prospective investors should consider carefully the
following factors in evaluating the Company before purchasing any Shares.
LIMITED OPERATING HISTORY IN THE COMMERCIAL NETWORK SECURITY MARKET;
UNPREDICTABILITY OF OPERATING RESULTS
Although the Company has been developing network security products since
1989, the Company has operated in the commercial network security market only
since October 1994. In view of, among other things, the Company's short
operating experience in, and the rapidly changing and intensely competitive
nature of, the commercial network security market, the uncertainty of acceptance
of the Company's products, the reliance of such products on the Internet, the
mix of distribution channels through which the Company's products are sold, and
the dependence of the Company on Concurrent as the sole supplier of computer
platforms on which the Company's products are currently sold, there is no
assurance that the Company will be profitable in future years. The Company's
results of operations may become increasingly unpredictable from quarter to
quarter as a result of numerous other factors, including market acceptance of
the Company's products, fluctuations in the development and growth of the
commercial network security industry in general, the timing of orders and
shipments of products, the introduction of new products by the Company, or the
introduction or the announcement of competitive products. In addition, a
substantial portion of the Company's sales occurs during the last few weeks of
each quarter; therefore, any delays in orders or shipments are more likely to
result in revenue not being recognized until the following quarter. The
Company's current and planned expense levels are based in part on its
expectations of future sales and, as a result, net income for a given period
could be disproportionately affected by any reduction in sales. There can be no
assurance that the Company will be able to achieve significant sales of products
in the future or that the level of sales in the future will not decrease from
past levels. There can be no assurance that in future quarters the Company's
sales or operating results will meet the expectations of stock market securities
analysts and investors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LIQUIDITY AND CAPITAL REQUIREMENTS; DEPENDENCE ON OFFERING PROCEEDS;
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company's cash requirements have historically been funded from the
Company's working capital and operating cash flow provided by the Company's
Real-time Business. As a result of the sale of the Real-time Business, the
Company expects that funds generated from operations will be insufficient to
satisfy the Company's anticipated cash requirements. The Company has obtained a
revolving line of credit (the "Revolving Line of Credit") with Foothill Capital
Corporation ("Foothill") upon the sooner to occur of this Offering or September
30, 1996 under which the Company may borrow a maximum amount of $5,000,000 at an
interest rate of 2% above the lowest rate announced from time to time by Norwest
Bank Minnesota, National Association. The Revolving Line of Credit is secured by
all the assets of the Company (including 7,000,000 shares of the Concurrent
common and all of the preferred stock to be received by the Company in
connection with the Real-time Sale). The Company may in the future seek another
line of credit that is likely to be secured by all the assets of the Company and
to be subject to financial covenants, restrictions on indebtedness, asset
dispositions, and investments and corporate transactions, all of which may
affect the operating flexibility of the Company and subject the Company's assets
to seizure upon default. While the Company may sell or pledge some of the
Concurrent securities received in connection with the Real-time Sale, the
Company's ability to do so is subject to a number of limitations and conditions
imposed in connection with the Share Holding Agreement or likely to be imposed
by any line of credit. These limitations and conditions may affect the Company's
flexibility in generating cash through sales of Concurrent securities and may
require the Company to seek alternative sources of cash, including borrowings
and equity sales. In addition, the timing of any such sales and the prices at
which the Concurrent securities may be sold may be affected by other factors
beyond the Company's control, such as general market conditions and changes in
the business, operations or prospects of Concurrent. See "Fluctuation in Value
of Concurrent Common Stock and
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Concurrent Preferred Stock Held by the Company" below. In the event that the
Company requires financing from additional outside sources, there can be no
assurance that any additional financing will be available to the Company on
acceptable terms, or at all. Any additional financing may involve dilution of
the interests of the Company's then existing shareholders. If adequate funds are
not available, the Company may be required to curtail certain activities,
including product development, marketing and sales activities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions."
FLUCTUATION IN VALUE OF CONCURRENT COMMON STOCK AND CONCURRENT PREFERRED STOCK
HELD BY THE COMPANY
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 (the "Concurrent Common Stock
Consideration") of common stock of Concurrent, par value $.01 per share
("Concurrent Common Stock"); (ii) 1,000,000 newly issued shares of convertible
exchangeable preferred stock of Concurrent ("Concurrent Preferred Stock") with a
9% cumulative annual dividend payable quarterly in arrears and a liquidation
preference of $8.20 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 "Assumed Liabilities"). See
"Certain Transactions." Concurrent Common Stock Consideration, represented
approximately 22% of the Concurrent Common Stock outstanding as of the Real-time
Sale (28% if the Concurrent Preferred Stock were to be converted into Concurrent
Common Stock). The Concurrent Common Stock and Concurrent Preferred Stock owned
by the Company following the recent sale of 2,000,000 shares of Concurrent
Common Stock would have constituted in the aggregate approximately 65% of the
Company's assets on a pro forma basis as of March 30, 1996 (based on a market
price for Concurrent Common Stock of $1.25 per share as of July 10, 1996). The
market price of the Concurrent Common Stock will vary from time to time as the
result of 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. In addition, the trading price of the
Concurrent Common Stock may be adversely affected by future issuances of
Concurrent Common Stock, including up to approximately 6,400,000 shares
available as of the date hereof for future grants or awards pursuant to the
Concurrent 1991 Restated Stock Option Plan (the "Concurrent Stock Plan"). In
connection with the Real-time Sale, approximately 4,300,000 shares of Concurrent
Common Stock became issuable and freely tradeable, including options to purchase
approximately 2,600,000 shares (being all options then outstanding under the
Concurrent Stock Plan) and approximately 1,700,000 additional shares became
issuable as severance or other compensation to, among others, Concurrent's
employees, contractors and financial advisors pursuant to outstanding warrants
to purchase Concurrent Common Stock, or pursuant to certain contracts entered
into by Concurrent in connection with the Real-time Sale. The market price of
Concurrent Common Stock may also be adversely affected by sales of such stock by
the Company. Additionally, any sales of large amounts of Concurrent Common Stock
to fund the Company's significant liquidity requirements would likely be at a
discount to its trading value. See "Liquidity and Capital Requirements;
Dependence on Offering Proceeds; Possible Need for Additional Financing" above,
"Certain Transactions" and "Business -- Interest in Concurrent."
The Company's assets also include Concurrent Preferred Stock. There is no
public market for Concurrent Preferred Stock and it is not anticipated that a
trading market will ever develop. Concurrent has agreed to register the
Concurrent Common Stock issuable upon conversion of the Concurrent Preferred
Stock but not the Concurrent Preferred Stock. See "Certain Transactions -- Share
Holding Agreement." Absent such registration, the transferability of the
Concurrent Preferred Stock is subject to restrictions under applicable federal
and state securities laws. Therefore, the Company may be unable to sell the
Concurrent Preferred Stock for an indefinite period of time. 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 the factors that influence the price
of the Concurrent Common Stock.
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INABILITY TO INFLUENCE CONCURRENT OPERATIONS; DECLINING TRENDS IN CONCURRENT
RESULTS
As a result of the Real-time Sale, the Company received approximately 22%
of the Concurrent Common Stock issued and outstanding as of the date thereof
(28% if the Concurrent Preferred Stock were to be converted into Concurrent
Common Stock), and the Company holds as of the date hereof approximately 19% of
such stock (24% if the Concurrent Preferred Stock were to be converted into
Concurrent Common Stock). Despite the Company's ownership of the Concurrent
Common Stock Consideration and the Concurrent Preferred Stock and its right to
designate up to three of Concurrent's nine members of its Board of Directors,
the Company will not be able to control Concurrent's strategic direction or
influence the day-to-day management of Concurrent's business or the future
results of Concurrent's operations.
Concurrent's revenues were $220 million, $179 million, $140 million and $77
million for the fiscal years ended June 30, 1993, 1994 and 1995 and the nine
months ended March 31, 1996, respectively. The general decline in Concurrent's
revenues is largely the result of a decline in sales of proprietary real-time
computer systems without a corresponding increase in the sales of open systems.
Concurrent reported net income of $3.9 million and net losses of $39.8 million,
$2.0 million and $5.7 million for the same periods, respectively. Concurrent
expects that revenues for the quarter ending June 30, 1996 will be the lowest
quarterly revenues for the fiscal year, and currently expects to take charges
related to the Real-time Sale in such quarter in an aggregate amount in the
range of $29 million to $32 million. There can be no assurance that Concurrent
will be able to achieve profitability, or if achieved, that such profitability
can be maintained, or that Concurrent will not take additional charges or
write-downs of inventories or other assets in the foreseeable future.
Although the purchase by Concurrent of the Real-time Business and the
planned integration and consolidation of the combined development and
manufacturing operations could improve Concurrent's liquidity by permitting
additional borrowing availability, there can be no assurance that the
integration of the Real-time Business into Concurrent's operations will be
successful or that cash flow from the combined real-time operations will be
sufficient to fund Concurrent's transaction costs related to the Real-time Sale,
its anticipated restructuring costs and its ongoing working capital
requirements.
Many factors including, but not limited to, a continued deterioration of
Concurrent's business, operations or prospects and the inability of Concurrent
to successfully integrate the Real-time Business to achieve its planned
operational improvements may have a negative effect on the price of Concurrent
Common Stock and may therefore have a negative effect on the Company's Common
Stock.
DEPENDENCE ON PRINCIPAL PRODUCT; UNCERTAINTY OF PRODUCT ACCEPTANCE
Sales of the Company's CyberGuard Firewall in the commercial network
security market account for a substantial portion of the Company's sales, and
the Company expects the portion of its sales attributable to the CyberGuard
Firewall to increase. As a result, any factor adversely affecting sales of this
product could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's future success
depends on the continued adoption of the Company's CyberGuard Firewall and other
network security products by users. The market acceptance of the Company's
products is difficult to estimate due in large measure to the recent emergence
of the market for network security products and the effect of a number of new
products, applications or product enhancements that have been introduced into
the market. Competitive products are currently available that have comparable or
more favorable price characteristics and that may be perceived to have
comparable performance characteristics. There can be no assurance that the
Company's products, particularly its CyberGuard Firewall, will continue to
achieve acceptance in the network security market, and the failure of the
Company's products to achieve such continued market acceptance could have a
material adverse effect on the Company's business, operating results and
financial condition. Moreover, the Company anticipates that its existing and new
competitors will introduce additional competitive products, particularly if
demand for enterprise-wide network security products increases, which could
reduce future market acceptance of the Company's products.
As the network security industry continues to evolve, the Company's future
financial performance will depend in part on the successful development,
introduction and market acceptance of new products, applications and product
enhancements. There can be no assurance that the Company will be able to develop
new products or that such products will satisfy evolving consumer preferences
and achieve market acceptance
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or, if market acceptance is achieved, that the Company will be able to maintain
such acceptance for a significant period of time. Any significant delay in the
introduction of the Company's future products could result in loss of market
share and could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH NETWORK SECURITY MARKET
The market for the Company's products is only beginning to emerge. The
rapid development of the Internet and enterprise-wide computing has increased
the vulnerability of proprietary information to access by unauthorized persons
and has in recent years increased demand for computer and network security
products. However, there is no assurance that demand for network security
products will continue at current levels or increase. Moreover, because the
market for network security products is only beginning to develop, it is
difficult to assess the size of this market and the product features and prices,
the optimal distribution strategy and the competitive environment that will
develop in this market. Declines in demand for network security products,
whether as a result of technological change, the public's perception of the need
for network security products, developments in the hardware and software
environments in which these products operate, general economic conditions or
other factors, could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The market for network security products and services is intensely
competitive, rapidly evolving and characterized by frequent technological
change. The Company expects competition to persist and intensify in the future.
The Company's principal current competitors include Advanced Network & Services
Inc. ("ANS", which is owned by America Online, Inc.), Check Point Software
Technologies Ltd. ("Check Point"), Raptor Systems, Inc. ("Raptor"), Secure
Computing Corporation ("Secure Computing") and Trusted Information Systems, Inc.
("TIS"). In addition, companies such as Digital Equipment Corporation ("DEC"),
International Business Machines Corporation ("IBM"), and Sun Microsystems, Inc.
("Sun") sell products with similar features and functions that could be
considered competitors of the Company. Several other companies offering other
network and other computer-related products, including Microsoft Corporation
("Microsoft"), are expected to enter the commercial network security market in
the near future. Many of the Company's current and potential competitors have
greater name recognition, larger installed customer bases and significantly
greater financial, technical or marketing resources than the Company. As a
result, they may be able to adapt more quickly to new or emerging technologies
or changes in customer requirements or to devote greater resources to the
promotion and sale of their products than the Company. In addition, 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 announced the
signing of a definitive agreement for the acquisition of Border Network
Technologies, Inc. ("Border"). Competition could increase if new companies enter
the market or if existing competitors expand their product lines. An increase in
competition could result in price reductions and loss of market share for the
Company. Such competition and any resulting reduction in pricing and gross
margins could have a material adverse effect on the Company's business,
financial condition and results of operations.
There can be no assurance that the Company's competitors will not develop
network security products using approaches substantially similar to or different
from the Company's that may be more effective than the Company's current or
future products or that the Company's technologies and products would not be
rendered obsolete by such developments. 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 process. Competitors may also employ litigation or the threat
of litigation relating to patents and other intellectual property to gain a
competitive advantage. See "Business -- Competition."
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POTENTIAL ACQUISITIONS
In the normal course of its business, the Company evaluates potential
acquisitions of businesses, products and technologies that could complement or
expand the Company's network security business. To date, the Company has not
made any acquisitions. In the event the Company were to identify an appropriate
acquisition candidate, there is no assurance that the Company would be able to
successfully negotiate the terms of any such acquisition, finance such
acquisition and integrate such acquired business, products or technologies into
the Company's existing business and operations. Furthermore, the integration of
an acquired business could cause a diversion of management time and resources.
There can be no assurance that a given acquisition, when consummated, would not
materially adversely affect the Company's business, financial condition and
results of operations. If the Company proceeds with one or more significant
acquisitions in which the consideration consists of cash, a substantial portion
of the Company's available cash (including proceeds of this offering) could be
used to consummate the acquisitions. If the Company consummates one or more
significant acquisitions in which the consideration consists of stock, or is
financed with the proceeds of the issuance of stock, stockholders of the Company
could suffer a significant dilution of their interests in the Company. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON THE INTERNET AND INTRANETS
The Company's products are designed primarily for computer network
environments, such as the Internet and certain enterprise-wide networks that are
based upon the Transmission Control Protocol/Internet Protocol ("TCP/IP")
network protocol. Accordingly, sales of the Company's current products will
depend in large part upon a robust industry and infrastructure for providing
Internet access and carrying Internet traffic. Because global commerce and the
exchange of information on the Internet and other similar open wide area
networks are new and evolving, it is difficult to predict with any assurance
whether the complementary products or other factors necessary to make the
Internet a viable commercial marketplace will be developed. The failure of the
Internet to become a viable commercial marketplace could have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, the Company plans to continue to develop products for use by
customers with TCP/IP-based enterprise-wide intranet applications. The failure
of the TCP/IP protocol to gain wide acceptance as an enterprise-wide network
protocol could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Industry
Background."
RECENT TRANSITION TO THE COMMERCIAL MARKET
The Company has targeted the world-wide commercial market as its principal
focus for sales of network security products. The Company believes it has
accomplished the transition from its historically focused government products
market to the commercial network security products market with sales to
commercial customers reaching 74% of sales during the six-month period ended
March 30, 1996, up from 42% for the fiscal year ended September 30, 1995. As the
Company's commercial sales have increased relative to its government-related
sales, gross profit margins have declined. Since the transition to the
commercial market has occurred recently, there can be no assurance that gross
margins can be sustained at current levels given the different competitive
nature of the commercial market as compared to the government market.
Furthermore, the Company, until recently, has not relied on the commercial
market as the primary source of its sales and there can be no assurance that the
Company will be successful competing in the commercial market against
competitors that have more experience in such market.
The Company expects to continue to derive a significant portion of its
near-term sales from sales to the government market. Government business is, in
general, subject to additional special risks, including delays in funding, the
need to comply with diverse rules and regulations, termination of contracts at
the convenience of the government, changes in governmental policies and
budgetary restraints. In addition, even if funds are appropriated or remain
available, delays in payment may occur that could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Markets and Customers."
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CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS; SIGNIFICANT RESEARCH AND
DEVELOPMENT EXPENDITURES
The network security industry is characterized by rapid changes, including
evolving industry standards, frequent new product introductions, continuing
advances in technology and changes in customer requirements and preferences. The
introduction of new technologies could render the Company's existing products
obsolete or unmarketable. Advances in techniques employed by individuals and
entities seeking to gain unauthorized access to networks could expose the
Company's existing products to new and unexpected attacks and require
accelerated development of new products. There can be no assurance that the
Company will be able to counter challenges to its current products, that the
Company's future product offerings will keep pace with technological changes
implemented by competitors or persons seeking to breach network security, that
the Company will be able to establish and maintain any strategic technical
alliances necessary to achieve a competitive advantage or that the Company will
be successful in developing and marketing products for any future technology.
The development cycle for the Company's new products may be significantly longer
than the Company's historical product development cycle or significantly longer
than anticipated, resulting in higher development costs or a loss in market
share. Failure to develop and introduce new products and product enhancements on
a timely basis could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, the costs of developing
new products, and related sales and marketing expenses, are expected to be
significant before such products are in a position to deliver significant sales
or cash flow to the Company. There can be no assurance that new product
introduction will be executed without materially and adversely affecting the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- The CyberGuard Solution" and "-- Product
Development."
DEPENDENCE ON RESELLERS; NEED TO ESTABLISH COLLABORATIVE MARKETING ARRANGEMENTS
In marketing its products, the Company depends substantially, and expects
to increase its dependence, upon the performance of indirect sales channels,
including systems integrators and VARs, over which the Company does not have
complete authority. The Company's relationships with most of its resellers have
been established within the last year, and the Company is unable to predict with
accuracy the extent to which its resellers will be successful in marketing and
selling the Company's products. Moreover, the Company's future success will
depend in part on its ability to establish collaborative marketing relationships
in other indirect sales channels. There can be no assurance that the Company's
existing or contemplated collaborative relationships will be commercially
successful, that the Company will be able to negotiate additional collaborative
relationships, that such additional collaborations will be available to the
Company on acceptable terms or that any such relationships, if established, will
be commercially successful. In addition, there can be no assurance that parties
with whom the Company has established collaborative relationships will not
pursue alternative technologies or develop alternative products in addition to
or in lieu of the Company's products either on their own or with others,
including the Company's competitors. The loss of any of the Company's major
resellers, either to competitive products offered by other companies or to
products developed internally by the resellers, could have a material adverse
effect on the Company's business, financial condition or results of operations.
If the Company is successful in expanding its network of indirect sales
channels, the Company will need to add substantially to its pre-sales, field
support, and marketing staffs in order to support the sales activities of an
expanded distribution network. There can be no assurance that such internal
expansion will be successfully completed, that the cost of such expansion will
not exceed the sales generated thereby, or that the Company's sales and
marketing organization will successfully compete against the more extensive and
well-funded sales and marketing operations of many of the Company's current and
future competitors. See "Business -- Sales and Marketing."
DEPENDENCE ON SOLE-SOURCE SUPPLIERS
The Company's products were developed to function in an open architecture,
real-time environment, based upon UNIX operating system technology. The Company
currently uses only Night Hawk computers, which have certain essential
multiprocessing capabilities, on which to install its secure operating system,
secure networking software and CyberGuard Firewall software applications for
resale. See "Business --
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<PAGE> 15
Products" and "Certain Transactions." The Company also has a relationship with
the Santa Cruz Operation, Inc. ("SCO"), which provides the core UNIX operating
system technology into which the Company's computer security enhancements are
integrated.
Concurrent is the only source of supply for Night Hawk computers. The
unavailability of, or any delay in receiving, Night Hawk computers could result
in delays in shipping the Company's products and in loss of sales during such
period. Pursuant to a one-year Night Hawk Supplier Agreement dated June 27,
1996, the Company may buy Night Hawk computers at the price and subject to the
delivery terms quoted by Concurrent for Night Hawks as of the day that the
Company submits a purchase order. A substantial increase in the price of Night
Hawks or a change in the delivery terms thereof would result in an increase in
the price of the Company's products, which could result in decreased profit
margins or loss of sales. The Company is actively seeking alternative platforms
on which to install its products; however, there is no assurance that the
Company will be successful in its attempts to market its products on platforms
other than the Night Hawk or that such products will be successful in the
marketplace. There can further be no assurance that such alternative platforms
will continue to be manufactured or that the price and delivery terms of such
platforms will be favorable to the Company. Should the Company be successful in
marketing its products on platforms other than the Night Hawk, the Company will
remain obliged to continue to support the Night Hawk to satisfy existing
customer expectations for the availability and support of the Night Hawk
platform. This support requirement may place significant burdens on the
Company's resources.
SCO's UNIX operating system technology has been purchased by the Company as
the basis for the computer security enhancements for the Company's products. The
Company depends upon SCO to develop its UNIX operating system technology and to
provide specific enhancements and features necessary to ensure that the UNIX
operating system remains competitive in the general computer marketplace. In
particular, the Company depends upon SCO to ensure that support is provided for
new and emerging hardware technologies (e.g., Intel processor chipsets, new
communication technologies) and new and emerging software features (e.g.,
standards compliance, DOS/Windows applications support). Should SCO discontinue
development efforts related to the UNIX operating system technology, or should
such technology no longer be offered for sale by SCO to the Company, the Company
would be required to initiate internally funded development to support new
hardware and/or software features or choose an alternate UNIX operating system
supplier. Any such internally funded development would likely preclude the
Company from delivering a competitive product offering into the marketplace in a
timely manner and would likely result in substantial development expenses.
Likewise, choosing an alternate UNIX operating system supplier would require the
Company to transfer a significant number of computer security enhancements into
the alternate UNIX operating system which would place a substantial strain on
the Company's product development resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISK OF ERRORS OR FAILURES
Products as complex as those offered by the Company may contain undetected
errors when first introduced or when new versions are released. The Company has
in the past discovered software errors in certain of its product offerings after
their introduction and has experienced delays in revenue recognition during the
period required to correct these errors. There can be no assurance that errors
will not be found in new products or releases after commencement of commercial
shipments by the Company, particularly as the Company undertakes to develop
network security products for platforms other than the Night Hawk that may be
characterized by a wide variety of non-standard configurations that make
pre-release testing for programming or compatibility errors very difficult and
time-consuming. A computer break-in or other disruption experienced by one of
the Company's customers, if caused by errors or failures in the Company's
products, could result in product recalls and liability under the Company's
warranties or otherwise. A well publicized actual or perceived breach of network
security at a customer site could adversely affect the market's perception of
the Company or its products. Alleviating such problems could require significant
expenditures of capital and resources by the Company, could cause interruptions,
delays or cessation of service to the Company's customers and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company attempts to limit its liability to customers,
including liability arising
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<PAGE> 16
from a failure of the security features contained in the Company's products,
through contractual limitations of warranties and remedies. However, some courts
have held similar contractual limitations of liability, or the "shrinkwrap
licenses" in which they are often embodied, to be unenforceable. Accordingly,
there can be no assurance that such limitations will be enforced. Moreover, to
the extent such limitations are enforced as to licensees, there can be no
assurance that they will be enforceable as to other users of the Company's
products or as against parties who have an interest in data stored on networks
that might be compromised by a failure of the Company's product. While the
Company currently has product liability insurance to protect against these
risks, there can be no assurance that such insurance will cover all losses from
failures of the Company's products or will continue to be available to the
Company on commercially reasonable terms or at all.
ANTICIPATED INCREASES IN CERTAIN EXPENSES TO PROVIDE NEW INFRASTRUCTURE
Many of the Company's sales and administrative personnel and facilities
were transferred to Concurrent in connection with the Real-time Sale. In
connection with the Real-time Sale, the Company entered into a Shared Services
Agreement with Concurrent that expires on June 27, 1997 pursuant to which
Concurrent provides certain administrative and personnel-related services for
the Company. The Company believes that Concurrent provides these services costs
equal to or below that which the Company would incur if the Company were to
provide these services for itself. Upon expiration of the Shared Services
Agreement, the Company will be required to acquire the necessary skills, staff
and systems to provide these services for itself. Acquiring such skills, staff
and systems could substantially increase the Company's operating expenses. There
can be no assurance that the Company will be able to make the transition to
providing for itself the services covered by the Shared Services Agreement, and
to continue to provide such services in the future, without incurring costs that
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the Company has agreed to lease approximately 10,000 square
feet of office and development space from Concurrent at a price that the Company
believes is below market rates for substantially equivalent space. The Company's
lease with Concurrent expires in June 1997, subject to earlier termination under
certain circumstances. Following the expiration or termination of the lease, the
Company will be required to lease substantially equivalent space at market
rates. There can be no assurance that the Company will be able to offset such
additional costs with corresponding increases in revenues or without having a
material adverse effect on the Company's business, financial condition and
results of operations.
NEW MANAGEMENT TEAM
In April 1996, in anticipation of the Real-time Sale and effective upon the
consummation thereof, the Company engaged a new Chief Executive Officer,
appointed a new Chief Financial Officer from a management position within the
Company's Trusted Systems Division sales force and appointed other executive
officers from positions inside the Company's Trusted Systems Division. These
individuals had not previously worked together as senior managers and are in the
process of integrating as a management team. With the exception of the Company's
Chief Executive Officer and the Vice President of International Operations, none
of these senior managers has previously served as an executive officer of a
publicly held corporation.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends in large part on its ability to attract and
retain highly qualified engineering, management and marketing personnel.
Although the Company maintains key man life insurance on the Company's Chief
Executive Officer, the loss of the services of the Company's Chief Executive
Officer or other key employees of the Company could have a material adverse
effect on the Company. Competition for such personnel is intense and there can
be no assurance that the Company will be able to attract and retain all
personnel necessary for the development and operation of its business. The loss
of the services of key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Employees" and "Management."
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LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; RISK OF
LITIGATION
The Company relies upon license agreements with customers, trademark,
copyright and trade secret laws, and employee conflict of interest and
third-party non-disclosure agreements and other methods to protect its
proprietary rights. The Company currently does not hold any patents and has no
pending patent applications to cover any aspects of its technology. The Company
intends to file patent applications in relevant jurisdictions to protect aspects
of its technology; however, there can be no assurance that any future patent
applications will be granted or that any future patents will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
competitive advantages to the Company. There can also be no assurance that the
Company's conflict of interest or non-disclosure agreements will provide
meaningful protection of the Company's proprietary information. Further, the
Company may be subject to additional risk as it enters into transactions in
countries where intellectual property laws are not well developed or are poorly
enforced. The Company's inability to maintain a competitive advantage based on
proprietary rights could have a material adverse effect on the Company's
business, financial condition and results of operations.
As the number of network security products in the industry increases and
the functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. There can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by the Company or that the Company's
technology will not infringe upon patents or other rights owned by others.
Likewise, there can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current or
future products. Although the Company is not currently the subject of any
intellectual property litigation, there has been substantial litigation
regarding patent, copyright, trademark and other intellectual property rights
involving computer software companies. Any claims or litigation, with or without
merit, could be costly and could result in a diversion of management's
attention, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in such
claims or litigation could also have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Patents and Proprietary Technology."
INTERNATIONAL SALES RISKS
For the six months ended March 30, 1996 and the fiscal years ended
September 30, 1995 and June 30, 1994, 46%, 31% and 64%, respectively, of the
Company's total trusted sales were attributable to sales outside the United
States. The Company expects to continue to expand its marketing efforts abroad.
International sales are subject to certain risks, such as currency fluctuations,
that could make the Company's products less competitive in foreign markets and
contribute to fluctuations in the Company's operating results. Other risks
affecting international sales include political instability, difficulties in
staffing and managing international operations, potential insolvency of
international resellers, longer receivable collection periods and difficulty in
collecting accounts receivable. In addition, the laws of certain countries do
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. There can be no assurance that these
factors would not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales and
Marketing."
EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS
The Company's international sales and operations may be subject to risks
such as the imposition of governmental controls, export license requirements,
restrictions on the export of critical technology, trade restrictions and
changes in tariffs. In particular, because of governmental controls on the
exportation of encryption technology, the Company may be unable to export its
most robust network security products. As a result, foreign competitors that
face less stringent controls on their products may be able to compete more
effectively than the Company in the global network security market. There can be
no assurance that these factors would not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Regulation."
16
<PAGE> 18
INADVERTENT INVESTMENT COMPANY
The Concurrent Common Stock and the Concurrent Preferred Stock owned by the
Company would have comprised approximately 65% of the Company's assets on a pro
forma basis as of March 30, 1996 (based on a market price for Concurrent Common
Stock of $1.25 per share as of July 10, 1996). As a result, the Company may be
deemed to be an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"), which defines an investment
company as one engaged in the business of investing or holding securities and
owning "investment securities" having a value exceeding 40% of the value of such
company's total assets. Generally, an investment company is required to register
as such with the Securities and Exchange Commission, subjecting itself to
extensive regulation, compliance with which would have a material adverse effect
on the Company's business, financial condition and results of operations.
A company is deemed not to be an investment company for one year if it has
a bona fide intent to be engaged in a business other than investing, holding or
trading in securities. The Company does not intend to remain a long-term holder
of the remaining Concurrent securities or of any investment securities having a
value exceeding 40% of the value of its total assets when the one-year exemption
period expires in June 1997. Although on June 27, 1996, the Company sold
2,000,000 shares of Concurrent Common Stock for an aggregate purchase price of
$3,500,000, there is no assurance that the Company will be successful in its
efforts to reduce its holdings of Concurrent securities, or that, if successful,
it can do so at a favorable price. The Company's ability to sell or pledge the
Concurrent Common Stock or the Concurrent Preferred Stock is subject to the
limitations imposed in the Share Holding Agreement and the Revolving Line of
Credit. In addition, the Company's ability to sell such securities may be
affected by factors beyond the Company's control, such as general market
conditions and changes in the business, operations or prospects of Concurrent.
See "Fluctuation in Value of Concurrent Common Stock and Concurrent Preferred
Stock Held by the Company" above and "Certain Transactions -- Share Holding
Agreement" and "-- Revolving Line of Credit."
SHARES ELIGIBLE FOR FUTURE SALE
No assurance can be given as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares of Common Stock for future
sales, will have on the market price of the Common Stock from time to time.
Future sales of shares of Common Stock (including shares issued upon exercise of
stock options), or the possibility that such sales could occur, could adversely
affect the prevailing market price of the Common Stock and could also impair the
Company's ability to raise capital through an offering of its equity securities.
Immediately following completion of the offering, there will be 8,773,983 shares
of Common Stock outstanding, all of which (including the 2,400,000 shares sold
in this offering) will be immediately tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"). Of these, 341,589
shares of Common Stock will be subject to the Share Holding Agreement between
the Company and Concurrent pursuant to which such shares may be sold by
Concurrent subject to certain restrictions on transfer (including when the
Company is engaged in or is preparing to engage in a public offering of its
Common Stock) and on the volume of sales by Concurrent of the Company's Common
Stock. See "Certain Transactions." An additional 1,651,342 shares of Common
Stock are issuable upon exercise of currently outstanding options (a majority of
which are in-the-money and approximately 38% of which is currently exercisable),
and 100,000 shares are issuable upon the exercise of outstanding warrants to
purchase Common Stock. A total of 545,106 shares of Common Stock or options
thereon are available for future issuance under the Company's Stock Incentive
Plan. The Company, together with each of its executive officers and directors
and certain of the Selling Shareholders, owning upon the consummation of this
offering an aggregate of 1,196,324 shares of Common Stock or options to purchase
Common Stock, have entered into a "lock up" with the Underwriters pursuant to
which they have agreed that they will not, without the prior consent of the
Underwriters, sell, contract to sell or otherwise dispose of, directly or
indirectly, any Common Stock or securities convertible into Common Stock until
180 days after the date of this Prospectus. Certain other Selling Shareholders,
owning an aggregate of 512,584 shares of Common Stock or options to purchase
Common Stock have agreed to identical lock up provisions with respect to 383,753
such shares or options to purchase shares. Shares of Common Stock that are not
subject to the lock up provisions are, and all such
17
<PAGE> 19
shares once the lock provisions expire will be, freely tradable subject to
compliance with Rule 144 under the Securities Act with respect to shares held by
affiliates. See "Shares Eligible for Future Sale" and "Underwriting."
ABSENCE OF DIVIDENDS
The Company does not intend to pay any cash dividends for the foreseeable
future. The Company intends to follow a policy of retaining earnings, if any, to
finance the development and expansion of its business. See "Dividend Policy." In
addition, pursuant to the Revolving Line of Credit, the Company has agreed not
to declare or pay dividends on its securities (other than dividends in capital
stock) without the prior written approval of Foothill. See "Certain
Transactions -- Revolving Line of Credit."
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and By-laws contain certain
anti-takeover provisions that could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. These provisions
include a staggered Board of Directors, certain super-majority voting
requirements with respect to removal of directors and amendments of the Articles
of Incorporation and By-laws, requirements concerning the filling of board
vacancies, adoption of Florida's Control Share Acquisition Act, elimination of
shareholder action by written consent, creation of a class of "blank check"
preferred stock and an increase in the percentage of shareholder votes required
to call a special meeting of shareholders. The Company also has adopted and
implemented a Shareholder Rights Agreement that will expire by its terms on
September 20, 2004 pursuant to which each share of Common Stock has attached to
it a right to purchase a share of preferred stock under certain circumstances.
These provisions and agreements are intended to encourage a person interested in
acquiring the Company to negotiate with, and to obtain the approval of, the
Board of Directors in connection with such a transaction. However, certain of
these provisions and agreements may discourage a future acquisition of the
Company, including an acquisition in which shareholders might otherwise receive
a premium for their shares. As a result, shareholders who might desire to
participate in such a transaction may not have the opportunity to do so. See
"Description of Capital Stock."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to be received by the Company from the offering are
estimated to be $ , or $ if the Underwriters'
over-allotment option is exercised in full. The Company's intent is to use these
proceeds (i) to expand the Company's research and development efforts to enhance
the capabilities and performance of its CyberGuard Firewall product and to
expand the Company's overall product offering; (ii) to expand the Company's
sales and marketing staff to increase its indirect sales efforts and provide
infrastructure and support for an expected increasing number of VARs; (iii) to
repay any outstanding balance under the Revolving Line of Credit, and (iv) for
working capital and other general corporate purposes.
Amounts expended for these purposes will vary significantly depending on a
number of factors including the annual cash generated from the Company's
operations, the Company's ability to establish a competitive position within
selected vertical markets, the progress of the Company's efforts to rapidly
introduce innovative products and the ability of the Company to sustain its
rapid growth rate.
Consistent with the Company's efforts to expand the breadth of its product
offering and its marketing efforts in selected vertical markets, the Company may
make one or more strategic business acquisitions. The goal of such acquisitions
would be to acquire complementary technologies or products to further enhance
the Company's CyberGuard Firewall product or to provide a larger, more effective
distribution network for the Company's products. The Company has no current
agreements or commitments for any such acquisition and is not currently engaged
in any negotiations with respect to any such acquisition.
Pending application of the net proceeds of the offering to the uses
described above, the Company intends to invest such proceeds in short-term,
investment grade, interest-bearing marketable instruments.
The Company will not receive any of the proceeds from the sale of Shares
being offered by the Selling Shareholders.
DIVIDEND POLICY
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. In addition,
pursuant to the Revolving Line of Credit, the Company has agreed not to declare
or pay dividends on its securities (other than dividends in capital stock)
without the prior written consent of Foothill. See "Certain
Transactions -- Revolving Line of Credit."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded over-the-counter and is included for
quotation on the Nasdaq National Market under the symbol CYBG. The following
table sets forth the range of high and low bid prices for the Common Stock for
the periods indicated, as reported by the Nasdaq National Market.
<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 April 1, 1996 to June 30, 1996................................... 23 1/2 13 3/4
Period from July 1 to July 12, 1996............................................ 16 1/2 10 3/4
</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.
On July 12, 1996, the last reported sale price of the Common Stock on the
Nasdaq National Market was $11 1/2 per share. There were approximately 7,544
holders of record of Common Stock as of July 11, 1996.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization and pro forma
capitalization of the Company at March 30, 1996, and the capitalization as of
such date as adjusted to give effect to the sale of 1,803,489 shares of Common
Stock offered by the Company hereby at the offering price of $ per share.
The information set forth in the table below should be read in conjunction with
the Consolidated Financial Statements of the Company and the notes thereto
incorporated herein by reference and with the Pro Forma Condensed Consolidated
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 30, 1996
-------------------------------------
PRO AS
ACTUAL FORMA(1) ADJUSTED(2)
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Shareholders' equity:
Preferred Stock, $.01 par value; 5,000,000 authorized;
none issued or outstanding........................... -- --
Common Stock, $.01 par value; 25,000,000 shares
authorized; 5,997,475 shares outstanding at March 30,
1996; 6,680,653 shares outstanding on a pro forma
basis; 8,773,983 shares outstanding upon completion
of this offering(3).................................. $ 60 $ 67
Additional paid-in-capital................................ 44,144 55,601
Accumulated deficit....................................... (14,363) (24,183)
Cumulative translation adjustment......................... (701) --
-------- --------
Total shareholders' equity........................... 29,140 31,485
-------- --------
Total capitalization................................. $ 29,140 $ 31,485
======== ========
</TABLE>
- ---------------
(1) Assumes that the Real-time Sale had occurred as of such date.
(2) Adjusted to give effect to the sale of 1,803,489 shares of Common Stock
offered by the Company hereby, at the offering price of $ per share,
after deducting underwriting discounts and estimated offering expenses of
the Company. See "Underwriting."
(3) Assumes the Underwriters' over-allotment option is not exercised and
excludes an aggregate of 1,751,342 shares of Common Stock issuable upon
exercise of currently outstanding options or warrants to purchase Common
Stock. See "Management," "Underwriting," "Principal and Selling
Shareholders," and "Recent Events."
20
<PAGE> 22
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements have been prepared
to give effect to the Real-time Sale. See "Certain Transactions." These
financial statements do not purport to represent what the results of operations
or financial position actually would have been had the Real-time Sale occurred
on the dates when they are reflected to have occurred in the pro forma financial
statements, or to project the results of operations or financial condition for
any future period or date.
The pro forma condensed consolidated statements of operations for the year
ended September 30, 1995 and for the six months ended March 30, 1996 have been
prepared assuming the Real-time Sale occurred as of the beginning of each of the
respective periods. The pro forma condensed consolidated statement of operations
for the year ended September 30, 1995 includes the Company's equity interest in
the losses of Concurrent for the year ended June 30, 1995. The pro forma
condensed consolidated statement of operations for the six months ended March
30, 1996 includes the Company's equity interest in the losses of Concurrent for
the six months ended March 31, 1996. The pro forma condensed consolidated
balance sheet at March 30, 1996 has been prepared assuming the Real-time Sale
had occurred as of that date.
The pro forma condensed financial statements should be read in conjunction
with (i) the consolidated financial statements of the Company incorporated by
reference in this Prospectus and (ii) the financial statements related to the
Company's Trusted Systems Division appearing elsewhere in this Prospectus. The
financial statements related to the Company's Trusted Systems Division exclude
corporate assets and liabilities not specifically identifiable to the division.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
21
<PAGE> 23
HARRIS COMPUTER SYSTEMS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 30, 1996
<TABLE>
<CAPTION>
HARRIS LESS OTHER
HISTORICAL REAL-TIME PRO FORMA
CONSOLIDATED BUSINESS(A) ADJUSTMENTS PRO FORMA
------------ ----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales
Equipment......................................... $ 18,942 $ (14,765) $ 4,177
Maintenance....................................... 6,622 (6,404) 218
---------- --------- --------
Total sales......................................... 25,564 (21,169) 4,395
Cost of sales
Equipment......................................... 10,051 (7,228) 2,823
Maintenance....................................... 3,279 (3,187) 92
---------- --------- --------
Total cost of sales................................. 13,330 (10,415) 2,915
---------- --------- --------
Gross profit........................................ 12,234 (10,754) 1,480
Operating expenses
Research and development.......................... 3,580 (3,003) 577
Selling, general and administrative expenses...... 11,266 (8,054) 154(b) 3,366
Transaction expenses.............................. 820 -- 820
---------- --------- -------- --------
Total operating expenses............................ 15,666 (11,057) 154 4,763
---------- --------- -------- --------
Operating loss...................................... (3,432) 303 (154) (3,283)
Equity interest in losses of Concurrent............. (141)(c) (141)
Dividends on Concurrent Preferred Stock............. 51(d) 51
Interest income..................................... 155 (129) 26
Other expense....................................... 2 (2) --
---------- --------- -------- --------
Net loss............................................ $ (3,275) $ 172 $ (244) $ (3,347)
========== ========= ======== ========
Net loss per common share........................... $(.55) $(.50)
Weighted average number of common shares
outstanding....................................... 5,948 6,631
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma adjustments were made to the Company's
historical condensed consolidated statements of operations for the six months
ended March 30, 1996 to give effect to the Real-time Sale as if it had occurred
as of the beginning of such period:
(a) To subtract the operating results of the Company's Real-time Business.
(b) To record the amortization of compensation for the Common Stock granted to
E. Courtney Siegel and Daniel S. Dunleavy (the Company's former Chief
Executive Officer and Chief Financial Officer, respectively) in
consideration for non-competition agreements between each of them and the
Company. The amount represents the pro-rated amortization expense over five
years.
(c) To record the Company's equity interest in the net losses of Concurrent
based on its percentage ownership of Concurrent Common Stock.
(d) To record preferred stock dividends on Concurrent Preferred Stock received
as partial consideration for the Real-time Sale.
22
<PAGE> 24
HARRIS COMPUTER SYSTEMS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
HARRIS LESS OTHER
HISTORICAL REAL-TIME PRO FORMA
CONSOLIDATED BUSINESS(A) ADJUSTMENTS PRO FORMA
------------ --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales
Equipment........................................ $ 31,184 $ (26,650) $ 4,534
Maintenance...................................... 13,927 (13,644) 283
---------- --------- --------
Total sales........................................ 45,111 (40,294) 4,817
Cost of sales
Equipment........................................ 18,550 (15,549) 3,001
Maintenance...................................... 7,214 (7,075) 139
---------- --------- --------
Total costs of sales............................... 25,764 (22,624) 3,140
---------- --------- --------
Gross profit....................................... 19,347 (17,670) 1,677
Operating expenses
Research and development......................... 7,903 (7,068) 835
Selling, general and administrative expenses..... 22,984 (18,985) 308(b) 4,307
---------- --------- --------- --------
Total operating expenses........................... 30,887 (26,053) 308 5,142
---------- --------- --------- --------
Operating loss..................................... (11,540) 8,383 (308) (3,465)
Equity interest in losses of Concurrent............ (1,850)(c) (1,850)
Dividends on Concurrent Preferred Stock............ 203 (d) 203
Interest income.................................... 456 (407) 49
Other expense...................................... (4) 4 0
---------- --------- --------- --------
Net loss........................................... $ (11,088) $ 7,980 $ (1,955) $ (5,063)
========== ========= ========= ========
Net loss per common share.......................... $(1.88) $(.77)
Weighted average number of common shares
outstanding...................................... 5,911 6,595
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma adjustments were made to the Company's
historical condensed consolidated statements of operations for the year ended
September 30, 1995 to give effect to the Real-time Sale as if it had occurred as
of the beginning of such period:
(a) To subtract the operating results of the Company's Real-time Business.
(b) To record the amortization of compensation for the Common Stock granted to
Messrs. Siegel and Dunleavy in consideration for non-competition agreements
between each of them and the Company. The amount represents the pro-rated
amortization expense over five years.
(c) To record the Company's equity interest in the net losses of Concurrent
based on its percentage ownership of Concurrent Common Stock.
(d) To record preferred stock dividends on Concurrent Preferred Stock received
as partial consideration for the Real-time Sale.
23
<PAGE> 25
HARRIS COMPUTER SYSTEMS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 30, 1996
<TABLE>
<CAPTION>
HARRIS LESS OTHER PRO
HISTORICAL REAL-TIME FORMA
CONSOLIDATED BUSINESS(A) ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 1,307 $ (1,307) $ --
Concurrent Common Stock available for sale...... 21,400 (b) 21,400
Accounts receivable............................. 15,335 (12,709) 2,626
Inventories..................................... 6,381 (6,294) 87
Prepaid expenses................................ 660 1,540 (c) 1,793
-------- -------
(407)
Total current assets.................. 23,683 25,906
Property, plant and equipment................... 5,912 (4,878) 1,034
Capitalized software............................ 8,135 (5,409) 2,726
Concurrent Preferred Stock available for sale... 5,384 (b) 5,384
Other assets.................................... 822 (792) 30
-------- -------
Total assets.......................... $ 38,552 $35,080
======== =======
Accounts payable................................ 4,565 (4,100) 465
Deferred revenue................................ 628 (591) 37
Accrued expenses................................ 4,219 (3,326) 2,200 (d) 3,093
-------- -------
Total current liabilities............. 9,412 3,595
Equity.......................................... 29,140 1,540 (c) 31,485
(2,200)(d)
(8,459)(e)
11,464 (f)
-------- -------
Total liabilities and equity.......... $ 38,552 $35,080
======== =======
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma adjustments were made to the
historical condensed consolidated balance sheet as of March 30, 1996 to
give effect to the Real-time Sale as if it had occurred as of such date:
(a) To reflect the sale of the assets and liabilities of the Company's
Real-time Business.
(b) To reflect the receipt of Concurrent Common Stock and Concurrent
Preferred Stock valued at $21,400 and $5,384, respectively, as part of
the Real-time Sale. The value of the Concurrent Common Stock is the
average of the closing prices for Concurrent Common Stock from May 1 to
May 7, 1996. The value of Concurrent Preferred Stock is based on the
assumptions (i) that no cash dividends will be paid until the
redemption of the Concurrent Preferred Stock; (ii) that such redemption
will occur in 2006; and (iii) that the value of Concurrent Preferred
Stock is discounted at a rate of 14% per annum. The Share Holding
Agreement contains restrictions on the volume of sales of Concurrent
Common Stock by the Company in certain circumstances.
(c) To reflect the issuance of shares of Common Stock to Mr. Siegel (78,000
shares) and Mr. Dunleavy (13,800 shares) at $16.78 per share (the
average of the closing prices from May 1 through May 7, 1996) in
consideration for their respective five-year non-competition agreements
with the Company.
(d) To reflect the accrual of estimated expenses relating to the Real-time
Sale of $2,200.
(e) To reflect the book loss on the Real-time Sale; such amount is subject
to change based on the value of the Concurrent Common Stock
Consideration and Concurrent Preferred Stock at the time of the closing
of the Real-time Sale.
(f) To reflect the issuance of 683,178 shares of Common Stock valued at
$11,464 to Concurrent as part of the Real-time Sale. The value of the
stock is the average of the closing prices of the Common Stock from May
1 through May 7, 1996.
24
<PAGE> 26
SELECTED FINANCIAL DATA
The following table sets forth certain selected historical financial data
for the Company's Trusted Systems Division, which exclude the Company's
corporate assets and liabilities not specifically identifiable to the division.
The financial data for the six months ended March 30, 1996 and for 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 Prospectus. The statement of
operations data set forth for the six months ended March 30, 1996 are not
necessarily indicative of results for the entire year. Financial data for the
six months ended March 31, 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
SIX MONTHS ENDED FISCAL YEAR ENDED
------------------------ YEAR ENDED JUNE 30,
MARCH 30, MARCH 31, SEPTEMBER 30, ---------------
1996 1995 1995 1994 1993
------------ --------- ------------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales........................................ $ 4,395 $ 3,489 $ 4,817 $8,464 $5,974
Cost of sales................................ 2,915 2,103 3,140 3,842 2,992
-------- ------- ------- ------ ------
Gross profit................................. 1,480 1,386 1,677 4,622 2,982
Selling, general and administrative
expenses................................... 3,330 1,879 3,999 3,677 2,467
Research and development..................... 578 430 835 816 698
-------- ------- ------- ------ ------
Operating income (loss)...................... (2,428) (923) (3,157) 129 (183)
Interest income (expense), net............... 26 18 49 (1) --
Other income (expense), net.................. (21) 5 -- 7 5
-------- ------- ------- ------ ------
Net income (loss) before income tax.......... (2,423) (900) (3,108) 135 (178)
Income tax expense (benefit)................. -- (173) -- 26 (137)
-------- ------- ------- ------ ------
Net income (loss)............................ $ (2,423) $ (727) $(3,108) $ 109 $ (41)
======== ======= ======= ====== ======
</TABLE>
25
<PAGE> 27
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. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors." 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
Trusted Systems Division, including the notes thereto, appearing elsewhere in
this Prospectus. See "Selected Financial Data."
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 Defence ("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 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. See "Use of Proceeds,"
"Business -- Strategy" and "Risk Factors."
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 27, 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
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<PAGE> 28
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 expects to report certain charges in the quarter ending June
30, 1996. The Company estimates that it will incur a loss of approximately $8.5
million on the sale of the Real-time Business (based on an assumed market price
of Concurrent Common Stock of $2.14 per share); approximately $0.4 million in
charges related to certain grants of Common Stock; and approximately $1.4
million in additional expenses related to the Real-time Sale. See "Certain
Transactions."
The Company was incorporated in August 1994 for the purpose of
consolidating in a corporate subsidiary the activities of the former Computer
Systems Division performed by Harris Corporation and its subsidiary, Lanier
Worldwide, Inc. ("Lanier"). The Harris Computer Systems Division had been
established in 1974. On October 7, 1994, all of the Company's Common Stock was
distributed on a pro rata basis to Harris Corporation shareholders. In May 1995
the Company separated its business operations into two units: the Real-time
Business and the Trusted Systems Division. Effective June 30, 1996, the Company
has sold to Concurrent its Real-time Business, representing approximately 82% of
the Company's total assets as of March 30, 1996. See "Certain Transactions." The
Company's focus is now exclusively on the development and marketing of network
security products. As a result of the Real-time Sale, the Company's assets
include Concurrent Common Stock and Concurrent Preferred Stock, the value of
which may vary from time to time. See "Risk Factors -- Fluctuation in Market
Value of Concurrent Common Stock and Concurrent Preferred Stock Held by the
Company."
RESULTS OF OPERATIONS
The following table sets forth certain items in the Trusted Systems
Division statements of operations as a percentage of sales on a historical basis
for the six-month periods ended March 30, 1996 and March 31, 1995 and for the
fiscal years ended September 30, 1995 and June 30, 1994 and 1993.
<TABLE>
<CAPTION>
FISCAL
SIX MONTHS ENDED YEAR ENDED
------------------- FISCAL JUNE 30,
MARCH 30, MARCH 31, YEAR ENDED -----------
1996 1995 SEPT. 30, 1995 1994 1993
-------- -------- -------------- ---- ----
<S> <C> <C> <C> <C> <C>
Sales............................................. 100% 100% 100% 100% 100%
Cost of sales..................................... 66 60 65 45 50
--- --- --- --- ---
Gross profit...................................... 34 40 35 55 50
Operating expenses:
Selling, general and administrative............. 76 55 84 43 41
Research and development........................ 13 12 17 10 12
--- --- --- --- ---
Total operating expenses.......................... 89 67 101 53 53
Operating income (loss)........................... (55) (27) (66) 2 (3)
Interest/other income (expense)................... -- 1 1 -- --
--- --- --- --- ---
Net income (loss) before taxes.................... (55) (26) (65) 2 (3)
Income tax expense................................ -- (5) -- -- (2)
--- --- --- --- ---
Net income (loss)................................. (55)% (21)% (65)% 2% (1)%
=== === === === ===
</TABLE>
Six Months Ended March 30, 1996 Compared to Six Months Ended March 31, 1995
Net Sales. Net sales consist primarily of product sales, systems
integration services and sales related to porting the Company's secure operating
system. Net sales increased $0.9 million to $4.4 million for the six months
ended March 30, 1996 compared to the same period ended March 31, 1995. The 1996
period included sales of 91 network security firewalls compared to 62 such units
in the 1995 period. The six months ended March 31, 1995 included a $1.9 million
sale (or 54% of total sales) to one government-related customer for 43
27
<PAGE> 29
units; the six month period ended March 30, 1996 included sales to the British
MOD of approximately $0.6 million (or 14% of total sales). There were no sales
in the six months ended March 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. During the six months
ended March 30, 1996, 74% of the Company's sales were to commercial customers,
compared to 35% for the same period of fiscal year 1995.
International sales increased $1.1 million to $2.0 million for the six
months ended March 30, 1996. Domestic sales decreased $0.2 million to $2.4
million. The domestic sales figure for the period ended March 31, 1995 includes
$1.9 million in sales to one domestic customer.
Gross Profit. The Company's gross profit increased $0.1 million to $1.5
million for the period ended March 30, 1996 from the period ended March 31,
1995. The Company's gross margin decreased to 33.7% for the period ended March
30, 1996 from 39.7% for the 1995 period. This decrease in gross margin is the
result of the change in the mix of the Company's product sales to include a
greater percentage of CyberGuard Firewalls, which have significantly lower gross
margin than the Company's secure operating system and secure networking software
that, until the first quarter of fiscal year 1995, represented the Company's
primary products.
Net Income. The Company's operating expenses increased $1.6 million to
$3.9 million during the six months ended March 30, 1996, compared to the same
period in the prior year, due to an increase in selling, general and
administrative, and research and development expenses. These increased expenses
were incurred to enhance and market the CyberGuard Firewall in the commercial
network security market. The Company also incurred expenses of $0.1 million in
connection with the Real-time Sale. As a result primarily of these expenditures
and costs, the Company incurred a loss of $2.4 million for the period ended
March 30, 1996, compared to a loss of $0.7 million for the period ended March
31, 1995.
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended
June 30, 1994
Net Sales. 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 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 Company's sales.
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 Profit. The Company's gross profit decreased $2.9 million to $1.7
million in fiscal year 1995. This decrease is the result of lower sales and
significantly lower profit margins for CyberGuard Firewalls when compared to
sales of secure operating systems and secure networking software. Gross margin
decreased to 34.8% for fiscal year 1995 from 54.6% for fiscal year 1994.
Net Income. 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.
28
<PAGE> 30
Fiscal Year Ended June 30, 1994 Compared to Fiscal Year Ended June 30, 1993
Net Sales. Net sales 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 Profit. Gross profit 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. Total indirect expenses 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 six months ended March 30, 1996 and the fiscal year
ended September 30, 1995 were $0.4 million and $0.6 million respectively.
Capitalized software development costs were $1.4 million and $0.7 million,
respectively, during the same periods. The Company has funded these cash
requirements from its working capital and cash flow provided from its Real-time
Business. As a result of the Real-time Sale, it is expected that cash flows from
operations will be insufficient to satisfy the Company's ongoing cash
requirements.
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. Estimated cash expenditures relating to the Real-time
Sale are $2.2 million. The Company also anticipates certain one-time
expenditures approximating $0.7 million to $0.8 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 the Shared Services Agreement.
Under the Revolving Line of Credit, which expires upon the earlier of the
consummation of this offering or September 30, 1996, the Company may borrow a
maximum amount of $5,000,000 at an interest rate of 2% above the lowest rate
announced from time to time by Norwest Bank Minnesota, National Association. The
Revolving Line of Credit is secured by all the assets of the Company. The
maximum amount that the Company may draw under the Revolving Line of Credit is
subject to certain financial covenants and reduction based upon, among other
things, the value of the Company's accounts receivable. The Revolving Line of
Credit restricts the Company, without Foothill's prior written consent, from
incurring any additional indebtedness, allowing the creation of liens,
undergoing major corporate transactions (including a change of control), or
making capital expenditures in excess of certain amounts. The Company has also
agreed not to declare dividends on its Common Stock (other than dividends in
capital stock) without Foothill's prior written consent. See "Certain
Transactions -- Revolving Line of Credit."
29
<PAGE> 31
A principal source of liquidity will be the Concurrent Common Stock
Consideration and the Concurrent Preferred Stock. The Company does not intend to
be a long-term holder of the remaining Concurrent securities. On June 27, 1996,
the Company sold 2,000,000 shares of Concurrent common stock at an aggregate
price of $3,500,000. The Company's ability to sell or pledge these Concurrent
securities is subject to limitations imposed in the Share Holding Agreement and
the Revolving Line of Credit. See "Certain Transactions -- Share Holding
Agreement." These limitations and conditions may affect the Company's
flexibility in generating cash through sales of the Concurrent Common Stock
Consideration and the Concurrent Preferred Stock and may require the Company to
seek alternative sources of cash, including borrowings and equity sales. In
addition, the timing of such sales may be affected by other factors beyond the
Company's control, such as general market conditions and changes in the
business, operations or prospects of Concurrent.
If adequate funds are not available, the Company may be required to curtail
certain activities, including product development, marketing and sales
activities. Although there can be no assurance that additional financing will be
available to the Company on acceptable terms, the Company believes that the net
proceeds of this offering together with proceeds from sales or pledges of the
Concurrent securities and any additional financing will be sufficient to satisfy
the Company's operations and capital requirements for the foreseeable future.
30
<PAGE> 32
QUARTERLY COMPARISONS
The following table presents selected financial information 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 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>
FISCAL YEAR 1995
------------------------------------------------
DECEMBER 29, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 29, MARCH 30,
1994 1995 1995 1995 1995 1996
------------ --------- -------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product sales
Domestic.......................... $ 442 $ 2,001 $ 210 $ 404 $ 663 $ 1,494
International..................... 137 777 137 426 1,082 938
------ ------- -------- ------- -------- -------
Total product sales................. 579 2,778 347 830 1,745 2,432
Other............................... 66 66 84 67 80 138
------ ------- -------- ------- -------- -------
Total sales......................... 645 2,844 431 897 1,825 2,570
Cost of sales
Product sales..................... 402 1,636 328 635 1,084 1,739
Other............................. 32 33 42 32 36 56
------ ------- -------- ------- -------- -------
Total cost of sales................. 434 1,669 370 667 1,120 1,795
------ ------- -------- ------- -------- -------
Gross profit........................ 211 1,175 61 230 705 775
Operating expenses
Research and development.......... 219 211 156 250 307 271
Selling, general and
administrative................. 497 1,382 834 1,285 1,602 1,728
------ ------- -------- ------- -------- -------
Total operating expenses............ 716 1,593 990 1,535 1,909 1,999
------ ------- -------- ------- -------- -------
Operating loss...................... (505) (418) (929) (1,305) (1,204) (1,224)
Other income (expense).............. -- 5 (4) (1) -- (21)
Interest income..................... 7 11 8 23 13 13
------ ------- -------- ------- -------- -------
Net loss before income tax.......... (498) (402) (925) (1,283) (1,191) (1,232)
Income tax expense (benefit)........ (173) -- 173 -- -- --
------ ------- -------- ------- -------- -------
Net loss............................ $ (325) $ (402) $ (1,098) $(1,283) $ (1,191) $(1,232)
====== ======= ======== ======= ======== =======
</TABLE>
31
<PAGE> 33
BUSINESS
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. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors." References to the "Company" with respect to periods before the
Real-time Sale are to the Company's Trusted Systems Division.
OVERVIEW
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 has combined its secure operating system and secure networking
software with its firewall application to produce the CyberGuard Firewall, which
provides a barrier to unauthorized access to a customer's enterprise network,
including unauthorized access from (i) the Internet, (ii) networks of other
enterprises or (iii) other intranet users within the same enterprise network.
The CyberGuard Firewall's secure operating system and secure networking software
are designed to protect the firewall itself from attack, a distinction not
shared by most commercially available firewall products. The superior level of
security of the Company's product, together with its high network throughput
capabilities, permits the CyberGuard Firewall to address network security
markets having the most demanding performance requirements such as the
healthcare and financial services markets. The CyberGuard Firewall is the only
commercially available firewall built on integrated secure operating system and
secure networking software components that are rated B1 by the NCSC. For
information regarding NCSC security ratings, see "The CyberGuard Solution"
below.
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, as well as direct
sales representatives. During the six months ended March 30, 1996, indirect
channels accounted for approximately 40% of the Company's sales of CyberGuard
Firewalls and related network security products. Sales to customers in
international markets accounted for approximately 55% of the Company's
CyberGuard Firewall sales during the same period. The Company's strategy is to
expand indirect channels to achieve a 75% indirect sales level and to broaden
international channels while maintaining a 50% sales level in the international
markets. To strengthen the commercial appeal of the CyberGuard Firewall, the
Company is currently "porting" its secure operating system, secure networking
software and firewall application from a Motorola microprocessor-based Night
Hawk computer to the more widely used Intel PC-compatible computer platform. The
Company plans to make the CyberGuard Firewall available on such platforms, and
plans to make available a software-only solution, by December 1996.
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 has sold to Concurrent the assets of its real-time computer
business, representing approximately 82% of the Company's total assets. See
"Certain Transactions." 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.
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<PAGE> 34
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. See "Risk Factors -- Dependence
on the Internet and Intranets."
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.
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.
33
<PAGE> 35
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").
[Graphic]
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 authentication 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.
34
<PAGE> 36
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.
[Graphic]
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
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
35
<PAGE> 37
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 an 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 six months
ended March 30, 1996, indirect sales channels accounted for approximately
24% 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. During the first two
quarters of fiscal year 1996, the Company's international channels
accounted for 46% 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 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 the Company's CyberGuard Firewall by "porting" its
secure operating system, networking software and firewall application to
the more widely used Intel-based PC compatible platforms currently
available in a wide range of multiprocessor systems. The Company further
plans to introduce products that are
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compatible with other network protocols, such as Novell Inc.'s NetWare, in
addition to TCP/IP. In moving to address the widely used Intel platform
and NetWare protocol, the Company believes its solutions will more closely
match the requirements and expectations of its customers.
- Introduce Software-only and Other Product Offerings. The Company plans
to introduce a software-only version of the CyberGuard Firewall,
consisting of an integrated operating system, networking software and base
security software, and to offer upgrades to be priced and sold separately.
This software-only product will allow the Company to competitively
position its CyberGuard Firewall product against lower-priced competitors
while maintaining or increasing its gross margins. In addition, the
Company is actively seeking strategic alliances, particularly with
companies offering encryption, token authentication and virus detection
products, through which the Company can develop new products or enhance
the features of its existing products.
- 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 SHIPMENT
PRODUCTS (CALENDAR QUARTERS) DESCRIPTION
- ------------------------------------ ---------------------- -------------------------------------------
<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
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
Private Virtual Networking.......... Q4 1995 Encrypted firewall-to-firewall link
High Availability CyberGuard Q1 1996 CyberGuard feature designed to ensure
Firewall.......................... minimal network down-time
</TABLE>
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<TABLE>
<CAPTION>
DATE OF FIRST SHIPMENT
PRODUCTS (CALENDAR QUARTERS) DESCRIPTION
- ------------------------------------ ---------------------- -------------------------------------------
<S> <C> <C>
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
Security Dynamics................. Q2 1996 of token authentication cards in place of
static password
Informix Online/Client Server Q4 1992 Secure database tool for server and
Systems........................... 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 B2 Operating System.. Q2 1994 Latest generation secure operating system
currently in evaluation by NCSC for B2
rating
PowerProtocols Secure B2 Networking Q2 1996 Latest generation secure networking
Software.......................... 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 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.
Private Virtual Networking. The CyberGuard Firewall supports an optional
Private Virtual Networking ("PVN") product that provides a mechanism for
establishing a logically separate network between multiple
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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 and allows the customer to
locally replace the encryption algorithm with their locally preferred algorithm.
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 lost network connectivity.
In addition, through strategic alliances, the Company offers certain
network security products for use with the CyberGuard Firewall. See "Strategic
Alliances" below. These products include:
WebTrack URL Blocking. Together with its CyberGuard Firewall, the Company
offers WebTrack, a product developed by Webster Network Strategies (which has
been 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
(which has entered into an agreement to be acquired by Secure Computing), 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 non-Power PC technology. 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 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.
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.
Systems Integration 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
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<PAGE> 41
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.
The Company's CyberGuard Firewall and related security products accounted
for 92% and 86% of the Company's sales for the six months ended March 30, 1996
and the fiscal year ended September 30, 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." 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.
PRODUCT DEVELOPMENT
The Company's research and development efforts are focused in the near term
on porting the Company's secure operating system, secure networking software and
firewall application from a Motorola microprocessor-based Night Hawk platform to
the more widely used Intel PC-compatible computer platform. The following table
shows the significant products and product enhancements that the Company expects
to introduce during the last two quarters of calendar year 1996 and during
calendar year 1997.
<TABLE>
<CAPTION>
EXPECTED DATE OF
INTRODUCTION
PRODUCT (CALENDAR QUARTERS) DESCRIPTION
- ---------------------------------------- -------------------- -----------------------------------------------------
<S> <C> <C>
Intel Pentium/Pentium Pro-compatible
CyberGuard Firewall................... Q4 1996 Low-cost, software-only CyberGuard Firewall product
Remote/Mobile PC Secure Link............ Q4 1996 Encrypted protection for PC and laptop connections to
host networks
Virus Scanning.......................... Q4 1996 Helps prevent viruses from infecting host computers
RSA Encryption.......................... Q4 1996 Largest commercially available encryption product
CyberGuard Intranet Firewall............ Q4 1996 Novell NetWare support and other intranet-specific
features
TerraMax ISP Solution................... Q2 1997 Multiple virtual firewalls
Fortezza Encryption..................... Q2 1997 Government-sponsored encryption process
X.400 Secure Message Handling........... Q4 1997 Secure X.400 e-mail service
</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. See "Risk Factors"
for a discussion of other factors that may cause such assumptions to differ from
actual results.
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 1996. The Company supplements the development staff
from time to time with contract engineers as needed to meet product demands in
the market. For the six months ended March 30, 1996 and the fiscal years ended
September 30, 1995 and June 30, 1994, the Company spent $2.0 million, $1.5
million and $1.6 million, respectively, on research and development, an
equivalent of 44%, 31%, and 18% of total sales during such periods,
respectively. These amounts include software development costs that have been
capitalized during such periods.
STRATEGIC ALLIANCES
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
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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.
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 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 14% 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.
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New customers accounted for 82% of the Company's sales in the six months
ended March 30, 1996 and 28% of sales in the fiscal year ended September 30,
1995. Of sales to new customers during such periods, 96% and 100%, respectively,
represented non-government customers and related to sales of the Company's
CyberGuard Firewall and related products.
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% of the
Company's sales in the six months ended March 30, 1996 and 31% of sales in
fiscal year ended September 30, 1995. Of sales to international customers during
such periods, 55% and 49%, respectively, represented sales of the Company's
CyberGuard Firewall and related products. The Company strategy includes
capitalizing on existing international penetration to increase its sales abroad
with a focus on the CyberGuard Firewall.
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 six months ended
March 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 26% 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 six months ended March
30, 1996, total sales to the British MOD were 13% 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 Telstra Corporation, Public IP Exchange Limited, a
U.K. subsidiary of UUnet Technologies, Inc., and Nissin. During the six months
ended March 30, 1996, the indirect marketing channels for the Company's products
accounted for 40% 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. See "Risk Factors -- Dependence on
Resellers; Need to Establish Collaborative Marketing Relationships."
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 13 sales representatives and maintains sales
offices in Atlanta, Georgia; Chicago, Illinois; Dayton, Ohio; Fort Lauderdale,
Florida; Houston, Texas; Los Angeles, California; New York, New York; St. Louis,
Missouri; Washington, D.C.; London, England; 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.
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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 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. See "Risk Factors -- Dependence on Principal Product; Uncertainty
of Product Acceptance."
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 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, such as Check Point, 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 announced the signing of a definitive agreement for the acquisition of
Border.
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
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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 system has also successfully completed evaluation by CELAR and
is currently in evaluation in the United Kingdom against ITSEC requirements. The
Company's PowerPC-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 Decency 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.
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EMPLOYEES
At July 1, 1996, the Company employed 61 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 agreement.
All employees are bound by agreements containing confidentiality and conflict of
interest provisions. The Company believes it maintains good relations with its
employees.
OPERATIONS
The Company's production operations consist primarily of the purchasing of
assembled and tested hardware components and the installation of the Company's
products on such platforms. The Company sells its CyberGuard Firewall on Night
Hawk real-time computers purchased from Concurrent. Night Hawk real-time
computers were formerly developed and manufactured by the Company. See "Risk
Factors -- Dependence on Sole Source Suppliers" and "Certain Transactions." The
Company sells its products with memory, displays, power supplies and peripherals
such as hard drives and network interface cards purchased from other third-party
vendors. The Company also purchases software media and user documentation for
its software products and uses subcontractors for its duplication services.
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.
LEGAL PROCEEDINGS
The Company is not involved in any pending or, to its knowledge, threatened
litigation.
INTEREST IN CONCURRENT
Following the recent sale of a portion of the Concurrent Common Stock
Consideration, the Company owns as of the date hereof approximately 19% of the
outstanding Concurrent Common Stock and $8,200,000 liquidation preference of
Concurrent Preferred Stock. The Company's ownership of Concurrent Common Stock
would be 24% if the Concurrent Preferred Stock were to be converted into
Concurrent Common Stock. See "Certain Transactions." Concurrent is engaged in
the business of providing and servicing high-performance real-time computer
systems and services, including the Night Hawk. "Real-time" systems acquire,
analyze, store, display and control analog, digital and network data to provide
time critical information as real-world events occur. Concurrent has over 25
years of experience in real-time systems, including specific expertise in
systems, applications software, productivity tools and networking. Concurrent's
real-time systems offer networked and distributed computing solutions and may be
configured to provide fault tolerance. Concurrent sells its systems worldwide to
end-users as well as to original equipment manufacturers, systems integrators,
independent software vendors and value-added resellers who combine Concurrent's
products with other equipment or with additional application software for resale
to end-users. End uses of Concurrent's systems include product design and
testing; flight simulation; air traffic control and weather forecasting;
intelligence data acquisition and analysis; financial trading; and hospital
information management. Concurrent designs, manufactures, sells, and supports
real-time proprietary and standards-based open systems. Concurrent also offers
traditional maintenance and support services and professional services, such as
performance and capacity analysis and systems integration.
Concurrent is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the SEC, to which reference is made for detailed financial and
other information regarding Concurrent. Such reports, proxy statements and other
information can be inspected and copied at the offices of the SEC and the
National Association of Securities Dealers, Inc. The Company does not warrant
the accuracy or completeness of such reports, proxy statements or other
information nor that there have not occurred events not yet publicly disclosed
by Concurrent which would affect either the accuracy or the completeness of the
information concerning Concurrent included herein or therein.
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<PAGE> 47
Concurrent's revenues were $77 million during the nine months ended March
31, 1996 and $140 million, $179 million and $220 million for the fiscal years
ended June 30, 1995, 1994 and 1993, respectively. Concurrent reported net losses
of $5.7 million, $2.0 million, and $39.8 million and net income of $3.9 million
for such periods, respectively. Concurrent expects that its revenues for the
quarter ending June 30, 1996 will be the lowest quarterly revenues for its
fiscal year. In addition, Concurrent expects to take a material pre-tax charge
and to adjust negative goodwill, as appropriate, in the quarter in which the
Real-time Sale occurs (expected to be the quarter ending June 30, 1996) to cover
costs related to the Real-time Sale and other business integration costs. As of
the date hereof, the estimated aggregate charge for these items is in the range
of $29 million to $32 million, approximately $18 million of which is expected to
be paid out in cash in the next two years.
The Company expects to account for its interest in Concurrent using the
equity method whereby its proportionate share of Concurrent's earnings or losses
will be included in income. See Notes to Pro Forma Condensed Consolidated
Statement of Operations for certain additional information regarding the
Company's equity in Concurrent.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Certain biographical information concerning the Company's executive
officers and directors is presented below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -------------------------------------------------
<S> <C> <C>
Robert L. Carberry................... 53 President, Chief Executive Officer and Chairman
of the Board of Directors(1)
Patrick O. Wheeler................... 37 Chief Financial Officer and Vice President
Finance
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, Secretary and Director(1)
C. Shelton James..................... 56 Director(2)(4)
Michael F. Maguire................... 69 Director(3)(4)
Richard F. Rifenburgh................ 64 Director(2)
</TABLE>
- ---------------
(1) Member of the class of directors whose term expires at the annual meeting to
be held in 1999. See "Description of Capital Stock -- Certain Anti-takeover
Provisions Included in the Company's Articles of Incorporation and Bylaws."
(2) Member of the class of directors whose term expires at the annual meeting to
be held in 1998.
(3) Member of the class of directors whose term expires at the annual meeting to
be held in 1997.
(4) Member of the Audit and Compensation and Stock Options Committees of the
Board of Directors.
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 at 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 LLP.
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
World-wide 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.
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<PAGE> 49
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.
Robert F. Perks. Mr. Perks was appointed Vice President Sales 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. 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.
C. Shelton James. Since May 1991, Mr. James has served as Chief Executive
Officer of Elcotel, Inc., a public company that manufactures telecommunications
equipment. Mr. James is President of Fundamental Management Corporation, an
investment management firm specializing in active investment in small
capitalization companies, where he was Executive Vice President from 1990 to
April 1993. Prior to 1990, Mr. James was Executive Vice President of Gould,
Inc., a diversified electronics company, and President of Gould's Computer
Systems Division. Mr. James is Chairman of the Board of Directors of Elcotel,
Inc. and serves on the boards of directors of CSPI, NAI Technologies, Inc.,
Fundamental Management Corporation and SK Technologies, Inc.
Michael F. Maguire. Since 1984, Mr. Maguire has served as President,
director and sole shareholder of Maguire Investment Management, Inc., a
management consulting company. For more than 13 years, Mr. Maguire served as an
executive at Harris Corporation, most recently as Senior Vice President from
1979 to 1986. Mr. Maguire serves on the board of directors of Autosight, Inc.,
as well as several non-profit corporations.
Richard P. Rifenburgh. Mr. Rifenburgh joined the Company's Board of
Directors in July 1996 following the Real-time Sale as the designee of
Concurrent. See "Certain Transactions -- Share Holding Agreement." Mr.
Rifenburgh is Chairman of the Board of Moval Management Corporation, a privately
held company specializing in restoring companies in financial distress. He is,
or in the past five years has been, a member of the Board of Directors of the
following public companies: Concurrent since 1991; Tristar Corporation (formerly
known as Ross Cosmetics Distribution Centers, Inc.) since June 1992 and Chairman
since August 1992; Miniscribe Corporation (manufacturer of disc drives for
personal computers), Chairman and CEO from 1989 to 1991; and Library Bureau (a
manufacturer of library furniture) from 1976 to 1995.
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<PAGE> 50
COMPENSATION OF EXECUTIVE OFFICERS
Employment Agreements. The Company and Mr. Carberry entered into an
agreement dated as of March 5, 1996 (the "Carberry Employment Agreement"),
effective as of April 12, 1996. The Carberry Employment Agreement provides for
the employment of Mr. Carberry as Chairman of the Board, President and Chief
Executive Officer of the Company at an annual base salary of $200,000, $225,000
and $250,000 for the first, second and third twelve-month periods, respectively,
of the Carberry Employment Agreement. The Carberry Employment Agreement
provides, as of March 5, 1996, for Mr. Carberry to be granted options to
purchase 339,000 shares of the Company's Common Stock at an exercise price of
$10.67 per share and becoming exercisable in three equal installments of 113,000
on each of March 5, 1997, 1998, and 1999. The Carberry Employment Agreement
provides for Mr. Carberry to have a target bonus for the achievement of certain
performance objectives to be established by the Company of 50% of his annual
base salary.
The Company may terminate the Carberry Employment Agreement for "cause."
The Carberry Employment Agreement defines "cause" as willful acts against the
Company intended to enrich Mr. Carberry at the expense of the Company, the
conviction of Mr. Carberry for a felony involving moral turpitude, willful and
gross neglect by Mr. Carberry of his duties or the intentional failure of Mr.
Carberry to observe policies of the Company's Board of Directors that have or
will have a material adverse effect on the Company. If the Carberry Employment
Agreement is terminated by the Company other than for "cause" or the death,
disability or normal retirement of Mr. Carberry or by Mr. Carberry for "good
reason," Mr. Carberry will receive severance pay of two times his annual base
salary and two times his target bonus as in effect immediately prior to
termination, and all of Mr. Carberry's stock options and stock appreciation
rights will be exercisable at termination. If Mr. Carberry's employment with the
Company is terminated within one year following a "change in control" of the
Company other than for "cause" or the death, disability or normal retirement of
Mr. Carberry or by Mr. Carberry for "good reason," Mr. Carberry will receive
severance pay of three times his annual base salary and three times his target
bonus as in effect immediately prior to termination, and all of Mr. Carberry's
stock options and stock appreciation rights will become exercisable at
termination. If Mr. Carberry's employment is terminated at any time by the
Company for "cause" or by Mr. Carberry other than for "good reason," the
Carberry Employment Agreement prohibits Mr. Carberry from engaging in any
business competitive with the business of the Company for a one-year period
following the effective date of termination. If Mr. Carberry's employment is
terminated by the Company other than for "cause" or the death, disability or
normal retirement of Mr. Carberry or by Mr. Carberry for "good reason," other
than within one year of a "change in control," the Carberry Employment Agreement
prohibits Mr. Carberry from engaging in any business competitive with the
business of the Company for a two-year period following the effective date of
termination.
In addition to the Carberry Employment Agreement, the Company has
employment agreements with Messrs. Lesher, Gelbart and Foremny and expects to
enter into employment agreements with the other executive officers. Such
employment agreements, other than the Carberry Employment Agreement, are
referred to herein as the "Executive Employment Agreements." The initial base
salaries under such Employment Agreements are or are expected to be, as the case
may be, $100,000 for Mr. Wheeler, $115,500 for Mr. Gelbart, $90,000 for Ms.
Hutchison, $90,000 for Mr. Perks, $90,000 for Mr. Siebenaler, $115,500 for Mr.
Lesher, and $120,000 for Mr. Foremny (based on part-time service). The Executive
Employment Agreements with Mr. Lesher and Mr. Foremny expire on September 30,
1996 and February 28, 1998, respectively. Certain of the Executive Employment
Agreements also provide or are expected to provide, as the case may be, for
bonuses based on certain Company performance targets in initial amounts based
upon the following percentages of base salary: Mr. Wheeler -- 40%; Mr.
Gelbart -- 50%; Ms. Hutchison -- 50%; Mr. Perks -- 50%; Mr. Siebenaler -- 40%;
Mr. Lesher -- 50% and Mr. Foremny -- 16.7%.
Certain of the Executive Employment Agreements will provide for the Company
to issue to such officers options to purchase Common Stock at a price of $5.50
per share, as follows: Mr. Wheeler -- 75,000 options; Ms. Hutchison -- 60,000
options; Mr. Perks -- 60,000 options; and Mr. Siebenaler -- 60,000 options. Such
options will vest in three equal annual installments beginning one year from the
date of the respective Executive Employment Agreement. The agreement with Mr.
Gelbart provides for Mr. Gelbart to receive options to purchase 100,000 shares
of common stock at a price of $18.25 per share, vesting in equal annual
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<PAGE> 51
installments beginning June 1, 1997, and 2,000 shares of Common Stock subject to
restrictions that lapse on December 31, 1996. The agreement with Mr. Foremny
provides for Mr. Foremny to receive options to purchase 72,000 shares of Common
Stock at a price of $5.50 per share, vesting in three equal annual installments
beginning March 1, 1996. The Agreement with Mr. Lesher provides for Mr. Lesher
to receive options to purchase 60,000 shares of Common Stock at a price of $2.58
per share, all of which have vested. Certain executive officers also were
granted options to purchase shares in the following amounts at the indicated
prices: Mr. Wheeler -- 3,000 shares at $2.58 per share; Ms. Hutchinson -- 12,000
shares at $2.58 per share and 600 shares at $3.71 per share; Mr. Lesher -- 9,000
shares at $4.71 per share and 60,000 shares at $2.58 per share; Mr.
Perks -- 6,000 shares at $3.83 per share; and Mr. Siebenaler -- 12,000 shares at
$2.58 per share and 600 shares at $4.92 per share.
The Executive Employment Agreements relating to Messrs. Lesher, Gelbart and
Foremny may be terminated by either the Company or the respective executive
officer at any time. In the event the executive officer resigns without "good
reason" or is terminated for "cause," compensation under the employment
agreements will end. In the event any such employment agreement is terminated by
the Company without "cause" or the executive officer resigns for "good reason,"
the terminated executive officer will receive, among other things, severance
compensation equal to a specified multiple of such employee's annual base salary
and target bonus under the Company's bonus program. In addition, all
non-statutory options and stock appreciation rights of all such executive
officers will be immediately exercisable upon termination of employment and
certain other awards previously made under any of the Company's compensation
plans or programs and previously not paid will immediately vest on the date of
such termination. Termination by the Company or by the executive (except for
such terminations occurring within three years after a change of control) give
rise to certain noncompetition and nonsolicitation provisions (except in the
case of Mr. Foremny, who maintains a legal practice apart from the Company). The
other Executive Agreements are expected to contain similar termination
provisions.
The Executive Employment Agreements with Messrs. Lesher, Gelbart and
Foremny contain severance provisions that apply if the executive officer's
employment is terminated within three years after the occurrence of a change of
control. In the event that any such employee is terminated by the Company within
three years following the occurrence of a change in control or by such employee
for "good reason", such employee will be entitled to receive on the date of such
termination an amount equal to, among other things, a specific multiple of such
employee's base salary, target bonus under the Company's bonus program, and any
performance award payable under the Stock Incentive Plan or similar plan, as
well as any other benefits which any such employee would be entitled to where
termination was without "cause" or with "good reason" by employee. The other
Executive Employment Agreements are expected to contain similar severance
provisions.
Stock Incentive Plan. The Company has adopted the CyberGuard Corporation
Stock Incentive Stock Plan (the "Stock Incentive Plan"), as amended, pursuant to
which 2,025,000 shares of Common Stock have been authorized for issuance. The
primary purpose of the Stock Incentive Plan is to attract and retain capable
executives and employees by offering them a greater personal interest in the
Company's business through stock ownership. The Stock Incentive Plan is
administered by the Incentive and Stock Option Committee of the Company's Board
of Directors (the "Committee"), which determines, among other things, the nature
and the terms of any award granted thereunder. The Stock Incentive Plan provides
for the granting of stock options (including incentive stock options meeting the
requirements of the Internal Revenue Code), restricted stock, stock appreciation
rights, performance awards, and other stock-based awards. In the case of stock
options, the Stock Incentive Plan provides that the exercise price of any stock
option granted under the Stock Incentive Plan must be equal to the fair market
value of the shares underlying the option on the date of grant, or, in the case
of incentive stock options, 110% of fair market value of the shares underlying
the option on the date of the grant. Any stock options granted under the Stock
Incentive Plan expire no later than ten years from the date of their granting.
No award under the Stock Incentive Plan is transferable except upon the death of
the optionee. The Committee has the power to impose additional limitations,
conditions and restrictions in connection with the grant of any option. In the
event of a change of control of the Company, all outstanding awards become
immediately exercisable prior to the occurrence of the change in control, in the
manner determined by the Committee. A change in control is deemed to occur if
any person or entity acquires 20% or
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<PAGE> 52
more of the outstanding shares of the Company or if, as a result of any tender
or exchange offer, merger or other business combination, sale of assets or
contested election, there is a change of a majority of the directors. As of the
date hereof, 545,106 shares are available for grant or award of options under
the Stock Incentive Plan.
The Stock Incentive Plan provides that non-employee directors of the
Company will receive options to purchase shares of the Company's common stock.
Upon joining the Board of Directors, all non-employee directors receive 6,000
such options. In addition, on the date of each annual meeting of shareholders,
each director who is not an employee of the Company will automatically be
granted an option to purchase 1,500 shares of common stock of the Company. In
addition, the Stock Incentive Plan provides for non-employee directors who
served in such capacity on February 4, 1996 to receive options to purchase
15,000 shares of the Company's Common Stock at an exercise price of $5.50 per
share. All such options will be non-statutory stock options and priced at 100%
of the fair market value on the date of grant. In the event of a director's
retirement, the options which are exercisable at the date of retirement will be
exercisable for three months thereafter, and, in the event of a director's
death, the options which are exercisable at the date of death will be
exercisable for the next succeeding twelve months. Neither the Board of
Directors nor any committee of the Board of Directors will have any discretion
with respect to options granted to non-employee directors pursuant to the Stock
Incentive Plan.
COMPENSATION OF DIRECTORS
In addition to grants pursuant to the Stock Incentive Plan, non-employee
directors of the Company receive a $15,000 annual retainer payable upon election
as a director of the Company at an annual meeting of shareholders (and a pro
rata amount to any non-employee who becomes a director of the Company
thereafter, payable at the time of becoming a director) and $1,000 per Board of
Directors meeting attended. In addition, directors receive $750 ($1,000 for the
Chairman) for attendance at any meeting of a committee of the Board of
Directors, payable at any such meeting, except for committee meetings held on
the same day as Board of Directors meetings, in which case no such fee will be
payable. Directors are also reimbursed for travel and lodging expenses in
connection with Board of Directors and committee meetings.
CERTAIN TRANSACTIONS
Effective June 30, 1996, pursuant to the Purchase and Sale Agreement, the
Company sold the assets of its Real-time Business and issued 683,178 shares of
its Common Stock to Concurrent in exchange for (i) the Concurrent Common Stock
Consideration (consisting of 10,000,000 newly issued shares of Concurrent Common
Stock); (ii) Concurrent Preferred Stock (consisting of 1,000,000 newly issued
shares of convertible exchangeable preferred stock of with a 9% cumulative
annual dividend payable quarterly in arrears and a liquidation preference of
$8.20 per share (subject to adjustment to reflect, among other things, the net
current assets transferred in the Real-time Sale; the "liquidation
preference")); and (iii) the assumption by Concurrent of the Assumed
Liabilities. As a result of the Real-time Sale, the Company received
approximately 22% of the Concurrent Common Stock issued and outstanding as of
the date thereof (28% if the Concurrent Preferred Stock were to be converted
into Concurrent Common Stock as set forth in the Purchase and Sale Agreement and
as described generally below), and Concurrent received approximately 10% of the
issued and outstanding shares of Common Stock of the Company as of the date
thereof (one-half of which are included in this offering).
CONCURRENT PREFERRED STOCK
The terms and conditions of the Concurrent Preferred Stock are set forth in
a Certificate of Designation containing generally the terms and conditions
described below. The description below is qualified entirely by reference to the
form of Certificate of Designation, which is incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part.
Designation and Number of Shares. The Concurrent Preferred Stock is 9.00%
Class B Convertible Preferred Stock, and the number of shares constituting such
series is 1,000,000, par value $0.01 per share.
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<PAGE> 53
Holders of Concurrent Preferred Stock do not have preemptive rights to acquire
shares of any class or series of capital stock of Concurrent.
Rank. The Concurrent Preferred Stock ranks, with respect to rights to
receive dividends and rights to receive distributions upon the liquidation,
winding up or dissolution of Concurrent: (a) senior to the Concurrent Common
Stock, and senior to any class or series of capital stock, including any
preferred stock, issued by Concurrent, other than the Class A Preferred Stock
("junior stock") and (b) on a parity with the Class A Preferred Stock ("parity
stock"), none of which was issued or outstanding as of the Real-time Sale.
Dividends and Distributions. Holders of shares of Concurrent Preferred
Stock are entitled to receive, when, as and if declared by the Concurrent's
Board of Directors (the "Concurrent Board") out of funds legally available for
such purpose, dividends at the rate per annum of 9.00% of the liquidation
preference (as defined below) of such shares. Such dividends are fully
cumulative, accumulate from the date of original issuance of the Concurrent
Preferred Stock, and are payable quarterly in arrears in cash at the end of each
calendar quarter, commencing with the first business day of the first fiscal
quarter which commences following the Closing Date.
No dividends or other distributions to shareholders may be paid or declared
and set apart for payment on any junior stock (including the Concurrent Common
Stock) for any period nor may any payment be made or set apart for the purchase,
redemption or other retirement of any shares of junior stock, except the Rights
(as defined below) and a distribution consisting solely of junior stock, unless
(i) full cumulative dividends have been, or contemporaneously are, paid or
declared and set apart for payment on the Concurrent Preferred Stock for all
dividend periods terminating on or prior to the date of payment of such full
cumulative dividends and (ii) Concurrent shall not be in default or in arrears
with respect to any redemption of Concurrent Preferred Stock.
Dividends may not be paid or declared and set apart for payment on the
Concurrent Preferred Stock or parity stock for any period unless full cumulative
dividends have been, or contemporaneously are, paid or declared and set apart
for payment on any parity stock or the Concurrent Preferred Stock, as the case
may be, for all dividend periods terminating on or prior to the date of payment
of such full cumulative dividends. When dividends are not paid in full upon the
Concurrent Preferred Stock and any parity stock, Concurrent may make dividend
payments on account of arrears on the Concurrent Preferred Stock or any such
parity stock, provided that Concurrent shall make such payments ratably upon all
outstanding shares of Concurrent Preferred Stock and such parity stock in
proportion to the respective amounts of dividends in arrears upon all such
outstanding shares of Concurrent Preferred Stock and such parity stock to the
date of such dividend payment.
Conversion Rights. Each holder of Concurrent Preferred Stock has the
right, at the option of such holder, at any time to convert, subject to certain
terms and conditions, one or more shares of Concurrent Preferred Stock into
fully paid and nonassessable shares of Concurrent Common Stock. Such conversion
will be made at a conversion rate of one share of Concurrent Preferred Stock for
a number of shares of Concurrent Common Stock equal to (x) the liquidation
preference divided by (y) the conversion price of Concurrent Common Stock at the
time of conversion. The conversion price will initially be $2.50, subject to
adjustment for stock splits, stock dividends, or subdivisions or
reclassifications of the Concurrent Common Stock. Assuming the initial
conversion price of $2.50 and a liquidation preference of $8,200,000, a total of
3,280,000 shares of Concurrent Common Stock would be issuable upon conversion of
all the shares of the Concurrent Preferred Stock. An amount in cash equal to the
full cumulative dividends accrued and accumulated but unpaid, whether or not
declared and without interest, on such shares of Concurrent Preferred Stock is
to be paid on the effective date of the conversion through the last quarterly
payment date that immediately precedes the effective date of the conversion. A
holder's right to convert the Concurrent Preferred Stock terminates on the date
such stock is redeemed by Concurrent. See "Redemption" below.
In the event that Concurrent shall be a party to any transaction pursuant
to which Concurrent Common Stock shall be exchanged for, converted into,
acquired for or constitute solely the right to receive other securities, cash or
other property, then appropriate provision shall be made as part of the terms of
such transaction whereby each holder of Concurrent Preferred Stock then
outstanding shall thereafter have the
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<PAGE> 54
right to convert such share only into the kind of securities, cash or other
property receivable by a holder of Concurrent Common Stock.
Exchange. Concurrent may, at its option, cause shares of Concurrent
Preferred Stock, as a whole or in part, at any time and from time to time, to be
exchanged for debentures (the "Debentures"). See "Debentures" below. Such
exchange of shares of Concurrent Preferred Stock for the Debentures will be made
at an exchange rate of Debentures in the principal amount equal to the
liquidation preference. On the effective date of the exchange, Concurrent will
pay holders of the Concurrent Preferred Stock to be exchanged an amount in cash
equal to the full cumulative dividends accrued and accumulated but unpaid,
whether or not declared and without interest, on such shares of Concurrent
Preferred Stock through the last quarterly dividend payment date that
immediately precedes the effective date of the exchange.
Each holder of Concurrent Preferred Stock will have the right at any time
after September 1, 1998, at the option of such holder, whenever dividends due
for four quarterly periods have not been paid, to exchange such shares of
Concurrent Preferred Stock, as a whole or in part, for the Debentures. Such
exchange of shares of Concurrent Preferred Stock for the Debentures shall be at
an exchange rate of Debentures in the principal amount equal to the liquidation
preference plus all dividends which are accrued and accumulated but unpaid,
whether or not declared and without interest up to the calendar quarter
immediately preceding the calendar quarter in which the date of exchange occurs.
Redemption. Whenever the Current Market Price (as defined below) exceeds
$3.75, as such price may be adjusted pursuant to stock splits, stock dividends,
subdivisions or reclassifications, prior to the date of any notice of
redemption, Concurrent may, at its option, redeem all or a portion of the shares
of Concurrent Preferred Stock, at any time or from time to time, at a price per
share equal to the liquidation preference, plus all accrued and accumulated but
unpaid dividends, whether or not declared, without interest, to the date fixed
for redemption. Dividends on the shares to be redeemed will cease to accrue on
such redemption date. "Current Market Price" means the average of the daily
closing sale prices per share of Concurrent Common Stock for the 30 consecutive
trading days immediately prior to the date in question as such price is quoted
on the principal national securities exchange or quotation system on which such
security is quoted or listed or admitted to trading.
Concurrent is required to redeem all Concurrent Preferred Stock on June 30,
2006 at a price per share equal to the liquidation preference, plus accrued and
accumulated but unpaid dividends, whether or not declared, without interest, to
the date fixed for redemption. Dividends on the shares to be redeemed will cease
to accumulate on such redemption date.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of Concurrent, whether voluntary or involuntary, each holder of
Concurrent Preferred Stock is entitled to receive out of the assets of
Concurrent available for distribution to shareholders, before any distribution
of assets shall be made to the holders of Concurrent Common Stock or of any
other shares of junior stock, a liquidating distribution in the amount of the
liquidation preference plus an amount equal to any accrued and accumulated but
unpaid dividends thereon to the date of final distribution to such holders,
whether or not declared, without interest, provided that the liquidation
preference is subject to adjustment based on an audit of the value of assets of
the Real-time Business transferred to Concurrent. If, upon any voluntary or
involuntary liquidation, dissolution or winding up of Concurrent, the assets
available for distribution are insufficient to pay in full the amounts payable
with respect to the Concurrent Preferred Stock and any other outstanding shares
of parity stock, the holders of the Concurrent Preferred Stock and of such other
parity stock share ratably in any distribution of assets of Concurrent in
proportion to the full respective preferential amounts to which they are
entitled.
Voting. Except as otherwise provided by applicable law, the holders of
shares of the Concurrent Preferred Stock have no voting rights with respect to
the election of directors or for any other purpose, except that the holders of a
majority of the outstanding shares of Concurrent Preferred Stock, voting
separately as a class, must approve any amendment, alteration or repeal of any
provision of Concurrent's Certificate of Incorporation or the Certificate of
Designation if such action would (a) increase or decrease the aggregate number
of authorized shares of Concurrent Preferred Stock, (b) increase or decrease the
par value of such shares or (c) amend, alter, repeal or change the powers,
rights, privileges or preferences of the holders of
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<PAGE> 55
shares of Concurrent Preferred Stock so as to affect them adversely, provided
that the creation, issuance or increase in the amount of authorized shares of
any series of junior stock will not be deemed to adversely affect such powers,
rights, privileges or preferences of the Concurrent Preferred Stock.
DEBENTURES
The terms of the Debentures into which the Concurrent Preferred Stock may
be converted are set forth in a term sheet (the "Debenture Term Sheet") and are
described generally below. The description below is qualified entirely by
reference to the form of Debenture Term Sheet incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part.
Principal Amount. If the Concurrent Preferred Stock is converted into
Debentures pursuant to Concurrent's conversion privilege in accordance with the
Certificate of Designation, the initial principal amount shall equal the Total
Liquidation Preference of the Concurrent Preferred Stock outstanding on the date
that such Concurrent Preferred Stock is converted (the "Conversion Date") into
the Debentures in accordance with the Certificate of Designation. If the
Concurrent Preferred Stock is converted into Debentures by the holder thereof,
the initial principal amount shall equal the Total Liquidation Preference of the
Concurrent Preferred Stock outstanding on the Conversion Date plus all dividends
which are accrued and accumulated but unpaid, whether or not declared and
without interest, up to the calendar quarter immediately preceding the quarter
in which the Conversion Date occurs. The principal amount of the Debentures
issuable upon conversion of Concurrent Preferred Stock is subject to adjustment
in a manner similar to adjustments to the liquidation preference of Concurrent
Preferred Stock. See "Concurrent Preferred Stock -- Liquidation Preference"
below.
Payment-in-Kind. Interest payments on the Debentures may be paid in cash
or in kind.
Interest Rate. The Debentures will bear interest at the rate of 9% per
annum, accruing from the first day of the calendar quarter (the "Accrual Date")
during which the Conversion Date occurred, and payable quarterly at the end of
each calendar quarter commencing on the Accrual Date.
Maturity Date. The Debentures will mature on the tenth anniversary of the
date of issuance of the Concurrent Preferred Stock.
Redemption. Subject to certain adjustments for stock splits, stock
dividends and similar transactions, whenever the Current Market Price (as
defined in the Certificate of Designation) of Concurrent Common Stock exceeds
$3.75, Concurrent may, at its option, redeem all or a portion of the Debentures,
at any time or from time to time, at par plus any accrued interest thereon. On
June 1, 2006, Concurrent is required to redeem all of the Debentures then
outstanding at par plus any accrued interest thereon or at any time the
outstanding principal amount of the Debentures is less than an amount to be
determined.
Conversion of Debentures. Each holder of a Debenture shall have the right,
at the option of such holder, at any time or from time to time, in whole or in
part, to convert such Debenture into fully paid and nonassessable shares of
Concurrent Common Stock. Such conversion of Debentures to shares of Concurrent
Common Stock shall be made at a conversion rate equal to (x) the principal
amount of such Debenture (plus any accrued and unpaid interest thereon) divided
by (y) the applicable conversion price per share of Concurrent Common Stock at
the time of conversion. The conversion price will initially be $2.50, subject to
certain adjustments for stock splits, stock dividends, or subdivisions or
reclassifications of the Concurrent Common Stock. Notwithstanding any other
provision to the contrary, the maximum number of shares in which the Debentures
shall be convertible shall be 3,280,000 (subject to adjustment on a basis
similar to the anti-dilution adjustments contained in the Certificate of
Designation for the Concurrent Preferred Stock).
Ranking. The Debentures will be general unsecured indebtedness of
Concurrent and will rank pari passu in right of payment to existing unsecured
indebtedness.
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<PAGE> 56
Modification of Debenture Terms. Modifications to provisions of the
indenture or similar instrument for the Debentures (the "Debenture Indenture")
will be effected by majority of outstanding principal amount, with certain
exceptions involving certain fundamental changes which shall require unanimous
approval.
Certain Restrictions. The terms of the Debenture Indenture will provide
that, subject to certain exceptions, Concurrent will not directly or indirectly
(i) declare or pay any dividend or make any distribution on account of any of
its capital stock or of its subsidiaries; (ii) purchase or redeem for value any
of its capital stock of Concurrent, any subsidiary or other affiliates; nor
(iii) purchase or redeem for value or make any cash interest payment on any
indebtedness of Concurrent that is subordinated to the Debentures, unless at the
time of such payment no default or event of default will have occurred and be
continuing or would occur as a consequence thereof and interest due on the
Debentures for the four calendar quarters immediately preceding the quarter in
which such payment occurs shall have been paid in cash. The Debenture Indenture
will further provide that Concurrent may not consolidate or merge or sell or
lease all or substantially all of its properties and assets as an entirety,
unless (i) the surviving entity (if other than Concurrent) is an entity
organized in the United States and assumes all the obligations of Concurrent
under the Debenture Indenture and (ii) immediately before and after giving
effect to such transaction, no event of default with respect to the Debentures
will have occurred and be continuing.
Events of Default. The terms of the Debentures will provide that each of
the following constitutes an event of Default: (i) default in the payment when
due of interest on the Debentures for a number of days after notice to be
determined by Concurrent and the Company; (ii) default in payment when due of
the principal of, or premium, if any, on the Debentures; (iii) failure by
Concurrent to comply with any of its other agreements in the Debenture Indenture
or the Debentures for a number of days to be determined by Concurrent and the
Company after notice; and (iv) certain events of bankruptcy or insolvency with
respect to Concurrent or any of its subsidiaries.
THE SHARE HOLDING AGREEMENT
In connection with the Real-time Sale, the Company and Concurrent entered
into a Share Holding Agreement relating to the Purchased Shares and the
Concurrent Common Stock Consideration. The Share Holding Agreement is described
generally below. The description below is qualified entirely by reference to the
Share Holding Agreement, which is incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part. All references to
numbers of shares are subject to adjustment for stock splits or stock dividends
and similar transactions.
Corporate Governance. Pursuant to the Share Holding Agreement, the
Concurrent Board must consist of no more than nine directors, including the
initial directors designated by the Company. The initial designees of the
Company are E. Courtney Siegel (formerly the President and Chief Executive
Officer of the Company), C. Shelton James and Michael F. Maguire. Until
September 30, 1997, the Company will be entitled to designate three members of
the Concurrent Board, provided that if the Company beneficially owns less than
2,400,000 shares of Concurrent Common Stock on the date of the mailing of the
proxy statement for the next annual meeting of Concurrent, the Company will not
be entitled to any representation on the Concurrent Board. After September 30,
1997, as long as the Company beneficially owns at least 10,700,000 shares,
4,700,000 shares or 2,400,000 shares of Concurrent Common Stock, the Company
will be entitled to designate three directors, two directors or one director,
respectively, on the Concurrent Board and Concurrent will maintain a board of
directors of no more than nine directors.
Pursuant to the Share Holding Agreement, the Company's Board of Directors
will consist of no more than seven directors, including Richard P. Rifenburgh,
who is designated by Concurrent. So long as Concurrent beneficially owns at
least 375,000 shares of the Company's Common Stock, Concurrent is entitled to
name one nominee to the Company's Board of Directors, provided that if
Concurrent beneficially owns less than 375,000 shares of the Company's Common
Stock on the date of the mailing of the proxy statement for the next annual
meeting of the Company's shareholders, Concurrent will not be entitled to any
representation on the Company's Board of Directors.
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<PAGE> 57
Voting of Shares. Until Concurrent beneficially owns less than 341,589
shares of the Company's Common Stock (the number of shares Concurrent will own
immediately following this offering), Concurrent must be present for all
shareholder meetings for purposes of establishing a quorum and must vote all
securities of the Company owned by it and entitled to vote in favor of matters
recommended by the Company's Board of Directors for approval by shareholders. So
long as either (i) the Company beneficially owns at least 4,700,000 shares of
Concurrent Common Stock or (ii) the Company beneficially owns at least at least
2,400,000 shares of Concurrent Common Stock and at least one member of the
existing Concurrent Board (other than the Chief Executive Officer) is a designee
of the Company, the Company must be present for all shareholder meetings for
purposes of establishing a quorum and must vote all securities of Concurrent
owned by it and entitled to vote in favor of matters recommended by the
Concurrent Board for approval by shareholders.
Transfer Restrictions. Except in connection with any transfers in
accordance with clause (ii) under "Third Party Offers" below, neither the
Company nor Concurrent nor their subsidiaries may, directly or indirectly, sell,
transfer or otherwise dispose of any securities of the other except (i) pursuant
to a sale to any other person of any such securities in an amount of less than
5% of the outstanding securities of any class of Concurrent or the Company, as
the case may be (including open market transactions that are not intended to
assist the buyer in acquiring over 5% of the securities of the other or, if to
certain institutional investors eligible to file a statement on Schedule 13G,
greater than 5% but less than 10%); (ii) pursuant to a merger, consolidation or
other business combination if the surviving or purchasing entity agrees to be
bound by the terms of the Share Holding Agreement; (iii) certain intracompany
transfers; (iv) pursuant to the pledge provisions described below; and (v) in
order to, and only to the extent necessary to, comply with applicable law. For
purposes of the provisions regarding restrictions on transfer, the Concurrent
Preferred Stock shall be deemed to be the same class of securities as the
Concurrent Common Stock.
The Company or Concurrent may pledge the securities of the other received
in connection with the Real-time Sale to secure borrowings or other indebtedness
as extended from time to time if (i) the pledgee agrees in writing not to sell,
transfer or otherwise dispose of the securities pledged to it other than
pursuant to an effective registration statement on Form S-3 or an applicable
exemption from registration under the Securities Act; (ii) the pledgee agrees in
writing to be bound by the terms of the Share Holding Agreement; and (iii) all
certificates representing securities pledged to such pledgee bear an appropriate
restrictive legend.
Standstill. Until December 30, 1999, neither Concurrent nor the Company
nor any of their controlled affiliates may, directly or indirectly, seek (i) to
acquire or affect control of the other; (ii) to propose or support any merger,
business combination, change of control of the other or their subsidiaries;
(iii) to gain additional representation on the Board of Directors of the other,
remove directors from the other's Board or change size or composition of such
Board; (iv) to propose any security holder proposal without the approval of the
Board of Directors of the other; (v) deposit any securities of the other in a
voting trust or similar arrangement; (vi) disclose or take any action that would
require disclosure of any intent, purpose, plan, arrangement or proposal
inconsistent with the foregoing; (vii) make any request to amend or waive any
portion of the standstill provision in the Share Holding Agreement, which
request would require public disclosure under applicable law, rule or
regulation; (viii) take any action challenging the validity or enforceability of
the foregoing; (ix) or assist, advise, encourage or negotiate with any person
with respect to, or seek to do, any of the foregoing.
Third Party Offers. As long as the Company beneficially owns more than 10%
of the outstanding voting securities of Concurrent, the Company may either (i)
exercise its right of first refusal with respect to offers by any third party to
acquire Concurrent that has been approved by a majority of the Concurrent Board
or (ii) support such third party offer, including tender or sale of all the
Concurrent securities owned by it and its controlled affiliates to the third
party offeror.
Registration. The Share Holding Agreement requires Concurrent and the
Company to register the shares of their respective common stock received by the
other in connection with the Real-time Sale (or issuable upon conversion of the
Concurrent Preferred Stock) on Form S-3 (to be maintained effective for three
years plus the amount of time during such period that certain standstill
provisions, described below, shall have been in effect) and to list such shares
for trading on the Nasdaq National Market System. For certain periods when the
Company or Concurrent is "in registration" with respect to a public offering of
its shares and
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<PAGE> 58
the other party holds certain threshold numbers of shares, the party not in
registration is subject to certain standstill provisions restricting sales of
the securities of the other. However, each such restricted party has the right
to include a certain number of shares in the public offering of the other. An
amount of 341,589 shares of Common Stock held by Concurrent is included in this
offering pursuant to the registration provisions of the Share Holding Agreement.
The Share Holding Agreement provides both the Company and Concurrent certain
cross indemnification rights for losses incurred in connection with the
registration of securities, including for liabilities arising under the
Securities Act.
Termination. The Share Holding Agreement will automatically terminate upon
the last to occur of all of the following (i) any standstill period has expired
and (ii) each of the Company and Concurrent own less than 5% of the common stock
of the other.
ANCILLARY AGREEMENTS
The Company and Concurrent are parties to a Noncompetition Agreement, a
Shared Services Agreement, a Lease, a Night Hawk Supplier Agreement and a
CyberGuard Reseller Agreement, each effective upon the closing of the Real-time
Sale. The Noncompetition Agreement contains provisions prohibiting the Company
and Concurrent from competing in the respective markets of each Company for five
years. The Shared Services Agreement, which has a one-year term, provides for
Concurrent to provide certain administrative and personnel-related services to
the Company at prices based on the cost of providing such services at market
rates. The Lease provides for Concurrent to lease approximately 10,000 square
feet of Concurrent's Fort Lauderdale facility to the Company at $13.75 per
square foot. The Lease has a one-year term. The Night Hawk Supplier Agreement
provides for Concurrent to supply the Company's requirements for Night Hawk
computers at advantageous rates. The CyberGuard Reseller Agreement provides for
Concurrent to purchase the Company's products for installation on Concurrent's
Night Hawk computers for resale by Concurrent. Both the Night Hawk Supplier
Agreement and the CyberGuard Reseller Agreement have terms of one year.
REVOLVING LINE OF CREDIT
On June 27, 1996, the Company executed an amendment to a Loan and Security
Agreement dated April 1, 1996 (collectively, the "Loan and Security Agreement")
between the Company and Foothill pursuant to which the Company obtained the
Revolving Line of Credit. The Company may borrow up to $5,000,000 under the
Revolving Line of Credit any borrowings will bear interest at a rate of 2% above
the lowest rate announced from time to time by Norwest Bank Minnesota, National
Association. The Revolving Line of Credit terminates upon the earlier to occur
of this offering or September 30, 1996 and is secured by all the assets of the
Company. The Revolving Line of Credit is subject to certain financial covenants
and restricts the Company, without Foothill's prior written consent, from
incurring of any additional indebtedness, allowing the creation of liens,
undergoing major corporate transactions (including a change of control), or
making capital expenditures in excess of certain amounts. The Company has also
agreed not to declare dividends on its Common Stock (other than dividends in
capital stock) without Foothill's prior written consent. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
On June 27, 1996, in consideration for Foothill's agreeing to extend the
termination of the Revolving Line of Credit beyond the closing of the Real-time
Sale, the Company issued to Foothill warrants to purchase 100,000 shares of the
Company's Common Stock at a price of $____ per share (the "Foothill Warrants").
The Foothill Warrants become exercisable five days from the closing of this
offering and expire on June 27, 2001. The Foothill Warrants contain customary
anti-dilution provisions. The Foothill Warrants contain "demand registration
rights," pursuant to which the Company is obligated to register the Foothill
Warrants under the Securities Act under certain circumstances. The Company has
the right to repurchase the Foothill Warrants and shares issued upon exercise of
the Foothill Warrants in the event that the Revolving Line of Credit is repaid
prior to September 30, 1996. The repurchase price is (i) $2,000 multiplied by
the number of days from June 27, 1996 to the date of repayment of the Revolving
Line of Credit plus (ii) the aggregate
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exercise price paid by the holders of warrants in connection with the issuance
of any shares of Common Stock upon exercise of the Foothill Warrants.
OTHER
Upon the closing of the Real-time Sale, 640,229 options outstanding to
purchase Common Stock became vested and exercisable. In addition, restrictions
on 39,000 and 13,800 shares of Common Stock owned, respectively, by E. Courtney
Siegel, the Company's president and Chief Executive Officer prior to the Real-
time Sale, and Daniel S. Dunleavy, the Company's Chief Financial and Chief
Administrative Officer prior to the Real-time Sale, lapsed upon consummation of
the Real-time Sale. The Company also will issue 78,000 and 13,800 shares of
Common Stock, respectively, to Messrs. Siegel and Dunleavy as consideration for
their entering into non-competition agreements with the Company that became
effective upon consummation of the Real-time Sale.
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<PAGE> 60
PRINCIPAL AND SELLING SHAREHOLDERS
The following sets forth, as of July 2, 1996 and as adjusted at that date
to reflect the sale of the Company's Common Stock offered hereby and the
consummation of the Real-time Sale, information with respect to the beneficial
ownership of the Company's Common Stock by: (i) each Selling Shareholder; (ii)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of the Company's Common Stock; (iii) each director of the
Company; (iv) each of the Company's named executive officers; and (v) all
directors and executive officers as a group. Unless otherwise indicated, each of
the shareholders named in this table: (a) has sole voting and investment power
with respect to all shares of Common Stock beneficially owned and (b) has the
same address as the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
----------------------- SHARES TO BE --------------------------
NUMBER OF SOLD IN NUMBER
NAME/ADDRESS SHARES PERCENT OFFERING OF SHARES PERCENT(1)
- -------------------------------------- --------- ------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Concurrent Computer Corporation....... 683,178 9.96% 341,589 341,589 3.89%
2 Crescent Place
Oceanport, New Jersey 07757
Okabena Partnership K................. 548,820 8.00 0 548,820 6.25
5140 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Paul Tudor Jones II................... 451,500 6.58 0 451,500 5.15
c/o Tudor Investment Corporation
One Liberty Plaza, 51st Floor
New York, New York 10006(2)
Austin W. Marxe....................... 366,915 5.35 0 366,915 4.18
153 East 53 Street
New York, New York 10022(3)
E. Courtney Siegel(4)(6).............. 164,790 2.39 117,000 47,790 *
Daniel S. Dunleavy(5)(6).............. 122,624 1.76 27,600 95,024 1.07%
Michael N. Smith(5)................... 75,950 1.10 19,000 56,950 *
Robert T. Menzel(5)................... 90,843 1.31 37,922 52,921 *
Robert E. Chism(5).................... 75,658 1.09 18,900 56,758 *
Robert L. Carberry(7)................. 0 * 0 0 *
Patrick O. Wheeler(5)................. 3,785 * 0 3,785 *
Frank Gelbart(7)...................... 0 * 0 0 *
Katherine K. Hutchison(5)............. 12,900 * 0 12,900 *
Bradley C. Lesher(5).................. 70,641 1.02 34,500 36,142 *
Robert F. Perks(5).................... 6,477 * 0 6,477 *
Rick A. Siebenaler(5)................. 11,574 * 0 11,574 *
Brian Foremny(5)...................... 30,000 * 0 30,000 *
C. Shelton James(5)(8)................ 21,000 * 0 21,000 *
Michael F. Maguire(5)................. 21,000 * 0 21,000 *
Richard P. Rifenburgh(5).............. 6,000 * 0 6,000 *
All directors and officers as a group
(9) persons...................... 183,376 2.63% 34,500 148,876 1.68%
</TABLE>
- ---------------
* Less than 1% (footnotes continued on following page)
(1) Assumes that the Underwriters' over-allotment option is not exercised.
(2) Includes 146,600 shares of Harris Common Stock owned by The Raptor Global
Fund Ltd. ("Raptor Ltd."), 77,400 shares of Harris Common Stock owned by
The Raptor Global Fund L.P. ("Raptor
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<PAGE> 61
L.P."), 30,100 shares of Harris Common Stock owned by Tudor Arbitrage
Partners L.P. ("TAP"), 30,100 shares of Harris Common Stock owned by Tudor
Global Trading LLC ("TGT") and 197,400 shares of Harris Common Stock owned
by Tudor BVI Futures, Ltd. ("Tudor BVI"). Tudor Investment Corporation
("TIC"), Raptor L.P.'s general partner, shares voting and investment power
with respect to shares owned by Raptor Ltd., Raptor L.P., TAP and Tudor
BVI. In addition, Paul Tudor Jones II ("Mr. Jones"), the principal
shareholder and executive officer of TIC, shares voting and investment
power with respect to shares owned by TIC. TGT, sole general partner of
TAP, shares voting and investment power with respect to shares owned by
TAP.
(3) Includes 97,705 shares of Common Stock owned by Special Situations Fund
III, L.P. (the "Fund") and 24,600 shares of Common Stock owned by Special
Situations Cayman Fund, L.P. (the "Cayman Fund"). MGP Advisors Limited
Partnership ("MGP"), the Fund's general partner, shares voting and
investment power as to the shares of Common Stock owned by the Fund. AWM
Investment Company, Inc. ("AWM"), the general partner of MGP and the Cayman
Fund, and Austin W. Marxe, the principal shareholder and executive officer
of AWM, share voting and investment power as to the shares of Common Stock
beneficially owned by the MGP, the Fund, and the Cayman Fund.
(4) In addition to the 164,000 shares listed in the table, Mr. Siegel also has
options to purchase 137,000 shares of Common Stock, the vesting of which
would have accelerated upon consummation of the Real-time Sale but as to
which Mr. Siegel agreed to delay acceleration.
(5) Includes options that are currently exercisable to purchase Common Stock in
the following amounts: Mr. Siegel -- 40,000 shares; Mr. Dunleavy -- 93,000
shares; Mr. Smith -- 75,000 shares; Mr. Menzel -- 90,000 shares; Mr.
Chism -- 75,000 shares; Mr. Wheeler -- 3,000 shares; Ms.
Hutchison -- 12,600 shares; Mr. Lesher -- 69,000 shares; Mr. Perks -- 6,000
shares; Mr. Siebenaler -- 11,301 shares; Mr. Foremny -- 30,000 shares; Mr.
James -- 21,000 shares; Mr. Maguire -- 21,000 shares; and Mr.
Rifenburgh -- 6,000 shares.
(6) Includes 78,000 shares of Common Stock, in the case of Mr. Siegel, and
13,800 shares of Common Stock, in the case of Mr. Dunleavy, issued in
connection with the Real-time Sale pursuant to their respective
non-competition agreements.
(7) Does not include, in the case of Mr. Carberry, options granted pursuant to
the Carberry Employment Agreement to purchase 339,000 shares of Common
Stock at an exercise price of $10.67 per share that become exercisable in
three equal annual installments beginning March 5, 1997; or, in the case of
Mr. Gelbart, options granted pursuant to his employment agreement to
purchase 100,000 shares of Common Stock at an exercise price of $18.75 per
share that become exercisable in three equal annual installments beginning
June 1, 1997.
(8) Does not include 255,000 shares that are deemed beneficially owned by Mr.
James as a result of his serving as an executive officer and director of
various investment limited partnerships.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value of $.01 per share and 5,000,000 shares of Preferred
Stock, par value $.01 per share. As of July 1, 1996, 6,860,172 shares of Common
Stock and no shares of preferred stock were outstanding. An additional 1,861,664
shares of Common Stock may be issued upon the exercise of outstanding warrants
or options to purchase common stock (1,751,342 such options will be outstanding
following exercise by certain Selling Shareholders of options to purchase shares
of Common Stock that are being sold by such Selling Shareholders in this
offering).
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Shareholders do not have the right to cumulate their votes in elections of
directors. Accordingly, holders of a majority of the issued and outstanding
Common Stock will have the right to elect all the Company's directors and
otherwise control the affairs of the Company.
Holders of Common Stock are entitled to dividends on a pro rata basis upon
declaration of dividends by the Board of Directors. Dividends are payable only
out of funds legally available for the payment of dividends. The Board of
Directors is not required to declare dividends, and it currently expects to
retain earnings to finance the development of the Company's business. See
"Dividend Policy."
Upon a liquidation of the Company, holders of the Common Stock will be
entitled to a pro rata distribution of the assets of the Company, after payment
of all amounts owed to the Company's creditors, and subject to any preferential
amount payable to holders of Preferred Stock of the Company, if any. Holders of
Common Stock have no preemptive, subscription, conversion, redemption or sinking
fund rights.
PREFERRED STOCK
The Articles of Incorporation permit the Company's Board of Directors to
issue shares of Preferred Stock in one or more series and to fix the relative
rights, preferences and limitations of each series. Among such rights,
preferences and limitations are dividend rates, provisions of redemption, rights
upon liquidation, conversion privileges and voting powers. Should the Board of
Directors elect to exercise this authority, the rights and privileges of holders
of Common Stock could be made subject to the rights and privileges of any such
series of Preferred Stock. The Board of Directors of the Company currently has
no plans to issue any shares of Preferred Stock. The issuance of Preferred Stock
could have the effect of making it more difficult for a third party to acquire,
or discouraging a third party from acquiring, a majority of the outstanding
voting stock of the Company.
CERTAIN ANTI-TAKEOVER PROVISIONS INCLUDED IN THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
The Articles of Incorporation provide for a Board of Directors divided into
three classes, as nearly equal in number as possible. The directors are elected
for three-year terms, which are staggered so that the terms of approximately
one-third of the directors expire each year. The Articles of Incorporation
permit removal of directors only for cause by the shareholders of the Company at
a meeting by the affirmative vote of at least 50% of the outstanding shares
entitled to vote for the election of directors (the "Voting Stock"). The
Articles of Incorporation provide that any vacancy on the Board of Directors may
be filled only by the remaining directors then in office.
The Articles of Incorporation of the Company also provide that shareholder
action can be taken only at an annual or special meeting of shareholders or by
unanimous written consent in lieu of a meeting. The Company's Articles of
Incorporation provide that special meetings of the shareholders of the Company
can be called (i) pursuant to a resolution approved by the Chairman of the Board
of Directors, the Chief Executive Officer or a majority of the Company's Board
of Directors then in office or (ii) upon delivery or one or more
61
<PAGE> 63
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% of all holders of
shares of all classes or series of the Company, voting as a class, entitled to
vote on the issues proposed to be considered at such special meeting.
The Bylaws establish an advance notice procedure for the nomination of
candidates for election as directors by shareholders as well as for shareholder
proposals to be considered at shareholders' meetings.
The above-described provisions may have certain anti-takeover effects. Such
provisions, in addition to the provisions described below, may make it more
difficult for persons, without the approval of the Company's Board of Directors,
to make a tender offer or acquire substantial amounts of the Common Stock or
launch other takeover attempts that a shareholder might consider in such
shareholder's best interests, including attempts that might result in the
payment of a premium over the market price for the Common Stock held by such
shareholder.
CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to certain anti-takeover provisions under Florida
law that apply to a public corporation organized under Florida law including the
Florida Control Share Acquisition Act (the "Control Share Act"). The Control
Share Act prohibits the voting of shares in a publicly-held Florida corporation
that are acquired in a "control share acquisition" unless the holders of a
majority of the corporation's voting shares (exclusive of shares held by
officers of the corporation, inside directors or the acquiring party) approve
the granting of voting rights as to the shares acquired in the control share
acquisition or unless the acquisition is approved by the corporation's board of
directors. A "control share acquisition" is defined as an acquisition that
immediately thereafter entitles the acquiring party to voting power within each
of the following ranges: (i) one-fifth or more but less than one-third of such
voting power; (ii) one-third or more but less than a majority of such voting
power; or (iii) a majority or more of such voting power.
RIGHTS AGREEMENT
The Company has adopted and implemented a Shareholder Protection Rights
Agreement (the "Rights Agreement"), dated September 29, 1994, with Society
National Bank, N.A. as "Rights Agent." Pursuant to the terms of the Rights
Agreement, each share of Common Stock has attached a preferred stock purchase
right (the "Rights"). Each Right entitles its holder to purchase from the
Company, after the Separation Time (as defined below), one hundredth of a share
of Preferred Stock, par value $.01 per share, or, at the option of the Company,
one share of Common Stock for $12.67 (the "Exercise Price"), subject to
adjustment. The Rights do not trade separately from the Common Stock unless and
until the Separation Time.
The Rights are evidenced by certificates of the Company's Common Stock
until the close of business on the earlier of (either, the "Separation Time"):
(i) the tenth business day (or such later date as the Board of Directors may
from time to time fix by resolution adopted prior to the Separation Time that
would otherwise have occurred) after the date on which any Person (as defined in
the Rights Agreement) commences a tender or exchange offer that, if consummated,
would result in such Person's becoming an Acquiring Person (as defined below);
and (ii) the first date (the "Flip-in Date") of public announcement by the
Company that a Person has become an Acquiring Person, other than as a result of
a Flip-over Transaction or Event (as defined below); provided that if a tender
or exchange offer referred to in clause (i) is cancelled, terminated or
otherwise withdrawn prior to the Separation Time without the purchase of any
Common Stock pursuant thereto, such offer will be deemed never to have been
made.
An Acquiring Person is any Person having Beneficial Ownership (as defined
in the Rights Agreement) of 15% or more of the outstanding Common Stock, which
term does not include: (i) the Company, any wholly-owned subsidiary of the
Company or any employee stock ownership or other employee benefit plan of the
Company; (ii) any Person who becomes the Beneficial Owner of 15% or more of the
outstanding Common Stock solely as a result of an acquisition of Common Stock by
the Company, until such time as such Person acquires additional Common Stock,
other than through a dividend or stock split; (iii) any Person who becomes an
Acquiring Person without any plan or intent to seek or affect control of the
Company if such Person, upon notice by the Company, promptly divests sufficient
securities such that such 15% or greater
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<PAGE> 64
Beneficial Ownership ceases; or (iv) any Person who beneficially owns Common
Stock consisting solely of (A) shares acquired pursuant to the grant or exercise
of an option granted by the Company in connection with an agreement to merge
with, or acquire, the Company at a time at which there is no Acquiring Person,
(B) shares owned by such Person and its affiliates and associates at the time of
such grant and (C) shares, amounting to less than 1% of the outstanding Common
Stock, acquired by affiliates and associates of such Person after the time of
such grant.
The Rights Agreement provides that, until the Separation Time, the Rights
will be transferred only with the Common Stock. Common Stock certificates issued
after the Record Time but prior to the Separation Time will evidence one Right
for each share of Common Stock represented thereby and will contain a legend
incorporating by reference the terms of the Rights Agreement (as such may be
amended from time to time). Promptly following the Separation Time, separate
certificates evidencing the Rights (the "Rights Certificates") will be mailed to
holders of record of Common Stock at the Separation Time.
The Rights are not be exercisable until the business day following the
Separation Time. The Rights will expire on the earliest of: (i) the Exchange
Time (as defined below); (ii) the close of business on the tenth year
anniversary of the date the Company enters into the Rights Agreement; and (iii)
the date on which the Rights are terminated as described below (in any such
case, the "Expiration Time").
The Exercise Price and the number of Rights outstanding, or in certain
circumstances the securities purchasable upon exercise of the Rights, are
subject to adjustment from time to time to prevent dilution in the event of a
Common Stock dividend on, or a subdivision or a combination into a smaller
number of shares of, Common Stock, or the issuance or distribution of any
securities or assets in respect of, in lieu of or in exchange for Common Stock.
In the event that prior to the Expiration Time a Flip-in Date occurs, the
Company must take such action as necessary to ensure that each Right (other than
Rights beneficially owned by the Acquiring Person or any affiliate or associate
thereof, which Rights will become void) will constitute the right to purchase
from the Company, upon its exercise, that number of shares of Common Stock of
the Company having an aggregate Market Price (as defined in the Rights
Agreement), on the date of the public announcement of a Person becoming an
Acquiring Person (the "Stock Acquisition Date"), equal to twice the Exercise
Price for an amount in cash equal to the then current Exercise Price. In
addition, the Board of Directors may, at any time after a Flip-in Date and prior
to the time that an Acquiring Person becomes the Beneficial Owner of more than
50% of the outstanding Common Stock, elect to exchange all (but not less than
all) the then outstanding Rights (other than Rights beneficially owned by the
Acquiring Person or any affiliate or associate thereof, which Rights become
void) for shares of Common Stock at an exchange ratio of one share of Common
Stock per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date of the Separation Time
(the "Exchange Ratio"). Immediately upon such action by the Board of Directors
(the "Exchange Time"), the right to exercise the Rights will terminate and each
Right will thereafter represent only the right to receive a number of shares of
Common Stock equal to the Exchange Ratio.
Whenever the Company becomes obligated as described in the preceding
paragraph to issue shares of Common Stock upon exercise of or in exchange for
Rights, the Company may substitute therefor shares of Preferred Stock, at a
ratio of one hundredth of a share of Preferred Stock for each share of Common
Stock so issuable.
In the event that prior to the Expiration Time the Company enters into,
consummates or permits to occur a transaction or series of transactions after
the time an Acquiring Person has become such in which, directly or indirectly,
(i) the Company shall consolidate or merge or participate in a binding share
exchange with any other Person if, at the time of the consolidation, merger or
share exchange or at the time the Company enters into an agreement with respect
to such consolidation, merger or share exchange, the Acquiring Person controls
the Board of Directors and any term of, or arrangement concerning the treatment
of shares of, capital stock in such consolidation, merger or share exchange
relating to the Acquiring Person is not identical to the terms and arrangements
relating to other holders of Common Stock or (ii) the Company shall sell or
otherwise transfer (or one or more if its subsidiaries shall sell or otherwise
transfer) assets (A) aggregating more than 50% of the
63
<PAGE> 65
assets (measured by either book value or fair market value) or (B) generating
more than 50% of the operating income or cash flow of the Company and its
subsidiaries (taken as a whole) to any other Person (other than the Company or
one or more of its wholly-owned subsidiaries) or two or more such Persons which
are affiliated or otherwise acting in concert, if, at the time of such sale or
transfer of assets or at the time the Company (or any such subsidiary) enters
into an agreement with respect to such sale or transfer, the Acquiring Person
controls the Board of Directors (a "Flip-over Transaction or Event"), the
Company must take such action as is necessary to ensure, and must not enter
into, consummate or permit to occur such Flip-over Transaction or Event until it
has entered into a supplemental agreement with the Person engaging in such
Flip-over Transaction or Event or the parent corporation thereof (the "Flip-over
Entity"), for the benefit of the holders of the Rights, providing, that upon
consummation or occurrence of the Flip-over Transaction or Event (i) each Right
will thereafter constitute the right to purchase from the Flip-over Entity, upon
its exercise, that number of shares of common stock of the Flip-over Entity
having an aggregate Market Price on the date of consummation or occurrence of
such Flip-over Transaction or Event equal to twice the Exercise Price for an
amount in cash equal to the then current Exercise Price and (ii) the Flip-over
Entity will thereafter be liable for, and must assume, by virtue of such
Flip-over Transaction or Event and such supplemental agreement, all the
obligations and duties of the Company pursuant to the Rights Agreement. For
purposes of the foregoing description, the term "Acquiring Person" includes any
Acquiring Person and its Affiliates and Associates counted together as a single
Person.
The Board of Directors may, at any time prior to the Flip-in Date,
terminate the Rights without any payment to the holders thereof. Immediately
upon the action of the Board of Directors to terminate the Rights, without
further action and without any notice, the right to exercise the Rights will
terminate and each Right will thereafter be null and void.
The holders of Rights will, solely by reason of their ownership of Rights,
have no rights as shareholders of the Company, including the right to vote or to
receive dividends.
The Company and the Rights Agent may from time to time supplement or amend
the Rights Agreement without the approval of any holders of Rights: (i) prior to
the Flip-in Date, in any respect; and (ii) after the Flip-in Date, to make any
changes that the Company may deem necessary or desirable and that do not
materially adversely affect the interests of the holders of Rights generally or
in order to cure any ambiguity or to correct or supplement any provision
contained therein which may be inconsistent with any other provision therein or
otherwise defective.
The Rights will not prevent a takeover of the Company. However, the Rights
may cause substantial economic and voting dilution to a person or group that
acquires 15% or more of the Common Stock unless the Rights are first terminated
by the Board of Directors. Nevertheless, management believes that the Rights
should not interfere with a transaction that is in the best interests of the
Company and its shareholders because the Rights can be terminated on or prior to
the Flip-in Date, before the consummation of such transaction.
As long as the Rights are attached to the Common Stock, the Company will
issue one Right with each new share of Common Stock, including the shares
offered by the Company hereby, so that all shares will have Rights attached. The
Company's Board of Directors has reserved for issuance upon exercise of the
Rights approximately 60,000 shares of Preferred Stock.
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
After completion of the offering, the Company will have 8,773,983 shares of
Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option or any employee stock options). All of these shares
(including the 2,400,000 offered hereby) are or will be tradable without
restriction or further registration under the Securities Act, unless purchased
by "affiliates" of the Company, as that term is defined under Rule 144
promulgated under the Securities Act ("Rule 144"). Of these, 341,589 shares are
subject to a Share Holding Agreement that provides generally for such shares to
be freely tradable but subject to certain restrictions on the nature of the
transferees and for certain volume limitations under certain circumstances. See
"Certain Transactions."
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any affiliate of the Company, the acquiror or subsequent holder is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of the Company's Common
Stock (approximately 84,983 shares immediately after the offering, assuming no
exercise of the Underwriters' over-allotment option) or the average weekly
trading volume of the Company's Common Stock or the Nasdaq Stock Market's
National Market or reported through the automated quotation system of a
registered securities association during the four calendar weeks preceding the
date on which notice of the sale is filed with the SEC. Sales under Rule 144 are
also subject to certain manner of sales provisions, notice requirements and the
availability of current public information about the Company. If three years
have elapsed since the later of the date of acquisition of restricted shares
from the Company or from any affiliate of the Company, and the acquiror or
subsequent holder thereof is deemed not to have been an affiliate of the Company
at any time during the 90 days preceding a sale, such person would be entitled
to sell such shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information requirements
or notice requirements.
The Company is unable to predict the effect that sales of Common Stock made
under Rule 144, pursuant to future registration statements or otherwise, may
have on any then prevailing market price for shares of the Common Stock.
Nevertheless, sales of a substantial amount of the Common Stock in the public
market, or the perception that such sales could occur, could materially
adversely affect the market price of the Common Stock as well as the Company's
ability to raise additional capital through the sale of its equity securities.
The Company, together with each of its executive officers and directors and
certain of the Selling Shareholders, owning upon the consummation of this
offering an aggregate of 1,196,324 shares of Common Stock or options to purchase
Common Stock, have entered into a "lock up" with the Underwriters pursuant to
which they have agreed that they will not, without the prior consent of the
Underwriters, sell, contract to sell or otherwise dispose of, directly or
indirectly, any Common Stock or securities convertible into Common Stock until
180 days after the date of this Prospectus. Certain other Selling Shareholders,
owning an aggregate of 512,584 shares of Common Stock or options to purchase
Common Stock, have agreed to identical lock up provisions with respect to
383,753 such shares or options to purchase shares. Shares of Common Stock that
are not subject to the lock up provisions are, and all such shares once the lock
provisions expire will be, freely tradable subject to compliance with Rule 144
under the Securities Act with respect to shares held by affiliates. See
"Underwriting."
An aggregate of up to 1,685,448 shares of Common Stock issuable under the
Stock Incentive Plan (consisting of options currently outstanding to purchase
1,140,342 shares of Common Stock and 545,106 shares remaining available for
grant or award thereunder) and an additional 411,000 shares issuable upon
exercise of currently outstanding non-plan options may become eligible for sale
without restriction to the extent they are held by persons who are not
affiliates of the Company and by affiliates pursuant to Rule 144. See
"Management -- Stock Incentive Plan," "Certain Transactions" and "Principal and
Selling Shareholders." An additional 100,000 shares of Common Stock are issuable
upon the exercise of the warrants held by the Company's lender. See "Certain
Transactions -- Revolving Line of Credit."
TRANSFER AGENT AND REGISTRAR
KeyCorp Shareholder Services, Inc. has been appointed the transfer agent
and registrar for the Common Stock. Its address is KeyCorp Shareholder Services,
Inc., P.O. Box 6477, Cleveland, Ohio 44101-1477.
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<PAGE> 67
UNDERWRITING
The underwriters named below (collectively, the "Underwriters"), acting
through their representatives, Bear, Stearns & Co. Inc., Cowen & Company and
Furman Selz LLC (the "Representatives"), have severally agreed, subject to the
terms and conditions of the underwriting agreement with the Company and the
Selling Shareholders (the "Underwriting Agreement"), to purchase from the
Company and the Selling Shareholders the respective number of Shares of Common
Stock set forth opposite their respective names below. The underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Bear, Stearns & Co. Inc...........................................................
Cowen & Company...................................................................
Furman Selz LLC...................................................................
---------
Total................................................................... 2,500,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose initially to offer the Shares to the public at the
public offering price and on the terms set forth on the cover page of this
Prospectus. The Underwriters may allow selected dealers a concession of not more
than $ per share and such dealers may re-allow, a concession of not
more than $ per share to certain other dealers. After this offering,
the price and concession and reallowances to dealers may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period following the date of this Prospectus, to purchase up to a
maximum of 375,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the Shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional Shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such Shares only to cover
over-allotments made in connection with this offering.
The Company, together with each of its executive officers and directors and
certain of the Selling Shareholders, owning upon the consummation of this
offering an aggregate of 1,196,324 shares of Common Stock or options to purchase
Common Stock, have entered into a "lock up" with the Underwriters pursuant to
which they have agreed that they will not, without the prior consent of the
Representatives, sell, contract to sell or otherwise dispose of, directly or
indirectly, any Common Stock or securities convertible into Common Stock until
180 days after the date of this Prospectus. Certain other Selling Shareholders,
owning an aggregate of 512,584 shares of Common Stock or options to purchase
Common Stock, have agreed to identical lock up provisions with respect to
383,753 such shares or options to purchase shares.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
Certain of the Underwriters have from time to time performed various
investment banking services for the Company and its subsidiaries, for which
customary compensation has been received. The Company has retained Bear, Stearns
& Co. Inc. ("Bear Stearns") as its financial advisor in connection with the
Real-time
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<PAGE> 68
Sale. Pursuant to the engagement letter entered into between the Company and
Bear Stearns in connection with such engagement, Bear Stearns received a
customary financial advisory fee as well as the right to serve as lead
underwriter with respect to this offering. In addition, Bear Stearns may sell on
behalf of the Company up to 1,000,000 shares of Concurrent Common Stock for
which Bear Stearns will receive customary commissions.
Certain of the Underwriters that currently act as market makers for the
Company's Common Stock may engage in "passive market making" in such securities
on Nasdaq in accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A
permits, upon the satisfaction of certain conditions, underwriters and selling
group members participating in a distribution that are also Nasdaq market makers
in the security being distributed to engage in limited market making
transactions during the period when Rule 10b-6 under the Exchange Act would
otherwise prohibit that activity (the "cooling off period"). It prohibits
underwriters and selling group members engaged in passive market making
generally from entering a bid or effecting a purchase at a price that exceeds
the highest bid for those securities displayed on Nasdaq by a market maker that
is not participating in the distribution. Under Rule 10b-6A, each underwriter or
selling group member engaged in passive market making is subject to a daily net
purchase limitation equal to 30% of that Underwriter's or selling group member's
average daily trading volume during the two full consecutive calendar months
immediately preceding the date of the filing of the registration statement under
the Securities Act pertaining to the security to be distributed. Certain
Underwriters engaged in passive market making in the Company's Common Stock
during the cooling off period pursuant to Rule 10b-6A.
EXPERTS
The consolidated financial statements of Harris Computer Systems
Corporation as of September 30, 1995 and 1994 and for the year ended September
30, 1995 and the three months ended September 30, 1994 have been incorporated by
reference herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, and
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing. The financial statements of Harris Computer Systems
Corporation -- Trusted Systems Division (a division of Harris Computer Systems
Corporation) as of March 30, 1996 and September 30, 1995 and for the six months
ended March 30, 1996 and the year ended September 30, 1995 have been included
herein and in the Registration Statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Harris Computer Systems Business
at June 30, 1994 and 1993 and for the years then ended appearing in Harris
Computer Systems Corporation's annual report on
Form 10-K have been audited by Ernst & Young LLP, independent auditors, as set
forth on their report included therein and incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Concurrent Computer Corporation's consolidated balance sheets as of June
30, 1995 and 1994, and the consolidated statement of operations, shareholders'
equity (deficiency) and cash flow for each of the three years in the period
ended June 30, 1995, incorporated by reference in this Prospectus and in the
Registration Statement, have been incorporated herein in reliance upon the
report of Coopers & Lybrand, L.L.P., independent accountants, given upon the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the offering will be passed upon for
the Company by the law firm of Holland & Knight, One East Broward Boulevard,
Suite 1300, Fort Lauderdale, Florida 33301. Certain legal matters will be passed
upon for the Underwriters by Simpson Thacher & Bartlett (a partnership which
includes professional corporations), 425 Lexington Avenue, New York, New York
10017. Simpson Thacher & Bartlett will rely on Holland & Knight with respect to
matters of Florida law.
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<PAGE> 69
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information filed by the Company can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the regional offices of the SEC at 7 World
Trade Center, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material also
may be obtained at prescribed rates from the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Common
Stock is traded on the Nasdaq National Market (Symbol: NHWK). Reports and other
information concerning the Company can also be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
This Prospectus constitutes part of a Registration Statement on Form S-3
(the "Registration Statement") and does not contain all the information set
forth in the Registration Statement, certain items of which have been omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to the Company and the securities offered hereby, reference is made
to the Registration Statement and to the exhibits and schedules thereto.
Statements made in this Prospectus as to the contents of any contract, agreement
instrument or other document referred to are not necessarily complete. With
respect to each such contract, agreement instrument or other document filed as
an exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement is
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents previously filed by the Company with the SEC are
incorporated herein by reference: (i) the Company's Annual Report on Form 10-K
for the year ended September 30, 1995; (ii) the Company's Quarterly Reports on
Form 10-Q for the fiscal quarters ended December 29, 1995 and March 30, 1996;
(iii) the Company's Current Reports on Form 8-K dated April 10, 1996 (and as
amended on June 18, 1996) and July 11, 1996, respectively; and (iv) the
description of the Company's Common Stock contained in the Registration
Statement on Form 10 filed with the SEC on September 29, 1994.
In addition, all reports and documents filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Shares made hereby
shall be deemed to be incorporated by reference herein and made a part hereof
from the date of the filing of such documents. Any statement contained or
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed document that also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon written or oral request
of such person to CyberGuard Corporation, 2101 West Cypress Creek Road, Fort
Lauderdale, Florida 33309 (telephone (954) 974-1700), Attention: Investor
Relations, a copy of any or all documents referred to above (other than exhibits
to such documents) that have been incorporated by reference in this Prospectus.
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<PAGE> 70
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Balance Sheets as of March 30, 1996 and September 30, 1995............................ F-3
Statements of Operations and Cumulative Trusted Systems Division Losses for the Six
Months Ended March 30, 1996 and Year Ended September 30, 1995....................... F-4
Statements of Cash Flows for the Six Months Ended March 30, 1996 and Year Ended
September 30, 1995.................................................................. F-5
Notes to Financial Statements......................................................... F-6
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Harris Computer Systems Corporation:
We have audited the accompanying balance sheets of Harris Computer Systems
Corporation -- Trusted Systems Division (a division of Harris Computer Systems
Corporation) as of March 30, 1996 and September 30, 1995 and the related
statements of operations and changes in cumulative Trusted Systems Division
losses and cash flows for the six months ended March 30, 1996 and the year ended
September 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 financial statements referred to above present fairly,
in all material respects, the financial position of Harris Computer Systems
Corporation -- Trusted Systems Division as of March 30, 1996 and September 30,
1995, and the results of its operation and its cash flows for the six months
ended March 30, 1996 and the year ended September 30, 1995, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Miami, Florida
May 10, 1996
F-2
<PAGE> 72
HARRIS COMPUTER SYSTEMS CORPORATION -- TRUSTED SYSTEMS DIVISION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 30, SEPTEMBER 30,
1996 1995
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Accounts receivable, less allowance for uncollectible accounts of $29
at March 30, 1996 and $84 at September 30, 1995.................... $ 2,626 $ 814
Inventories.......................................................... 87 121
Prepaid expenses..................................................... 49 61
--------- -------------
Total current assets....................................... 2,762 996
Machinery and equipment at cost, less accumulated depreciation of
$953 at March 30, 1996 and $828 at September 30, 1995.............. 1,034 716
Capitalized computer software development costs, less accumulated
amortization of $602 at March 30, 1996, and $408 at September 30,
1995............................................................... 2,726 1,545
--------- -------------
Total assets............................................... $ 6,522 $ 3,257
======= ==========
LIABILITIES AND CUMULATIVE TRUSTED SYSTEMS DIVISION LOSSES
Due to Harris Computer Systems Corporation........................... $12,053 $ 6,365
--------- -------------
Total liabilities.......................................... 12,053 6,365
Cumulative Trusted Systems Division losses........................... (5,531) (3,108)
--------- -------------
Total liabilities and Cumulative Trusted Systems Division
losses................................................... $ 6,522 $ 3,257
======= ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 73
HARRIS COMPUTER SYSTEMS CORPORATION -- TRUSTED SYSTEMS DIVISION
STATEMENTS OF OPERATIONS
AND CUMULATIVE TRUSTED SYSTEMS DIVISION LOSSES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 30, SEPTEMBER 30,
1996 1995
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Sales
Products.......................................................... $ 4,177 $ 4,534
Other............................................................. 218 283
---------- -------------
Total sales............................................... 4,395 4,817
Cost of sales
Products.......................................................... 2,823 3,001
Other............................................................. 92 139
---------- -------------
Total cost of sales....................................... 2,915 3,140
Gross profit........................................................ 1,480 1,677
Other operating expense
Research and development.......................................... 578 835
Selling, general and administrative............................... 3,330 3,999
---------- -------------
Total other operating expenses............................ 3,908 4,834
---------- -------------
Operating loss...................................................... (2,428) (3,157)
Interest income..................................................... 26 49
Other expense....................................................... (21) --
---------- -------------
Total other income........................................ 5 49
---------- -------------
Net loss............................................................ $ (2,423) $(3,108)
======== ==========
Changes in cumulative Trusted Systems Division losses:
Cumulative Trusted Systems Division losses, beginning of period... $ (3,108) $ --
Net loss.......................................................... (2,423) (3,108)
---------- -------------
Cumulative Trusted Systems Division losses, end of period......... $ (5,531) $(3,108)
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 74
HARRIS COMPUTER SYSTEMS CORPORATION -- TRUSTED SYSTEMS DIVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED SEPTEMBER
MARCH 30, 30,
1996 1995
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities
Net loss........................................................... $ (2,423) $ (3,108)
Adjustment to reconcile net loss to net cash provided from (used
in) operating activities:
Depreciation.................................................... 125 415
Amortization.................................................... 206 278
Bad debt expense................................................ -- 84
Changes in assets and liabilities
Accounts receivables.......................................... (1,812) 5,062
Inventories................................................... 34 (16)
---------- ------------
Net cash provided from (used in) operating activities...... (3,870) 2,715
---------- ------------
Cash flows from investing activities
Additions to machinery and equipment............................... (443) (635)
Software development costs......................................... (1,375) (653)
---------- ------------
Net cash used in investing activities...................... (1,818) (1,288)
---------- ------------
Cash flows from financing activities
Increase (decrease) in due to Harris Computer Systems Corporation,
net............................................................. 5,688 (1,427)
---------- ------------
Net cash provided from (used in) financing activities...... 5,688 (1,427)
---------- ------------
Net increase in cash and cash equivalents............................ -- --
Cash and cash equivalents, beginning of period....................... -- --
---------- ------------
Cash and cash equivalents, end of period............................. $ -- $ --
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 75
HARRIS COMPUTER SYSTEMS CORPORATION -- TRUSTED SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS
MARCH 30, 1996 AND SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. NATURE OF BUSINESS
Harris Computer Systems Corporation -- Trusted Division (the "Division"),
is a division of Harris Computer Systems Corporation ("Harris"). The Division is
engaged in supplying computer and network security products, including operating
systems and firewall application products, to commercial and government markets
in the United States and abroad.
On November 5, 1995, Harris entered into an agreement and plan of merger
and reorganization with Concurrent Computer Corporation ("Concurrent"). The
transaction contemplated between Harris and Concurrent was revised. On March 26,
1996, Harris and Concurrent signed a Purchase and Sale Agreement. Under the
revised transaction structure, Harris will sell its Real-time computer business
(the "Real-time Business") and 683,178 shares of its common stock to Concurrent
in exchange for (i) 10 million newly issued shares of Concurrent common stock,
par value $0.01 per share, (ii) 1 million convertible exchangeable preferred
stock of Concurrent paying a 9% cumulative annual dividend quarterly in arrears
with an aggregate liquidation preference of $10,000 subject to adjustment, to
reflect, among other things, the amount of net current assets of the Real-time
Business transferred in the Real-time Sale and (iii) the assumption of certain
liabilities of the Real-time Business hereafter defined as (the "Real-time
Sale"). The Real-time Sale is subject to a number of conditions including
approval of the shareholders of each company.
Immediately following the Real-time Sale, Concurrent's shareholders are
expected to own approximately 77% of Concurrent's outstanding common stock, with
the balance to be owned by Harris. Harris' shareholders will own approximately
90% of its common stock, with Concurrent owning approximately 10%; Harris could
increase its position in Concurrent from approximately 23% to approximately 29%
upon full conversion of the preferred stock.
Harris will retain its Trusted Systems product line after the Real-time
Sale.
2. LIQUIDITY
At March 30, 1996, the Division had net current assets of $2,762 comprised
mainly of accounts receivables, inventory and other prepaid expenses compared to
$996 at September 30, 1995. The Division increased its investment in machinery
and equipment and capitalized software by $443 and $1,375 respectively for the
six months ended March 30, 1996 and by $635 and $653, respectively, for the year
ended September 30, 1995.
Since the formation of Harris Computer Systems Corporation in August 1994,
the Division has relied upon the Real-time Business to fund its operating
working capital and capital asset purchase requirements. Inception-to-date
funding of the Division by the Real-time Business is disclosed as "Due to Harris
Computer Systems Corporation" in the "Liabilities and Cumulative Trusted
Division Losses" section of the Balance Sheet. Continued operational funding of
the Division by the Real-time Business is expected to continue until the sale of
the Real-time Business assets to Concurrent is complete.
Following the Real-time Sale, the Division expects to fund its operational
requirements through various means. Initially, the Division expects to reduce
its stock holding in Concurrent Corporation. While the Company may sell or
pledge part of the Concurrent Common Stock consideration to generate cash, the
Company's ability to do so is subject to certain restrictions set forth in the
Share Holding Agreement. The proceeds from the Concurrent Stock Sale are
expected to be utilized to provide working capital for the Company's operations.
At the present time, Division management is not able to predict whether
funding sources from operations and the sale of Concurrent stock will be
sufficient to support its long-term working capital and capital
F-6
<PAGE> 76
HARRIS COMPUTER SYSTEMS CORPORATION -- TRUSTED SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expenditure requirements. If management determines that additional funding is
required to support its on-going or strategic requirements, external financing
may be sought. These external financing sources may include, but are not limited
to, asset-backed lines of credit and/or funds generated through the issuance of
additional shares of Harris' stock. 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, management believes that such funding
should be available if required.
3. SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting -- The accompanying financial statements include the
operations, assets and liabilities of the Division. The financial statements do
not include Harris' corporate assets and liabilities not specifically
identifiable to the Division. Further, certain cost of goods sold components and
operating expense items were also allocated based on reasonable allocation
methods. The financial information included herein may not necessarily reflect
the financial position and results of operations of the Division in the future
or what the financial position and results of operations of the Division would
have been had it been a separate, stand-alone entity during the periods covered.
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 Division 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.
Due to Harris Computer Systems Corporation -- The Due to Harris Computer
Systems Corporation represents the net amount assumed to have been paid for or
accrued for by Harris on behalf of the Division since October 1, 1994. This
assumption is reasonable in light of the fact that Real-Time and the Division
share the same operating infrastructure, substantially all operating costs are
commingled, and the predominance of Real Time to Harris.
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.
Income Taxes -- For the periods presented, the Division was included in the
consolidated Federal income tax return of Harris. The income tax provision
presented has been determined, as if the Division was a stand-alone business
filing separate tax returns for the six months ended March 30, 1996 and the year
ended September 30, 1995.
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
F-7
<PAGE> 77
HARRIS COMPUTER SYSTEMS CORPORATION -- TRUSTED SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Use of Estimates -- Management of the Division 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 these estimates.
4. SOFTWARE DEVELOPMENT COSTS
Software development costs capitalized were $1,375 and $653 for the six
months ended March 30, 1996 and the year ended September 30, 1995, respectively.
Software amortization expenses were $194 and $234 for the six months ended March
30, 1996 and the year ended September 30, 1995, respectively.
5. INCOME TAXES
As disclosed in Note 1, Harris Computer Systems Corporation -- Trusted
Systems Division is a division of Harris Computer Systems Corporation. The
deferred tax inventory shown below reflects deferred tax assets and liabilities
as though the Division was a separate company and not part of a consolidated
filing for U.S. Federal income tax purposes.
There is no provision for income taxes because the Division incurred
operating losses for both book and tax purposes during the six months ended
March 30, 1996 and the year ended September 30, 1995.
The components of deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
MARCH 30, SEPTEMBER 30,
1996 1995
--------- -------------
<S> <C> <C>
Net operating losses........................................... $ 2,380 $ 1,315
Depreciation................................................... (52) (39)
Capitalized software........................................... (927) (525)
Accrued vacation............................................... 41 39
All other -- net............................................... 56 26
Valuation allowance............................................ (1,498) (816)
--------- -------------
Net deferred income taxes............................ $ -- $ --
======= ==========
</TABLE>
The net increase in the total valuation allowance for the six months ended
March 30, 1996 was $682.
A reconciliation of the effective income tax rate and the statutory United
States income tax rate follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 30, SEPTEMBER 30,
1996 1995
----------------- -------------
<S> <C> <C>
Statutory U.S. income tax rate.......................... (34.0)% (34.0)%
Operating loss carryforwards............................ 31.0 32.2
Other Items............................................. 3.0 1.8
------ ------
Effective income tax rate............................... --% --%
============== ==========
</TABLE>
F-8
<PAGE> 78
HARRIS COMPUTER SYSTEMS CORPORATION -- TRUSTED SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of March 30, 1996, the Division has U.S. net operating loss
carryforwards of approximately $7,000. The Division's net operating loss
carryforwards begin to expire in 2010.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 30, SEPTEMBER 30,
1996 1995
--------- -------------
<S> <C> <C>
Work in Process.............................................. $87 $ 31
Raw materials................................................ -- 90
--- ------
$87 $ 121
======= ==========
</TABLE>
7. MACHINERY AND EQUIPMENT, NET
Machinery and equipment, net is summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
MARCH 30, SEPTEMBER 30, USEFUL LIFE
1996 1995 (IN YEARS)
--------- ------------- -----------
<S> <C> <C> <C>
Machinery and equipment.................................. $ 1,334 $ 1,143 5-10
Loan equipment and service parts......................... 653 401 1-5
--------- -------------
Gross machinery and equipment............................ 1,987 1,544
Less: Accumulated depreciation........................... 953 828
--------- -------------
Net machinery and equipment.............................. $ 1,034 $ 716
======= ==========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The employees of Harris Computer Systems Corporation -- Trusted Systems
Division are eligible to participate in the Harris Computer Systems Corporation
401(k) savings plan (the "Plan"). An employee is eligible to participate in the
Plan on the date he completes one year of service. The amount of profit-sharing
contributions made is discretionary and shall be determined based on a
percentage of adjusted net income before taxes. Each participant may contribute
up to 12% of his compensation into the Plan. Matching contributions are made on
behalf of each participant for the first 6% of their individual contribution.
Participant's profit-sharing and matching contributions vest over a seven-year
period. The Division's contributions to the Plan were $99 and $195 for the six
months ended March 30, 1996 and the year ended September 30, 1995, respectively.
9. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Division to a
concentration of credit risk principally consist of trade receivables.
Concentrations of credit risk with respect to receivables are limited due to the
Division's large number of customers.
10. GEOGRAPHIC INFORMATION
The Division operates exclusively in the computer systems industry. A
significant portion of the Division's sales are to contractors who resell the
Division's computer and network systems to the U.S. Government and its agencies
as the ultimate end-user. These sales represented approximately 24% and 58% of
the Division's sales for the six months ended March 30, 1996 and the year ended
September 30, 1995, respectively. The Division had two significant commercial
customers, who combined, accounted for 20% and 14% of total sales
F-9
<PAGE> 79
HARRIS COMPUTER SYSTEMS CORPORATION -- TRUSTED SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for the periods ended March 30, 1996 and September 30, 1995, respectively. No
other customers individually represented more than 5% of total sales for the
referenced periods.
A summary of the Division's operations by geographic area is summarized
below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 30,
1996
--------------------------
U.S. EUROPEAN TOTAL
------ -------- ------
<S> <C> <C> <C>
Net Sales................................................... $3,357 $1,038 $4,395
====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1995
--------------------------
U.S. EUROPEAN TOTAL
------ -------- ------
<S> <C> <C> <C>
Net Sales................................................... $4,356 $ 461 $4,817
====== ======= ======
</TABLE>
U.S. export sales were $983 and $1,016 for the six months ended March 30,
1996 and for the year ended September 30, 1995, respectively.
Identifiable assets relating to European operations were $958 and $287 at
March 30, 1996 and September 30, 1995, respectively.
Foreign operations principally represent sales offices and disclosure of
separate operating profit is not meaningful.
F-10
<PAGE> 80
[PHOTO]
<PAGE> 81
------------------------------------------------------------
------------------------------------------------------------
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OR PROJECTIONS OF FUTURE PERFORMANCE
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND ANY SUCH OTHER INFORMATION,
PROJECTIONS OR REPRESENTATIONS IF GIVEN OR MADE MUST NOT BE RELIED UPON AS
HAVING BEEN SO AUTHORIZED. THE DELIVERY OF THIS PROSPECTUS OR ANY SALE HEREUNDER
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 8
Use of Proceeds............................ 19
Dividend Policy............................ 19
Price Range of Common Stock................ 19
Capitalization............................. 20
Pro Forma Condensed Consolidated Financial
Statements............................... 21
Selected Financial Data.................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 26
Business................................... 32
Management................................. 47
Certain Transactions....................... 51
Principal and Selling Shareholders......... 59
Description of Capital Stock............... 61
Shares Eligible for Future Sale............ 65
Underwriting............................... 66
Experts.................................... 67
Legal Matters.............................. 67
Available Information...................... 68
Incorporation of Certain Information by
Reference................................ 68
Index to Financial Statements.............. F-1
</TABLE>
------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
2,500,000 SHARES
LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
FURMAN SELZ
, 1996
------------------------------------------------------------
------------------------------------------------------------
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth expenses and costs (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities being registered and payable by the
Company. All amounts are estimated except for the SEC registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................................. $ 17,102
NASD filing fee................................................................... 5,460
Nasdaq fees....................................................................... 17,500
Legal fees and expenses........................................................... 200,000
Accounting fees and expenses...................................................... 100,000
Blue Sky fees and expenses........................................................ 20,000
Printing expenses................................................................. 200,000
Miscellaneous..................................................................... 10,000
--------
Total................................................................... $570,062
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act ("FBCA") and the Company's Articles of
Incorporation provide, in certain cases, for each officer and director of the
Company to be indemnified by the Company against certain costs, expenses and
liabilities which he or she may incur in his or her capacity as such.
The Company's Articles provide:
To the fullest extent permitted by the Florida Business Corporation
Act, the Corporation shall indemnify, or advance expenses to, any person
made, or threatened to be made, a party to any action, suit or proceeding
by reason of the fact that such person (i) is or was a director of the
Corporation; (ii) is or was serving at the request of the Corporation as a
director of another corporation; (iii) is or was an officer of the
Corporation, provided that such person is or was at the time a director of
the Corporation; or (iv) is or was serving at the request of the
Corporation as an officer of another corporation, provided that such person
is or was at the time a director of the Corporation or a director of such
other corporation, serving at the request of the Corporation. Unless
otherwise expressly prohibited by the Florida Business Corporation Act, and
except as otherwise provided in the previous sentence, the Board of
Directors of the Corporation shall have the sole and exclusive discretion,
on such terms and conditions as it shall determine, to indemnify, or
advance expenses to, any person made, or threatened to be made, a party to
any action, suit or proceeding by reason of the fact that such person is or
was an officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as an officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
No person falling within the purview of this paragraph may apply for
indemnification or advancement of expenses to any court of competent
jurisdiction.
FBCA 607.0850 "Indemnification of officers, directors, employees and
agents" provides:
(1) A corporation shall have power to indemnify any person who was or
is a party to any proceeding (other than an action by, or in the right of,
the corporation), by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise
against liability incurred in connection with such proceeding, including
any
II-1
<PAGE> 83
appeal thereof, if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any
proceeding by judgment, order, settlement, or conviction or upon a plea of
nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in, or not opposed to, the best interests of
the corporation or, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation shall have power to indemnify any person, who was or
is a party to any proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against expenses and amounts paid in settlement not
exceeding, in the judgment of the board of directors, the estimated expense
of litigating the proceeding to conclusion, actually and reasonably
incurred in connection with the defense or settlement of such proceeding,
including any appeal thereof. Such indemnification shall be authorized if
such person acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the corporation, except
that no indemnification shall be made under this subsection in respect of
any claim, issue, or matter as to which such person shall have been
adjudged to be liable unless, and only to the extent that, the court in
which such proceeding was brought, or any other court of competent
jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
(3) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense of
any proceeding referred to in subsection (1) or subsection (2), or in
defense of any claim, issue, or matter therein, he shall be indemnified
against expenses actually and reasonably incurred by him in connection
therewith.
(4) Any indemnification under subsection (1) or subsection (2), unless
pursuant to a determination by a court, shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsection (1) or subsection (2). Such determination shall be
made:
(a) By the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such proceeding;
(b) If such a quorum is not obtainable or, even if obtainable, by
majority vote of a committee duly designated by the board of directors
(in which directors who are parties may participate) consisting solely
of two or more directors not at the time parties to the proceeding;
(c) By independent legal counsel;
1. Selected by the board of directors prescribed in paragraph
(a) or the committee prescribed in paragraph (b); or
2. If a quorum of the directors cannot be obtained for paragraph
(1) and the committee cannot be designated under paragraph (b),
selected by majority vote of the full board of directors (in which
directors who are parties may participate); or
(d) By the shareholders by a majority vote of a quorum consisting
of shareholders who were not parties to such proceeding or, if no such
quorum is obtainable, by a majority vote of shareholders who were not
parties to such proceeding.
(5) Evaluation of the reasonableness of expenses and authorization of
indemnification shall be made in the same manner as the determination that
indemnification is permissible. However, if the
II-2
<PAGE> 84
determination of permissibility is made by independent legal counsel,
persons specified by paragraph (4)(c) shall evaluate the reasonableness of
expenses and may authorize indemnification.
(6) Expenses incurred by an officer or director in defending a civil
or criminal proceeding may be paid by the corporation in advance of the
final disposition of such proceeding upon receipt of an undertaking by or
on behalf of such director or officer to repay such amount if he is
ultimately found not to be entitled to indemnification by the corporation
pursuant to this section. Expenses incurred by other employees and agents
may be paid in advance upon such terms or conditions that the board of
directors deems appropriate.
(7) The indemnification and advancement of expenses provided pursuant
to this section are not exclusive, and a corporation may make any other or
further indemnification or advancement of expenses of any of its directors,
officers, employees, or agents, under any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office. However, indemnification or advancement of expenses shall not
be made to or on behalf of any director, officer, employee, or agent if a
judgment or other final adjudication establishes that his actions, or
omissions to act, were material to the cause of action so adjudicated and
constitute:
(a) A violation of the criminal law, unless the director, officer,
employee, or agent had reasonable cause to believe his conduct was
lawful or had no reasonable cause to believe his conduct was unlawful;
(b) A transaction from which the director, officer, employee, or
agent derived an improper personal benefit;
(c) In the case of a director, a circumstance under which the
liability provisions of sec. 607.0834 are applicable; or
(d) Willful misconduct or a conscious disregard for the best
interests of the corporation in a proceeding by or in the right of the
corporation to procure a judgment in its favor or in a proceeding by or
in the right of a shareholder.
(8) Indemnification and advancement of expenses as provided in this
section shall continue as, unless otherwise provided when authorized or
ratified, to a person who has ceased to be a director, officer, employee,
or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person, unless otherwise provided when authorized
or ratified.
(9) Unless the corporation's articles of incorporation provide
otherwise, notwithstanding the failure of a corporation to provide
indemnification, and despite any contrary determination of the board or of
the shareholders in the specific case, a director, officer, employee, or
agent of the corporation who is or was a party to a proceeding may apply
for indemnification or advancement of expenses, or both, to the court
conducting the proceeding, to the circuit court, or to another court of
competent jurisdiction. On receipt of an application, the court, after
giving any notice that it considers necessary, may order indemnification
and advancement of expenses, including expenses incurred in seeking
court-ordered indemnification or advancement of expenses, if it determines
that:
(a) The director, officer, employee, or agent is entitled to
mandatory indemnification under subsection (3), in which case the court
shall also order the corporation to pay the director reasonable expenses
incurred in obtaining court-ordered indemnification or advancement of
expenses;
(b) The director, officer, employee, or agent is entitled to
indemnification or advancement of expenses, or both, by virtue of the
exercise by the corporation of its power pursuant to subsection (7); or
(c) The director, officer, employee, or agent is fairly and
reasonably entitled to indemnification or advancement of expenses, or
both, in view of all the relevant circumstances, regardless of whether
II-3
<PAGE> 85
such person met the standard of conduct set forth in subsection (1),
subsection (2), or subsection (7).
(10) For purposes of this section, the term "corporation" includes, in
addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger, so that any person who is or was a director, officer, employee, or
agent of a constituent corporation, or is or was serving at the request of
a constituent corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other
enterprise, is in the same position under this section with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(11) For purposes of this section;
(a) The term "other enterprises" includes employee benefit plans;
(b) The term "expenses" includes counsel fees, including those for
appeal;
(c) The term "liability" includes obligations to pay a judgment,
settlement, penalty, fine (including an excise tax assessed with respect
to any employee benefit plan), and expenses actually and reasonably
incurred with respect to a proceeding;
(d) The term "proceeding" includes any threatened, pending, or
completed action, suit, or other type of proceeding, whether civil,
criminal, administrative, or investigative and whether formal or
informal;
(e) The term "agent" includes a volunteer;
(f) The term "serving at the request of the corporation" includes
any service as a director, officer, employee, or agent of the
corporation that imposes duties on such persons, including duties
relating to an employee benefit plan and its participants or
beneficiaries; and
(g) The term "not opposed to the best interest of the corporation"
describes the actions of a person who acts in good faith and in a manner
he reasonably believes to be in the best interests of the participants
and beneficiaries of an employee benefit plan.
(12) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee, or
agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such capacity
or arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liability under the provisions
of this section.
ITEM 16. EXHIBITS
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
1.01 -- Form of Underwriting Agreement
2.01 -- Purchase and Sale Agreement between Concurrent Computer Corporation and the Company
dated March 26, 1996**
3.01 -- Amended and Restated Articles of Incorporation*
4.01 -- Form of Common Stock Certificate*****
4.02 -- Form of Stockholder Rights Plan*
4.03 -- Non-Statutory Stock Option Agreement dated as of October 8, 1994 between the
Company and Robert E. Chism***
</TABLE>
II-4
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
4.04 -- Non-Statutory Stock Option Agreement dated as of October 8, 1994 between the
Company and Robert T. Menzel***
4.05 -- Non-Statutory Stock Option Agreement dated as of October 8, 1994 between the
Company and Michael N. Smith***
4.06 -- Non-Statutory Stock Option Agreement dated as of October 8, 1994 between the
Company and Bradley C. Lesher***
4.07 -- Non-Statutory Stock Option Agreement dated as of October 8, 1994 between the
Company and Daniel S. Dunleavy***
4.08 -- Non-Statutory Stock Option Agreement dated as of October 8, 1994 between the
Company and E. Courtney Siegel***
4.09 -- Restricted Stock Award Agreement dated as of October 8, 1994 between the Company
and Daniel S. Dunleavy***
4.10 -- Restricted Stock Award Agreement dated as of October 8, 1994 between the Company
and E. Courtney Siegel***
4.11 -- Form of Share Holding Agreement between Concurrent Computer Corporation and the
Company****
5.01 -- Opinion of Holland & Knight****
23.01 -- Consent of KPMG Peat Marwick LLP, independent Certified Public Accountants
23.02 -- Consent of Ernst & Young LLP, independent Certified Public Accountants
23.03 -- Consent of Coopers & Lybrand, L.L.P.
23.04 -- Consent of Holland & Knight (included in Exhibit 5)
24.01 -- Power of Attorney****
</TABLE>
- ---------------
* 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 March 26, 1996
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.
**** Previously filed
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of a Registration Statement
II-5
<PAGE> 87
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be a part of this Registration Statement as of the time it
was declared effective.
The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-6
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Lauderdale, State of Florida on
July 15, 1996.
CyberGuard Corporation (formerly known
as
Harris Computer Systems Corporation)
By: /s/ ROBERT L. CARBERRY*
------------------------------------
Robert L. Carberry
President, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ---------------
<C> <S> <C>
/s/ ROBERT L. CARBERRY President, Chairman and Chief July 15, 1996
- --------------------------------------------- Executive Officer and
Robert L. Carberry Director (Principal Executive
Officer)
/s/ PATRICK O. WHEELER Vice-President Finance and July 15, 1996
- --------------------------------------------- Chief Financial Officer
Patrick O. Wheeler (Principal Financial and
Principal Accounting Officer)
/s/ BRIAN FOREMNY* Secretary, General Counsel, and July 15, 1996
- --------------------------------------------- Director
Brian Foremny
/s/ C. SHELTON JAMES* Director July 15, 1996
- ---------------------------------------------
C. Shelton James
/s/ MICHAEL F. MAGUIRE* Director July 15, 1996
- ---------------------------------------------
Michael F. Maguire
/s/ RICHARD F. RIFENBURGH Director July 15, 1996
- ---------------------------------------------
Richard F. Rifenburgh
</TABLE>
- ---------------
* Signed by power of attorney.
II-7
<PAGE> 1
2,500,000 Shares of Common Stock
CyberGuard Corporation
UNDERWRITING AGREEMENT
July __, 1996
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
FURMAN SELZ LLC
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
CyberGuard Corporation, a corporation organized and existing
under the laws of Florida (the "Company"), and certain stockholders of the
Company named in Schedule I hereto (the "Selling Stockholders"), propose,
subject to the terms and conditions stated herein, to sell to the several
underwriters named in Schedule II hereto (the "Underwriters") an aggregate of
2,500,000 shares (the "Firm Shares") of its common stock, par value $.01 per
share (the "Common Stock"). Each share of Common Stock has attached to it a
Preferred Stock Purchase Right (a "Right"). Unless the context otherwise
requires, all references in this Agreement to Common Stock include the attached
Rights. Of the 2,500,000 shares of the Firm Shares, 1,797,978 are being sold
by the Company and 702,022 by the Selling Stockholders. In addition, the
Company proposes to grant to the Underwriters an option to purchase for the
sole purpose of covering over- allotments in connection with the sale of the
Firm Shares, up to an additional 375,000 shares (the "Additional Shares") of
Common Stock. The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Shares". The Shares are more fully
described in the Registration Statement referred to below.
<PAGE> 2
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have
filed an amendment or amendments thereto, on Form S-3 (No. 333-04407),
for the registration of the Shares under the Securities Act of 1933,
as amended (the "Act"). A second registration statement on Form S-3
with respect to the Shares may also be prepared by the Company in
conformity with the requirements of the Act and the Rules and
Regulations of the Commission under the Act (the "Regulations") and if
to be so prepared, will be filed with the Commission under the
Securities Act pursuant to Rule 462(b) of the Regulations. "Primary
Registration Statement" means the first registration statement
referred to in the first sentence of this Section 1(a), as amended at
the time of its effectiveness, "Rule 462(b) Registration Statement"
means the second registration statement, if any, referred to in the
second sentence of this Section 1(a), as filed with the Commission,
and "Registration Statements" means both the Primary Registration
Statement and any Rule 462(b) Registration Statement, including in
each case the prospectus, financial statements and schedules, exhibits
and all other documents filed as a part thereof, as amended at the
time of effectiveness of the Primary Registration Statement, including
any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434, and
the prospectus, in the form first filed with the Commission pursuant
to Rule 424(b) of the Regulations or filed as part of the Primary
Registration Statement at the time of effectiveness if no Rule 424(b)
or Rule 434 filing is required, is herein called the "Prospectus".
The term "preliminary prospectus" as used herein means a preliminary
prospectus as described in Rule 430 of the Regulations. Any reference
herein to the Registration Statements, any preliminary prospectus or
the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Item 12 of Form S-3
which were filed under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") on or before the effective date of the Primary
Registration Statement, the date of such preliminary prospectus or the
date of the Prospectus, as the case may be, and any reference herein
to the terms "amend", "amendment" or "supplement" with respect to
either of the Registration Statements, any preliminary prospectus or
the Prospectus shall be deemed to refer to and include (i) the filing
of any document under the Exchange Act after the effective date of
such Registration Statement, the date of such preliminary prospectus
or the date of the Prospectus, as the case may be, which is
incorporated therein by reference and (ii) any such document so filed.
2
<PAGE> 3
(b) At the time of the effectiveness of the Primary
Registration Statement (and the Rule 462(b) Registration Statement, if
any) or the effectiveness of any post-effective amendment to the
Registration Statements, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations,
when any supplement to or amendment of the Prospectus is filed with
the Commission, when any document filed under the Exchange Act is
filed and at the Closing Date and the Additional Closing Date, if any
(as hereinafter respectively defined), the Registration Statements and
the Prospectus and any amendments thereof and supplements thereto
complied or will comply in all material respects with the applicable
provisions of the Act and the Regulations and the Exchange Act and the
respective rules and regulations thereunder and does not or will not
contain an untrue statement of a material fact and does not or will
not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein (i) in the case of
the Registration Statements, not misleading and (ii) in the case of
the Prospectus, in light of the circumstances under which they were
made, not misleading. When any related preliminary prospectus was
first filed with the Commission (whether filed as part of the Primary
Registration Statement or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or
supplement thereto was first filed with the Commission, such
preliminary prospectus and any amendments thereof and supplements
thereto complied in all material respects with the applicable
provisions of the Act and the Regulations and the Exchange Act and the
respective rules and regulations thereunder and did not contain an
untrue statement of a material fact and did not omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein in light of the circumstances under which
they were made not misleading. No representation and warranty is made
in this subsection (b), however, with respect to any information
contained in or omitted from the Registration Statements or the
Prospectus or any related preliminary prospectus or any amendment
thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through you as herein stated expressly for use in
connection with the preparation thereof. If Rule 434 is used, the
Company will comply with the requirements of Rule 434.
(c) (i) KPMG Peat Marwick LLP ("KPMG") and Ernst & Young LLP
("Ernst & Young") who have certified the financial statements and
supporting schedules of the Company included or incorporated by
reference in the Registration Statements, are current and former
independent public accountants of the Company, respectively, as
required by the Act and the Regulations.
3
<PAGE> 4
(ii) Coopers & Lybrand, L.L.P. ("Coopers & Lybrand") who have
certified the financial statements for Concurrent Computer Corporation
("Concurrent") incorporated by reference in the Registration
Statements, are independent public accountants of Concurrent as
required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which
information is given in the Registration Statements and the
Prospectus, except as set forth in the Registration Statements and the
Prospectus, there has been no material adverse change or any
development involving a prospective material adverse change in the
business, prospects, properties, operations, condition (financial or
other) or results of operations of the Company and its subsidiaries
taken as a whole, whether or not arising from transactions in the
ordinary course of business, and since the date of the latest balance
sheet presented in the Registration Statements and the Prospectus,
neither the Company nor any of its subsidiaries has incurred or
undertaken any liabilities or obligations, direct or contingent, which
are material to the Company and its subsidiaries taken as a whole,
except for liabilities or obligations which are reflected in the
Registration Statements and the Prospectus.
(e) This Agreement and the transactions contemplated hereby
have been duly and validly authorized by the Company and this
Agreement has been duly and validly executed and delivered by the
Company.
(f) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby
do not and will not in any material respect (i) conflict with or
result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time,
or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, any
agreement, instrument, franchise, license or permit to which the
Company or any of its subsidiaries is a party or by which any of such
corporations or their respective properties or assets may be bound or
(ii) violate or conflict with any provision of the certificate of
incorporation or by-laws of the Company or any of its subsidiaries or
any judgment, decree, order, statute, rule or regulation of any court
or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their respective properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets is
required for
4
<PAGE> 5
the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the
issuance, sale and delivery of the Shares to be issued, sold and
delivered by the Company hereunder, except the registration under the
Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits
as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters.
(g) All of the outstanding shares of Common Stock are duly
and validly authorized and issued, fully paid and nonassessable and
were not issued and are not now in violation of or subject to any
preemptive rights. The Shares to be sold by the Company hereunder,
when issued, delivered and paid for in accordance with this Agreement,
will be duly and validly issued and outstanding, fully paid and
nonassessable, and will not have been issued in violation of or be
subject to any preemptive rights. The Company has an authorized and
outstanding capitalization as set forth in the Registration Statements
and the Prospectus. The Common Stock and the Shares conform to the
descriptions thereof contained in the Registration Statements and the
Prospectus.
(h) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation. Each of the
Company and its subsidiaries is duly qualified and in good standing as
a foreign corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the nature
or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which will
not in the aggregate result in any material adverse change or any
development involving a material adverse change in the business,
prospects, properties, operations, condition (financial or other) of
the Company and its subsidiaries taken as a whole. Each of the
Company and its subsidiaries has good and marketable title to, or
valid and enforceable leasehold interests in, all property necessary
to conduct the business of such entity as described in the
Registration Statements and the Prospectus. Each of the Company and
its subsidiaries has all requisite power and authority, and all
necessary consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and
operate its properties and conduct its business as now being conducted
and as described in the Registration Statements and the Prospectus,
and no such consent, approval, authorization, order, registration,
qualification, license or permit contains a materially burdensome
5
<PAGE> 6
restriction not adequately disclosed in the Registration Statements
and the Prospectus.
(i) As of the date hereof, the Company owns 8,000,000 shares
of common stock of Concurrent, is the sole registered owner of such
shares and has good title thereto, free and clear of any liens or
other encumbrances other than those created by the Share Holding
Agreement, dated as of June 26, 1996, between the Company and
Concurrent or otherwise disclosed in the Prospectus.
(j) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company or any of
its subsidiaries is a party or to which any property of the Company or
any of its subsidiaries is subject or which is pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries which might result in any material adverse change or any
development involving a material adverse change in the business,
prospects, properties, operations, condition (financial or other) or,
results of operations of the Company and its subsidiaries taken as a
whole or which is required to be disclosed in the Registration
Statements and the Prospectus.
(k) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares.
(l) (i) The financial statements, including the notes
thereto, included in the Registration Statement and the Prospectus
present fairly the financial position of the Company, formerly the
Trusted Systems Division of Harris Computer Systems Corporation, as of
the dates indicated and the results of its operations for the periods
specified; except as otherwise stated in the Registration Statement,
said financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent
basis.
(ii) The financial statements, including the notes
thereto, incorporated by reference in the Registration Statements and
the Prospectus present fairly the financial position of Harris
Computer Systems Corporation as of the dates indicated and the results
of its operations for the periods specified; except as otherwise
stated in the Registration Statements, said financial statements have
been prepared in conformity with generally accepted accounting
principles applied on a consistent basis; and the supporting schedules
included in the Registration Statements present fairly the information
required to be stated therein.
6
<PAGE> 7
(iii) The pro forma condensed consolidated balance
sheet and condensed consolidated statements of operations and the
related notes thereto set forth in the Registration Statements and the
Prospectus with respect to the Company have been prepared in
accordance with the applicable requirements of Rule 11-02 of
Regulation S-X promulgated under the Exchange Act, have been compiled
on the pro forma basis described therein, and in the opinion of the
Company, the assumptions used in the preparation thereof were
reasonable at the time made and the adjustments used therein are based
upon good faith estimates and assumptions believed by the Company to
be reasonable at the time made.
(m) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration
Statements or otherwise in connection with the sale of the Shares
contemplated hereby.
(n) Except as otherwise disclosed in the Registration
Statements and the Prospectus, neither the Company nor any subsidiary
is an "investment company" or a company "controlled" by an "investment
company" within the meaning of and subject to regulation under the
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder.
(o) The conditions for use of Form S-3, as set forth in the
General Instructions thereto, have been satisfied.
(p) The documents incorporated or deemed to be incorporated
by reference in the Prospectus, at the time they were or hereafter are
filed with the Commission, complied and will comply in all material
respects with the requirements of the Exchange Act and the rules and
regulations of the Commission under the Exchange Act, and, when read
together with the other information in the Prospectus, at the time the
Registration Statements and any amendments thereto become effective
and at the Closing Date, will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(q) The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights and licenses necessary for the
conduct of their respective businesses and have no reason to believe
that the conduct of their respective businesses will conflict with,
and have not received any notice of any claim of conflict with, any
such rights of others.
7
<PAGE> 8
(r) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Prospectus which is not so
described.
(s) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of
the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and
each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is
so qualified in all material respects and nothing has occurred,
whether by action or by failure to act, which would cause the loss of
such qualification.
(t) The Company has filed all federal, state and local income
and franchise tax returns required to be filed (or has obtained a
valid extension) through the date hereof and has paid all taxes due
thereon, and no tax deficiency has been determined adversely to the
Company or any of its subsidiaries which has (nor does the Company
have any knowledge of any tax deficiency which, if determined
adversely to the Company or any of its subsidiaries, might have)
resulted in any material adverse change or any development involving a
material adverse change in the business, prospects, properties,
operations, condition (financial or other) or results of operations of
the Company and its subsidiaries taken as a whole or which is required
to be disclosed in the Registration Statements and the Prospectus.
(u) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any
material respect, and no event has occurred which, with notice or
lapse of time or both, would constitute such a default, in the due
performance or observance of any term, covenant or condition contained
in any material indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which it is a party or by which it is
bound or to which any of its properties or assets is subject or (iii)
is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its
properties or assets may be subject.
8
<PAGE> 9
(v) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or
acting on behalf of the Company or any of its subsidiaries, has used
any corporate funds for any unlawful contribution, gift, entertainment
or other unlawful expense relating to political activity; made any
direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated or is
in violation of any provision of the Foreign Corrupt Practices Act of
1977.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder severally represents, warrants and
agrees that:
(a) The Selling Stockholder has, and immediately prior to the
Closing Date the Selling Stockholder will have, good and marketable
title to the shares of Shares to be sold by the Selling Stockholder
hereunder on such date, free and clear of all liens, encumbrances,
equities or claims other than created by the Power of Attorney and the
Custody Agreement; and upon payment for, and delivery of, the shares
of Common Stock to be sold by the Selling Stockholder under this
Agreement in accordance with the terms hereof, the Underwriters will
acquire all of the rights of the Selling Stockholder in such Shares
and will also acquire the interest of the Selling Stockholder in such
Shares free of any adverse claim (within the meaning of the Uniform
Commercial Code as in effect in the State of New York).
(b) The Selling Stockholder has placed in custody under a
custody agreement (the "Custody Agreement" and, together with all
other similar agreements executed by the other Selling Stockholders,
the "Custody Agreements") with CyberGuard Corporation, as custodian
(the "Custodian"), for delivery under this Agreement, certificates in
negotiable form (with signature guaranteed by a commercial bank or
trust company having an office or correspondent in the United States
or a member firm of the New York or American Stock Exchanges)
representing the shares of Stock to be sold by the Selling Stockholder
hereunder.
(c) The Selling Stockholder has duly and irrevocably executed
and delivered a power of attorney (the "Power of Attorney" and,
together with all other similar agreements executed by the other
Selling Stockholders the "Powers of Attorney") appointing the
Custodian and one or more other persons, as attorneys-in-fact, with
full power of substitution, and with full authority (exercisable by
any one or more of them) to execute and deliver this Agreement and to
take such other action as may be necessary or desirable to carry out
the provisions hereof on behalf of the Selling Stockholder.
9
<PAGE> 10
(d) The Selling Stockholder has full right, power and
authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement; the execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement by the
Selling Stockholder and the consummation by the Selling Stockholder of
the transactions contemplated hereby do not (i) violate or conflict
with any provision of the certificate of incorporation, by-laws or
comparable organizational documents of the Selling Stockholder, if
applicable, or any of its subsidiaries, (ii) in any material respect,
conflict with or result in a breach of any of the terms and provisions
of or constitute a default (or an event which with notice or lapse of
time, or both, would constitute a default) under or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Selling Stockholder pursuant to, any
agreement, instrument, franchise, license or permit to which the
Selling Stockholder is a party or by which any of such Selling
Stockholder's properties or assets may be bound or (iii) violate or
conflict in any material respect with any judgment, decree, order,
statute, rule or regulation of any court or any public, governmental
or regulatory agency or body having jurisdiction over the Selling
Stockholder or any of the Selling Stockholder's properties or assets.
No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Selling Stockholder or any of the Selling Stockholder's properties or
assets is required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby,
including the sale and delivery of the Shares to be sold and delivered
by the Selling Stockholder hereunder, except the registration under
the Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits
as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters.
(e) At the time of the effectiveness of the Primary
Registration Statement (and the Rule 462(b) Registration Statement, if
any) or the effectiveness of any post-effective amendment to the
Registration Statements, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations,
when any supplement to or amendment of the Prospectus is filed with
the Commission, when any document filed under the Exchange Act is
filed and at the Closing Date and the Additional Closing Date, if any,
the Registration Statements and the Prospectus and any amendments
thereof and supplements thereto does not or will not contain an untrue
statement of a material fact relating to the Selling Stockholder set
forth under the caption "Principal and Selling Shareholders"
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<PAGE> 11
(the "Selling Stockholder Information") and does not or will not omit
to state any such material fact required to be stated therein or
necessary in order to make the Selling Stockholder Information (i) in
the case of the Registration Statements, not misleading and (ii) in
the case of the Prospectus, in light of the circumstances under which
they were made, not misleading. When any related preliminary
prospectus was first filed with the Commission (whether filed as part
of the Primary Registration Statement or any amendment thereto or
pursuant to Rule 424(a) of the Regulations) and when any amendment
thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendments thereof and supplements
thereto did not contain an untrue statement of a material fact
relating to the Selling Stockholder Information and did not omit to
state any such material fact required to be stated therein or
necessary in order to make the Selling Stockholder Information in
light of the circumstances under which they were made not misleading.
With respect to Concurrent Computer Corporation as a Selling
Stockholder ("Concurrent"), Concurrent represents and warrants that
Concurrent is not, and is not proposed to be, a party to any material
transaction or material contract involving the Company which is to be
performed, in whole or in part, on or after the date hereof, except
for those transactions and contracts described in the Prospectus;
provided, however, that Concurrent is not providing any representation
or warranty with respect to the accuracy or completeness of the
description of such transactions and contracts set forth in the
Prospectus.
(f) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or
which constitutes or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares.
3. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell 1,797,978 shares of
Common Stock and each Selling Stockholder hereby agrees to sell the number of
shares of Common Stock set opposite their name in Schedule I hereto, severally
and not jointly, to the Underwriters and the Underwriters, severally and not
jointly, agree to purchase, at a purchase price per share of $__, the number of
Firm Shares set forth opposite the respective names of the Underwriters in
Schedule II hereto plus any additional number of Shares which such Underwriter
may become obligated to purchase pursuant to the provisions of Section 11
hereof.
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<PAGE> 12
(b) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the office of Simpson Thacher &
Bartlett, 425 Lexington Avenue, New York, New York, or at such other place as
shall be agreed upon by you and the Company, at 10:00 A.M. on the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
(unless postponed in accordance with the provisions of Section 11 hereof)
following the date of the effectiveness of the Registration Statement (or, if
the Company has elected to rely upon Rule 430A of the Regulations, the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the initial public offering price of the Shares), or
such other time not later than ten business days after such date as shall be
agreed upon by you and the Company (such time and date of payment and delivery
being herein called the "Closing Date"). Payment shall be made to the Company
and the Selling Stockholders by wire transfer in same day funds to the account
of the Company and the Selling Stockholders, respectively, as the case may be,
against delivery to you for the respective accounts of the Underwriters of
certificates for the Shares to be purchased by them. Certificates for the
Shares shall be registered in such name or names and in such authorized
denominations as you may request in writing at least two full business days
prior to the Closing Date. The Company and the Selling Stockholders will
permit you to examine and package such certificates for delivery at least one
full business day prior to the Closing Date.
(c) In addition, the Company hereby grants to the
Underwriters the option to purchase up to 375,000 Additional Shares at the same
purchase price per share to be paid by the Underwriters for the Firm Shares as
set forth in this Section 3, for the sole purpose of covering over-allotments
in the sale of Firm Shares by the Underwriters. This option may be exercised
at any time, in whole or in part, on or before the thirtieth day following the
date of the Prospectus, by written notice by you to the Company. Such notice
shall set forth the aggregate number of Additional Shares as to which the
option is being exercised and the date and time, as reasonably determined by
you, when the Additional Shares are to be delivered (such date and time being
herein sometimes referred to as the "Additional Closing Date"); provided,
however, that the Additional Closing Date shall not be earlier than the Closing
Date or earlier than the second full business day after the date on which the
option shall have been exercised nor later than the eighth full business day
after the date on which the option shall have been exercised (unless such time
and date are postponed in accordance with the provisions of Section 11 hereof).
Certificates for the Additional Shares shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the Additional Closing Date. The Company
will permit you to examine and package such certificates for delivery at least
one full business day prior to the Additional Closing Date.
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<PAGE> 13
The number of Additional Shares to be sold to each Underwriter
shall be the number which bears the same ratio to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule II hereto (or such number
increased as set forth in Section 11 hereof) bears to the total number of Firm
Shares purchased by the Underwriters, subject, however, to such adjustments to
eliminate any fractional shares as you in your sole discretion shall make.
Payment for the Additional Shares shall be made by wire
transfer in same day funds to the account of the Company, upon delivery of the
certificates for the Additional Shares to you for the respective accounts of
the Underwriters.
4. Offering. Upon your authorization of the release of the
Firm Shares, the Underwriters propose to offer the Shares for sale to the
public upon the terms set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and
agrees with the Underwriters that:
(a) If the Primary Registration Statement has not yet been
declared effective, the Company will use its best efforts to cause the
Primary Registration Statement and any amendments thereto to become
effective as promptly as possible, and if Rule 430A is used or the
filing of the Prospectus is otherwise required under Rule 424(b) or
Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within
the prescribed time period and will provide evidence satisfactory to
you of such timely filing. If necessary, the Company will prepare a
462(b) Registration Statement in a form approved by you and to file
such Rule 462(b) Registration Statement with the Commission on the
date hereof. If the Company elects to rely on Rule 434, the Company
will prepare and file a term sheet that complies with the requirements
of Rule 434.
The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when Registration
Statements and any amendments thereto become effective, (ii) of any
request by the Commission for any amendment of or supplement to the
Registration Statements or the Prospectus or for any additional
information, (iii) of the mailing or the delivery to the Commission
for filing of any amendment of or supplement to the Registration
Statements or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration
Statements or any post-effective amendment thereto or of the
initiation, or the threatening, of any proceedings therefor, (v) of
the receipt of any comments from the Commission, and (vi) of the
receipt by the Company of any notification with respect to the
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<PAGE> 14
suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for
that purpose. If the Commission shall propose or enter a stop order
at any time, the Company will make every reasonable effort to prevent
the issuance of any such stop order and, if issued, to obtain the
lifting of such order as soon as possible. The Company will not file
any amendment to the Registration Statements or any amendment of or
supplement to the Prospectus (including the prospectus required to be
filed pursuant to Rule 424(b)or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Primary
Registration Statement before or after the effective date of the
Primary Registration Statement or file any document under the Exchange
Act if such document would be deemed to be incorporated by reference
into the Prospectus to which you shall reasonably object in writing
after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares
is required to be delivered under the Act any event shall have
occurred as a result of which the Prospectus as then amended or
supplemented would, in the judgment of the Underwriters or the Company
include an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to
amend or supplement the Prospectus or Registration Statements to
comply with the Act or the Regulations, or to file under the Exchange
Act so as to comply therewith any document incorporated by reference
in the Registration Statements or the Prospectus or in any amendment
thereof or supplement thereto, the Company will notify you promptly
and prepare and file with the Commission an appropriate amendment or
supplement (in form and substance satisfactory to you) which will
correct such statement or omission or which will effect such
compliance and will use its best efforts to have any amendment to the
Registration Statements declared effective as soon as possible.
(c) The Company will promptly deliver to you four signed
copies of the Primary Registration Statement and the 462(b)
Registration Statement, if any, including exhibits and all documents
incorporated by reference therein and all amendments thereto, and the
Company will promptly deliver to each of the Underwriters such number
of copies of any preliminary prospectus, the Prospectus, the
Registration Statements, and all amendments of and supplements to such
documents, if any, and all documents incorporated by reference in the
Primary Registration Statement and Prospectus or any amendment thereof
or supplement thereto, without exhibits, as you may reasonably
request.
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<PAGE> 15
(d) The Company will endeavor in good faith, in cooperation
with you, at or prior to the time of effectiveness of the Primary
Registration Statement to qualify the Shares for offering and sale
under the securities laws relating to the offering or sale of the
Shares of such jurisdictions as you may designate and to maintain such
qualification in effect for so long as required for the distribution
thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute
a general consent to service of process.
(e) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to
you as soon as practicable, but not later than 45 days after the end
of its fiscal quarter in which the first anniversary date of the
effective date of the Primary Registration Statement occurs, an
earning statement (in form complying with the provisions of Rule 158
of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Primary Registration
Statement.
(f) From the date hereof until 180 days after the Closing
Date, the Company will not offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, any shares of the Company's
capital stock or securities exercisable for, or convertible or
exchangeable into, shares of the Company's capital stock, without your
prior written consent, and the Company will use its best efforts to
obtain the undertaking of each of its officers and directors and such
of its shareholders as have been heretofore designated by you and
listed on Schedule III attached hereto not to engage in any of the
aforementioned transactions on their own behalf, other than (i) the
sale of the Shares hereunder; (ii) the Company's issuance of Common
Stock upon the exercise of presently outstanding stock options; and
(iii) the issuance of stock options pursuant to the Company's existing
stock option plans provided that such options shall not be exercisable
within such 180-day period.
(g) During a period of three years from the effective date of
the Registration Statement, the Company will furnish to you copies of
(i) all reports to its shareholders; and (ii) all reports, financial
statements and proxy or information statements filed by the Company
with the Commission or any national securities exchange.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares
to be sold by the Company to be included in the
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<PAGE> 16
National Association of Securities Dealers Automated Quotation
National Market System.
(j) The Company, during the period when the Prospectus is
required to be delivered under the Act or the Exchange Act, will file
all documents required to be filed with the Commission pursuant to
Section 13, 14 or 15 of the Exchange Act within the time periods
required by the Exchange Act and the rules and regulations thereunder.
6. Covenants of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) That the Shares to be sold by the Selling Stockholder
hereunder are subject to the interest of the Underwriters and the
other Selling Stockholders thereunder, that the arrangements made by
the Selling Stockholder for such custody are to that extent
irrevocable, and that the obligations of the Selling Stockholder
hereunder shall not be terminated by any act of the Selling
Stockholder, by operation of law, by the death or incapacity of any
individual Selling Stockholder or, in the case of a trust, by the
death or incapacity of any executor or trustee or the termination of
such trust, or the occurrence of any other event.
(b) To deliver to the Representatives prior to the Closing
Date a properly completed and executed United States Treasury
Department Form W-8 (if the Selling Stockholder is a non-United States
person) or Form W-9 (if the Selling Stockholder is a United States
person).
7. Payment of Expenses. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statements, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus
and any amendments or supplements thereto (including, without limitation, fees
and expenses of the Company's accountants and counsel), the underwriting
documents (including this Agreement and the Agreement Among Underwriters and
the Selling Agreement) and all other documents related to the public offering
of the Shares (including those supplied to the Underwriters in quantities as
hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to
the Underwriters, including any transfer or other taxes payable thereon, (iii)
the qualification of the Shares under state or foreign securities or Blue Sky
laws, including the costs of printing and mailing a preliminary and final "Blue
Sky Survey" and the fees of counsel for the Underwriters and such counsel's
disbursements in relation thereto, (iv) quotation of the Shares on the National
Association of Securities Dealers
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<PAGE> 17
Automated Quotation National Market System, (v) filing fees of the Commission
and the National Association of Securities Dealers, Inc.; (vi) the cost of
printing certificates representing the Shares; and (vii) the cost and charges
of any transfer agent or registrar. The Selling Stockholders shall pay the
fees and expenses of their counsel, the Custodian (and any other
attorney-in-fact) and any transfer taxes payable in connection with their
respective sales of Shares to the Underwriters, including the costs of
delivering and distributing the Custody Agreements and the Powers of Attorney.
8. Conditions of Underwriters' Obligations. The
obligations of the Underwriters to purchase and pay for the Firm Shares and the
Additional Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
herein contained, as of the date hereof and as of the Closing Date (for
purposes of this Section 8 "Closing Date" shall refer to the Closing Date for
the Firm Shares and any Additional Closing Date, if different, for the
Additional Shares), to the absence from any certificates, opinions, written
statements or letters furnished to you or to Simpson Thacher & Bartlett
("Underwriters' Counsel") pursuant to this Section 8 of any misstatement or
omission, to the performance by the Company and the Selling Stockholders of
their obligations hereunder, and to the following additional conditions:
(a) The Primary Registration Statement shall have become
effective not later than 5:30 P.M., New York time, on the date of this
Agreement or at such later time and date as shall have been consented
to in writing by you; the Rule 462(b) Registration Statement, if any,
shall have been filed with the Commission in a timely fashion in
accordance with Section 1(a) hereof; if the Company shall have elected
to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus
shall have been filed with the Commission in a timely fashion in
accordance with Section 1(a) hereof; and, at or prior to the Closing
Date no stop order suspending the effectiveness of the Registration
Statements or any post-effective amendment thereof shall have been
issued and no proceedings therefor shall have been initiated or
threatened by the Commission.
(b) At the Closing Date you shall have received the
opinion of Holland & Knight, counsel for the Company, dated the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. The Company is
duly qualified and in good standing as a foreign corporation
in each jurisdiction in which the character or location of its
properties (owned, leased
17
<PAGE> 18
or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a material
adverse effect on the Company. The Company has all requisite
corporate authority to own, lease and license its properties and
conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus.
(ii) The Company has an authorized capital stock
as set forth in the Prospectus. All of the outstanding shares
of Common Stock are duly and validly authorized and issued,
are fully paid and nonassessable and were not issued in
violation of or subject to any preemptive rights. The Shares
to be delivered by the Company on the Closing Date have been
duly and validly authorized and, when delivered by the Company
and paid for in accordance with this Agreement, will be duly
and validly issued, fully paid and nonassessable and will not
have been issued in violation of or subject to any preemptive
rights. The Common Stock and the Shares conform to the
descriptions thereof contained in the Prospectus.
(iii) The Common Stock currently outstanding is
listed, and the Shares to be sold under this Agreement to the
Underwriters are duly authorized for quotation, on the
National Association of Securities Dealers Automated Quotation
National Market System.
(iv) This Agreement has been duly and validly
authorized, executed and delivered by the Company.
(v) To the best of such counsel's knowledge,
there is no litigation or governmental or other action, suit,
proceeding or investigation before any court or before or by
any public, regulatory or governmental agency or body pending
or threatened against, or involving the properties or business
of, the Company, which is of a character required to be
disclosed in the Registration Statement and the Prospectus
which has not been properly disclosed therein.
(vi) The execution, delivery, and performance of
this Agreement and the consummation of the transactions
contemplated hereby by the Company do not and will not (A)
conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default)
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the
Company pursuant to, any agreement, instrument, franchise,
license or permit known to such counsel to which the
18
<PAGE> 19
Company is a party or by which it or its properties or assets may be
bound or (B) violate or conflict with any provision of the certificate
of incorporation or by-laws of the Company or, to the best knowledge
of such counsel, any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its
properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any
court or any public, governmental, or regulatory agency or body having
jurisdiction over the Company or any of its properties or assets is
required for the execution, delivery and performance of this Agreement
or the consummation of the transactions contemplated hereby, except
for (1) such as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters (as to which such counsel need express no opinion)
and (2) such as have been made or obtained under the Act.
(vii) The Registration Statements and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included or
incorporated by reference therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations. The documents filed under
the Exchange Act and incorporated by reference in the Registration
Statements and the Prospectus or any amendment thereof or supplement
thereto (other than the financial statements and schedules and other
financial data included or incorporated by reference therein, as to
which no opinion need be rendered) when they became effective or were
filed with the Commission, as the case may be, complied as to form in
all material respects with the Act or the Exchange Act, as applicable,
and the rules and regulations of the Commission thereunder.
(viii) The Registration Statements are effective under the
Act, and, to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statements or any
post- effective amendment thereof has been issued and no proceedings
therefor have been initiated or threatened by the Commission and all
filings required by Rule 424(b) of the Regulations have been made.
(ix) The statements made in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute
summaries of the terms of the Company's capital stock (including the
Shares),
19
<PAGE> 20
constitute accurate summaries of the terms of such capital
stock in all material respects.
(x) Except as otherwise disclosed in the Registration
Statements and the Prospectus, the Company is not an "investment
company" or a company "controlled" by an "investment company" within
the meaning of and subject to regulation under the Investment Company
Act of 1940 and the rules and regulations of the Commission thereunder.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives
of the Company, representatives of the independent public accountants for
the Company and the Underwriters at which the contents and the Prospectus
and related matters were discussed and based on the foregoing, no facts
have come to the attention of such counsel which would lead such counsel to
believe that either the Registration Statements, at the time each became
effective, including the information deemed to be part of the Registration
Statement at the time of effectiveness pursuant to Rule 430A or Rule 434,
if applicable (which pursuant to Form S-3 incorporates by reference the
Annual Report on Form 10-K of the Company for the fiscal year ended
September 30, 1995, the Company's Quarterly Reports on Form 10-Q for the
fiscal quarters ended December 29, 1995 and March 31, 1996, the Company's
Current Reports on Form 8-K dated April 10, 1996 and as amended on June 18,
1996 and dated July 11, 1996, and the description of the Company's Common
Stock contained in the Registration Statement on Form 10 filed with the
Commission on September 29, 1994, each as filed under the Exchange Act), or
any amendment thereof made prior to the Closing Date as of the date of such
amendment, contained an untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus as of its date
(or any amendment thereof or supplement thereto made prior to the Closing
Date as of the date of such amendment or supplement) and as of the Closing
Date contained or contains an untrue statement of a material fact or
omitted or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need express no belief or opinion with respect to the financial
statements and schedules and other financial data included or incorporated
by reference therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States
and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon
an
20
<PAGE> 21
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and certificates or other written statements of
officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the
Company and its subsidiaries, provided that copies of any such statements
or certificates shall be delivered to Underwriters' Counsel. The opinion
of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their
opinion, you and they are justified in relying thereon.
(c) At the Closing Date you shall have received the opinion of
Karen G. Fink, the General Counsel for Concurrent Computer Corporation
dated the Closing Date addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(i) Concurrent has full right, power and authority to enter
into this Agreement, the Power of Attorney and the Custody Agreement.
The execution, delivery, and performance of this Agreement, the Power
of Attorney and the Custody Agreement and the consummation of the
transactions contemplated hereby and thereby by Concurrent does not and
will not (A) violate or conflict with any provision of the certificate
of incorporation, by-laws or comparable organizational documents of
Concurrent, or to such counsel's best knowledge, any of its
subsidiaries, (B) to the best knowledge of such counsel, conflict with
or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time,
or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or
assets of Concurrent pursuant to, any agreement, instrument, franchise,
license or permit known to such counsel to which Concurrent is a party
or by which Concurrent or Concurrent's properties or assets may be
bound or (C) to the best knowledge of such counsel, violate or conflict
with any judgment, decree, order, statute, rule or regulation of any
court or any public, governmental or regulatory agency or body having
jurisdiction over Concurrent or any of Concurrent's properties or
assets. No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any
public, governmental, or regulatory agency or body having jurisdiction
over Concurrent or any of Concurrent's properties or assets is required
for the execution, delivery and performance of this Agreement,
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<PAGE> 22
the Power of Attorney and the Custody Agreement or the consummation of
the transactions contemplated hereby or thereby, except for (1) such
as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares sold by
Concurrent (the "Concurrent Shares") by the Underwriters (as to which
such counsel need express no opinion) and (2) such as have been made
or obtained under the Act.
(ii) This Agreement has been duly authorized, executed and
delivered by or on behalf of Concurrent.
(iii) A Power-of-Attorney and a Custody Agreement have been
duly authorized, executed and delivered by Concurrent and constitute
valid and binding agreements of Concurrent.
(iv) Upon payment for, and delivery of, the Concurrent Shares
under this Agreement in accordance with the terms hereof, the
Underwriters will acquire all of the rights of Concurrent in such
Shares and will also acquire the interest of Concurrent in such Shares
free of any adverse claim (within the meaning of the Uniform Commercial
Code as in effect in the State of New York).
In rendering such opinion, such counsel may rely (i) as to matters
involving the application of laws other than the laws of the United States
and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon
an opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to
Underwriters' Counsel, familiar with the applicable laws; provided that the
opinion of such counsel shall state that the opinion of any such other
counsel is in form satisfactory to such counsel and, in their opinion, you
and they are justified in relying thereon; (B) as to matters of fact, to
the extent they deem proper, upon a certificate of Concurrent in respect to
matters of fact as to ownership of and the absence of adverse claims
regarding, the Concurrent Shares, provided that such counsel shall furnish
copies thereof to the Representatives and state that they believe that both
the Underwriters and they are justified in relying upon such certificate.
(d) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and
the Underwriters shall have received from said Underwriters' Counsel a
favorable opinion, dated as of the Closing Date with respect to the
issuance and sale of the Shares, the Registration Statements
22
<PAGE> 23
and the Prospectus and such other related matters as you may reasonably
require, and the Company shall have furnished to Underwriters' Counsel such
documents as they request for the purpose of enabling them to pass upon
such matters.
(e) At the Closing Date you shall have received a certificate of
the Chief Executive Officer and Chief Financial Officer of the Company,
dated the Closing Date, to the effect that (i) the condition set forth in
subsection (a) of this Section 8 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate in all material
respects, (iii) as of the Closing Date the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed in all
material respects and (iv) subsequent to the respective dates as of which
information is given in the Primary Registration Statement and the
Prospectus, the Company and its subsidiaries have not sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse
change, or any development involving a material adverse change, in the
business, prospects, properties, operations, condition (financial or
otherwise) or results of operations of the Company and its subsidiaries
taken as a whole, except in each case as described in or contemplated by
the Prospectus.
(f) At the time this Agreement is executed and at the Closing
Date, you shall have received a letter from KPMG, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement (as used in this paragraph, the "initial letter") and as of the
Closing Date (as used in this paragraph, the "bring-down letter") addressed
to the Underwriters and in form and substance satisfactory to you, (i)
confirming that they are independent public accountants within the meaning
of the Act and are in compliance with the applicable requirements relating
to the qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in
the Prospectus, as of a date not more than five days prior to the date of
the bring- down letter), the conclusions and findings of such firm with
respect to the financial information and other matters covered by the
initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(g) Prior to the Closing Date the Company shall have furnished to
you such further information, certificates and documents as you may
reasonably request.
23
<PAGE> 24
(h) You shall have received from each person who is a director,
officer or shareholder of the Company as have been heretofore designated by
you and listed on Schedule III hereto a copy of the undertaking to be
provided pursuant to Section 5(f) hereof to the effect that from the date
hereof until 180 days after the Closing Date, such person will not offer,
sell, contract to sell or otherwise dispose of, directly or indirectly, any
shares of the Company's capital stock or securities exercisable for, or
convertible or exchangeable into, shares of the Company's capital stock,
without your prior written consent.
(i) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholders) shall have
furnished to the Representatives on the Closing Date a certificate, dated
the Closing Date, signed by, or on behalf of, the Selling Stockholder (or
the Custodian or one or more attorneys- in-fact) stating that the
representations, warranties and agreements of the Selling Stockholder
contained herein are true and correct in all material respects as of the
Closing Date and that the Selling Stockholder has complied in all material
respects with all agreements contained herein to be performed by the
Selling Stockholder at or prior to the Closing Date.
(j) At the Closing Date, the Shares to be sold by the Company
shall have been approved for quotation on the National Association of
Securities Dealers Automated Quotation National Market System.
If any of the conditions specified in this Section 8 shall not
have been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 8 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
9. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of
24
<PAGE> 25
any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in either of the Registration
Statements, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however,
that the Company will not be liable in any such case to the extent but only to
the extent that any such loss, liability, claim, damage or expense arises out
of or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any
Underwriter through you expressly for use therein. This indemnity agreement
will be in addition to any liability which the Company may otherwise have
including under this Agreement.
(b) Each Selling Stockholder agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against any and all losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to attorneys' fees and any
and all expenses reasonably incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact relating to
such Selling Stockholder contained in either of the Registration Statements or
any related preliminary prospectus or the Prospectus, or in any supplement
thereto or amendment thereof, as originally filed or any amendment thereof, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact relating to such Selling Stockholder required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that such indemnity with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter (or any persons
controlling such Underwriter) from whom the person asserting any such losses,
liabilities, claims, damages or expenses purchased the Shares which are the
subject thereof if such person did not receive a copy of the Prospectus (or the
Prospectus as amended or supplemented) at or prior to the confirmation of the
sale of such Shares to such person in any case where such delivery is required
by the Act and the untrue statement or omission or alleged untrue statement or
omission of the material fact contained in such preliminary prospectus was
corrected in the Prospectus (or the
25
<PAGE> 26
Prospectus as amended or supplemented). Notwithstanding the foregoing, no
Selling Stockholder shall be liable or responsible for the payment of an amount
pursuant to this Section 9 that exceeds the total proceeds received by such
Selling Stockholder (net of underwriting discounts and commissions but before
deducting expenses) from the sale of its Shares hereunder. This indemnity
agreement will be in addition to any liability which the Selling Stockholders
may otherwise have including under this Agreement.
(c) Each Underwriter severally, and not jointly, agrees
to indemnify and hold harmless the Company, the Selling Stockholders, each of
the directors of the Company and each of the officers of the Company who shall
have signed the Registration Statement, and each other person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any losses, liabilities, claims, damages and
expenses whatsoever as incurred (including but not limited to attorneys' fees
and any and all expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), jointly or several, to which they or any of them may become
subject under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in either of the Registration Statements, as originally
filed or any amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
you expressly for use therein; provided, however, that in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company and
the Selling Stockholders acknowledge that the statements set forth in the last
paragraph of the cover page and in the 2nd paragraph under the caption
"Underwriting" in the Prospectus constitute the only information furnished in
writing by or on behalf of any Underwriter expressly for use in the
Registration Statements or in any amendment thereof, any related preliminary
prospectus or the Prospectus or in any amendment thereof or supplement thereto,
as the case may be.
26
<PAGE> 27
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify each party against
whom indemnification is to be sought in writing of the commencement thereof
(but the failure so to notify an indemnifying party shall not relieve it from
any liability which it may have under this Section 9), except to the extent it
has been materially prejudiced by such failure as determined by a court of
competent jurisdiction in a final judgment. In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party
or parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in
connection with the defense of such action, (ii) the indemnifying parties shall
not have employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them that are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. In no event
shall the indemnifying party be liable for the fees and expenses of more than
one counsel (in addition to local counsel) for all indemnified parties in
connection with any one action or separate but similar or related actions
arising out of the same general allegations or circumstances. Anything in this
subsection to the contrary notwithstanding, an indemnifying party shall not be
liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
10. Contribution. In order to provide for contribution
in circumstances in which the indemnification provided for in Section 9 hereof
is for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, each indemnifying
party shall contribute to the aggregate losses, claims, damages, liabilities
and expenses of the nature contemplated by such indemnification provision
(including any investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims
27
<PAGE> 28
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the indemnified party any contribution
received by the Company from persons, other than the Underwriters, who may also
be liable for contribution, including persons who control the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
officers of the Company who signed the Registration Statement and directors of
the Company) as incurred to which the Selling Stockholders, the Company and one
or more of the Underwriters may be subject, in such proportions as is
appropriate to reflect the relative benefits received by the Selling
Stockholders, the Company and the Underwriters from the offering of the Shares
or, if such allocation is not permitted by applicable law or indemnification is
not available as a result of the indemnifying party not having received notice
as provided in Section 9 hereof, in such proportion as is appropriate to
reflect not only the relative benefits referred to above but also the relative
fault of the Selling Stockholders, the Company and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Selling
Stockholders, the Company and the Underwriters shall be deemed to be in the
same proportion as (x) the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Selling Stockholders and the Company and (y) the underwriting discounts
and commissions received by the Underwriters, respectively, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault of
the Selling Stockholders, the Company and the Underwriters shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Selling Stockholders, the
Company or the Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. The Selling Stockholders, the Company and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 10 were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this Section 10 and the preceding
sentence, (i) in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, (ii) in no case shall any Selling
Stockholder be liable or responsible for the payment of an amount pursuant to
this Section 10 that exceeds the total proceeds received by such Selling
Stockholder (net of underwriting discounts and commissions but before deducting
expenses) from the sale of its Shares hereunder and (iii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
28
<PAGE> 29
Notwithstanding the provisions of this Section 10, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Section 10,
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as such Underwriter, and each person, if any, who controls the
Selling Stockholders or the Company within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed the Registration Statement and each director of the Company shall
have the same rights to contribution as the Company, subject in each case to
clauses (i), (ii) and (iii) of this Section 10. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties, notify each party or
parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 10 or otherwise. No party shall be liable for contribution with
respect to any action or claim settled without its consent; provided, however,
that such consent was not unreasonably withheld.
11. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in
its or their obligation to purchase Firm Shares or Additional Shares hereunder,
and if the Firm Shares or Additional Shares with respect to which such default
relates do not (after giving effect to arrangements, if any, made by you
pursuant to subsection (b) below) exceed in the aggregate 10% of the number of
Firm Shares or Additional Shares, to which the default relates shall be
purchased by the non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their
respective names in Schedule I hereto bear to the aggregate number of Firm
Shares set forth opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than
10% of the Firm Shares or Additional Shares, as the case may be, you may in
your discretion arrange for yourself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase such
Firm Shares or Additional Shares, as the case may be, to which such default
relates on the terms contained herein. In the event that within five calendar
days after such a default you do not arrange for the purchase of the Firm
Shares or Additional Shares, as the case may be, to which such default relates
as provided in this Section 11, this Agreement or, in the case of a default
with
29
<PAGE> 30
respect to the Additional Shares, the obligations of the Underwriters to
purchase and of the Company to sell the Additional Shares shall thereupon
terminate, without liability on the part of the Company with respect thereto
(except in each case as provided in Section 7, 9(a), 9(b) and 10 hereof) or the
Underwriters, but nothing in this Agreement shall relieve a defaulting
Underwriter or Underwriters of its or their liability, if any, to the other
Underwriters, the Company and the Selling Stockholders for damages occasioned
by its or their default hereunder.
(c) In the event that the Firm Shares or Additional
Shares to which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the Closing Date or
Additional Closing Date, as the case may be for a period, not exceeding five
business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements, and the Company agrees to file promptly any
amendment or supplement to the Registration Statement or the Prospectus which,
in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 11 with like effect as if it had
originally been a party to this Agreement with respect to such Firm Shares and
Additional Shares.
12. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the Underwriters,
the Selling Stockholders and the Company contained in this Agreement, including
the agreements contained in Section 7, the indemnity agreements contained in
Section 9 and the contribution agreements contained in Section 10, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof or by or on
behalf of the Company, any of its officers and directors or any controlling
person thereof, and shall survive delivery of and payment for the Shares to and
by the Underwriters. The representations contained in Section 1 and the
agreements contained in Sections 7, 9, 10 and 13(d) hereof shall survive the
termination of this Agreement, including termination pursuant to Section 11 or
13 hereof.
13. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the later of
when (i) you and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price
per Share has not been agreed upon prior to 5:00 P.M., New York time, on the
fifth full business day after the Registration Statement shall have become
effective, this Agreement shall thereupon terminate without liability to the
Selling Shareholders, the Company or the
30
<PAGE> 31
Underwriters except as herein expressly provided. Until this Agreement becomes
effective as aforesaid, it may be terminated by the Company by notifying you or
by you notifying the Company. Notwithstanding the foregoing, the provisions of
this Section 13 and of Sections 1, 7, 9 and 10 hereof shall at all times be in
full force and effect.
(b) You shall have the right to terminate this Agreement at
any time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing
Date, as the case may be, if (A) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or
securities in general; or (B) if trading on the New York or American Stock
Exchanges or the over-the-counter market, shall have been suspended, or minimum
or maximum prices for trading shall have been fixed, or maximum ranges for
prices for securities shall have been required, on any such exchange or market
by order of the Commission or any other governmental authority having
jurisdiction; or (C) if a banking moratorium has been declared by a state or
federal authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Additional Shares, as the case may be,
shall have become effective; or (D) (i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United
States or there is a declaration of a national emergency or war by the United
States or (ii) if there shall have been such change in political, financial or
economic conditions if the effect of any such event in (i) or (ii) as in your
judgment makes it impracticable or inadvisable to proceed with the offering,
sale and delivery of the Firm Shares or the Additional Shares, as the case may
be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 13
shall be by telephone, confirmed in writing in accordance with Section 14.
(d) If this Agreement shall be terminated pursuant to any of
the provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 13(a) hereof or (ii) Section 11(b) or 13(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof,
the Company will, subject to demand by you, reimburse the Underwriters for all
reasonable out-of-pocket expenses (including the fees and expenses of their
counsel), incurred by the Underwriters in connection herewith.
14. Notice. All communications hereunder, except as may
be otherwise specifically provided herein, shall be in writing and , if sent to
any Underwriter, shall be mailed,
31
<PAGE> 32
delivered, or telexed, telecopied or telegraphed and confirmed in writing, to
such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, N.Y.
10167, Attention: Stephen M. Parish; if sent to the Company, shall be mailed,
delivered, or telegraphed, telecopied or telexed and confirmed in writing to
the Company, 2101 West Cypress Creek Road, Fort Lauderdale, Florida 33309,
Attention: Robert L. Carberry. If to any Selling Stockholders, shall be
mailed, delivered or telexed or telegraphed and confirmed in writing, to such
Selling Stockholder at the address set forth on Schedule II hereto.
15. Parties. This Agreement shall inure solely to the
benefit of, and shall be binding upon, the Underwriters, the Selling
Stockholders and the Company and the controlling persons, directors, officers,
employees and agents referred to in Sections 9 and 10, and their respective
personal representatives, successors and assigns, and no other person shall
have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provision herein
contained. The term "successors and assigns" shall not include a purchaser, in
its capacity as such, of Shares from any of the Underwriters.
16. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York, but without
regard to principles of conflicts of law.
32
<PAGE> 33
If the foregoing correctly sets forth the understanding
between you and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
CYBERGUARD CORPORATION
By
-----------------------------
Name:
Title:
The Selling Stockholders named
in Schedule I to this Agreement
By
-----------------------------
Attorney-in-Fact
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
FURMAN SELZ LLC
On behalf of themselves and the other
Underwriters named in Schedule II hereto.
By: BEAR, STEARNS & CO. INC.
By:
-----------------------------------
Name:
Title:
33
<PAGE> 34
SCHEDULE I
Number of CyberGuard Shares
<TABLE>
<S> <C>
Concurrent Computer Corporation
2 Crescent Place
Oceanport, New Jersey 07757 341,589
E. Courtney Siegel
c/o CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309 150,895
Daniel S. Dunleavy
c/o CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309 61,312
Michael N. Smith
c/o CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309 37,975
Robert T. Menzel
c/o CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309 37,922
Robert E. Chism
c/o CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309 37,829
Bradley C. Lesher
c/o CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309 34,500
</TABLE>
34
<PAGE> 35
SCHEDULE II
<TABLE>
<CAPTION>
Number of Cyberguard
Name of Underwriter Shares to be Purchased
------------------- ----------------------
<S> <C>
Bear, Stearns & Co. Inc . . . . . . . . . .
Cowen & Company . . . . . . . . . . . . . .
Furman Selz LLC . . . . . . . . . . . . . .
Total. . . . . 2,500,000
---------
</TABLE>
35
<PAGE> 36
SCHEDULE III
Lock-up Agreements
Concurrent Computer Corporation
Robert L. Carberry
Robert E. Chism
Daniel S. Dunleavy
Brian Foremny
Frank Gelbart
Katherine K. Hutchinson
C. Shelton James
Bradley C. Lesher
Michael Maguire
Robert T. Menzel
Robert F. Perks
Rick A. Siebenaler
E. Courtney Siegel
Michael N. Smith
Patrick O. Wheeler
36
<PAGE> 1
EXHIBIT 23.01
The Board of Directors
CyberGuard Corporation:
We consent to the use of our reports included herein and incorporated
herein by reference and to the reference to our firm under the headings
"Selected Financial Data" and "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Miami, Florida
July 15, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 Amendment No. 2) and related Prospectus of
CyberGuard Corporation (formerly known as Harris Computer Systems Corporation)
for the registration of 2,500,000 shares of its Common Stock and to the
incorporation by reference therein of our report dated July 13, 1994, with
respect to the financial statements of Harris Computer Systems Corporation
included in its Annual Report on Form 10-K for the year ended June 30, 1994,
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Jacksonville, Florida
July 11, 1996
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EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of CyberGuard Corporation (formerly Harris Computer Systems Corporation) on Form
S-3 (File No. 333-04407) of our report dated August 15, 1995, except for Note
19, as to which the date is September 26, 1995, on our audits of the
consolidated financial statements and financial statement schedules of
Concurrent Computer Corporation. We also consent to the reference to our Firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
July 11, 1996
