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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER 0-24544
CYBERGUARD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0510339
(STATE OR JURISDICTION (I.R.S. EMPLOYER
------------------------------ -------------------
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2000 WEST COMMERCIAL BOULEVARD, SUITE 200, FORT LAUDERDALE, FLORIDA 33309
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (954) 958-3900
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $10,205,927 (computed by reference to the last
sales price of the Registrant's Common Stock on August 29, 1999).
As of August 29, 1999, 9,071,937 shares of the Registrant's $0.01 par
value Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company's 1999 Annual Meeting of
Shareholders (incorporated in Part III to the
extent provided in Items 10, 11, 12 and 13 hereof).
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PART I
ITEM 1. BUSINESS
OVERVIEW
CyberGuard Corporation ("CyberGuard" or the "Company") is a leading
network security solutions provider to Fortune 1000 companies, major financial
institutions, and government agencies worldwide. The Company's CyberGuard(R)
Firewall provides a level of security, features and availability that the
Company believes is not matched in the industry. Through a combination of
proprietary and third-party technology (such as Virtual Private Network ("VPN"),
authentication, virus scanning, encryption, advanced reporting, high
availability and centralized management), the Company provides a full suite of
products and services that are designed to protect the integrity of electronic
data and customer applications from unauthorized individuals and digital
thieves.
The Company was incorporated in 1994 in connection with a spin-off of
the Company from Harris Corporation. The Company produced computers for the
real-time computing market as well as the CyberGuard Firewall for the secure
computing market. The Company changed its name from Harris Computer Systems
Corporation in Jun 1996 following a sale of the Company's real-time computer
business.
Information in this report contains forward-looking statements that
involve risks and uncertainties. The Company's actual accomplishments and
results may differ significantly from those discussed in the forward- looking
statements. See Item 7, "Management's Discussion and Analysis," for a more
complete discussion regarding forward-looking statements.
SIGNIFICANT EVENTS
During the Company's fiscal year ended June 30, 1999, the Company has
undergone significant changes and an organizational restructuring. During August
1998, the Audit Committee of the Board of Directors and the Company's outside
directors became aware that previously reported revenues had been overstated and
that a restatement of the Company's financial statements would be forthcoming.
An internal corporate investigation was undertaken immediately, resulting in
various management and other corporate changes over the past twelve months.
Some of the major events comprising these changes are described below.
o RETAINING. PRICEWATERHOUSECOOPERS LLP. The Company's Board of Directors
retained PricewaterhouseCoopers LLP ("PwC") to serve as the Company's
independent auditors for its 1998 fiscal year. This engagement began after
PwC had been engaged in September 1998 to assist in the Company's internal
investigation of the revenue overstatements. This change in auditors
occurred after the resignation of the Company's prior auditors, KPMG. See
Item 9 of this report on Form 10-K. The Company later also retained PwC to
re-audit the Company's 1997 fiscal year.
o NEW MANAGEMENT TEAM. The Company underwent numerous organizational changes,
resulting in a new management team. Mr. David Proctor, who first became
associated with CyberGuard as a member of the Board of Directors in 1997,
joined the Company's management team as Chief Executive Officer, President,
and Chairman of the Board of Directors. Mr. Proctor has previously served
as President and Chief Operating Officer of Platinum Software Corporation,
as President and Chief Operating Officer of Ashton-Tate Corporation, and as
Vice President of the Personal Software Products Division of IBM. Mr.
Terrence Zielinski, who joined the Company on an interim basis during
September 1998, has been named Chief Financial Officer. Mr. Zielinski is a
CPA with over thirty-five years experience, including having served as
chief financial officer of several public companies and having received
certification as a fraud auditor. Mr. Michael Wittig, who had been serving
as Vice President of Development for the Company, has been appointed to the
additional position of Chief Technical Officer. Mr. Frederick Hawkes,
having executive experience working with technology companies in marketing,
business development and product development, has joined CyberGuard as Vice
President of Worldwide Marketing.
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o CORPORATE INVESTIGATION. During August, 1998, the Company's Board of
Directors appointed a Special Committee/Executive Committee with the full
powers of the Board ("Special Committee"). The Special Committee authorized
and directed the Audit Committee of the Company's Board of Directors
("Audit Committee") to conduct an investigation into internal controls and
corporate governance matters of the Company. An independent law firm was
engaged to assist the Audit Committee in this investigation. This internal
investigation has been completed and the Audit Committee has made
recommendations to the Board of Directors regarding additional specific
actions to be taken with respect to the matters discovered as a result of
the investigation as well as improvements to the internal control
structure. The Company's management is in the process of executing these
actions. To date, a review of the Company's revenue recognition policies
has resulted in the quarterly adjustments described under the caption
"Quarterly Restatement" included in Item 6 of this report on Form 10-K and
in Note. 2 to the Consolidated Financial Statements contained in Item 8 of
this report.
o ADDING LIQUIDITY. To improve the Company's liquidity, the Company sold a
non-strategic asset for $2 million (the Company's Galaxy Internet search
engine, which was an asset of the Company's TradeWave division);
substantially all the assets of a subsidiary for $3.4 million (ARCA
Systems, Inc., a consulting company); and substantially all the assets of
its TradeWave division for $810,000, subject to an escrow agreement. During
December 1998, the Company obtained an additional $1,125,000 through the
issuance of convertible debt. The Company increased this convertible debt
to approximately $4,300.000 including repaying the initial debt
transaction. It closed the transaction on August 27, 1999. This increased
amount is principally with the same debt holders as the December 17, 1998,
transaction. The interest rate will be amended to 11.5% per annum. The
conversion rate will be amended to be convertible into approximately
4,300,000 shares of commom stock at a conversion price equal to $1.00 per
share. In addition, the initial warrants from the December 17, 1998,
transaction will be cancelled. The amended transaction will have the
Company issue approximately 4,300,000 warrants to purchase the Company's
common stock at $2.00 per share.
o RE-ESTABLISHMENT OF COMPANY GOALS. The Company believes that its flagship
product, the CyberGuard(R) Firewall, currently enjoys technological
advantages over its competitors. In addition, when coupled with other
network security products that are either proprietary to the Company or are
available through relationships with third parties, the Company provides a
full suite of network security products and services. The Company has
refocused its attention on capitalizing on its technological advantages and
is aggressively pursuing opportunities in its target markets.
o RESTATEMENT OF FINANCIAL RESULTS. Restatement of the Company's financial
statements for its fiscal years 1997 and 1998 is completed. See Items 6, 7
and 8 of this report on Form 10-K.
o OPTIONS EXCHANGE AND NEW ISSUANCES. As part of the overall program to
incentivize its personnel, during September 1998, the Company offered its
employees, officers and directors the opportunity to exchange their
existing stock options for new options, with an exercise price equal to the
market price per share on the date the Board of Directors adopted the
exchange program ($1.125 per share). The weighted-average exercise price
per share prior to this exchange offer was $7.58 per share. The only
employees who did not voluntarily terminate their employment with the
Company before May 6, 1999 were eligible for the Company's offer. Option
holders holding options on 1,140,007 shares of Company common stock
accepted this offer. In addition, during September 1998, the Company issued
new options on 1,110,936 shares of Company common stock at an exercise
price of $1.31 per share.
INDUSTRY BACKGROUND
CyberGuard competes in the network security and electronic commerce
markets. Network security has historically been the focus primarily of 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 from others and allowing only authorized users to
connect to their privately managed networks.
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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 coworkers. 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.
As popularity and use of the Internet and intranets for business
applications 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.
The following elements are principal means for protecting organizations
from digital mischief. These elements require substantial integration and
interoperability to smoothly implement an organization's security policy.
SECURITY POLICY. Security products are not effective unless they follow
a well-thought out enterprise security policy. Creating a policy requires
cooperation between information technology staffers, business unit managers and
senior executives. Generally, a policy should follow one of two philosophies.
The first is, "That which is not expressly prohibited is permitted." The second
is, "That which is not expressly permitted is prohibited." The former is less
intrusive but will not provide maximum protection. The latter requires
discussion and support from management because it affects the workflow of the
entire organization - all the way down to rules for locking offices and filing
cabinets, and discarding waste paper. The use of security technology such as a
firewall, generally is associated with the second philosophy.
LAN SECURITY. Popular local-area network ("LAN") operating system
software provides many security options - many of which are seldom used. Network
managers can immediately improve protection by implementing security features
such as log-in restrictions on specific workstations, days of the week and hours
of the day. More stringent password policies also create extra barriers, such as
increasing the minimum password length and forcing regular password changes.
Another overlooked area is share-level security rarely used with appropriate
precision. Rigorous application of LAN security features can bolster protection
from internal breaches.
FIREWALLS. Firewalls provide access control. They usually are aimed at
preventing external security breaches, but can also provide additional internal
security for corporate intranets. Firewalls are a combination of software and
hardware, usually consisting of a fast workstation located outside the LAN but
inside the router link to the Internet. To be effective, all network traffic
must pass through the firewall, whether going to the outside world or entering
the LAN. The firewall permits only authorized traffic to pass either way, and
must be impervious to unauthorized penetration.
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Premium firewalls run on special versions of the UNIX operating system, although
Windows NT-based versions are also popular for less-rigorous security
environments. Some firewalls also support ancillary special features, such as
Web URL filtering. Firewall features and the underlying operating system of the
firewall generally determine the level of security that a firewall provides.
Presented below is the security spectrum of firewall products available today.
- --------------------------------------------------------------------------------
ROUTER- PROXY FIREWALL
FULL BASED APPLICATION HYBRID WITH NO
ACCESS FILTERING FIREWALL FIREWALL SECURE OS ACCESS
< ------------------------------ >
LEAST SECURE MOST SECURE
- --------------------------------------------------------------------------------
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.
CyberGuard has developed its products to emphasize stringent security and thus
fall to the far right of this diagram.
o ENCRYPTION. Encryption is a data-scrambling technique that prevents
information from being read by unauthorized people. It is used to protect
data packets during transmission from one point to another. Encryption can
be implemented in two ways: from the PC that originates the data, or from
the server or Internet connection device that passes the data outside the
LAN. Protected data is decrypted by a reciprocating destination LAN server
or PC. Digital key technology is a common means of implementing encryption.
A digital key bearing a secret value is used to encrypt data. Decryption
can occur only by someone who possesses the appropriate decryption key--
much like secret agents passing coded messages from behind enemy lines.
Systems using the same key for encryption and decryption are referred to as
symmetric key encryption systems, whereas those that use a different key
for decryption than encryption are referred to as asymmetric or public-key
encryption systems. Encryption is a common security technique used to
protect VPNs and standard intranets.
o ANTI-VIRUS. A computer virus modifies programs and data, sometimes in an
innocuous manner and sometimes with malicious intent. Some viruses can
erase applications and data from systems or merely act as electronic
graffiti. Any form of computer virus, regardless of its intent, increase
costs and decreases productivity, and therefore cannot be tolerated.
Anti-virus protection software can be run from individual workstations or
from a network server or firewall. This software scans incoming files and
attachments to E-mail messages to protect servers, PCs and LANs from
infection.
o IDENTIFICATION AND AUTHENTICATION. On the Internet, no one can truly see
who is using the system. Digital identification technology is used to
identify who you are before you start using an information system.
Authentication is the means for proving to the system that you actually are
the person you claim to be. This is similar to the process of signing a
check, then showing a driver's license and a major credit card to a store
clerk. Digital identification and authentication employs passwords, keys,
physical tokens, badges and smart cards - even fingerprints, retinal scans
or voiceprints (biometric identification) in advanced systems. Digital
identification and authentication are particularly important for securing
electronic commerce, which mostly operates outside the protection of a
corporate intranet's security infrastructure.
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o CERTIFICATE AUTHORITY. Applications requiring absolute user identification
employ digital signatures managed by a trusted organization called a
certificate authority. Digital signatures are locked and unlocked with
electronic keys, and filed in a directory of certificates that identify
users owning the keys. A trusted organization called a certificate
authority manages and distributes these certificates with their
corresponding keys. A certificate authority can be an in-house department
or a third-party service provider. It is responsible for the complex
process of registering new users, securing Web servers, distributing and
updating private keys and certificates, recovering lost or forgotten keys
and maintaining audit trails.
THE CYBERGUARD SOLUTION
The Company produces two different firewall products: one based on a
Unix operating system (obtained from Santa Cruz Operations, Inc. ("SCO") and one
based on the Microsoft Windows NT operating system. CyberGuard has modified the
SCO UnixWare operating system to remove penetration vulnerabilities that are
common in Unix platforms. On the Windows NT operating system, CyberGuard has
developed a capability called SecureGuard that closes virtually all of the
security holes in that operating system. Both approaches have resulted in the
CyberGuard firewall products being the most secure firewalls in the industry for
both Unix and Windows NT.
The Company's secure operating system and secure networking software
technologies allow CyberGuard to position its product suite to address the broad
range of customer requirements in 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 competitive 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 competitive firewall through
the unsecure operating system or networking software. The Company's
CyberGuard(R) 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(R) Firewall.
MULTI-LEVEL SECURITY PROVIDES HIGHEST DEGREE
OF PROTECTION
STANDARD FIREWALL MLS CYBERGUARD FIREWALL
FIREWALL
APPLICATION
OPERATING
SYSTEM
NETWORKING
SOFTWARE
INTERNAL NETWORK EXTERNAL NETWORK INTERNAL NETWORK EXTERNAL NETWORK
NORMAL ACCESS PATH HACKER'S PATH MLS HACKER
PROTECTION
SOURCE: CYBERGUARD CORPORATION
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CyberGuard's 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 that person
has been given, 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 National Computer Security Center ("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 believes that
the CyberGuard(R) 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 have been awarded an E3
rating in the United Kingdom and Australia against the Information Technology
Security Evaluation Criteria ("ITSEC").
The Company's CyberGuard(R) Firewall also meets the compliance
standards of the Internet Protocol Security Standard (IPSec). IPSec is a
framework of open standards for ensuring private communications over public
networks like the Internet. Based on standards developed by the Internet
Engineering Task Force (IETF) IP Security Working Group, IPSec is an
industry-driven standard that ensures confidentiality, integrity, and
authenticity on an IP network. IPSec is a key component of this standards-based,
flexible solution for deploying a network-wide security policy.
In addition to enhanced operating system and network security,
CyberGuard's firewalls have been built on the Company's legacy of providing
high-performance, real-time computing systems. Therefore, the Company's
CyberGuard(R) 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(R) 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 database applications, and network access
control filters.
The Company's UNIX-based firewall is currently using SCO version 2.1.3.
SCO is working on version 7.1.X of their operating system and the Company is
evaluating current changes in the technology to further its goal of
multi-platform compatibility.
PRODUCTS AND SERVICES
PRODUCTS
The Company's products are used to secure access to distributed
electronic data and to safeguard the integrity of electronic commerce
applications. The products offered by the Company include the CyberGuard(R)
Firewall and related third-party products offered by the Company with its
strategic partners. Additional information regarding each of these products is
presented below.
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CYBERGUARD(R) FIREWALL. The CyberGuard(R) Firewall for UnixWare and the
CyberGuard(R) Firewall for NT include the following features and attributes:
o PACKET FILTERING. The CyberGuard(R) Firewall implements packet filtering
technology designed to allow 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 and the time of day
or day of week.
o SECURITY AUDITING AND ALARMS. The CyberGuard(R) Firewall incorporates
built-in auditing and alarm functions that are designed to permit
administrators to review a chronological record of system activities and
allow the reconstruction of security sensitive activities. The
CyberGuard(R) 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.
o APPLICATION PROXIES. The CyberGuard(R) 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
Internet), secure sockets layer ("SSL") security, network news transport
protocol ("NNTP"), simple mail transport protocol ("SMTP"), X-Windows
("X"), load balancing, lightweight directory access protocol ("LDAP") and
server message block ("SMB").
o REMOTE ADMINISTRATION. The CyberGuard(R) Firewall supports the ability to
remotely monitor and administer a firewall from a "Network Operations
Center." Using this remote administration capability, a CyberGuard(R)
Firewall can be managed from a remote site as if the system administrator
were physically located with the firewall.
o CENTRAL MANAGEMENT. The CyberGuard(R) Firewall provides the ability to
centrally manage and monitor multiple remote CyberGuard(R) Firewalls (both
UnixWare and NT). Remote firewalls (targets) can be administered and
monitored individually or within groups. The manager (central commander)
can continue to be utilized as a firewall. The high-availability feature
allows central management functions to be migrated to an alternate manager.
CyberGuard's Central Management also has the added capability of providing
automatic fail-over in the case where the firewall acting as the Central
Manager, should fail. The "back-up" manager can be located anywhere in the
world remote from the master Central Manager.
o DYNAMIC NETWORK ADDRESS TRANSLATION. The CyberGuard(R) 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.
o STATIC NETWORK ADDRESS TRANSLATION. The CyberGuard(R) Firewall supports the
ability to map internal private network addresses to public network
addresses. This allows machines with illegal or private network addresses
to be accessed via a public network address different from that of the
firewall.
o GRAPHICAL USER INTERFACE. The CyberGuard(R) Firewall provides a
Motif(TM)-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.
o SPLIT DOMAIN NAME SERVICE. The CyberGuard(R) 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(R) Firewall
information; responses from internal requests might contain a complete list
of hosts.
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o VIRTUAL PRIVATE NETWORKING. The CyberGuard(R) Firewall supports a variety
of VPN products from RedCreek Communications including their IPSec-based
product line. VPN products provide a mechanism for establishing a logically
separate network between multiple CyberGuard(R) Firewall systems. This
logical network supports fully encrypted communication among the machines
of the network. VPN also supports high-performance encrypted communication
between CyberGuard(R) Firewalls or remote/mobile users.
o HIGH AVAILABILITY CYBERGUARD(R) FIREWALL. The CyberGuard(R) Firewall for
UnixWare supports an optional High Availability configuration, which
combines two firewalls to operate as a single logical unit. If there is a
disruption in network connectivity or the primary firewall should fail, the
secondary firewall is designed to automatically take over to provide nearly
continuous network connectivity. All configuration changes are
automatically synchronized between High Availability firewall pairs. For
critical connections, such as electronic commerce sites, this High
Availability configuration minimizes the risk of lost network connectivity.
Originally introduced in October, 1994, the CyberGuard(R) Firewall was a
combined hardware/software solution which ran exclusively on the Concurrent
Night Hawk(R) UNIX platform. In October, 1996, the Company introduced the
Release 3 CyberGuard(R) Firewall, which is based on the SCO UnixWare operating
system. The Release 3 CyberGuard product is a "software only" solution that runs
on all industry-standard Intel(TM) Pentium-based platforms from leading
suppliers such as IBM, Hewlett Packard, Compaq and Data General. The newest
Release 4.1 CyberGuard(R) Firewall added new, or enhanced existing features,
such as centralized firewall management, high availability, IPSec VPN, advanced
reporting, load balancing, performance enhancements and embedded virus scanning.
THIRD-PARTY PRODUCTS AND SERVICES. Through strategic alliances, the
Company offers certain network security products for use with the CyberGuard(R)
Firewall. These products include:
o URL BLOCKING. Together with its CyberGuard(R) Firewall, the Company offers
a product that can be used to control Internet site accessibility. The URL
Blocker is a software product that monitors and controls access to
non-business-related web sites such as pornography, hate speech, on-line
shopping, job searching, sports and other sites that the firewall user
wishes to block.
o TOKEN AUTHENTICATION PRODUCTS. With the CyberGuard(R) Firewall, the Company
offers a number of third-party token authentication devices, including
those offered by the Company through alliances with Axent Technologies,
Security Dynamics and Enigma Logic, among others. Token authentication
devices provide 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.
SECURE OPERATING SYSTEMS. The Company offers secure operating systems
based on the Intel Pentium. The heritage of the Company's secure operating
system capabilities is from the Company's CX/SX operating system. CX/SX 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. This heritage has been passed down
to the Company's re-engineering of the SCO UnixWare operating system and to the
efforts the Company has placed into its SecureGuard product for Windows NT.
SECURE NETWORKING SOFTWARE. In a manner similar to the Company's legacy
with secure operating systems, the Company had developed the LAN/SX product as a
secure network software product that provided a multi-level secure interface
between CX/SX and a heterogeneous networking environment. The NCSC had
previously performed an evaluation of the Company's LAN/SX network software and
subsequently granted it a B1 rating.
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SERVICES
SYSTEM 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 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.
PRODUCT DEVELOPMENT
The following table shows the significant products and product
enhancements that the Company introduced during the last quarter of calendar
year 1998 and during calendar year 1999.
<TABLE>
<CAPTION>
PRODUCT INTRODUCTION DESCRIPTION
------- ------------ -----------
(Calendar Quarters)
<S> <C> <C>
Integrated hardware-based IPSec Q4 1998 Provides secure communications from firewall-
encryption to-firewall and remote user-to-firewall utilizing
industry standard encryption protocols
ITSEC E3 Evaluated Firewalls Q1 1999 ITSEC Evaluation of Windows NT and
UnixWare firewalls
Role-Based Management Q4 1998 Allows the definition of administrative roles to
allow for separation of duties
Synchronized High Availability Q4 1998 Automatic firewall fail-over with active network
health monitoring and firewall policy
synchronization
Fail-Safe Central Management Q4 1998 Provides backup central manager functionality
Advanced NT-based Internet Firewall Q2 1999 Microsoft NT-based firewall with Internet
features similar to the UNIX-based firewall
Checkmark Certification Q3 1999 Obtained Checkmark certification for NT and Unix
firewalls
PKI aware firewall 1999 Provide integrated public key infrastructure support
Browser-based administration 1999 Firewall administration via Netscape/Microsoft
Explorer-based browsers
</TABLE>
10
<PAGE> 11
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 Item 7,
"Management's Discussion and Analysis" for a more complete discussion regarding
forward-looking statements.
Development of new products and features is performed by the Company's
internal engineering staff and through third-party licensing. The Company has
approximately 35 full-time and contract employees devoted to product
development. The Company supplements the development staff from time-to-time
with contract engineers as needed to meet product demands in the market.
For the fiscal years ended June 30, 1999, June 30, 1998 and June 30,
1997, the Company spent $3.7 million and $5.8 million and $4.7 million,
respectively, on research and development, an equivalent of 27%, 37%, and 33% of
total sales during such periods, respectively.
JOINT PRODUCT DEVELOPMENT AND STRATEGIC ALLIANCES
In December 1996, CyberGuard and the Santa Cruz Operation, Inc.
("SCO"), the world's largest supplier of UNIX server and host applications,
announced a strategic joint marketing agreement that allows the two companies to
market the CyberGuard(R) Firewall to SCO's premier resellers and major accounts
worldwide. SCO's premier resellers consist of over 100 top resellers who
specialize in UNIX application software integration and training. Since January
1997, the Company has signed several of the SCO premier resellers who actively
market and/or recommend the products of both CyberGuard and SCO.
In 1998, the Company entered into an agreement with RedCreek
Communications to integrate and market a family of hardware network security
products for VPN applications on the Internet. VPNs offer a secure,
cost-effective alternative to private leased communication lines. These products
are available for both Unix and NT firewalls.
To complement CyberGuard(R) 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 worldwide. 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 Data General. The Company
has additional strategic resellers outside the United States, which include
Nissin Electric Co., Ltd. and Hucom, Inc. (Japan), Pan Dacom (Germany) and
Baltimore (United Kingdom).
The Company has also entered into product-related strategic alliances
with Axent Technologies Inc., Security Dynamics Technologies, Inc., PC Security
Ltd., and Aladdin Knowledge Systems to offer a variety of value-added products
to its CyberGuard(R) Firewall family of products.
11
<PAGE> 12
The Company is actively seeking additional strategic alliances for
product development and sales and marketing purposes. The Company is seeking
such alliances to continue efforts to develop additional products or
enhancements to its existing product offerings, particularly those relating to
encryption, token authentication, VPNs, intrusion detection 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. There can be no assurance
that the Company will be able to create new alliances, or that if formed, that
such alliances will be successful.
CUSTOMERS AND MARKETS
End-users of CyberGuard products include commercial businesses,
government agencies, public-utility consortiums, and educational institutions.
In many cases, CyberGuard supplies its product to authorized resellers,
distributors, business partners, or system integrators who ultimately sell to
and support the end-users. The Company in turn supports these reseller channels
which are marketed by the Company's direct sales force. The Company's current
and prospective commercial customers include medium to large domestic and
multinational companies, that routinely create and store proprietary and/or
highly sensitive information which is accessible via corporate networks
including intranets and extranets (wide area networks). These customers are
likely to consider network security and network throughput performance as
decisive factors in their procurement decisions. Target markets for the
Company's products include financial institutions, financial news services,
insurance companies, health care institutions, telecommunications companies and
companies who market electronic commerce applications to businesses and
consumers.
For the year ended June 30, 1999, sales to a major financial
institution accounted for approximately 34% of the total revenues of the
Company, one international telecommunications company accounted for 10% of
revenue and one international distributor accounted for 8% of revenue. No other
single customer accounted for more than 10% of sales for the 1999 fiscal year.
SALES, MARKETING, AND DISTRIBUTION
The Company has established a range of channels by which to market its
products in the United States and internationally, including Value Added
Resellers ("VARs"), distributors and manufacturers' representatives, strategic
alliance partners, as well as direct sales representatives. Key resellers and
distributors include: Harris Genicom, Hucom Inc., Pan Dacom, Datacraft Asia,
Baltimore Zergo and Nissin Electric Co. Ltd. (a member of Japan's Sumitomo
Group). During the year ended June 30, 1999, the indirect marketing channels for
the Company's products accounted for 27% of the Company's sales. See also
"Strategic Alliances" above.
The Company employs 18 sales representatives and maintains sales
offices in Chicago, Illinois; Dayton and Fairlawn, Ohio; Fort Lauderdale,
Florida; Dallas Texas; Los Angeles and Palo Alto, California; New York, New
York; Columbia, Maryland; United Kingdom and France. The sales force focuses its
sales and marketing efforts towards customers and VARs in selected vertical
markets such as financial services, healthcare, insurance, telecommunications
and electronic commerce application providers. The Company's sales staff also
solicits prospective customers and provides technical advice and support with
respect to the Company's products.
12
<PAGE> 13
In support of its sales efforts, the Company markets its products
through direct mail, advertising, seminars, trade shows, telemarketing, and
on-going customer and third-party communications programs. The Company has
entered into strategic marketing relationships with various vendors of
communications, security and network management products and consulting
services. Certain of these vendors recommend the Company's products along with
their own solutions to meet a customer's security needs. The Company also seeks
to generate interest in, and to educate potential customers about, computer and
network security through its speaking engagements, contributed articles,
interviews and documentaries.
The Company focuses its direct and indirect marketing efforts on
commercial businesses that the Company perceives as having a need for network
security due to the sensitive nature of data they collect or the devastating
potential impact of computer "hacking." The Company addresses these markets 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 ("ISP"),
electronic commerce service providers ("ESPs") and Internet-based retailers of
subscription products and services.
COMPETITION
The market for network security products is intensely competitive and
characterized by frequent technological change. The Company believes that
competition in this market is likely to persist and to intensify if demand for
network security products continues to increase.
In the market segments requiring the highest levels of network
security, the Company competes with Secure Computing Corporation, which also
offers a firewall with a security-enhanced operating system. The Company also
competes with manufacturers of proxy application firewalls and hybrid systems,
such as Check Point Software Technologies Ltd., Cisco Systems, Inc., Axent
Technologies, Inc., Network Associates, and IBM. Most of these companies enjoy
higher sales volumes than the Company due to their sales of lower-end firewalls
and other (non-firewall) products and applications.
These companies' products may be considered to be alternatives to the
Company. In addition, companies such as Compaq (Digital Equipment Corporation)
and Sun Microsystems, Inc. sell products with similar features and functions
that could be considered competitors of the Company. In addition, certain
companies, such as Microsoft and Lucent Technologies, Inc., have now begun to
offer network-related security products that could eventually compete with the
Company's firewall products.
Many of the Company's current and potential competitors have greater
name recognition, larger installed customer bases and significantly greater
financial, technical and marketing resources than the Company. 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. Failure to keep pace with rapid technology and changes could result
in the Company's products becoming less valuable or obsolete. 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. The trend toward enterprise-wide network management and
security solutions may result in a consolidation of the network management and
security market around a smaller number of vendors who are able to provide the
necessary software and support capabilities. 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.
13
<PAGE> 14
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 including interoperability and functionality,
ease of use, capabilities, customer service and support, integration of
products, manageability of products, brand name recognition, company reputation,
distribution channels and price. Based upon its understanding of the features of
the products and services offered by the Company's competitors, the Company
believes that its products currently compete favorably with respect to such
factors. Based upon its experience and understanding of the existing network
security market, the Company believes that potential purchasers of the Company's
security products who do not differentiate between the level of security
provided by competing security products are as likely to base their purchasing
decisions on price, ease of use, or other considerations as they are to base
such decisions on the level of security provided. In circumstances where a
potential purchaser's primary concern is the level of security provided by
products being considered, the Company, based upon its understanding of the
features in products and of the services offered by the Company's competitors,
believes that its products compete favorably.
Additionally, the Company believes a key competitive factor in the
foreign network security market, and certain domestic vertical markets, is a
computer system's security rating by intelligence and other government agencies
such as the NCSC and ITSEC. The CyberGuard(R) Firewall is built on an integrated
secure operating system and secure networking software components that are
certifiable to the B1 level by the NCSC and are rated E3 by ITSEC Certification
testing in the United Kingdom and Australia. The Company's secure operating
system has also successfully completed evaluation by CELAR, the ISCA, CheckMark
and NSS organizations. Certain of the Company's competitors have either recently
received an ITSEC Certification or have submitted their products for review
against the ITSEC E3 Requirements.
In addition, see Item 7, "Management's Discussion and Analysis -
Forward-Looking Statements," for further information regarding other factors
that could affect the Company's competitive position.
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 has no pending patent applications to
cover any aspects of its technology. The Company has received trademark
registration in the United States, Canada and numerous other countries for its
"CyberGuard(R) Firewall" marks and its CyberGuard logo.
YEAR 2000 COMPLIANCE
The Year 2000 problem stems from the use of a two-digit date to represent the
year (e.g., 85 = 1985) in computer software and firmware. As a result, many
currently installed computer systems are not capable of distinguishing dates
beginning with the year 2000 from dates prior to the year 2000. As a result,
computer systems or applications used by many companies in a wide variety of
industries may experience operating difficulties unless the systems or
applications are modified to process adequately information related to the date
change. Significant uncertainty exists in the software and other industries
concerning the scope and magnitude of problems associated with the century
change. To the extent Year 2000 issues cause significant delays in or
cancellation of decisions to purchase products or product support, due to the
reallocation of resources to address Year 2000 issues or otherwise, the
Company's business could be materially adversely affected.
14
<PAGE> 15
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 issues. The Company has put into place a Year 2000 risk
management initiative. This initiative's scope covers both the Company's
information technology (IT) systems and non-IT systems and addresses all areas
of the Year 2000 issues as defined by the Information Technology Association of
America (ITAA).
Based on the ongoing assessment relative to the Company's current software
service offerings, the Company believes that the current versions of its
products are Year 2000 compliant. The Company has reviewed, and continues to
review, internal management information and other systems in order to identify
and to further modify those products, services or systems that may not be Year
2000 compliant. Based on the Company's assessment to date, the Company believes
that internal management information and other systems are either Year 2000
compliant or will not require substantial effort or cost to make them Year 2000
compliant.
The Company's Year 2000 initiative also addresses vendor relationships (both IT
and non-IT) and their readiness/preparedness relating to Year 2000 issues. IT
vendors include software providers, hardware providers, service providers,
off-the-shelf software publishers and IT consultants. Non-IT providers include
electric power suppliers, vendors of uninterruptable power supplies and
generators, telecommunications service and equipment providers, business
partners, facilities maintainers and other non-IT service contractors. In the
event that third parties cannot provide the Company with products, services or
systems that are Year 2000 compliant on a timely basis, the Company's business
could be materially adversely affected. To date, the Company has not discovered
nor does it anticipate any material Year 2000 issues with vendors and service
providers. Evaluation of vendor Year 2000 preparedness is an on-going process.
As the Company's Year 2000 evaluation does not evaluate its vendors' vendors nor
its vendors' customer base viability issues, the Company may be required to
develop contingency plans to address specific vendor/service provider concerns.
Many of the Company's customers maintain their Internet operations on servers,
which may be impacted by Year 2000 complications. The failure of the Company's
customers to ensure that their servers are Year 2000 compliant could have a
material adverse effect on the Company's customers, which in turn could have a
material adverse affect on the Company's business, if the Company's customers
are forced to cease or interrupt Internet operations or experience malfunctions
related to their equipment.
While the Company believes its Year 2000 initiative is appropriate given its
available resources, there can be no assurance that the Company will identify
and remedy all Year 2000 problems in a timely fashion, that any remedial efforts
in this regard will not involve significant time and expense, or that such
problems will not have a material adverse affect on the Company's business. The
Company has been addressing these matters on an ongoing basis for the past two
years and has incurred minimal cost to date, due to the dynamic nature of the
development process.
REGULATION
The Company is not currently subject to direct regulation by any
government agency other than regulations applicable to businesses generally and
U.S. Commerce Department licensing of export of cryptographic products. Export
controls on cryptographic products restrict the export of the Company's products
outside the U.S. 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. The combined
effect of these regulations is to create delays in the introduction of the
Company's products in international markets, and in some cases to prohibit them
altogether.
There are currently few laws or regulations directly applicable to
access to or commerce on the Internet. The Communications Reform Act, which
applies to, among other things, communications over the Internet, became
effective in 1996, 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.
15
<PAGE> 16
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. One such
regulation is the Health Insurance Portability and Accountability Act (HIPAA), a
federal regulation in effect since 1996. HIPAA provides strict guidelines for
privacy and security of patient medical records affecting the methods used by
healthcare and insurance providers to transfer data over networks such as the
Internet. However, the adoption of laws or regulations may decrease the growth
of the Internet, which could in turn decrease the demand for the Company's
products and increase the Company's cost of doing business or otherwise have an
adverse effect on the Company's business, operating results or financial
condition.
EMPLOYEES
On June 30, 1999, the Company employed 86 employees through its Fort
Lauderdale headquarters, and its field offices in the United States and abroad.
The Company also utilizes the services of approximately three contract engineers
on a temporary basis for software development or documentation. All employees
are bound by agreement containing confidentiality and conflict of interest
provisions.
CyberGuard's future success will depend in significant part on the
continued service of its key technical, sales and senior management personnel.
Competition for such personnel is intense and there can be no assurance that
CyberGuard can retain its key managerial, sales and technical employees, or that
it can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future. None of CyberGuard's employees is
represented by a labor union. CyberGuard has not experienced any work stoppages
and considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing,
development, engineering, production and support facilities are located in Fort
Lauderdale, Florida. In August 1997, the Company relocated its principal offices
to a new location in Fort Lauderdale, Florida and now occupies approximately
26,000 square feet of leased office space. The lease on the facility expires on
June 30, 2004, although the Company has the right to sublease the premises.
Additionally, the Company maintains two other offices which perform sales and
product development functions. The facility located in the United Kingdom also
functions as the administrative office for the Company's subsidiary, CyberGuard
Europe Ltd.
The Company leases its sales office locations in the United States and
abroad. CyberGuard believes that its existing facilities are adequate for its
current needs and additional space will be available at current market rates as
required in the future.
ITEM 3. LEGAL PROCEEDINGS AND OTHER MATTERS
On August 24, 1998, the Company announced, among other things, that due
to a review of its revenue recognition policies relating to distributors and
resellers, it would restate prior financial results. After the August 24, 1998
announcement, twenty-five purported class action lawsuits were filed by alleged
shareholders against the Company and certain current and former officers and
directors. Each of these lawsuits was filed in the United States District Court
for the Southern District of Florida. These actions seek damages purportedly on
behalf of all persons who purchased or otherwise acquired the Company's common
stock during various periods from October 7, 1997 through August 24, 1998. The
complaints allege, among other things, that as a result of accounting
irregularities relating to the Company's revenue recognition policies, the
Company's previously issued financial statements were materially false and
misleading and that the defendants knowingly or recklessly published these
16
<PAGE> 17
financial statements which caused the Company's common stock prices to rise
artificially. The actions allege violations of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act. One action also alleges
violations of common law. Pursuant to an order issued by the Court, these
actions have been consolidated into one action, styled STEPHEN CHENEY, ET AL. V.
CYBERGUARD CORPORATION, ROBERT L. CARBERRY AND WILLIAM D. MURRAY, Case No.
98-6879-CIV-Gold, in the United States District Court, Southern District of
Florida. An amended consolidated complaint is expected within 45 days after the
filing of the Company's restated financial results.
On April 30, 1999, the Company sold substantially all of the assets of
its TradeWave division to Digital Signature Trust Company ("DST"). In June 1999,
CyberGuard filed a lawsuit against DST and Zions First National Bank, N.A. in
state court in Austin, Texas. The action was removed to United States District
Court, Western District of Texas, Case No. 99-CA-431-JN. The Company alleged
breach of contract, tortious interference and fraud. Also in June 1999, DST
filed a lawsuit against the Company in United States District Court, District of
Utah, Case No. 99CV 0417G, alleging fraud, negligent misrepresentation, unjust
enrichment, with unspecified damages, and rescission and reformation of
contract. Both actions are currently tolled due to ongoing negotiations towards
settlement between the Company and DST.
In August, 1998, the Securities and Exchange Commission (the "SEC")
began an informal investigation into certain accounting and financial reporting
practices of the Company and certain members of Company's management.
The Company is unable to predict the ultimate outcome of the litigation
and investigation described above in this Item 3. The resolution of such matters
could have a material adverse affect on the Company's results of operations and
financial position. The Company's financial statements do not include any
adjustments related to these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded on NASDAQ under the symbol "CYBG"
until October 2, 1998. From October 2, 1998 until January 13, 1999, the
Company's stock symbol was changed to "CYBGE" due to the Company being late in
filing its Form 10-K for its fiscal year ended June 30, 1998. On January 13,
1999, the Company was delisted from the NASDAQ Stock Market on which its
securities were traded, because the Company was delinquent in its filings under
the Exchange Act. From January 13, 1999, the Company's securities have been
traded by market makers through the "pink sheets" again under the symbol "CYBG."
Upon filing this report on Form 10-K and Forms 10-Q for the quarters
ended September 30, 1998, December 31, 1998 and March 31, 1999, the Company
believes that it will be current in its reporting responsibilities pursuant to
the Exchange Act. Once the Company is current in its Exchange Act reporting, the
Company will be eligible for trading on the OTC Bulletin Board; however, moving
from being traded on the "pink sheets" to the OTC Bulletin Board will require
that at least one NASD Broker/Dealer serve as a market maker for the Company's
securities. Although the Company is in the process of meeting with various
potential market makers, there can be no assurance that any NASD Broker/Dealer
will undertake to serve as market maker, in which case, the Company's securities
will continue to be traded through the "pink sheets." Therefore, at the present
time, the Company is unable to predict with certainty whether its securities
will be available for public trading on the OTC Bulletin Board.
There were approximately 4,368 holders of record of Common Stock as of
June 30, 1999. The table below sets forth, for the quarters indicated, the high
and low bid prices of the Company's Common Stock as reported by NASDAQ/NMS.
<TABLE>
<CAPTION>
BID PRICES (1)
--------------
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1997
Quarter Ended September 30, 1996 $ 17 1/4 $ 8 1/2
Quarter Ended December 31, 1996 14 8
Quarter Ended March 31, 1997 11 3/4 9
Quarter Ended June 30, 1997 10 1/2 8 1/2
FISCAL YEAR 1998
Quarter Ended September 30, 1997 11 1/2 $ 8 7/16
Quarter Ended December 31, 1997 9 7/8 5 1/8
Quarter Ended March 31, 1998 12 3/4 4
Quarter Ended June 30, 1998 18 3/8 7 7/8
FISCAL YEAR 1999
Quarter Ended September 30, 1998 11 1 1/16
Quarter Ended December 31, 1998 3 3/8 1 1/16
Quarter Ended March 31, 1999 2 1/4 1 1/4
Quarter Ended June 30, 1999 1 3/8 5/8
</TABLE>
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. The Company issued
on August 27, 1999, convertible debt securities in the approximate amount of
$4,300,000. For more information regarding this sale of the Company's
securities, see Item 7 of this report on Form 10-K.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the fiscal years ended June 30,
1999, June 30, 1998, June 30, 1997, June 30, 1996 and September 30, 1995,
selected historical consolidated financial data for the Company (which combined
the Company's Trusted Systems Division and the Real-time Business through June
30, 1996, and which, effective June 30, 1996 was sold to Concurrent Computer
Corporation ("Concurrent")). The financial data for the fiscal years ended June
30, 1999, June 30, 1998 and June 30, 1997 have been derived from the audited
financial statements of the Company as audited by PricewaterhouseCoopers LLP.
The financial data for the fiscal years ended June 30, 1996 and September 30,
1995 have been derived from unaudited financial statements of the Company. Such
data have been derived from, and should be read in conjunction with, the audited
financial statements and other financial information, including the notes
thereto, appearing elsewhere in this Annual Report.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
June 30, June 30,
June 30, June 30, 1997 1996 (B) September 30,
1999 1998 (restated) (i) (restated) 1995 (A)
-------- -------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 13,873 $ 15,552 $ 14,224 $ 46,118 $ 45,111
Cost of goods sold 5,313 7,076 7,244 26,177 25,764
-------- -------- -------- -------- --------
Gross profit 8,560 8,476 6,980 19,941 19,347
Research & development 3,664 5,767 4,723 7,293 7,903
Selling, general & administrative 14,724 18,869 15,133 4,304 22,984
Other operating expenses 20,983
-------- -------- -------- -------- --------
Operating loss (9,828) (16,160) (12,876) (12,639) (11,540)
Interest income (expense), net (186) 399 646 275 456
Interest income (expense) 79 11 (200) 331 (4)
Gain (loss) on sale of securities (128) (5,012)
available for sale
Gain (loss) on sale of business units 1,820 (2,386) (14,836)
-------- -------- -------- -------- --------
Net loss $ (8,115) $(18,264) $(17,442) $(26,869) $(11,088)
======== ======== ======== ======== ========
Loss per share $ (0.91) $ (2.17) $ (2.46) $ (4.44) $ (1.88)
======== ======== ======== ======== ========
</TABLE>
(i) See Note 2 to the Company's Consolidated Financial Statements (Item 8
of this report on Form 10-K) and the Quarterly Restatement schedule
below in this Item 6.
(A) During fiscal year 1995, the Company changed its fiscal year end from
June 30 to September 30.
(B) Coinciding with the sale of the Real-time Business to Concurrent on
June 30, 1996, the Company elected to change its fiscal year end from
September 30 to June 30. The Company's audited financial statements
included in Item 8 are as of and for the years ended June 30, 1999,
1998 and 1997. To facilitate comparability between periods, management
has prepared the preceding table by annualizing the nine months ended
June 30, 1996. Such annualization was accomplished by adding the
results of operations for the three months ended September 30, 1995 to
the nine months ended June 30, 1996.
19
<PAGE> 20
QUARTERLY RESTATEMENT
Previously, CyberGuard Corporation had announced that due to a review
of its revenue recognition policy relating to distributors and resellers it
would restate results for the first three quarters of its fiscal year ended June
30, 1998. Subsequently, the Company determined that it would also restate its
results from fiscal year 1997. These restatements are presented below.
Previously the Company had reported revenues for fiscal year 1997 of $15,621 and
a net loss of $12,490 or a loss per share of $1.76. For the first three-quarters
of fiscal 1998, the Company had previously reported revenue of $15,069 and a net
loss of $5,951 or $0.75 per share
The restatements arise from errors in applying the Company's revenue
recognition policy and resulted in the following adjustments to correct revenues
previously reported in fiscal years 1998 and 1997. In addition, the restatement
of expenses was primarily due to the restatement of the write-off of capitalized
software in fiscal year end 1996 and its amortization in fiscal years 1997 and
1998, and the timing of recognition of expense amounts.
<TABLE>
<CAPTION>
1997 FISCAL YEAR 1998 FISCAL YEAR
-----------------------------------------------------------------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3
9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, as previously
reported $ 3,067 $ 3,047 $ 4,105 $ 5,402 $ 5,063 $ 4,854 $ 5,152
Restatements (457) (389) (52) (499) (890) (669) (636)
-----------------------------------------------------------------------------------------------
Revenues, restated 2,610 2,658 4,053 4,903 4,173 4,185 4,516
===============================================================================================
Cost of revenues, as previously
reported 1,874 1,508 1,870 1,988 1,796 1,828 1,778
Restatements 4 (25) (5) (30)
-----------------------------------------------------------------------------------------------
Costs of revenues, restated 1,874 1,508 1,870 1,992 1,771 1,823 1,748
===============================================================================================
Gross profit, as previously
reported 1,193 1,539 2,235 3,414 3,267 3,026 3,374
Restatements (457) (389) (52) (503) (865) (664) (606)
-----------------------------------------------------------------------------------------------
Gross profit, restated 736 1,150 2,183 2,911 2,402 2,362 2,768
===============================================================================================
Development, Selling, General and
Administrative, as reported 3,400 3,563 3,875 5,557 5,421 5,817 5,047
Restatements 817 942 816 898 389 560 500
-----------------------------------------------------------------------------------------------
Development, Selling, General and
Administrative, restated 4,217 4,505 4,691 6,455 5,810 6,377 5,547
===============================================================================================
Other income(expense), as reported (6,055) 1,207 748 (376) 452 187 29
Restatements -- (238) (18) 178 (188) (59) --
-----------------------------------------------------------------------------------------------
Other income(expense), restated (6,055) 969 730 (198) 264 128 29
===============================================================================================
Net loss, as previously reported $ (8,262) $ (817) $ (892) $ (2,519) $ (1,702) $ (2,604) $ (1,644)
Restatements (1,274) (1,569) (886) (1,223) (1,442) (1,283) (1,106)
-----------------------------------------------------------------------------------------------
Net loss, restated (9,536) (2,386) (1,778) (3,742) (3,144) (3,887) (2,750)
===============================================================================================
Loss per share, as previously
reported $ (1.20) $ (0.12) $ (0.12) $ (0.32) $ (0.22) $ (0.32) $ (0.19)
Restatements (0.19) (0.22) (0.12) (0.17) (0.19) (0.16) (0.13)
-----------------------------------------------------------------------------------------------
Loss per share, restated $ (1.39) $ (0.34) $ (0.24) $ (0.49) $ (0.41) $ (0.48) $ (0.32)
===============================================================================================
Weighted Average Shares
Outstanding 6,859,146 7,086,692 7,375,293 7,100,014 7,688,529 8,111,851 8,504,575
===============================================================================================
</TABLE>
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements and the related Notes to Consolidated
Financial Statement. Except for historical information contained herein, the
matters discussed herein are forward-looking statements made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. A more
complete statement regarding forward-looking statements is set forth at the end
of this Item 7.
OVERVIEW
The Company is a leading developer and provider of commercial Internet
and Intranet network security solutions to Fortune 1000 companies, major
financial institutions and government agencies worldwide. Through a combination
of the Company's proprietary technology and licensed technology, the
CyberGuard(R) Firewall and related security products comprise a software suite
of products designed to protect the integrity of electronic and computer data
and customer applications from unauthorized individuals and digital thieves.
During August 1998, the Company suspended its Chief Executive Officer
(who was also Chairman of the Board of Directors) and its Chief Financial
Officer. These two officers subsequently resigned. At the same time, the four
non-employee members of the Company's Board of Directors determined that they
should form a Special Committee and take control of the management of the
Company. Initially, Mr. C. Shelton James served as Chairman and acting Chief
Executive Officer and guided the Company through various significant changes,
until March 1999. The Board appointed Mr. David R. Proctor as the Company's
Chief Executive Officer, President and Chairman of the Board of Directors. Mr.
Proctor has previously served as President and Chief Operating Officer of
Platinum Software Corporation, as President and Chief Operating Officer of
Ashton-Tate Corporation, and as Vice President of the Personal Software Products
Division of IBM. During September 1998, the Company also hired Mr. Terrence A.
Zielinski as Vice President Finance. Mr. Zielinski was subsequently appointed as
Chief Financial Officer. Mr. Zielinski is a CPA with 28 years experience in
working with public companies, including serving as an audit manager and
director of personnel at Coopers & Lybrand and as chief financial officer of
several public companies. His credentials include certification as a fraud
auditor. See Item 1, "Business - Significant Events" for further information
regarding the Company's recent management changes.
On June 23, 1998, the Company completed the acquisition of Arca
Systems, Inc. ("Arca"), a privately held information professional services firm,
for 590,429 shares of the Company's common stock. On October 5, 1998, the
Company sold all the assets of Arca. As a result, the transaction is presented
as an investment in Arca and accounted for on the cost basis at June 30, 1998,
because of the temporary control that the Company had over this wholly owned
subsidiary.
On September 14, 1998, the Company announced the sale of its Galaxy
Internet search engine for approximately $2,000,000. The disposition resulted in
a gain of approximately $1,820,000, which was recognized in the first quarter of
fiscal 1999. There are no significant revenues or costs associated with Galaxy
in the Company's consolidated statements of operations for any of the periods
presented.
21
<PAGE> 22
On April 30, 1999, the Company sold substantially all of the assets of
its TradeWave division to Digital Signature Trust Company for $810,000, subject
to an escrow agreement.
In May 1995, the Company separated its business operations into two
units: the real-time computer business ("Real-time Business") and the Trusted
Systems Division, which developed network security products. Effective June 30,
1996, the Company sold to Concurrent the assets of the Real-time Business (the
"Real-time Sale"). Since the completion of this transaction, the Company has
been focused solely on the business of developing and providing security
solutions. (Unless otherwise indicated, references in this Form 10-K to the
"Company" with respect to periods before the Real-time Sale are to the Company's
Trusted Systems Division.) The Real-time Business provided significant cash flow
and certain economies of scale with respect to sales and 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 incurred significant costs during fiscal year
1997, to establish the administrative, logistical and support groups necessary
to continue to operate the Company without the Real-time Business.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1998
NET REVENUES. Net Revenues for the year ended June 30, 1999 were $13.9
million compared to $15.6 million for the year ended June 30, 1998. This
represents a decrease of $1.7 million or 12%. The decrease in net revenues from
network security products for 1999 is principally the result of decreased sales
to distributors and reseller channels.
International sales accounted for $3.0 million or 22% of the total
revenue in 1999 as compared to $4.1 million or 26% of the total revenue in 1998,
a decrease of $1.2 million or 29%. North American sales have also decreased from
$11.4 million in 1998 to $10.9 million in 1999, a difference of $0.5 million or
4%.
CyberGuard provides its customer base with a service offering that
includes the installation of its firewall, customer support including hotline
assistance, and product training and consulting. For the fiscal year ended June
30, 1999, the Company reported service revenue for its security products of $2.5
million, an increase of $0.5 million or 25% compared to revenues of $2.0 million
for the year ended June 30, 1998. As a percentage of total security revenues,
service revenues accounted for 18% in 1999 as compared to 13% in 1998. The
increase in net revenues from services is attributable to a growing base of
customers under maintenance agreements and additional consulting and training
service revenues.
GROSS PROFIT. CyberGuard's cost of sales includes license fees to third
parties, media, packaging costs, equipment costs, and certain pre-sales,
post-sales and contract labor support costs. The Company's overall gross profit
increased by $0.1 million or 1% from $8.5 million for the year ended June 30,
1998 to $8.6 million for the year ended June 30, 1999.
Gross profit for network security products was $7.8 million or 68% in
1999 as compared to $8.1 million or 59% in 1998. The Company's gross profit
margin has remained steady over the past two fiscal years.
Gross profit for security-related services, as measured in dollars as a
percentage of service revenues, was $0.8 million or 31% for 1999 compared to
$0.4 million or 21% in 1998, a increase of $0.4 million. The increase in
service-related gross profit margin is the result of a greater number of
customers under firewall maintenance support contracts.
22
<PAGE> 23
OPERATING EXPENSES. The primary operating expenses of the company
consists of research and development, sales, and general and administration
costs. Research and development costs consist primarily of personnel costs
including salaries, benefits, payments to third-party or contract labor
development firms, travel, training and other personnel expenses to determine
the technical feasibility of products, develop the necessary product
features/functions for marketability, and maintain the product after customer
installation. The Company capitalizes costs related to the development of
certain software products 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 defined
by completion of a working model are considered research and development costs
and are expensed as incurred. Sales, general and administrative costs, consist
principally of personnel costs including commissions, bonuses, travel,
communication, MIS-related costs, marketing-related costs (such as advertising,
trade shows, seminars), finance and accounting expenses, legal, insurance,
general management and professional services.
For the year ended June 30, 1999, the Company reported total operating
expenses of $18.4 million compared to $24.6 million for the year ended June 30,
1998. The decrease of $6.2 million is attributable to a $2.1 million decrease in
research and development costs and a $4.1 million decrease in selling, general
and administrative costs. The decreased R&D expenses are attributed to the
introduction of the Company's NT-based firewall, new release version 4.0 UNIX
based firewall, and the ITSEC certification for E-3 in 1998. The decrease in
selling, general and administrative costs is the result of several factors.
Marketing costs decreased by approximately $2.7 million. These decreased
marketing costs are directly related to personnel changes, lower advertising and
promotion of the Company in trade shows and events. The additional decrease from
1998 is attributable to general and administrative expenses.
NET LOSS. For the year ended June 30, 1999, the Company incurred a net
loss of $8.6 million compared to a net loss of $18.3 million for the year ended
June 30, 1998. The net loss for fiscal year ended June 30, 1999 included a gain
from the sale of the Galaxy search engine of $1.8 million as compared to fiscal
year 1998 that included a charge of $2.4 million on the disposition of Arca.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1997
NET REVENUES. For the 12 months ended June 30, 1998 net revenues were
derived principally from the sale of the Company's firewall systems, and other
network security products, and service and support related to security products.
Net revenues for the year ended June 30, 1998 were $15.5 million compared to
$14.2 million for the year ended June 30, 1997. This represents an increase of
$1.3 million or 9%. The increase in net revenues from network security products
for 1998 is principally the result of increased sales to distributors and
reseller channels.
For the fiscal year ended June 30, 1998 the Company reported service
revenue for its security products of $2.0 million, an increase of $0.9 million
or 83% compared to revenues of $1.1 million for the year ending June 30, 1997.
As a percentage of total security revenues, service revenues accounted for 13%
in 1998 as compared to 8% in 1997. The increase in net revenues from services is
attributable to a larger base of customers under maintenance agreements in 1998.
The Company's overall gross profit increased by $1.5 million from $7.0
million for the year ended June 30, 1997 to $8.5 million for the year ended June
30, 1998. The increase is principally attributable to increased sales and
increased margins on product sales.
Gross profit for network security products was $8.1 million or 59% in
1998 as compared to $6.5 million in 1997 or 49%. The increase in the gross
profit percentage is largely due to product mix. As the Company moved
23
<PAGE> 24
away from a bundled proprietary hardware/software solution and toward a software
only product with Intel based hardware, the profit margins increased.
Gross profit for security-related services, as measured in dollars and
as a percentage of service revenues, was $0.4 million and 21% for 1998 compared
to $0.5 million or 47% for 1997. The decrease in service related gross profit is
the result of a greater number of customers under firewall maintenance support
contracts.
OPERATING EXPENSES. For the year ended June 30, 1998 the Company
reported total operating expenses of $24.6 million compared to $19.9 million for
year ended June 30, 1997. The increase of $4.7 million is attributable to $1.0
million increase in research and development costs and $3.7 million in selling,
general administrative costs. The increased R&D expenses are attributed to the
introduction of the Company's NT-based firewall, new release version 4.0
UNIX-based firewall, and the ITSEC certification for E-3. The increase in
selling, general and administrative expense is the result of several factors.
These factors included marketing expenses to expand worldwide sales and promote
the Company's network security products; new marketing personnel, additional
advertising and promotion of the Company in tradeshows and events; professional
fees relating to the acquisition and disposition of a subsidiary and additional
accounting, auditing fees, and other legal expenses due to its revenue
restatement and Arca acquisition and disposition; and increased facilities
expenses reflecting the move into a new facility and expanding other offices
throughout the United States.
NET LOSS. For the year ended June 30, 1998 the Company incurred a net
loss of $18.3 million compared to a net loss of $17.4 million for year ended
June 30, 1997. The net loss for 1997 included a loss of $ 5.0 million on the
disposition of the common stock of Concurrent Computer Corporation. This stock
had been received in June 1996 in exchange for assets of the Real-time Business
of the Company. The net loss for fiscal year ended June 30, 1998 included a
non-recurring loss of $2.4 million due to the disposition of Arca.
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced losses since its inception as a network
security company. The Company's historical uses of cash have been to fund net
losses from operations, establish inventory stocking levels, and fund capital
expenditures for property, equipment and software. For the fiscal year ended
June 30, 1997, the Company incurred a net loss of approximately $17.4 million on
revenues of approximately $14.2 million. For the fiscal year ended June 30,
1998, the Company incurred a loss of approximately $18.3 million on revenues of
approximately
25
<PAGE> 26
$15.6 million. For the fiscal year ended June 30, 1999, the Company incurred a
net loss of approximately $8.1 million on revenues of approximately $13.9
million. Capital expenditures for the fiscal year ended June 30, 1997, June 30,
1998, and June 30, 1999, were $0.5 million, $0.9 million, and $0.4 million
respectively.
Prior to the Real-time Sale, the Company funded its cash requirements
principally from its working capital and cashflows generated, primarily, by the
Real-time Business. Subsequent to the Real-time Sale which occurred in June
1996, and through the end of the 1998 fiscal year, the Company funded its
working capital needs through sales of securities that have been held for
resale, through sales of its own securities and from the proceeds of secured
financing with an institutional lender. During fiscal year 1997, the principal
source of funding for cash requirements came from the Company's sales of
Concurrent securities that the Company owned as a result of the Real-time Sale.
Sales of Concurrent securities during fiscal year 1997, generated approximately
$12.4 million in proceeds. During fiscal year 1998, the funding for the
Company's cash requirements came principally from the Company's sale of $7.5
million of Company common stock through a private offering. During December
1997, the Company entered into a $3.35 million asset based revolving line of
credit and a $650,000 Term Note Agreement with Coast Business Credit
(collectively, the "Credit Facility"). The Credit Facility is collaterized by
all the tangible assets and intellectual property of the Company. The Term Note
is secured by a $650,000 cash compensating balance account equal to the amount
of the Term Loan. At June 1999, the Company had borrowings of $1.4 million under
the revolving asset based line of credit. The Company is currently in technical
default under the Credit Facility. As a result, interest is being charged at the
default rate of prime plus 5%, and the obligations under the Credit Facility are
classified as a current liability. Although Coast Business Credit has not
activated the acceleration provisions of the Credit Facility, there can be no
assurances that they will not accelerate or that they will continue to make
advances under the Credit Facility. Even if Coast Business Credit were to
accelerate the Company's obligations to report the Credit Facility, the Company
believes that such an event would not be materially adverse to the Company as
other sources of funding are available. For more information regarding the
Credit Facility, see Note 11 to the Company's financial statements included in
Item 8 of this report on Form 10-K. At June 30, 1999, the Company had cash and
cash equivalents of $2.62 million.
Subsequent to the end of the 1998 fiscal year, the Company has
continued to experience losses from operations. These net losses have been
funded through sales of assets and a convertible note financing. The sales of
assets have included the sale of the Company's Galaxy Internet search engine
(sold during the first quarter of the Company's 1999 fiscal year for
approximately $2 million in cash), and the sale of substantially all the assets
of the Company's Arca Systems, Inc. subsidiary, (sold during the second quarter
of fiscal year 1999 for approximately $3.4 million in cash). The Arca subsidiary
was expected to provide approximately $1.7 million in revenues on a quarterly
basis for the Company. The Galaxy search engine revenues were not significant.
On December 17, 1998, the Company executed an agreement to issue
$1,125,000 of Convertible Debt ("Debt"). The Debt bears interest at prime plus
200 basis points and is payable quarterly. The Debt is convertible into 750,000
shares of common stock at a conversion price equal to $1.50 per share. The Debt
is convertible, at the debt holders' option, after February 1, 2000. In
addition, the Company issued the debt holders warrants to purchase 500,000
shares of the Company's common stock at $2.00 per share. The warrants are
exercisable at any time before June 2001. The terms of the Debt and warrant
agreement, which permit the conversion of the Debt and warrants to common stock
at a discount to market, is considered a beneficial conversion feature. The
beneficial Conversion Feature at the date of issuance of the Debt will be
recognized as interest expense over the shortest possible conversion period. The
convertible debt is secured by a second lien on the Company's assets and
properties and is subordinated to the Company's senior debt. The Company
increased this convertible debt to approximately $4,300,000 including repaying
the initial debt transaction. It closed the transaction on August 27, 1999. This
increased amount is principally with the same debt holders as the December 17,
1998, transaction. The interest rate will be amended to 11.5% per annum. The
conversion rate will be amended to be convertible into approximately 4,300,000
shares of common stock at a conversion price equal to $1.00 per share. In
addition, the initial warrants from the December 17, 1998, transaction will be
cancelled. The amended transaction will have the Company issue approximately
4,300,000 warrants to purchase the Company's common stock at $2.00 per share.
See also Note 11 to the Company's Consolidated Financial Statements, Item 8 of
this report on Form 10-K.
Working capital decreased by $5.3 million from $1.6 million at June 30,
1998 to ($3.6) million at June 30, 1999. The Company did not make significant
capital expenditures during fiscal year 1999, other than replacements of
computer equipment in the ordinary course. Based upon information currently
available to the Company, including the Company's current level of sales, its
margins on sales, its expected levels of expense, opportunities
26
<PAGE> 27
for selling additional network security products and the availability of
additional equity and debt financing, the Company believes that it has an
opportunity to execute on its business plans and achieve profitability. There
can be no assurance, however, that the Company will be able to execute on its
business plans, or that it will not be required to obtain additional financing
or capital infusions. There can be no assurance that the Company will be able to
secure additional financing or that such additional financing will be on terms
and conditions acceptable to the Company. Any additional financing may involve
dilution of the interests of the Company's then existing shareholders. 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, levels of required capital expenditures and access to external sources
of financing. Management believes that upon execution of its business plan,
which includes tactics to achieve operating efficiencies, use of availability
under its current line of credit, and the issuance of convertible debt, it will
enable it to continue as a going concern. Other recent and possible future
events that could also materially impact the Company's ability to successfully
execute on its business plans are described in this Item 7 under the heading
"Forward-looking Statements."
NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2 "Software Revenue Recognition" ("SOP 97-2"). This statement provides
guidance on applying generally accepted accounting principles in recognizing
revenues on software transactions. SOP 97-2 supercedes Statement of Position
91-1 "Software Revenue Recognition". SOP 97-2 is effective for transactions
entered into in fiscal years beginning after December 15, 1997. Earlier
application is encouraged as of the beginning of the fiscal year or interim
period for which financial statements or information have not been issued.
Retroactive application of the provisions of this statement is prohibited. The
Company believes that the adoption of this statement did not have a material
impact on its revenue recognition.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 requires all
items to be reported in a separate financial statement. The Company believes
that adoption of SFAS No.130 did not have a significant impact on its financial
reporting.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. SFAS No.
131 establishes standards for the way the public business enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. The Company believes that adoption of SFAS No.131 did
not have a significant impact on its financial reporting.
FORWARD-LOOKING STATEMENTS
Statements regarding future products, future prospects, future
profitability, business plans and strategies, future revenues and revenue
sources, future liquidity and capital resources, computer network security
market directions, future acceptance of the Company's products, possible growth
in markets, as well as all other statements contained in this Report on Form
10-K that are not purely historical are forward-looking statements.
27
<PAGE> 28
These statements are based upon assumptions and analyses made by the
Company in light of current conditions, future developments and other factors
the Company believes are appropriate in the circumstances, or information
obtained from third parties and are subject to a number of assumptions, risks
and uncertainties. Readers are cautioned that forward-looking statements are not
guarantees of future performance and that the actual results might differ
materially from those suggested or projected in the forward-looking statements.
Accordingly, there can be no assurance that the forward-looking statements will
occur, or that results will not vary significantly from those described in the
forward-looking statements. Some of the factors that might cause future actual
events to differ from those predicted or assumed include: future advances in
technologies and computer security; the Company's history of significant annual
operating losses and the financing of these losses through the sale of assets
and newly issued Company securities; risks related to the early stage of the
Company's existence and its products' development; the Company's history of
losses; the Company's ability to execute on its business plans; the Company's
dependence on outside parties such as its key customers and alliance partners;
competition from major computer hardware, software, and networking companies;
risks relating to the year 2000 problem; risk and expense of government
regulation and effects on changes in regulation; the limited experience of the
Company in marketing its products; uncertainties associated with product
performance liability; risks associated with growth and expansion; risks
associated with obtaining patent and intellectual property right protection;
uncertainties in availability of expansion capital in the future and other risks
associated with capital markets. In addition, certain recent events that have
occurred also are factors that might cause future actual events to differ from
those predicted or assumed, including: the resignation of KPMG Peat Marwick LLP
as the Company's independent accountant and the subsequent engagement of
PricewaterhouseCoopers LLP as the Company's independent accountant; the impact
of the restatement of financial results for the Company's fiscal year ended June
30, 1997 and quarters ended September 30, 1997, December 31, 1997 and March 31,
1998; the completion of the numerous organizational changes and the assembly of
a new management team for CyberGuard; the outcome of a purported class action
lawsuit against the Company and certain current and former officers and
directors relating to the restatement of financial results for the fiscal
periods noted above and an SEC investigation regarding these matters; the
delisting of the Company from the NASDAQ National Market; and the Company's past
delinquency in filing reports that were required to be filed under the
Securities Exchange Act of 1934 (which, among other things, restricts the
Company from being able to use Form S-3, a simplified method of registering
securities for sale with the Securities and Exchange Commission). In addition,
the forward-looking statements herein involve assumptions, risks and
uncertainties, including, but not limited to economic, competitive, operational,
management, governmental, regulatory, litigation and technological factors
affecting the Company's operations, liquidity, capital resources, markets,
strategies, products, prices and other factors discussed elsewhere herein and in
the other documents filed by the Company with the Securities and Exchange
Commission. Many of the foregoing factors are beyond the Company's control.
The Company's future success is based largely on its ability to develop
and sell increasingly technologically advanced network security solutions in
sufficient volume and at sufficient prices to become profitable on a consistent
basis. In addition, the network security market is characterized by extremely
rapid technological change, requiring rapid product in production. The velocity
of technological change has accelerated and the Company believes that it is
important to its future that it keeps pace with these changes. The Company
believes that competition will continue to intensify in the rapidly evolving
markets in which the Company is involved, and that the continued development of
technologically advanced products will be necessary to keep its products
current. The Company believes that its ability to generate adequate cash flow
from operations will be critical to its future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following items are attached and incorporated into this Item 8.
Independent Accountant's Report F-1
Consolidated Balance Sheets as of June 30, 1999
and June 30, 1998 F-2
Consolidated Statements of Operations for years ended
June 30, 1999, June 30, 1998, and June 30, 1997 F-3
Statement of Cash Flows for years ended June 30, 1999,
June 30, 1998, and June 30, 1997 F-4
Consolidated Statements of Shareholders' Equity
for years ended June 30, 1999, June 30, 1998,
and June 30, 1997 F-5
Notes to Consolidated Financial Statements F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On August 21, 1998, KPMG Peat Marwick LLP ("KPMG"), the Company's
independent public accounting firm, resigned effective immediately. In KPMG's
letter of resignation, KPMG stated that it had "a disagreement with management
of the Company regarding the methodology used for software revenue recognition."
In its letter of resignation, KPMG also advised the Company that it concluded
that it could no longer rely on management's representations and that it was
unwilling to be associated with the financial statements prepared by management.
On August 19, 1998, two days before KPMG's resignation, the Company's
Audit Committee met with KPMG to discuss the Company's software revenue
recognition policies and KPMG's concerns about the quality of the financial
information which had been presented by management to the Audit Committee and to
KPMG. During that meeting, the Audit Committee advised KPMG that the Audit
Committee (and not management) had the exclusive decision-making authority and
duties with respect to the Company's financial statements. The Audit Committee
advised KPMG that it agreed with KPMG as to KPMG's preliminary assessment of
these matters and discussed the steps that should be implemented to resolve
these issues, including a restatement of the Company's interim financial
statements.
The Company is not aware of any other disagreements with KPMG on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure between June 30, 1996 and the date of KPMG's
resignation, which disagreements, if not resolved to the satisfaction of KPMG,
would have caused KPMG to make a reference thereto in its reports. KPMG's
reports on the financial statements for the Company for the past two years did
not contain any adverse opinion or disclaimer of opinion and such reports were
not qualified or modified as to uncertainty, audit scope or accounting
principles. KPMG's resignation was not recommended or approved by the Company's
Board of Directors or any committee thereof. The Company has authorized KPMG to
respond fully to the inquiries of any successor accountant concerning the
subject matter of the foregoing.
The Company's Board of Directors retained PricewaterhouseCoopers LLP
("PWC") to serve as the Company's independent auditors for its 1998 fiscal year.
This engagement began after PWC had been engaged in September 1998 to assist in
the Company's internal investigation of the revenue overstatements. This change
in auditors occurred after the resignation of the Company's prior auditors,
KPMG. The Company later also retained PWC to re-audit the Company's 1997 fiscal
year.
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<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by items 10, 11, 12 and 13 of this report is
incorporated by reference to the Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders to be filed within 120 days from June 30, 1999 the end
of the Company's fiscal year.
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<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The Financial Statements filed as part of this report are listed
separately in the index to Financial Statements beginning on page F-1
of this report.
(b) No reports on Form 8-K were filed during the fourth quarter of the
1999 fiscal year. During the first quarter of Fiscal Year 1999, the
Company filed three reports on Form 8-K (dated August 9, 1998,
September 29, 19998 and October 19, 1998, with amendments dated
October 13, 1998, and November 4, 1998). These reports contain
information regarding the change in CyberGuard's certifying
accountant's resignation, the disposition of assets to AHN Partners,
LP (purchaser of Galaxy search engine), and the disposition of
substantially all the assets of Arca Systems, Inc. to Exodus
Communications, Inc. The reports contain information under Items 2, 4
and 7, which discuss the aforementioned information.
(c) The following exhibits are included in this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C> <C>
2.01 -- Restated Purchase and Sale Agreement between Concurrent Computer Corporation and the Company
dated May 23, 1996(i)
2.02 -- Agreement and Plan of Merger, dated May 29, 1998, among the Company, ARCA Acquisition
Corporation, ARCA Systems, Inc. and William F. Wilson, R. Kenneth Bauer and Michael L. Weidner(xii)
3.01 -- Articles of Incorporation of the Company, as amended(viii)
3.02 -- Bylaws of the Company(ii)
4.01 -- Form of Common Stock Certificate(iv)
4.02 -- Form of Stockholder Rights Plan(ii)
4.03 -- Form of Share Holding Agreement between Concurrent Computer Corporation and the Company(iv)
10.01 -- Employment Agreement dated November 7, 1997 between the Company and Tommy D. Steele, as amended
10.02 -- Termination Agreement dated May 17, 1999 between the Company and Tommy D. Steele
10.03 -- Employment Agreement dated March 11, 1999 between the Company and David R. Proctor, as amended May 4,
1999
10.04 -- Employment Agreement dated September 8, 1998 between the Company and Terrence A. Zielinski
10.05 -- Employment Agreement dated September 30, 1998 between the Company and Michael Wittig
-
10.06 -- Employee Stock Incentive Plan(vi)
10.07 -- Amendment to Employee Stock Incentive Plan(vii)
10.08 -- Amendment to Stock Incentive Plan dated March 20, 1998
10.09 -- Employee Stock Option Plan
10.10 -- Amendment to Employee Stock Option Plan
10.11 -- Employee Savings Plan(v)
10.12 -- Forms of Stock Option Agreements
10.13 -- TradeWave Asset Purchase Agreement(ix)
10.14 -- Agreement (regarding noncompetition, nonsolicitation and confidentiality)(ix)
10.15 -- Private Securities Subscription Agreement dated May 15, 1997 between the Company and Capital
Ventures International(x)
10.16 -- Registration Rights Agreement dated May 15, 1997 between the Company and Capital Ventures
International(x)
10.17 -- Loan and Security Agreement dated December 29, 1997 between the Company, TradeWave Corporation and
Coast Business Credit(xi)
10.18 -- Amendment Nr. 1 to Loan and Security Agreement dated December 29, 1997 between the Company, TradeWave
Corporation and Coast Business Credit(xi)
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
<S> <C> <C>
10.19 -- Loan Documents dated December 17, 1998 between the Company and Fernwood Partners, LLC
10.20 -- Joint Development and Marketing Agreement between the Company and Information Resource
Engineering, Inc.(viii)
10.21 -- OEM and Distribution Agreements between the Company and Information Resource Engineering, Inc. dated
June 11, 1998
10.22 -- Agreement between the Company and Information Resource Engineering, Inc. dated June 30, 1999
10.23 -- Asset Purchase Agreement dated September 11, 1998 between the Company and AHN
Partners, LP
10.24 -- Agreements relating to sale of assets of Arca Systems, Inc.
10.25 -- Agreements relating to sale of assets of TradeWave division
16.01 -- Letter from KPMG Peat Marwick LLP to the Company, dated August 21, 1998(xvi)
16.02 -- Letter from KPMG Peat Marwick LLP to the Commission, dated September 30, 1998(xvii)
16.03 -- Letter from KPMG Peat Marwick LLP to the Commission, dated November 3, 1998(xiii)
16.04 -- Letter from KPMG Peat Marwick LLP to the Company dated June 11, 1999
21.01 -- List of subsidiaries of the Company
23.01 -- Consent of PricewaterhouseCoopers LLP, Independent Certified Public Accountants
27.01 -- Financial Data Schedule (for SEC use only)
</TABLE>
- -----------------
(i) Incorporated by reference to Annex A of the Registrant's Definitive Proxy
Statement as filed with the Commission on May 24, 1996
(ii) 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.
(iv) Filed with the Company's Registration Statement on Form S-3 dated May 23,
1996 (File No. 333-04407) and incorporated herein by reference.
(v) Incorporated by reference from Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Commission File Number 33-88446) filed on January 13,
1995.
(vi) Incorporated by reference from Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Commission File Number 33-88448) filed on January 13,
1995.
(vii) Incorporated by reference to Annex E of the Registrant's Definitive Proxy
Statement as filed with the Commission on May 24, 1996.
(viii) Incorporated by reference to Company's Annual Report on 10-K for fiscal
year ended June 30, 1996.
(ix) Incorporated by reference to the Company's Current Report on Form 8-K dated
April 9, 1997.
(x) Incorporated by reference to the Company's Registration Statement on Form
S-3 (Commission File Number 333-28693) filed on June 12, 1997.
(xi) Filed with the Company's Quarterly Report on Form 10-Q for the period filed
on February 13, 1998 and incorporated herein by reference.
(xii) Filed with the Company's Current Report on Form 8-K dated June 17, 1998
and incorporated herein by reference.
(xiii) Filed with the Company's Current Report on Form 8-K/A filed as of
November 4, 1998 and incorporated herein by reference
(xiv) Referenced in the Company's Current Report on Form 8-K dated September 14,
1998.
(xv) Referenced in the Company's Current Report on Form 8-K dated October 2,
1998.
(xvi) Filed with the Company's Current Report on Form 8-K dated August 21, 1998
and incorporated herein by reference.
(xvii) Filed with the Company's Current Report on Form 8-K/A-1 filed as of
October 13, 1998 and incorporated herein by reference.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on behalf
of the undersigned, thereunto duly authorized.
CYBERGUARD CORPORATION
By: /s/ DAVID R. PROCTOR
David R. Proctor
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------- -------------------------------------------- -----------------------
<S> <C> <C>
/s/ DAVID R. PROCTOR Chairman, President and Chief Executive August 1999
- ----------------------------------------------- Officer and Director (Principal Executive
David R. Proctor Officer)
/s/ TERRENCE A. ZIELINSKI Chief Financial Officer and Vice President August 1999
- ----------------------------------------------- Finance (Principal Financial and Principal
Terrence A. Zielinski Accounting Officer)
/s/ C. SHELTON JAMES Director August 1999
- -----------------------------------------------
C. Shelton James
/s/ LELAND R. REISWIG, JR. Director August 1999
- -----------------------------------------------
Leland R, Reiswig, Jr.
/s/ RICHARD P. RIFENBURGH Director August 1999
- -----------------------------------------------
Richard P. Rifenburgh
</TABLE>
33
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
CyberGuard Corporation and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity (deficit) and comprehensive income after the restatement
described in Note 2, present fairly, in all material respects, the financial
position of CyberGuard Corporation and its Subsidiaries at June 30, 1999, and
1998, and the results of their operations and cash flows for each of the three
years in the period ended June 30, 1999, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As further described in Note 2, the Company restated its 1997 and 1996
financial statements previously audited by other independent accountants.
PricewaterhouseCoopers LLP
Atlanta, Georgia
August 27, 1999
F-1
<PAGE> 35
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,622 $ 1,773
Restricted cash 908 650
Accounts receivable, less allowance for uncollectible accounts of
$407 at 1999 and $450 at 1998 2,021 3,334
Inventories, net 210 916
Software development costs, net 185
Other current assets 482 166
Receivable from sale of Arca Systems 3,261
-------- --------
Total current assets 6,428 10,100
-------- --------
Property and equipment, net 1,154 1,761
Non-compete agreements, net 560 840
Goodwill, net 96
Other assets 135 279
-------- --------
Total assets $ 8,277 $ 13,076
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Line of credit and note payable $ 2,054 $ 2,198
Accounts payable 2,766 2,383
Deferred revenue 2,047 1,288
Accrued expenses and other liabilities 3,210 2,619
-------- --------
Total current liabilities 10,077 8,488
Convertible debenture, net 885
Commitments and contingencies - Note 15
Shareholders' equity (deficit):
Common stock par value $0.01 authorized 20,000,000 shares; issued and
outstanding 9,064,756 shares at 1999 and 8,902,699 shares at 1998 91 89
Additional paid in capital 73,677 72,999
Accumulated deficit (76,475) (68,360)
Accumulated other comprehensive income 22 (140)
-------- --------
Total shareholders' equity (deficit) (2,685) 4,588
-------- --------
Total liabilities and shareholders' equity (deficit) $ 8,277 $ 13,076
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
<PAGE> 36
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED JUNE 30,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Products $ 11,409 $ 13,563 $ 13,135
Services 2,464 1,989 1,089
----------- ----------- -----------
13,873 15,552 14,224
----------- ----------- -----------
Cost of Revenues:
Products 3,618 5,508 6,672
Services 1,695 1,568 572
----------- ----------- -----------
5,313 7,076 7,244
----------- ----------- -----------
Gross Profit 8,560 8,476 6,980
Operating Expenses:
Research and development 3,664 5,767 4,723
Selling, general and administrative 14,724 18,869 15,133
----------- ----------- -----------
Total operating expenses 18,388 24,636 19,856
Operating loss (9,828) (16,160) (12,876)
Interest income (expense), net (186) 399 646
Other income (expense), net 41 11 (200)
Loss on sale of Arca Systems (2,386)
Gain on sale of TradeWave 1,858
Loss on sale of securities available for sale (128) (5,012)
----------- ----------- -----------
1,713 (2,104) (4,566)
----------- ----------- -----------
Net loss $ (8,115) $ (18,264) $ (17,442)
=========== =========== ===========
Basic and fully-diluted loss per common share $ (.90) $ (2.17) $ (2.46)
=========== =========== ===========
Weighted average number of shares outstanding 8,967,045 8,423,011 7,100,014
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE> 37
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED JUNE 30,
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (8,115) $ (18,264) $ (17,442)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation 789 859 546
Amortization 525 888 2,861
Provision for inventory reserve 38 274 131
Provision for uncollectible accounts 326 500 327
Compensation and benefits 242 256 125
Gain on sale of TradeWave (1,858)
Loss on sale of securities available for sale 128 5,012
Loss on sale of Arca Systems 2,386
Changes in assets and liabilities net of effect of 1997 acquisition:
Accounts receivable 896 1,440 (1,905)
Inventories 667 379 (1,550)
Accounts payable 383 274 2,109
Accrued expenses and other liabilities 591 266 (1,647)
Deferred revenue 630 (130) 1,214
Other, net (31) 91 (494)
------------- ------------- -------------
Net cash used by operating activities (4,917) (10,656) (10,713)
Cash flows from (used) by investing activities:
Capitalized software development costs (230)
Additions to property and equipment (182) (911) (530)
Purchase of business, net of cash acquired (450) (400)
Proceeds from (advances to) Arca Systems 3,261 (417)
------------- ------------- -------------
Net cash from (used) by investing activities 2,849 (1,778) (930)
Cash flows from financing activities:
Increase in restricted cash (258)
Proceeds from sale of TradeWave 2,225
Proceeds from convertible debenture 1,125
Proceeds (repayments) on line of credit (194) 1,548 (3,200)
Proceeds from sale of securities 1,214 12,363
Proceeds from sale of common stock 19 8,470 1,838
------------- ------------- -------------
Net cash provided by financing activities 2,917 11,232 11,001
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 849 (1,202) (642)
Cash and cash equivalents at beginning of the period 1,773 2,975 3,617
------------- ------------- -------------
Cash and cash equivalents at end of the period $ 2,622 $ 1,773 $ 2,975
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE> 38
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------------- Paid in Accumulated Comprehensive
Shares Amount Capital Deficit Income Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996,
as previously reported 6,709,371 $ 67 $ 56,152 $ (37,210) $ (764) $ 18,245
Restatement 4,556 522 5,078
---------- ---------- ---------- ---------- ---------- ----------
Balance June 30, 1996, as restated 6,709,371 67 56,152 (32,654) (242) 23,323
Net loss (17,442) (17,442)
Change in market value of
securities available for sale (35) (35)
Translation adjustment 116 116
Issuance of common stock , for
the non compete agreement 91,800 1 1,399 1,400
Issuance of common stock 651,143 7 1,956 1,963
---------- ---------- ---------- ---------- ---------- ----------
Balance June 30, 1997, as restated 7,452,314 75 59,507 (50,096) (161) 9,325
Net loss (18,264) (18,264)
Translation adjustment (14) (14)
Change in market value of securities
available for sale 35 35
Issuance of common stock 1,450,385 14 8,711 8,725
Issuance of common stock for the
Arca investment 590,429 6 5,513 5,519
Receipt and retirement of common
stock for the Arca investment (590,429) (6) (732) (738)
---------- ---------- ---------- ---------- ---------- ----------
Balance June 30, 1998 8,902,699 $ 89 $ 72,999 $ (68,360) $ (140) $ 4,588
Net loss (8,115) (8,115)
Translation adjustment 162 162
Issuance of common stock 162,057 2 258 260
Beneficial conversion feature on
convertible debenture 420 420
---------- ---------- ---------- ---------- ---------- ----------
Balance June 30, 1999 9,064,756 $ 91 $ 73,677 $ (76,475) $ 22 $ (2,685)
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-5
<PAGE> 39
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as the reported amounts of revenues
and expenses during the reported periods. Significant estimates include those
made for software development costs, reserve for inventories, the allowance for
uncollectible accounts, and contingencies. Actual results could differ from
those estimates.
The consolidated financial statements of CyberGuard Corporation and
Subsidiaries (the "Company") include the accounts of the Company and its
subsidiaries over which it maintains control. Majority owned subsidiaries where
control is temporary are carried on the cost basis. All significant intercompany
balances and transactions have been eliminated.
The Company's operating results and financial condition may be impacted
by a number of factors including, but not limited to the following, any of which
could cause actual results to vary materially from current and historical
results or the Company's anticipated future results. A portion of the Company's
revenue is derived from its international operations and sources. As a result,
the Company's operations and financial results have been affected by
international factors such as changes in foreign currency exchange rates or weak
economic conditions in the international markets in which the Company
distributes its products. The network security industry is highly competitive
and competition is expected to intensify. There are numerous companies competing
in segments of the market in which the Company does business. Competitors
include organizations significantly larger and with more development, marketing
and financial resources than the Company.
In addition, the Company is subject to risks and uncertainties which
include, but are not limited to the timely development of and acceptance of new
products, impact of competitive products, regulation, inventory obsolescence,
the ultimate outcome of certain litigation matters, and cash balances in excess
of federally insured limits.
The Company provides a full suite of products and services for the
network security industry. The products offered by the Company include the
CyberGuard(R) Firewall, proprietary and third-party technology (such as Virtual
Private Network, authentication, virus scanning, encryption, advanced reporting,
high availability and centralized management), and consulting, support, and
installation services.
F-6
<PAGE> 40
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) RESTATEMENT
The Company restated its 1997 and 1996 financial statements previously
audited by other independent accountants.
The following table depicts the components of the restatement:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Accumulated deficit as previously reported $ (49,700) $ (37,210)
Prior year adjustments 4,556
Adjustments
Restore capitalized software development costs written off during fiscal 1996
and subsequent amortization during fiscal 1997 (2,539) 3,087
Reduction (recognition) of expenses due to changes in timing of
expense accrual (892) 1,196
Change in value of securities available for sale (598) 846
Write off of foreign currency translation adjustment related to
subsidiaries sold during fiscal 1996 522 (522)
Increase in receivable allowance for uncollectible accounts (51)
Deferral of revenue due to changes in timing of revenue recognition (1,374)
Change in components of TradeWave acquisition 255
Write off of inventory and other current assets (159)
Recognition of amounts related to prepaid licenses and post
contract customer support (167)
------------- -------------
Net Adjustments (396) 4,556
============= =============
Accumulated deficit, as adjusted $ (50,096) $ (32,654)
============= =============
1997
-------------
Net loss, as previously reported $ (12,490)
=============
Net loss, restated $ (17,442)
=============
Net loss per share, as previously reported $ (1.76)
=============
Net loss per share, restated $ (2.46)
=============
</TABLE>
F-7
<PAGE> 41
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES--Inventories consist primarily of purchase component parts
and are carried at the lower of cost, determined by the First-In-First-Out
(FIFO) method or market. The Company maintains a reserve for its estimate of
excess, obsolete and damaged goods based on historical and forecasted usage.
LONG-LIVED ASSETS--Property and equipment is carried at cost.
Depreciation is computed by the straight-line method using the estimated useful
lives of the assets which range from 3 to 5 years. Maintenance and repairs are
charged to expense as incurred. Upon sale, retirement or other disposition of
these assets, the cost and the related accumulated depreciation are removed from
the respective accounts and any gain or loss on the disposition is included in
the consolidated statement of operations. The Company evaluates the
recoverability of all its long-lived assets including intangibles and goodwill.
If the sum of the undiscounted future cash flows is less than the carrying
amount of the asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value.
SOFTWARE DEVELOPMENT COSTS--The Company capitalizes costs related to
the development of certain software products in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting For the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" ("SFAS No. 86") which
requires capitalization to begin 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 defined by completion of a working model 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 revenues for
a product bear to the total current and anticipated future revenues for that
product or the straight-line method over two to five years.
During 1999, the Company had qualifying software development costs of
$230 and associated amortization of $45. During 1998 and 1997, the period
between established technological feasibility and the general release has been
less than three months and software development costs qualifying for
capitalization have been minimal. Accordingly, the Company has not capitalized
any software development costs for those years.
REVENUE RECOGNITION--The Company accounts for software revenues in
accordance with the American Institute of Certified Public Accountants Statement
of Position. In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97.2 "Software Revenue Recognition"
(SOP 97-2"), subsequently amended. As amended, SOP 97-2 provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions, and is effective for transactions entered into in fiscal
years beginning after December 31, 1997. The Company adopted SOP 97-2 at July 1,
1998. Prior to July 1, 1998, the Company accounted for software revenues in
accordance with the American Institute of Certified Public Accountants Statement
of Position 91-1 "Software Revenue Recognition". The adoption did not have a
material impact on the Company's financial statements. Revenues earned under
software license agreements are generally recognized when the software has been
shipped, payment is due within one year, collectibility is probable, and there
are no significant vendor obligations. When factors indicate that fees in a
reseller or distributor arrangement are not fixed or that a reasonable basis for
estimating the degree of collectibility of the receivable does not exist,
revenue is recognized as cash is received. Certain arrangements with
distributors and resellers are under terms which allow for those distributors to
receive price protection based on future price reductions and allow limited
F-8
<PAGE> 42
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
rights of return. The Company provides an allowance for uncollectible accounts,
which includes returns and price protection. Revenue on post contract customer
support is deferred and amortized by the straight-line method over the term of
the contracts. The Company also provides professional support services which are
available under Service Agreements and charged for separately. These services
are generally provided under time and materials contracts and revenue is
recognized as the service is provided.
INCOME TAXES--The provision for income taxes and corresponding balance
sheet accounts are determined in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred tax liabilities and assets are determined based on
the temporary differences between the bases of certain assets and liabilities
for income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount,
which more likely than not, is expected to be realized.
FOREIGN CURRENCY TRANSLATION--All balance sheet accounts denominated in
foreign currency are translated into U.S. dollars at the current exchange rate
as of the end of the accounting period. Income statement items are translated at
weighted-average currency exchange rates. Gains and losses resulting from
foreign currency transactions denominated in a currency other than the
functional currency are included in the Statement of Operations. Gains and
losses relative to intercompany foreign currency transactions for which
settlement is not planned or anticipated, are reflected as a separate component
of other comprehensive income.
CASH EQUIVALENTS AND RESTRICTED CASH--The Company considers all
investments purchased with an original maturity of three months or less at the
time of purchase to be cash equivalents. Restricted cash is unavailable to the
Company until certain contractual terms and conditions are met.
MARKETABLE SECURITIES--The Company accounts for marketable securities
in accordance with the Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). In accordance with the provisions of SFAS No. 115, marketable securities,
which have been classified by the Company as available for sale, are carried at
market value, with the unrealized gains or losses, net of tax, reported as a
separate component of other comprehensive income.
BASIC AND DILUTED NET LOSS PER COMMON SHARE--Basic and diluted net loss
per common share are calculated according to the Financial Accounting Standards
Board ("FASB") issued Statement No. 128 ("SFAS No. 128"). This statement
establishes standards for computing and presenting earnings per share ("EPS").
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. SFAS No. 128 requires restatement of all prior
period EPS data presented. Potential common stock is in the form of stock
options, which do not have an effect on diluted net loss per share calculations
due to its anti-dilutive effect. Common stock equivalents, like stock options,
warrants, and convertible debt, would have a dilutive effect on per common share
calculations if the company earns a profit.
RECLASSIFICATIONS-- Certain amounts in the prior Fiscal Year have been
reclassified to conform to the current Fiscal Year presentation.
F-9
<PAGE> 43
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in normal course of business. The Company has suffered recurring
losses from operations resulting in net cash used in operating activities. In
addition, violations of covenants in debt agreements have resulted in
classification of all of its debt as current as of June 30, 1999. Management's
operating plans include tactics to achieve efficiencies and its financing plan
encompasses the use of availability under its current line of credit, issuance
of convertible debt, as well as the potential issuance of equity securities.
Accordingly, management believes that the Company's consolidated financial
statements are appropriately prepared on a going concern basis.
The Company and certain former officers and directors were named in
twenty-five shareholder lawsuits. The plaintiffs sued for unspecified
compensatory damages, legal fees, and litigation costs. The Company is unable to
predict the ultimate outcome or potential financial impact of this litigation.
The consolidated financial statements do not include any adjustments
relating to the realization of assets and the recognition and satisfaction of
liabilities that might be necessary as a result of these matters.
(5) REAL-TIME BUSINESS
In May 1995, the Company separated its business operation into two
units: the Real-time Division, responsible for equipment development, and the
Trusted Systems Division, responsible for network security product development.
On February 8, 1996, the Company and Concurrent Computer Corporation
("Concurrent") announced the sale of the Real-time Division to Concurrent which
became effective under the Purchase and Sale Agreement effective March 26, 1996,
and amended and restated as of May 23, 1996 (hereinafter referred to as the
"Agreement").
The Agreement was approved by the shareholders of both companies on
June 27, 1996, and the transaction was closed effective June 30, 1996. In
connection with this sale, the Company changed its fiscal year end from
September 30 to June 30 becoming effective in the year beginning October 1,
1995.
Under the Agreement, the Company sold the net assets of its Real-time
Division with a book value of $21,561 and issued 683,178 shares of its common
stock valued at $1,804 to Concurrent in exchange for (a) 10,000,000 newly issued
shares of Concurrent common stock, par value $0.01 per share valued at $10,700,
and (b) convertible preferred stock of Concurrent paying a 9% cumulative annual
dividend quarterly in arrears valued at $4,699. The preferred stock was
redeemable by Concurrent when the current market price of Concurrent's common
stock exceeded $3.75 per share and was mandatory redeemable on June 27, 2006, at
the liquidation preference of $6,264 plus any unpaid dividends at that date. The
conversion ratio for the preferred stock was based on the liquidation preference
divided by the conversion price per the Agreement, set at $2.50 per share.
At June 30, 1996, the Company sold its interest in 2,000,000 shares of
Concurrent common stock recognizing no gain or loss on the sale. During 1997,
all of the convertible preferred stock was converted to Concurrent common stock
and accounted for as securities available-for-sale. During 1997, the Company
sold a total of 9,950,000 shares recognizing a total loss on sale of those
shares of $5,012. At June 30, 1997, the securities available-for-sale were
valued at their market value of $1,007 with a net unrealized holding loss of $35
reflected as a separate component of other comprehensive income. At June 30,
1997, the securities available for sale also included $300 of cumulative
dividends receivable on preferred stock. During 1998, the remaining shares of
Concurrent common stock were sold at a loss of $128.
F-10
<PAGE> 44
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) TRADEWAVE
On April 9, 1997, the Company purchased substantially all the assets of
TradeWave Corporation ("TradeWave"). The transaction was accounted for as a
purchase and, accordingly, TradeWave's results are included in the consolidated
financial statements since the date of acquisition. The aggregate purchase price
was approximately $356. The fair value of identifiable net assets acquired was
approximately $211. Approximately $129 has been accounted for as goodwill and is
being amortized over its useful life of five years. Additionally, at the time of
acquisition, a deferred charge of $133 was recorded representing restricted
stock grants to TradeWave employees. The charge was expensed in 1998, over the
course of the vesting period of the restricted stock grants none of which
exceeded twelve months.
During September 1998, the Company's Board of Directors authorized a
plan to dispose of certain net assets of its TradeWave division, and on
September 14, 1998, the Company announced the sale of TradeWave's Galaxy
Internet search engine ("Galaxy") for approximately $2,000. In addition, on
April 30, 1999, the Company sold substantially all the remaining assets of its
TradeWave division to Digital Signature Trust Co. ("DST") for $810, subject to
an escrow agreement, and the assumption of certain liabilities. A definitive
Asset Purchase Agreement was entered into that has certain development
deadlines.
In June 1999, CyberGuard filed a lawsuit against DST in state court in
Austin, Texas. The Company alleged breach of contract, tortious interference and
fraud. Also in June 1999, DST filed a lawsuit against the Company in federal
court in Salt Lake City, Utah, alleging fraud, negligent misrepresentation,
unjust enrichment, with unspecified damages, and rescission and reformation of
contract. Both actions are currently tolled due to ongoing negotiations towards
settlement between the Company and DST.
(7) ARCA SYSTEMS, INC.
On June 17, 1998, the Company completed the acquisition of Arca
Systems, Inc. ("Arca"), a privately held information professional security
service firm, for 590,429 shares of its common stock. However, on October 5,
1998, the Company sold all the assets of Arca. As a result, the transaction is
presented as a receivable from the sale of Arca and accounted for on the cost
basis, at its net realizable value at June 30, 1998, because of the temporary
control the Company had over this majority owned subsidiary. The investment
amount was based on the fair value of the common stock issued, using an average
of its quoted market value a few days before and after the acquisition
announcement date, and other direct costs.
In response to the Company's announcement on August 24, 1998, that
revenues for certain 1998 quarters would be restated, the previous shareholders
of Arca threatened legal action under the purchase agreement. On October 5,
1998, the Company completed the sale of the net assets of Arca to Exodus
Communications. In exchange for the net assets of Arca, the Company received
approximately $3,261, the return of the previously issued 590,429 shares of the
Company's common stock, and the release of any potential legal claims the Arca
shareholders might have had against the Company. The disposition resulted in a
settlement loss that was recorded in the fourth quarter of fiscal 1998. The
settlement loss of $2,386 was determined based on the Company's investment in
and advances to Arca, less the $3,261 cash received and the 590,429 shares of
common stock at its fair value using its quoted market value on the return date.
The shares were assumed to be retired effective June 30, 1998.
F-11
<PAGE> 45
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
--------------- ----------------
<S> <C> <C>
Property and equipment $1,794 $3,286
Purchased software for internal use 255 415
Leasehold improvement 27 37
---------- ----------
Subtotal 2,076 3,738
---------- ----------
Less: accumulated depreciation (922) (1,977)
---------- ----------
Property and equipment, net $1,154 $1,761
========== ==========
</TABLE>
(9) NON-COMPETE AGREEMENTS
In connection with the sale of the Real-time Business, the Company
entered into non-compete agreements for a period of five years with two former
officers of the Company. In consideration for these non-compete agreements,
these officers received 91,800 shares of the Company's common stock. These
shares were valued at market price as of the date of the agreement, June 28,
1996. These amounts will be amortized over the life of the agreement. The
amortization expense was $280, for the years ended June 30, 1999, 1998, and
1997, respectively.
(10) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------- ---------------------
<S> <C> <C>
Salaries, wages and other compensation $ 1,271 $ 794
Accrued interest and sundry taxes 259 243
Accrued professional service fees 200 958
Other payables 550 624
Insurance finance payable 280 --
Customer advanced payments 650 --
------------------ ------------------
$ 3,210 $ 2,619
================== ==================
</TABLE>
(11) LINE OF CREDIT AND NOTE PAYABLE
On April 1, 1996, the Company entered into a loan agreement with
Foothill Capital Corporation ("Foothill") pursuant to which Foothill agreed to
make revolving advances to the Company on an amount of up to $5,000 subject to
certain borrowing base requirements and at an interest rate equal to prime, plus
two percent. As collateral for the loan, the Company granted Foothill a security
interest in its assets (including the Concurrent common and preferred stock). In
addition, the Company granted Foothill warrants to purchase 100,000 shares of
common stock at a price equal to the lower of the price of a share of common
stock issued to the public pursuant to a registration statement or $17.00 per
share. In August 1996, the Foothill loan of $3,200 was repaid.
F-12
<PAGE> 46
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On December 30, 1997, the Company entered into a $3,350 asset-based
revolving line of credit and a $650 Term Note Agreement with Coast Business
Credit ("Coast"). The Company is in default of certain provisions of the
agreement and interest is charged at the default rate of prime rate plus 5.0%
(at June 30, 1999). The credit facility is collateralized by all of the tangible
assets and intellectual property of the Company. Availability under the
revolving credit facility is limited to 80% of eligible accounts receivable and
30% of qualified inventory up to a maximum availability of $300 on eligible
inventory. The Company has presented the $650 cash compensating balance equal to
the amount of the term loan as restricted cash. As of June 30, 1999, there was
$1,405 outstanding under the revolving line of credit agreement, all of which
was classified as a current liability. The Company estimates that the fair value
of the line of credit and note payable approximates carrying value based upon
its effective current borrowing rate.
(12) CONVERTIBLE DEBENTURE
On December 17, 1998, the Company executed an agreement to issue
$1,125,000 of Convertible Debt ("Debt"). The Debt bears interest at prime plus
200 basis points and is payable quarterly. The Debt is convertible into 750,000
shares of common stock at a conversion price equal to $1.50 per share. The Debt
is convertible to registered shares, at the debt holders option, after February
1, 2000. In addition, the Company issued the debt holders 500,000 warrants to
purchase the Company's common stock at $2.00. The warrants are exercisable at
any time before June 2001. The terms of the Debt and warrant agreement, which
permit the conversion of the Debt and warrants to common stock at a discount to
market, is considered a beneficial conversion feature. The beneficial conversion
feature at the date of issuance of the Debt of $420 will be recognized as
interest expense over the fourteen month conversion period. The Company has
recognized $180 as additional interest expense for 1999. The convertible debt is
subordinated to the Company's senior debt and includes a security interest in
the Company's assets.
On August 27, 1999, the Company increased convertible debt to
approximately $4,300,000 including repaying the December 1998 issuance. The
interest rate will be 11.5% per annum. The debt will be convertible into
approximately 4,300,000 shares of common stock at a conversion price equal to
$1.00 per share which represents a beneficial conversion feature. In addition,
the warrants from the December 17, 1998 transaction will be cancelled and the
Company will issue approximately 4,300,000 warrants to purchase the Company's
common stock at $2.00 per share.
(13) INCOME TAXES
The significant components of the Company's net deferred income tax
assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS AND LIABILITIES June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Accrued expenses $ 384 $ 537
Depreciation and amortization (347) (444)
Net operating loss carryforwards 22,683 18,991
Capital loss carryforwards 2,023 2,697
Other Deferred tax assets(liabilities) 732 859
Valuation allowance (25,475) (22,640)
======== ========
Net deferred income tax liability -- --
======== ========
</TABLE>
F-13
<PAGE> 47
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the effective income tax rate and the statutory United
States income tax rate follows:
<TABLE>
<CAPTION>
Year ended Year ended
June 30, June 30,
1999 1998
---------------- -------------------
<S> <C> <C>
Statutory U.S. income tax rate (34.0%) (34.0%)
Loss on sale of Arca 0.0% 5.1%
State taxes ( 3.0%) ( 3.0%)
Other 0.8% 0.8%
Valuation Allowance 36.2% 31.1%
---------------- -------------------
Effective income tax rate 0.0% 0.0%
================ ===================
</TABLE>
As of June 30, 1999, the Company had U.S. net operating loss
carryforwards for federal income tax purposes of approximately $61 million. The
Company's net operating loss carryforwards begin to expire in 2010. Under the
Tax Reform Act of 1986, the amounts of, and the benefits from, net operating
loss carryforwards may be impaired or limited due to a change of ownership
control as defined by the Internal Revenue Code. In addition, the Company has a
U.S. net capital loss carryforwards of approximately $5,469. The Company may
utilize the capital loss carryforwards only to the extent it generates future
capital gains. As of June 30, 1999, a valuation allowance has been established
against the net deferred tax asset since the Company believes it is more likely
than not that some or all of the amounts will not be realized.
(14) SHAREHOLDERS' EQUITY
COMMON STOCK--Each share of the Company's common stock has attached to
it one right. Each right entitles its registered holder to purchase from the
Company after the "Separation Time", as hereinafter defined, one-hundredth of a
share of Participating Preferred Stock, par value $.01 per share, for an amount
calculated in accordance with the Preferred Stock Agreement. The rights will not
trade separately from the common stock unless and until the Separation Time. The
Separation Time is defined as the earlier of the tenth business day after the
date on which any person commences a tender or exchange offer which, if
consummated, would result in an acquisition, and the first date of public
announcement by the Company of such offering. In the event of any voluntary or
involuntary liquidation of the Company, the holders of the Preferred Stock shall
be paid an amount as calculated in accordance with the Preferred Stock
Agreement.
STOCK OPTION PLANS--Effective October 8, 1994, the Company adopted a
Stock Incentive Plan which permits the issuance of stock options, stock
appreciation rights, performance awards, restricted stock and/or other stock
based awards to directors and salaried employees. On February 4, 1996, the Board
of Directors approved an amendment to the plan to reserve 2,025,000 shares of
common stock for grant. The option price shall be determined by the Board
Committee effective on the Grant Date. The option price shall not be less than
fifty percent of the Fair Market Value of a share of common stock on the Grant
Date. If Incentive Stock Options are granted to a participant who on the Grant
Date is a ten-percent holder, such price shall not be less than one hundred and
ten percent of the Fair Market Value of a share of common stock on the Grant
Date. All options become immediately exercisable upon the occurrence of a Change
in Control of the Company. Vesting of these options occurs based on years of
service. Generally it begins at 33% after one year, 66% after two years, and
100% after the third year of service.
F-14
<PAGE> 48
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company also elected in September, 1998 to have non-qualified stock options
for key executives as part of their compensation plan. The Board of Directors
has the authority to determine to whom options may be granted, period of
exercise, the option price at the date of grant, and what other restrictions, if
any, should apply.
The Company applies APB 25 and related interpretations in accounting
for its plans. During 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123")
changing the methods for recognition of costs on plans similar to those of the
Company. Adoption of the accounting provisions of SFAS No. 123 is optional;
however, pro-forma disclosures as if the Company adopted the cost recognition
requirements under SFAS No. 123 are required.
The fair value method for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for 1999, 1998 and 1997, respectively: risk-free interest
rates were 5.11%, 5.69%, and 6.05%, expected dividend yield of 0%, volatility
factors of the expected market price of the Company's common stock were 116.3%,
79.1%, and 88.5% and a weighted average expected life of the option of 3, 4, and
3 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The adoption of SFAS No.123 under the fair value based method would
have increased compensation expense by $2,108, $2,524 and $1,728 for the years
ended June 30, 1999, 1998 and 1997, respectively. The effect of SFAS No. 123
under the fair value based method would have effected net loss and loss per
share as follows:
<TABLE>
<CAPTION>
Year ended Year Ended Year Ended
June 30, June 30, June 30,
1999 1998 1997
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Net loss $ (8,115) $ (18,264) $ (17,442)
==================== =================== ====================
Pro-Forma $(10,023) $ (20,789) $ (19,170)
==================== =================== ====================
Loss per common share as reported $ (0.90) $ (2.17) $ (2.46)
==================== =================== ====================
Pro-Forma $ (1.12) $ (2.47) $ (2.70)
==================== =================== ====================
</TABLE>
F-15
<PAGE> 49
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Information relating to the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
---------------------- ------------------------
<S> <C> <C> <C> <C>
Shares under option at June 30, 1996 1,589,664 $3.50
Granted 947,850 $9.37
Exercised (636,559) $3.00
Forfeited (75,033) $8.75
============== =============
Shares under option at June 30, 1997 1,825,922 $7.77
============== =============
Shares exercisable at June 30, 1997 594,442 $6.43
============== =============
Shares under option at June 30, 1997 1,825,922 $7.77
Granted 889,668 $7.48
Exercised (254,071) $4.37
Forfeited (363,774) $9.21
============== =============
Shares under option at June 30, 1998 2,097,745 $7.81
============== =============
Shares exercisable at June 30, 1998 759,291 $7.95
============== =============
Shares under option at June 30, 1998 2,097,745 $7.81
Granted 2,856,343 $1.24
Exercised (17,000) $1.13
Forfeited (1,875,645) $5.03
============== =============
Shares under option at June 30, 1999 3,061,443 $1.91
============== =============
Shares exercisable at June 30, 1999 1,141,492 $2.96
============== ==============
</TABLE>
At June 30, 1999, 2,684,868 stock options outstanding had exercise
prices ranging from $1.13 to $2.09. The weighted average exercise price of these
options is $1.25 and weighted remaining contractual life of these options is
4.16 years. Of these options, 764,917 are exercisable at a weighted average
price of $1.14.
At June 30, 1999, 376,575 stock options outstanding had exercise prices
ranging from $5.50 to $7.37. The weighted average exercise price of these
options is $6.67. The remaining contractual life of these options is 1.5 years.
Of these options, 376,575 are exercisable at a weighted average price of $6.67.
During September 1998, the Company re-priced all of the outstanding
options to its then current fair market value per share of $1.125 to all
officers, directors and employees with existing options. The total number of
shares re-priced were 1,404,891. In addition, during fiscal year 1999, the
Company issued officers, directors and employees approximately 1,110,936 new
options at an exercise price of $1.31 per share. As part of a severance
arrangement with a previous officer, the Company re-issued 235,490 shares at a
weighted average price of $7.10 per share.
F-16
<PAGE> 50
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(15) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--Rent expense was $744 for the year ended June 30,
1999, $501 for the year ended June 30, 1998, and $231 for the year ended June
30, 1997.
On June 10, 1997, the Company entered into a ten-year term office lease
for its corporate office located in a commercial building in Fort Lauderdale,
Florida. The lease provides for a 5-year renewal option.
Total future minimum rental commitments under non-cancelable operating
leases, primarily for buildings and equipment, for the years following June 30,
1999 are as follows:
YEAR AMOUNT
---- ------
2000 518
2001 475
2002 454
2003 464
=============
Total $1,911
=============
Effective May 1, 1999, the Company sold substantially all the assets of
its TradeWave division and the assumption of several capital and operating
leases. In the transaction, the operating lease amount assumed for the fiscal
year ended 1999 are $25, fiscal year end 2000 are $165, fiscal year end 2001 are
$3, and fiscal year end 2002 are $2.
LITIGATION--In August 1998, the Company and certain current and former
officers and directors were named as defendants in 25 shareholder lawsuits filed
in the United States District Court for the Southern District of Florida. All of
the lawsuits purport to be brought on behalf of a class of all persons who
purchased or otherwise acquired the Company's common stock during various
periods from October 7, 1997, through August 24, 1998. The lawsuits allege,
among other things, that as a result of accounting issues relating to the
Company's revenue recognition practices, defendants knowingly or recklessly
caused the Company to publish false and misleading financial statements which
caused the Company's common stock prices to rise artificially. One lawsuit also
alleges violations of common law. The plaintiffs are seeking an unspecified
amount of damages, interest, costs and attorney fees. These cases have been
transferred and consolidated into a single case for purposes of all pre-trial
matters and trial. Discovery has been stayed and the plaintiffs have been
ordered to file a single amended, consolidated complaint within 45 days of the
filing on July 22, 1999 of the Company's restated financial statements.
The Company's obligation to indemnify its officers and directors under
the aforementioned lawsuits is insured, to the extent of the limits of the
applicable insurance policies. The Company has notified its insurance carrier of
the existence of the lawsuits, and the carrier has sent the Company a
reservation of rights letter. The Company intends to vigorously defend these
actions, and believes that in the event that it is unsuccessful, that insurance
coverage will be available to defray a portion, or substantially all, the
expense of defending and settling the lawsuits or paying a judgment. However,
the Company is unable to predict the ultimate outcome of the litigation. There
can be no assurance that the Company will be successful in defending the
lawsuits or that if unsuccessful, that insurance will be available to pay all or
any portion of the expense of the lawsuits. If the Company is unsuccessful in
defending the lawsuits and the insurance coverage is unavailable or
insufficient, the resolution of the lawsuits could have a material adverse
effect on the Company's consolidated financial position, results of operations,
and cash flows. The Company's consolidated financial statements do not include
any adjustments related to these matters.
F-17
<PAGE> 51
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On April 30, 1999, the Company sold substantially all of the assets of
its TradeWave division to Digital Signature Trust Company ("DST"). In June 1999,
CyberGuard filed a lawsuit against DST and Zions First National Bank, N.A. that
alleged breach of contract, tortious interference and fraud. Also in June 1999,
DST filed a lawsuit against the Company, alleging fraud, negligent
misrepresentation, unjust enrichment, with unspecified damages, and rescission
and reformation of contract. Both actions are currently tolled due to ongoing
negotiations towards settlement between the Company and DST.
The Company is involved from time to time in other litigation on
various matters relating to the conduct of its business. The Company believes
that these other litigation matters, single or collective, will not have a
material adverse effect on its consolidated financial position, results of
operations or cash flows.
REGULATORY INVESTIGATIONS--In August 1998, the Securities and Exchange
Commission ("SEC") began an informal investigation into certain accounting and
financial reporting practices of the Company. The Company is cooperating with
the SEC. The Company is unable to predict the ultimate outcome of the
investigation. The resolution of such matters could have a material adverse
effect on the Company's consolidated financial position, results of operations,
and cash flows. The Company's consolidated financial statements do not include
any adjustments related to these matters.
(16) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to a
concentration of credit risk principally, consist of cash, cash equivalents and
trade receivables. The Company holds any excess cash in short-term investments
consisting of commercial paper. Concentrations of credit risk with respect to
receivables are limited due to the Company's customer base.
(17) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Savings Plan ("the Plan") which covers the
eligible employees of the Company. An employee is eligible to participate in the
Plan on the date of hire. The amount of profit-sharing contributions made by the
Company into the Plan is discretionary. Each participant may contribute up to
19% of compensation into the Plan. The Company makes a matching contribution on
behalf of each participant for the first 6% of their individual contribution.
These contributions are made in the form of cash and common stock of the
Company. Participants' profit sharing and matching contribution vests over a
three-year period. The Company's contributions to the Plan were $300 for year
ended June 30, 1999, $388 for the year ended June 30, 1998 and $221 for the year
ended June 30, 1997.
(18) GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates primarily in one segment: trusted systems
consisting of network security and electronic commerce products and services.
During 1999, one major financial institution represented 34% of consolidated
sales, one international telecommunications company represented 10.1% of
consolidated sales and one international distributor represented 7.8% of
consolidated sales. During 1998, one major financial institution represented 17%
of consolidated sales. During 1997 sales to a distributor represented 11% of
consolidated sales.
F-18
<PAGE> 52
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the Company's operations by geographic area is summarized
below:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, June 30, June 30,
1999 1998 1997
-------------------- ------------------- --------------------
<S> <C> <C> <C>
United States Operations
Net sales $ 10,882 $ 11,423 $ 10,057
Net loss (7,823) (17,292) (17,176)
Identifiable assets 5,795 11,100 15,043
European Operations
Net sales 2,991 4,129 4,167
Net loss (292) (972) (266)
Identifiable assets 2,482 1,976 162
</TABLE>
U.S. Export Sales were $3,747 for the year ended June 30, 1999, $4,530
for the year ended June 30, 1998, and $5,209 for the year ended June 30, 1997.
(19) CONCURRENT CORPORATION AGREEMENTS
The Company entered into an agreement with Concurrent Corporation on
June 30, 1996, to provide certain administrative and personnel-related services
for the Company. The Company was billed monthly for these services which totaled
$461 for the year ended June 30, 1997. Effective June 30, 1997, the only service
provided was for rental of facilities. The facility costs paid to Concurrent
were $40 for the fiscal year ended June 30, 1998.
CYBERGUARD RESELLER AGREEMENT:
The Company and Concurrent entered into a reseller agreement effective
June 27, 1996, to act as a reseller of CyberGuard products. For each CyberGuard
product sold by Concurrent, Concurrent shall pay to CyberGuard a predetermined
fee. The initial term of the agreement was for a period of twelve months
beginning with the effective date of this agreement and may be renewed for two
additional terms of twelve months each with the written consent of both the
Company and Concurrent. During the current fiscal year, the Company elected to
extend the reseller agreement to Concurrent for an additional twelve-month
period.
Sales to Concurrent Computer Corporation and its subsidiaries were $60
for the year ended June 30, 1997, $174 for the year ended June 30, 1998 and $96
for the year ended June 30, 1999.
(20) SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
During 1998, the Company issued 590,429 shares of common stock for all
of the outstanding common stock of Arca and subsequently, retired these shares
in 1999. In addition, during 1999, 1998 and 1997, the Company paid cash for
interest of $217, $84 and $2, respectively.
F-19
<PAGE> 53
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(21) NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2 "Software Revenue Recognition" ("SOP 97-2"). This statement provides
guidance on applying generally accepted accounting principles in recognizing
revenues on software transactions. SOP 97-2 supercedes Statement of Position
91-1 "Software Revenue Recognition". SOP 97-2 is effective for transactions
entered into in fiscal years beginning after December 15, 1997. Earlier
application is encouraged as of the beginning of the fiscal year or interim
period for which financial statements or information have not been issued.
Retroactive application of the provisions of this statement is prohibited. The
Company believes that the adoption of SOP 97-2 did not have a significant
impact on its revenue recognition policy.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") was issued. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components,
and is effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS 130 at July 1, 1998 and has included the appropriate disclosures in
the Consolidated Statements of Changes in Stockholders Equity and Comprehensive
Income.
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way public business enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The Company
believes that the adoption of SFAS No. 131 did not have a significant impact on
its financial reporting.
(22) SUBSEQUENT EVENTS
On August 27, 1999, the Company increased convertible debt to
approximately $4,300,000 including repaying the December 1998 issuance. The
interest rate will be 11.5% per annum. The debt will be convertible into
approximately 4,300,000 shares of common stock at a conversion price equal to
$1.00 per share which represents a beneficial conversion feature. In addition,
the warrants from the December 17, 1998 transaction will be cancelled and the
Company will issue approximately 4,300,000 warrants to purchase the Company's
common stock at $2.00 per share.
F-20
<PAGE> 1
EXHIBIT 10.01
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
November 7, 1997 by and between CyberGuard Corporation, a Florida corporation
(the "Company"), and Tommy D. Steele ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain the
services of Employee, and Employee desires to be retained by the Company, on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment, as President and Chief Operating Officer of the Company upon
the terms of and subject to this Agreement.
2. TERM. The term (the "Initial Term") of this Agreement shall commence on
November 1, 1997, and shall continue for a period of one year in accordance with
the terms hereof and with an option for mutually agreed upon annual renewal
under substantially the same terms (the Initial Term together with any periods
during which this Agreement is extended are sometimes herein referred to as the
"Term").
3. DUTIES. During his employment hereunder, Employee will serve in such
capacity and with such duties as shall be assigned from time to time by the
Chief Executive Officer of the Company. Employee shall diligently perform such
duties and shall devote his entire business skill, time and effort to his
employment and his duties hereunder and shall not during the Term, directly or
indirectly, alone or as a member of a partnership, or as an officer, director,
employee or agent of any other person, firm or business organization engage in
any other business activities or pursuits requiring his personal service that
materially conflict with his duties hereunder or the diligent performance of
such duties.
4. COMPENSATION.
a. SALARY. During his employment hereunder, Employee shall be paid a
salary of $200,000 year, payable in equal installments not less than
monthly ("Base Salary"). The Employee's Base Salary shall be reviewed at
least annually by the Board of Directors or any Committee of the Board
delegated the authority to review executive compensation. A target ten per
cent (10%) increase in base salary compensation for subsequent years of the
contact shall be established.
b. OPTION AND BONUS. In addition to salary, the Employee shall be
entitled to participate in the Company's Stock Incentive Plan as adopted by
the Board of Directors of the Company on September 14, 1994, effective on
October 8, 1994, and amended from time to time (the "Stock Incentive Plan",
to be provided under separate cover). An option to purchase 175,000 shares
of CyberGuard Common Stock at a date of grant price as of November 10, 1997
is hereby granted. The option will vest 33% of the shares on November 1,
1998; 66% on
<PAGE> 2
November 1, 1999 and 100% of the shares on November 1, 2000. In
addition, Employee shall participate in a Management Bonus Program
established by the Company with an initial annual targeted bonus equal
to 50% of Employee's Base Salary (hereafter the "Management Bonus
Program"). Employee will first be considered for a bonus in connection
with the Company's fiscal year ending June 31, 1998, and the amount of
the bonus eligibility will not be prorated with the number of months
between Employee's start date and June 30, 1998 (that is, Employee's
first bonus will be calculated as though he had been with the Company
since at least June 30, 1997). The Company's Bonuses are payable on an
annual basis and, at the Company's discretion, may be paid as stock
grants or cash. An additional stock incentive bonus of 25,000 shares
will also be conditionally granted, the actual amount of shares
eligible for purchase will be dependent upon attainment of the same
criteria as the 50% salary incentive bonus. In addition, a "starting
bonus" shall be paid to Employee in Company restricted common stock,
with the number of shares to be an amount that is divisible by 100 and
is closest to $25,000.00 divided by the closing price of the Company's
common stock on the date first above written (such closing price to be
as reported by NASDAQ). This starting bonus shall be further described
in a restricted stock agreement between the Company and Employee that,
among other things, requires that Employee remain in the employ of the
Company until May 1, 1998, that the restricted shares be properly
registered with the Securities and Exchange Commission before they are
issued, and other matters that are customary for agreements of this
type.
c. INSURANCE. During his employment hereunder, Employee shall
be entitled to participate in all such health, life, disability and
other insurance programs, if any, that the Company may offer to other
key executive employees of the Company from time to time.
d. OTHER BENEFITS. During his employment hereunder, Employee
shall be entitled to all such other benefits, if any, that the Company
may offer to other key executive employees of the Company from time to
time.
e. VACATION. Employee shall be entitled to four weeks' vacation
leave (in addition to holidays) in each calendar year during the Term
in accordance with the Company's vacation policy for executives as it
may be in effect from time to time. Except with respect to vacation
time unused as the result of a request by the Company to postpone a
vacation, any unused vacation from one calendar year shall not
carry-over to any subsequent calendar year.
f. EXPENSE REIMBURSEMENT. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in the performance of his
duties hereunder in accordance with policies established by the
Company. Such expenses shall include, without limitation, reasonable
entertainment expenses, gasoline and toll expenses and cellular phone
use charges, if such charges are directly related to the business of
the Company.
g. RELOCATION EXPENSE REIMBURSEMENT. Employee shall, upon
submission of appropriate supporting documentation, be entitled to
reimbursement of relocation expense consistent with the CyberGuard
relocation policy (sent under separate cover). The Employee shall be
eligible for a Special Property - Buyout Program (as defined by the
Company's relocation agent - Armstrong Relocation; Atlanta, GA 30340).
Upon acceptance of this offer CyberGuard will contract for the
services of Armstrong Relocation Services, LLC to assist with the
pre-marketing and sale of Employee's home located at 1300 Chandler
Road, Huntsville, Alabama 35801. Employee's obligation to proceed
under this Employment Agreement will be subject to the Company
entering into a contract with Armstrong Relocation for the sale of
Employee's residence (if the Company and Armstrong fail to reach
agreement within three business days after the date that Employee
executes and delivers this Employment Agreement, Employee may: (i)
withdraw from this Employment Agreement, or (ii) extend the time
period that the Company may have
<PAGE> 3
to complete negotiations with Armstrong Relocation or an acceptable
substitute for Armstrong Relocation). The Armstrong Consultant assigned to
Employee is Jeannie Reeve (1-800-925-0523). Armstrong Relocation, on behalf
of the Company, will extend an offer ("Offer") to purchase the residence in
the amount of $525,000.00, which is the average of the two appraisals
previously received. Armstrong will forward to Employee an offer packet
that will include a contract for sale ("Contract of Sale") and any
additionally required legal documents (the "Offer Materials"). The Offer
will remain in effect for a period of 90 days, after which time it will
expire at midnight on the 91st day from the date of Company's first Offer.
As condition precedent to accepting the Company's Offer, Employee must have
the residence listed and marketed for 90 days in an attempt to sell the
residence to a third party purchaser and must otherwise comply with all the
terms and conditions of the Offer as set forth in the Offer Materials.
If no valid offer to purchase has been received from a third party
purchaser, the Employee must accept the Company's Offer of $525,000.00 by
midnight on the 91st day after the Company has extended the Offer to
purchase or the Offer will be withdrawn.
If a written offer to purchase Employee's residence for more than $525,000,
executed by the proposed purchaser, is received from a third party
purchaser, and if Armstrong approves the offer from the third party,
Armstrong will amend the terms of the Contract of Sale to reflect the net
cash value and other pertinent terms of the offer from the third party
purchaser. All necessary qualifications and approvals will be the
responsibility of Armstrong prior to the Contract of Sale being amended.
Employee shall not sign any offer from a third party purchaser; instead,
Employee shall provide a copy of the third party contract of sale executed
by the proposed purchaser to Armstrong Relocation for validation of the
third party offer.
5. GROUNDS FOR TERMINATION. The Board of Directors of the Company may
terminate this Agreement for Cause. As used herein, "Cause" shall mean any of
the following: (i) an act of willful misconduct or gross negligence by Employee
in the performance of his material duties or obligations to the Company; if such
act is capable of cure, Employee shall be given written notice and such act
shall not be deemed a basis for Cause if cured within 60 days after written
notice is received by Employee specifying the alleged failure in reasonable
detail (and during such 60 day period, Employee shall continue to be employed by
the Company at full pay), or (ii) conviction of Employee of a felony involving
moral turpitude or (iii) a material act of dishonesty or breach of trust on the
part of Employee resulting or intended to result directly or indirectly in
personal gain or enrichment at the expense of the Company.
6. TERMINATION BY EMPLOYEE. Employee may terminate this Agreement with Good
Reason. In the event of termination by Employee for Good Reason, Employee shall
be entitled to the benefits of Paragraph 7b. of this Agreement. "Good Reason"
means:
a. A material breach of the provisions of this Agreement by the
Company (except those set forth in Paragraph 4a.) and Employee provides at
least 15 days' prior written notice to the Company of the existence of such
breach and his intention to terminate this Agreement (no such termination
shall be effective if such breach is cured during such period); or
b. The failure of the Company to comply with the provisions of
Paragraph 4a. or to pay any amounts due under the Management Bonus Program
provisions of Paragraph 4b. for an uninterrupted 10 day period.
<PAGE> 4
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in
Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7a. shall apply. These same
provisions shall apply if Employee terminates his employment without Good
Reason as described in Paragraph 6.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company
shall pay in a lump sum to Employee at the time of Employee's
termination such amount of compensation due Employee for services
rendered to the Company, as well as compensation for unused vacation
time and earned bonus, as has accrued but remains unpaid. Any and all
other rights granted to Employee under this Agreement shall terminate
as of the date of termination.
ii. NON-COMPETITION/NON-SOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period of
up to one year following the date of termination, so long as the
Company: (x) provides a written notice to Employee within 5 business
days after Employee's termination that the Company wishes to exercise
its right to require that Employee not compete and not solicit in
accordance with Paragraphs 14 and 15 hereof; and (y) Company thereafter
pays to Employee in periodic installments, without interest, in
accordance with the regular salary payment practices of the Company an
amount equal to (.1) the amount of Employee's annual Base Salary as in
effect immediately prior to Employee's date of termination, multiplied
by (.2) the number of months that the Company is requiring the
non-competition and non-solicitation covenants to remain in place,
divided by 12. The first such installment of Base Salary and target
bonus shall be paid on or before the delivery of the notice described
in the prior sentence of this Paragraph 7a(ii). The non-competition and
non-solicitation provisions of this Agreement shall no longer apply to
Employee if the Company fails to pay the amounts required under this
Section 7a(ii) for an uninterrupted 10-day period and such failure is
not cured with 5 days after written notice of such failure is delivered
to the Company.
b. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for any reason other than for
Cause as provided in Paragraph 5 and other than as a consequence of
Employee's death, disability, or normal retirement under the Company's
retirement plans and practices, then the following provisions apply. These
same provisions shall apply if Employee terminates his employment with Good
Reason as described in Paragraph 6. In addition to the amounts stated
below, Employee shall be paid any other amounts by the Company to which he
is entitled.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. On or before
Employee's last day of employment with the Company, the Company shall
pay the first of twelve equal monthly payments to Employee as
compensation for services rendered to the Company an amount equal to
the amount of Employee's annual Base Salary and the greater of (x) the
target bonus under the Management Bonus Program as in effect
immediately prior to his date of termination or (y) the amount of the
bonus under the Management Bonus Program to which he is entitled but
which remains unpaid. At the election of the Company, the cash amount
referred to in this Paragraph 7b.i. will be paid to Employee in
periodic installments, without interest, in accordance with the
regular salary payment practices of the Company, with the first such
installment to be paid on or before Employee's last day of employment
with the Company, and no interest shall be paid with respect to any
amount not paid on the Employee's date of termination.
ii. VESTING OF OPTIONS AND RIGHTS. Notwithstanding the vesting
period provided for in the Stock Incentive Plan and any related stock
option agreements between the Company and Employee for stock options
("options") and stock appreciation rights ("rights") granted Employee
by the
<PAGE> 5
Company, all options and stock appreciation rights that were
exercisable at the date of termination or within 6 months thereafter
shall be immediately exercisable upon termination of employment. In
addition, Employee will have the right to exercise all such options
and rights for the shorter of (a) three months following his
termination of employment or (b) with respect to each option, the
remainder of the period of exercisability under the terms of the
appropriate documents that grant such options.
iii. BENEFIT PLAN COVERAGE. The Company shall maintain in full
force and effect for Employee and his dependents for six months after
the date of termination, all life, health, accident, and disability
benefit plans and other similar employee benefit plans, programs and
arrangements in which Employee or his dependents were entitled to
participate immediately prior to the date of termination, in such
amounts as were in effect immediately prior to the date of
termination, provided that such continued participation is possible
under the general terms and provisions of such benefit plans, programs
and arrangements.
In the event that participation in any benefit plan, program or
arrangement described above is barred, or any such benefit plan,
program or arrangement is discontinued or the benefits thereunder
materially reduced, the Company shall arrange to provide Employee and
his dependents for three months after the date of termination with
benefits substantially similar to those that they were entitled to
receive under such benefit plans, programs and arrangements
immediately prior to the date of termination. Notwithstanding any time
period for continued benefits stated in this Paragraph 7b.iii., all
benefits in this Paragraph 7b.iii. will terminate on the date that
Employee becomes an employee of another employer and eligible to
participate in the employee benefit plans of such other employer. To
the extent that Employee was required to contribute amounts for the
benefits described in this Paragraph 7b.iii. prior to his termination,
he shall continue to contribute such amounts for such time as these
benefits continue in effect after termination.
iv. OTHER COMPENSATION. Any awards previously made to Employee
under any of the Company's compensation plans or programs and not
previously paid shall immediately vest on the date of his termination
and shall be paid on that date and included as compensation in the
year paid.
v. SAVINGS AND OTHER PLANS. Except as otherwise more specifically
provided herein or under the terms of the respective plans relating to
termination of employment, Employee's active participation in any
applicable savings, retirement, profit sharing or supplemental
employee retirement plans or any deferred compensation or similar plan
of the Company or any of its subsidiaries shall continue only through
the last day of his employment. All other provisions, including any
distribution and/or vested rights under such plans, shall be governed
by the terms of those respective plans.
vi. NON-COMPETITION/NON-SOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall continue, beyond the time periods set forth
in such paragraphs, to apply with respect to Employee for six (6)
months following the date of termination, and at the end of such six
(6) month period, the Company shall have the right to extend the time
period of non-competition and non-solicitation for an additional six
(6) months by giving written notice to Employee of such extension and
paying to Employee an amount equal to one-half the amount of
Employee's annual Base Salary and one-half the target bonus under the
Management Bonus Program as in effect immediately prior to his date of
termination. At the election of the Company, the cash amount referred
to in the prior sentence of this Paragraph 7b.vi. may be paid to
Employee in periodic installments in accordance with the regular
salary payment practices of the Company, with the first such
installment to be paid on or before the delivery of the notice
described in the first sentence of this Paragraph 7b.vi., and no
interest shall be paid with respect to any amount paid in
installments. The non-competition and
<PAGE> 6
non-solicitation provisions of this Agreement shall no longer apply to
Employee if the Company fails to pay the amounts required under the
provisions of Paragraph 7b.i. or the first two sentences of this
Paragraph 7b.vi. for an uninterrupted 10-day period and such failure
is not cured within 5 days after written notice of such failure is
delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior to or more than one year after the
occurrence of a Change of Control (as defined in Paragraph 8c.). From the
occurrence of any Change of Control until the first anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of
this Paragraph 7, EXCEPT THAT in the event that Employee's employment is
terminated by Employee after a Change of Control without Good Reason, then
the provisions of Paragraph 8 shall not apply and the provisions of
Paragraph 7a. shall apply. Termination upon death, disability and
retirement are covered by Paragraphs 9, 10, and 11, respectively.
d. In the event that (i) the Company does not offer to extend this
Employment Agreement for at least two additional one-year Terms after the
expiration of the Initial Term (that is, if this Agreement terminates
because the Company has not proposed an extension or extensions of the Term
to at least approximately October 31, 2000 (the "Second-Year and Third-Year
Term")), and (ii) the Company does not have grounds to terminate this
Agreement for Cause, then such termination of this Agreement shall be
considered a termination by the Company without Cause, with Employee
receiving all the benefits to be accorded to him under paragraph 7.b.
hereof. In the event that (.1) the Company does not offer to extend this
Employment Agreement at the end of any Term after the Second-Year and
Third-Year Term, and (.2) the Company does not have grounds to terminate
this Agreement for Cause, then upon such termination of this Agreement,
Employee shall receive all the benefits to be accorded to him under
paragraph 7.b. hereof, except that the amounts of salary and bonus to be
paid Employee shall be one-half (1/2) of the amounts described in paragraph
7.b.i.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANGE OF CONTROL.
a. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. In the event
Employee's employment with the Company is terminated within one year
following the occurrence of a Change of Control (other than as a
consequence of his death or disability, or of his normal retirement under
the Company's retirement plans and practices) either (i) by the Company for
any reason whatsoever or (ii) by Employee with Good Reason as provided in
Paragraph 6, then Employee shall be entitled to receive from the Company,
the following:
i. BASE SALARY. An amount equal to the Employee's annual Base
Salary as in effect at the date of termination shall be paid on the
date of termination;
ii. TARGET BONUS. An amount equal to the Employee's target bonus
under the Management Bonus Program for the fiscal year in which the
date of termination occurs shall be paid on the date of termination;
and
iii. OTHER BENEFITS. All benefits under Paragraphs 7b.i, 7.b.ii.,
7b.iii. 7b.iv. and 7b.v. shall be extended to Employee as described in
such paragraphs except that all options and rights shall be
immediately exercisable and the period for exercise of options and
rights described in the last sentence of Paragraph 7b.ii shall be
one-half year.
b. NON-COMPETITION/NON-SOLICITATION PERIOD. In the event of a
termination under the circumstances described in Paragraph 8a., the
provisions of Paragraphs 14 and 15 shall be without force and effect and
shall not apply to Employee.
<PAGE> 7
c. For purposes of this Agreement, the term "Change of Control" shall
mean any of the events described in paragraphs 8.c.i. through 8.c.iv.
below:
i. The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
Section 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) (any of the foregoing
described in this Paragraph hereafter a "Person") of 30% or more of
either (a) the then outstanding shares of Capital Stock of the Company
(the "Outstanding Capital Stock") or (b) the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Voting Securities"),
PROVIDED, HOWEVER, that any acquisition by (x) the Company or any of
its subsidiaries, or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any of its subsidiaries or
(y) any Person that is eligible, pursuant to Rule 13d-1(b) under the
Exchange Act, to file a statement on Schedule 13G with respect to its
beneficial ownership of Voting Securities, whether or not such Person
shall have filed a statement on Schedule 13G, unless such Person shall
have filed a statement on Schedule 13D with respect to beneficial
ownership of 30% or more of the Voting Securities or (z) any
corporation with respect to which, following such acquisition, more
than 60% of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock and Voting Securities immediately prior to
such acquisition in substantially the same proportion as their
ownership, immediately prior to such acquisition, of the Outstanding
Capital Stock and Voting Securities, as the case may be, shall not
constitute a Change of Control for purposes of this paragraph 8.c.i.;
or
ii. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a
director subsequent to the date hereof whose election or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of
Regulation 14A, or any successor section, promulgated under the
Exchange Act); or
iii. Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in
each case, with respect to which all or substantially all holders of
the Outstanding Capital Stock and Voting Securities immediately prior
to such Business Combination do not, following such Business
Combination, beneficially own, directly or indirectly, more than 60%
of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company or
(b) a sale or other disposition of all or substantially all of the
assets of the Company other than to a corporation with respect to
which, following such sale or disposition, more than 60% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors is then owned
beneficially, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the
<PAGE> 8
Outstanding Capital Stock and Voting Securities immediately prior to
such sale or disposition in substantially the same proportion as their
ownership of the Outstanding Capital Stock and Voting Securities, as
the case may be, immediately prior to such sale or disposition.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while employed by
the Company both prior to termination of employment and during the effective
term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have accrued
but remain unpaid and a prorated amount of targeted bonus under the Company's
Management Bonus Program through the month in which his death occurs, plus three
additional months of the fixed salary and targeted bonus. All benefits under
7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate as described in
such paragraphs. In addition, Employee's eligible dependents shall receive
continued benefit plan coverage under Paragraph 7b.iii. for three months from
the date of Employee's death.
10. TERMINATION BY DISABILITY. This Agreement may be terminated by the
Company for disability. In such event, all Employee's rights under this
Agreement shall terminate with the payment of such amounts of annual Base Salary
as have accrued but remain unpaid as of thirtieth (30th) day after such notice
is given EXCEPT that all benefits under Paragraphs 7b.ii, 7b.iii, 7b.iv. and
7b.v. shall be extended to Employee as described in such paragraphs. In
addition, the non-competition and non-solicitation provisions of Paragraphs 14
and 15 shall continue to apply to Employee for a period of one year from the
date of termination.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an officer of
the Company on a substantially full-time basis for six (6) consecutive
months; and
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
11. (Omitted Intentionally)
12. (Omitted Intentionally)
13. (Omitted Intentionally)
14. NON-COMPETITION.
a. At all times during Employee's employment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner,
operator, shareholder, director, partner, creditor, consultant, agent or
any capacity whatsoever that manufactures products designed to compete
directly with products of the Company or markets such products anywhere in
the world where the Company (i) is engaged in business or (ii) has
evidenced an intention of engaging in business. Employee acknowledges that
he has read the foregoing and agrees that the nature of the geographical
restrictions are reasonable given the international nature of the Company's
business.
In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions which
are reasonable.
<PAGE> 9
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to be a
competitor of the Company as described in the previous sentence
("Competitor"), so long as (i) the Competitor has had annual revenues of at
least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition
with the Company does not exceed 50% of its total revenues and (iii)
Employee's responsibilities are solely for divisions or subsidiaries of the
Competitor that do not compete with the Company.
15. NON-SOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times during
Employee's employment hereunder, or for such additional periods as may otherwise
be set forth in this Agreement in reference to this Paragraph 15, Employee shall
not, directly or indirectly, for himself or for any other person, firm,
corporation, partnership, association or other entity (a) attempt to employ,
employ or enter into any contractual arrangement with any employee or former
employee of the Company, its affiliates, subsidiaries or predecessors in
interest, unless such employee or former employee has not been employed by the
Company, its affiliates, subsidiaries or predecessors in interest during the
twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
matters related to or competitive with the business of the Company.
16. CONFIDENTIALITY.
a. NONDISCLOSURE. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity any proprietary or confidential information
relating to the Company or any information concerning the Company's
financial condition or prospects, the Company's customers, the design,
development, manufacture, marketing or sale of the Company's products or
the Company's methods of operating its business (collectively "Confidential
Information"). Confidential Information shall not include information
which, at the time of disclosure, is known or available to the general
public by publication or otherwise through no act or failure to act on the
part of Employee.
b. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and
all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the
foregoing materials have in fact been returned or destroyed.
c. BOOKS AND RECORDS. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company upon termination of Employee's employment hereunder or upon the
Company's request at any time.
17. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately or
reasonably compensated at law. Therefore, Employee agrees that the Company shall
be entitled, if any such breach shall occur or be threatened or attempted, to a
decree of specific performance and to a temporary and permanent injunction,
without the posting of a bond, enjoining
<PAGE> 10
and restraining such breach by Employee or his agents, either directly or
indirectly, and that such right to injunction shall be cumulative to whatever
other remedies for actual damages to which the Company is entitled. Employee
further agrees that the Company may set off against or recoup from any amounts
due under this Agreement to the extent of any losses incurred by the Company as
a result of any breach by Employee of the provisions of Paragraphs 14, 15 or 16
hereof.
18. SEVERABILITY. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
19. SUCCESSORS. This Agreement shall be binding upon Employee and inure to
his and his estate's benefit, and shall be binding upon and inure to the benefit
of the Company and any permitted successor of the Company. Neither this
Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the Company.
The foregoing sentence shall not be deemed to have any effect upon the rights of
Employee upon a Change of Control.
20. CONTROLLING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
21. NOTICES. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2000 West Commercial Blvd.
Suite 200
Fort Lauderdale, Florida 33309
Attention: President
To Employee: Tommy Steele
(address to be provided by Mr. Steele to
Company's Human Resources Department)
22. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
23. WAIVER. A waiver by any party of any of the terms and conditions hereof
shall not be construed as a general waiver by such party.
24. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
25. INTERPRETATION. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties of
Employee or the Company upon Employee's termination, the rights and duties set
forth in this Agreement shall control.
<PAGE> 11
26. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason. It
is the intention of this Agreement that if the Company terminates Employee other
than for Cause (and other than as a consequence of Employee's death, disability
or normal retirement) or if Employee terminates his employment with Good Reason,
then the payments and other benefits set forth in Paragraph 7b. shall constitute
the sole and exclusive remedies of Employee.
27. SURVIVAL. Notwithstanding the provisions of Paragraph 2, the provisions
of Paragraphs 14, 15, and 16 shall survive the expiration or early termination
of this Agreement.
IN WITNESS WHEREOF, THIS EMPLOYMENT AGREEMENT HAS BEEN EXECUTED BY THE
PARTIES AS OF THE DATE FIRST ABOVE WRITTEN.
COMPANY:
CYBERGUARD CORPORATION
BY: ROBERT L. CARBERRY
ITS: CEO
EMPLOYEE:
TOMMY D. STEELE
<PAGE> 1
EXHIBIT 10.02
TERMINATION AGREEMENT
This Termination Agreement ("Agreement") is entered into as of May 17, 1999 by
and between CyberGuard Corporation ("CyberGuard" or the "Company") and Tommy D.
Steele ("Steele").
WHEREAS, Steele resigned effective the date hereof, as President, Chief
Operating Officer and Director of CyberGuard and from any other officer or
director position that he has held with CyberGuard or its affiliates; and
WHEREAS, Steele and CyberGuard are parties to a certain Employment
Agreement between Steele and CyberGuard, originally dated November 7, 1997, and
amended from time to time thereafter ("Employment Agreement"); and
WHEREAS, CyberGuard and Steele desire to provide for the termination of the
Employment Agreement and to provide for certain terms about Steele's termination
in this Agreement; and
NOW THEREFORE, CyberGuard and Steele agree as follows:
1. SALARY AND BONUS. Steele shall be paid as follows:
a. CyberGuard shall pay Steele an aggregate pre-tax amount of
$245,000.00, in equal payments over the next 52 weeks, to be paid in
accordance with the regular payroll practices of the Company. Under current
Company payroll practices, this would result in Steele being paid a gross
amount of $9,423.08 (less withholding) every second week. The aggregate
amount of $245,000.00 represents Steele's base salary ($220,000.00 per year
as of May 14, 1999) plus $25,000.00 (representing his bonus for the fiscal
quarter ending June 30, 1999).
b. Steele's bonus for the period ended March 31, 1999, in the amount
of $25,000.00 has been earned but not yet paid. This $25,000.00 will be
paid by the Company in a lump sum as soon as possible (taking into account
the Company's cash flow position), but not later than upon the Company's
collection of a pending receivable from a financial institution customer
that is in the approximate amount of $1.4 million.
2. STOCK OPTIONS. The parties acknowledge that, from time to time, Steele
has been granted options to acquire, in the aggregate, 300,000 shares of
CyberGuard's Common Stock ("Options"). The Options have been evidenced by
various agreements that have been entered into between Steele and CyberGuard,
and by CyberGuard's Stock Option Plans. The parties also acknowledge that, other
than the Options, CyberGuard has granted Steele no other options, warrants,
restricted stock or rights of any kind to acquire capital stock of CyberGuard
(except for a restricted stock grant on which the restriction previously was
lifted and the 3,600 shares representing such grant have not already been issued
to Steele). The parties agree that all the Options shall become immediately
exercisable and shall remain exercisable until May 17, 2001.
3. STATUS. Steele hereby resigns effective the date hereof, as President,
Chief Operating Officer and Director of CyberGuard and from any other officer or
director position that he has held with CyberGuard or its affiliates (including,
without limitation, as director of CyberGuard Europe Ltd. and of CYBG
Consultant, Inc.). Steele shall continue to be considered an active employee of
the Company, which status shall terminate upon the sooner to occur of: (i)
November 19, 1999;
<PAGE> 2
or (ii) the day on which Steele becomes a full-time employee of another business
enterprise. While Steele continues as an active employee of the Company, his
position with the Company shall be that of Special Assistant to the Chief
Executive Officer, and his duties shall be as mutually agreed between Steele and
the Chief Executive Officer. Once Steele terminates as an active employee of the
Company, his status until May 16, 2000 shall be that of a severed employee, and
thereafter Steele shall have no further relationship with the Company.
4. OTHER BENEFITS.
a. MEDICAL AND DENTAL INSURANCE. Steele has informed CyberGuard that
he intends to enroll in CyberGuard's medical and dental insurance plan
during the next open enrollment period, beginning on June 1 and ending on
June 30, 1999. If he so enrolls, CyberGuard will pay Steele's premiums (up
to the amount that is paid for employees consistent with past practices)
for coverage under such insurance from the inception of the coverage (July
1, 1999) through the month of November, 1999, at which time, if Steele
wishes to continue such coverage, he will thereafter pay such premiums.
This Agreement is not intended to cover the Company's responsibilities to
give Steele COBRA notice, which notice under current law would be provided
to him after he is no longer an active employee or severed employee of the
Company.
b. LIFE AND AD&D INSURANCE. The coverage for life and AD&D insurance
that is currently in effect for Steele will remain in place until the
sooner to occur of: (i) Steele's status as an active employee of the
Company ends (as described in section 3 above); or (ii) the insurance
policies that provide for life and AD&D coverage are no longer in effect or
no longer cover an employee of Steele's status.
c. 401-K PLAN. Steele hereby agrees not to make any further
contributions to the Company 401-k Plan from the date of this Agreement,
and to sign an appropriate letter addressed to the 401-k Plan
administrators directing that no further payments be accepted on his
behalf. Steele's vesting in the 401-k plan shall be determined as of the
day his status as an active employee of the Company ends (as described in
section 3 above), unless the 401-k Plan or ERISA requires otherwise.
5. NO OTHER RIGHTS TO COMPENSATION.
a. CASH COMPENSATION. The compensation and benefits set forth in this
Agreement are intended to be the only compensation and benefits that
CyberGuard is required to pay Steele. Steele hereby acknowledges that once
the payments required of CyberGuard under section 1 hereof have been paid
in full, Steele will have been paid in full all amounts due or owing to him
in the nature of salary, bonus, severance, vacation pay, personal leave,
sick leave or other compensation of any kind whatsoever, for all services
rendered to CyberGuard as employee, consultant or in any other capacity
whatsoever.
b. BENEFITS. With respect to benefits other than cash compensation,
Steele hereby agrees that once CyberGuard has fulfilled its obligations
described in sections 2, 4 and 6 hereof, no other employee welfare benefits
or benefits of any kind will be due or owing to Steele from CyberGuard.
This Agreement is intended to be a novation of CyberGuard's obligations to
Steele rather than an accord and satisfaction.
c. EXPENSE REIMBURSEMENT. Steele shall continue to be entitled to be
reimbursed for reasonable expenses incurred on behalf of the Company in his
prior capacity as an officer of the Company and in his continuing capacity
as an active employee of the Company, upon submission and Company approval
of appropriate expense vouchers.
6. INDEMNIFICATION. CyberGuard and Steele agree that this Agreement shall
not in any way affect or impair Steele's right to indemnification by CyberGuard
to the extent provided for in
<PAGE> 3
Section 6.4 of the Bylaws of CyberGuard and Florida Statute Section 607.0850.
Subject to CyberGuard's Bylaws and Section 607.0850 of the Florida Statutes, the
right to indemnification includes payment for Steele's expenses actually and
reasonably incurred in the multiple related actions brought in the United States
District Court, Southern District of Florida, which are now consolidated in an
action entitled STEPHEN CHENEY, ET AL. V. CYBERGUARD CORPORATION, ROBERT L.
CARBERRY AND WILLIAM D. MURRAY, Case No. 98-6879-CIV-Gold and in connection with
any future lawsuits or regulatory or self-regulatory investigations concerning
Steele's employment with CyberGuard. Steele hereby agrees to promptly repay any
and all expenses paid by CyberGuard if he is ultimately found not to be entitled
to indemnification by CyberGuard.
7. CERTAIN COMMUNICATIONS. CyberGuard and Steele hereby each agree that
neither shall say, write or communicate in any manner to any person or entity
anything substantially derogatory about the other, regardless of the truth or
falsity of the information. Of course, nothing in this section 7 shall be
construed to prevent either party from testifying truthfully under oath if
compelled to do so by court order or other legal compulsion. In this connection,
for purposes hereof, "CyberGuard" means and includes CyberGuard Corporation, and
its current officers, directors, employees, affiliates and representatives.
8. COMPANY EQUIPMENT. Steele acknowledges that he has in his possession
certain property that is owned by the Company. This property includes a laptop
computer, a company cellular telephone, one or more Company credit cards, and an
access card for electronic access to the Company's headquarters. Steele agrees
that he will return to CyberGuard, promptly at its request, any or all Company
property that is in his possession.
9. NON-COMPETITION. Steele agrees that until May 17, 2000, he shall not,
directly or indirectly, be employed by, act as a consultant or contractor for,
be involved in a venture with, or otherwise engage in any business enterprise or
employment, with any of the following companies: Axent Technologies, Inc., Check
Point Software Technologies, Inc, Fore Systems, Inc., Network Associates, Inc.,
Secure Computing Corp., or Network-1 Security Solutions, Inc. In the event that
these geographical or temporal restrictions are judicially determined to be
unreasonable, the parties agree that these restrictions shall be judicially
reformed to the maximum restrictions which are reasonable.
10. NON-SOLICITATION. Without the prior written consent of the Company,
Steele shall not, directly or indirectly, for himself or for any other person,
firm, corporation, partnership, association or other entity (a) attempt to
employ, employ or enter into any contractual arrangement with any employee or
former employee of the Company, its affiliates, subsidiaries or predecessors in
interest, unless such employee or former employee has not been employed by the
Company, its affiliates, subsidiaries or predecessors in interest during the 120
days prior to Steele's attempt to employ him, or (b) call on or solicit any of
the actual or currently targeted prospective customers of the Company for the
purpose of offering any product or service that is in direct competition with
the products or services of the Company.
11. CONFIDENTIALITY; TERMINATION OF THE EMPLOYMENT AGREEMENT. Paragraph 16
of the Employment Agreement (governing confidential information) shall remain in
full force and effect for two years from the date hereof. Otherwise, in all
other respects, the Employment Agreement is hereby terminated and shall be of no
further force or effect.
12. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Steele acknowledges that a
breach of any of the provisions of Sections 9, 10 or 11 hereof would result in
immediate and irreparable injury to the Company which cannot be adequately or
reasonably compensated at law. Therefore, Steele agrees that the Company shall
be entitled, if any such breach shall occur or be threatened or attempted, to a
decree of specific performance and to a temporary and permanent injunction,
<PAGE> 4
without the posting of a bond, enjoining and restraining such breach by Steele
or his agents, either directly or indirectly, and that such right to injunction
shall be cumulative to whatever other remedies for actual damages to which the
Company is entitled. Steele further agrees that the Company may set off against
or recoup from any amounts due under this Agreement to the extent of any losses
incurred by the Company as a result of any breach by Steele of the provisions of
Sections 9, 10 or 11 hereof.
13. MISCELLANEOUS. This Agreement constitutes the entire agreement between
the parties hereto on the subject matter hereof and may not be modified without
the written agreement of both parties hereto. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Florida. A waiver
by any party of any of the terms and conditions hereof shall not be construed as
a general waiver by such party. Words such as "hereof", "hereunder", "herein"
and words of similar meaning shall refer to this Agreement as a whole and not to
only a specific section or paragraph of this Agreement. This Agreement shall
inure to the benefit of, and be binding upon, the parties hereto, their heirs,
successors and assigns; provided, however that Steele may not assign his rights
or duties hereunder except by operation of the laws of descent and distribution,
and CyberGuard may not assign its rights or duties hereunder except to a
business enterprise that acquires CyberGuard or substantially all its assets (by
merger, consolidation, share purchase or exchange, asset acquisition or other
corporate transaction).
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the date first above written.
CYBERGUARD CORPORATION TOMMY D. STEELE
By:
---------------------------------- ----------------------------------
Name:
--------------------------------
Title:
-------------------------------
<PAGE> 1
EXHIBIT 10.03
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
March 11, 1999 by and between CyberGuard Corporation, a Florida corporation (the
"Company"), and David R. Proctor (the "Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain the
services of Employee, and Employee desires to be retained by the Company, on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. During his employment hereunder, Employee will serve as the
Chief Executive Officer and Chairman of the Board of Directors of the Company.
2. TERM. The term ("Term") of this Agreement shall commence on March 15,
1999, and shall continue until otherwise terminated in accordance with the terms
of this Agreement.
3. DUTIES. Employee shall have general and active charge of the business
and affairs of the Company and, in such capacity, shall have responsibility for
the day-to-day operations of the Company, subject to the authority and control
of the Board of Directors of the Company. Throughout the term of employment
hereunder, the Employee shall devote his business time and attention to the
affairs of the Company as appropriate to his duties and responsibilities
hereunder; provided, however, that the Board of Directors acknowledges that
Employee is a resident of Austin TX, and it is not contemplated or expected that
Employee will change his principal residence from Austin TX to South Florida.
Furthermore, nothing in this Agreement shall preclude the Employee from devoting
reasonable periods required for serving as a director or member of any advisory
committee of other business organizations involving no conflict of interest with
the interests of the Company or from engaging in charitable and community
activities, or from managing his personal investments.
4. COMPENSATION.
a. SALARY. During his employment hereunder, Employee shall be paid a
base salary of $182,00.00 per year, payable in equal installments not less
than monthly ("Base Salary"). The Employee's Base Salary shall be reviewed
at least annually by the Board of Directors or any Committee of the Board
delegated the authority to review executive compensation, but may not be
reduced during the Term.
b. OPTION AND BONUS. In addition to salary, Employee is hereby awarded
an option to acquire 375,000 shares ("Option Shares") of Company common
stock under the Company's Employee Stock Option Plan (the "Stock Option
Plan"), at an exercise price of $1.25 per share. The Option Shares shall be
exercisable as follows: the first 1/2 of the Option Shares shall be
exercisable on the date hereof, and the remainder shall become exercisable
one year from today. The Option Shares shall
<PAGE> 2
become immediately exercisable upon the occurrence of certain events
described in sections 7 and 8 of this Agreement. An agreement shall be
prepared providing for other terms and conditions regarding the Option
Shares that are typical of other executives option agreements, and this
option agreement shall also provide for anti-dilution in the event that
shares of Company stock are issued in settlement of any lawsuit pending
against the Company. In addition, Employee shall participate in the
management bonus program established by the Company with an initial annual
targeted bonus equal to 100% of Employee's Base Salary (hereafter the
"Management Bonus Program").
c. INSURANCE. During his employment hereunder, Employee shall be
entitled to participate in all such health, life, disability and other
insurance programs, if any, that the Company may offer to other key
executive employees of the Company from time to time.
d. OTHER BENEFITS. During his employment here under, Employee shall be
entitled to all such other benefits, if any, that the Company may offer to
other key executive employees of the Company from time to time.
e. VACATION. Employee shall be entitled to four weeks' vacation leave
(in addition to holidays) in each calendar year during the Term; however,
Employee may take only two weeks' vacation leave within any calendar month.
Except with respect to vacation time unused as the result of a request by
the Company to postpone a vacation, and except for any Company policy that
is more favorable to Employee, any unused vacation from one calendar year
shall not carry-over to any subsequent calendar year.
f. EXPENSE REIMBURSEMENT. As a condition to employees agreement to
enter into this Agreement, the Company has agreed to reimburse Employee for
all his expenses in connection with his travel from Austin, TX to Fort
Lauderdale FL, as well as his expenses in connection with his living away
from home in Fort Lauderdale, FL. If Employee believes that it is in the
best interests of the Company to work over a weekend, he shall have the
option to have his spouse fly to Fort Lauderdale at Company expense. In
addition, Employee shall, upon submission of appropriate supporting
documentation, be entitled to reimbursement of reasonable out-of-pocket
expenses incurred in the performance of his duties hereunder in accordance
with policies established by the Company. Such expenses shall include,
without limitation, reasonable entertainment expenses, gasoline and toll
expenses and cellular phone use charges, if such charges are directly
related to the business of the Company.
5. GROUNDS FOR TERMINATION. The Board of Directors of the Company may
terminate this Agreement for Cause. As used herein, "Cause" shall mean any of
the following: (i) an act of willful misconduct or gross negligence by Employee
in the performance of his material duties or obligations to the Company; if such
act is capable of cure, Employee shall be given written notice and such act
shall not be deemed a basis for Cause if cured within 60 days after written
notice is received by Employee specifying the alleged failure in reasonable
detail (and during such 60 day period, Employee shall continue to be employed by
the Company at full pay), or (ii) conviction of Employee of a felony involving
moral turpitude or (iii) a material act of dishonesty or breach of trust on the
part of Employee resulting or intended to result directly or indirectly in
personal gain or enrichment at the expense of the Company.
6. TERMINATION BY EMPLOYEE. Employee may terminate this Agreement with Good
Reason. In the event of termination by Employee for Good Reason, Employee shall
<PAGE> 3
be entitled to the benefits of Paragraph 7b. of this Agreement. "Good Reason"
means:
a. The Company materially breaches the provisions of this Agreement
(except those set forth in Paragraph 4a.) and Employee provides at least 15
days' prior written notice to the Company of the existence of such breach
and his intention to terminate this Agreement (no such termination shall be
effective if such breach is cured during such period); or
b. The Company fails to comply with the provisions of Paragraph 4a. or
to pay any amounts due under the Management Bonus Program provisions of
Paragraph 4b. for an uninterrupted 10 day period; or
c. the Company demotes or otherwise elects or appoints the Employee to
lesser offices or responsibilities than set forth in Section 1 hereof, or
fails to re-elect or appoint him to such positions, or the Company causes a
material change in the nature or scope of the authorities, powers,
functions, duties or responsibilities attached to the Employee's positions
as described in Section 3; or
d. The Company decreases Employee's compensation (salary or percentage
of bonus opportunity); or
e. The Company materially reduces Employee's welfare benefits,
including without limitation: paid vacation; paid sick time; paid legal and
float holidays; medical, dental and cancer insurance, hospital indemnity,
Flexible Spending, Short- and Long-term Disability insurance, Basic Group
Term Life/Accidental Death & Dismemberment insurance, Supplemental
Life/AD&D insurance, Spouse Life/Spouse AD&D insurance, Dependent Life
insurance, Vision Plan, 401k plan, Employee Assistance Program; education
reimbursement program (collectively, the "Benefits"); provided, however,
that any change in Benefits that is made by the Company that applies to its
employees generally, shall not be considered as giving rise to "Good
Reason"; or
f. The Employee is required, without his prior written consent, to
relocate his office more than seventy-five miles from the office Employee
currently reports to.
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in
Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7a. shall apply. These same
provisions shall apply if Employee terminates his employment without Good
Reason as described in Paragraph 6.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company
shall pay in a lump sum to Employee at the time of Employee's
termination such amount of compensation due Employee for services
rendered to the Company, as well as compensation for unused vacation
time and earned bonus, as has accrued but remains unpaid. Any and all
other rights granted to Employee under this Agreement shall terminate
as of the date of termination.
ii. NON-COMPETITION/NON-SOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period of
up to six months following the date of termination, so long as the
<PAGE> 4
Company: (x) provides a written notice to Employee within 5 business
days after Employee's termination that the Company wishes to exercise
its right to require that Employee not compete and not solicit in
accordance with Paragraphs 14 and 15 hereof; and (y) Company
thereafter pays to Employee in periodic installments, without
interest, in accordance with the regular salary payment practices of
the Company an amount equal to (.1) the amount of Employee's annual
Base Salary as in effect immediately prior to Employee's date of
termination, multiplied by (.2) the number of months that the Company
is requiring the non-competition and non-solicitation covenants to
remain in place, divided by 12. The first such installment of Base
Salary and target bonus shall be paid on or before the delivery of the
notice described in the prior sentence of this Paragraph 7a(ii). The
non-competition and non-solicitation provisions of this Agreement
shall no longer apply to Employee if the Company fails to pay the
amounts required under this Section 7a(ii) for an uninterrupted 10-day
period and such failure is not cured with 5 days after written notice
of such failure is delivered to the Company.
b. In the event Employee's employment with the Company (including
its subsidiaries) is terminated by the Company for any reason other
than for Cause as provided in Paragraph 5 and other than as a
consequence of Employee's death, disability, or normal retirement
under the Company's retirement plans and practices, then the following
provisions apply. These same provisions shall apply if Employee
terminates his employment with Good Reason as described in Paragraph
6. In addition to the amounts stated below, Employee shall be paid any
other amounts by the Company to which he is entitled.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. On or
before Employee's last day of employment with the Company, the
Company shall pay in a lump sum to Employee as compensation for
services rendered to the Company a cash amount equal to twice the
amount of Employee's annual Base Salary. At the election of the
Company, the cash amount referred to in this Paragraph 7b.i. may
be paid to Employee in periodic installments, without interest,
in accordance with the regular salary payment practices of the
Company, with the first such installment to be paid on or before
Employee's last day of employment with the Company, and no
interest shall be paid with respect to any amount not paid on the
Employee's date of termination.
ii. VESTING OF OPTIONS AND RIGHTS. Notwithstanding the
vesting period provided for in any Company stock option plan and
any related stock option agreements between the Company and
Employee for stock options ("Options") and stock appreciation
rights ("Rights") granted Employee by the Company, all Options
(including without limitation the Option Shares) and Rights shall
become immediately exercisable upon termination of employment. In
addition, Employee will have the right to exercise all such
Options and Rights for the shorter of (a) two years following his
termination of employment or (b) with respect to each Option and
Right, the remainder of the period of exercisability under the
terms of the appropriate documents that grant such options.
iii. BENEFIT PLAN COVERAGE. The Company shall maintain in
full force and effect for Employee and his dependents for six
months after the date of termination, all life, health, accident,
and disability benefit plans and other similar employee benefit
plans, programs and arrangements in which Employee or his
dependents were entitled to participate immediately prior to the
date of termination, in such amounts as were in effect
immediately prior to the date of termination, provided that such
continued participation is possible under the general terms and
provisions of such benefit plans, programs and arrangements.
In the event that participation in any benefit plan, program or
arrangement described above is barred, or any such benefit plan,
program or arrangement is
<PAGE> 5
discontinued or the benefits thereunder materially reduced, the
Company shall arrange to provide Employee and his dependents for six
months after the date of termination with benefits substantially
similar to those that they were entitled to receive under such benefit
plans, programs and arrangements immediately prior to the date of
termination. Notwithstanding any time period for continued benefits
stated in this Paragraph 7b.iii., all benefits in this Paragraph
7b.iii. will terminate on the date that Employee becomes an employee
of another employer and eligible to participate in the employee
benefit plans of such other employer. To the extent that Employee was
required to contribute amounts for the benefits described in this
Paragraph 7b.iii. prior to his termination, he shall continue to
contribute such amounts for such time as these benefits continue in
effect after termination.
iv. OTHER COMPENSATION. Any awards previously made to Employee
under any of the Company's compensation plans or programs and not
previously paid shall immediately vest on the date of his termination
and shall be paid on that date and included as compensation in the
year paid.
v. SAVINGS AND OTHER PLANS. Except as otherwise more specifically
provided herein or under the terms of the respective plans relating to
termination of employment, Employee's active participation in any
applicable savings, retirement, profit sharing or supplemental
employee retirement plans or any deferred compensation or similar plan
of the Company or any of its subsidiaries shall continue only through
the last day of his employment. All other provisions, including any
distribution and/or vested rights under such plans, shall be governed
by the terms of those respective plans.
vi. NON-COMPETITION/NON-SOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall continue, beyond the time periods set forth
in such paragraphs, to apply with respect to Employee for six (6)
months following the date of termination. The non-competition and
non-solicitation provisions of this Agreement shall no longer apply to
Employee if the Company fails to pay the amounts required under the
provisions of Paragraph 7b.i. for an uninterrupted 10-day period and
such failure is not cured within 5 days after written notice of such
failure is delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior to or more than one year after the
occurrence of a Change of Control (as defined in Paragraph 8c.). From the
occurrence of any Change of Control until the first anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of
this Paragraph 7, except that in the event that Employee's employment is
terminated by Employee after a Change of Control without Good Reason, then
the provisions of Paragraph 8 shall not apply and the provisions of
Paragraph 7a. shall apply. Termination upon death, disability and
retirement are covered by Paragraphs 9, 10, and 11, respectively.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANGE OF CONTROL.
a. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. In the event
Employee's employment with the Company is terminated within one year
following the occurrence of a Change of Control (other than as a
consequence of his death or disability, or of his normal retirement under
the Company's retirement plans and practices) either (i) by the Company for
<PAGE> 6
any reason whatsoever or (ii) by Employee with Good Reason as provided in
Paragraph 6, then Employee shall be entitled to receive from the Company,
the following:
i. BASE SALARY. An amount equal to twice the Employee's annual
Base Salary as in effect at the date of termination shall be paid on
the date of termination; and
ii. OTHER BENEFITS. All benefits under Paragraphs 7.b.ii.,
7b.iii., 7b.iv. and 7b.v. shall be extended to Employee as described
in such paragraphs.
b. NON-COMPETITION/NON-SOLICITATION PERIOD. In the event of a
termination under the circumstances described in Paragraph 8a., the
provisions of Paragraphs 14 and 15 shall be without force and effect and
shall not apply to Employee.
c. For purposes of this Agreement, the term "Change of Control" shall
mean:
i. The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
Section 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) (any of the foregoing
described in this Paragraph hereafter a "Person") of 30% or more of
either (a) the then outstanding shares of Capital Stock of the Company
(the "Outstanding Capital Stock") or (b) the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Voting Securities"),
provided, however, that any acquisition by (x) the Company or any of
its subsidiaries, or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any of its subsidiaries or
(y) any Person that is eligible, pursuant to Rule 13d-1(b) under the
Exchange Act, to file a statement on Schedule 13G with respect to its
beneficial ownership of Voting Securities, whether or not such Person
shall have filed a statement on Schedule 13G, unless such Person shall
have filed a statement on Schedule 13D with respect to beneficial
ownership of 30% or more of the Voting Securities or (z) any
corporation with respect to which, following such acquisition, more
than 60% of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock and Voting Securities immediately prior to
such acquisition in substantially the same proportion as their
ownership, immediately prior to such acquisition, of the Outstanding
Capital Stock and Voting Securities, as the case may be, shall not
constitute a Change of Control; or
ii. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a
director subsequent to the date hereof whose election or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of
Regulation 14A, or any successor section, promulgated under the
Exchange Act); or
iii. Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in
each case, with respect to which all or substantially all holders of
the Outstanding Capital Stock and Voting Securities immediately prior
to such Business Combination do not, following such Business
Combination, beneficially own, directly or
<PAGE> 7
indirectly, more than 60% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company or
(b) a sale or other disposition of all or substantially all of the
assets of the Company other than to a corporation with respect to
which, following such sale or disposition, more than 60% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors is then owned
beneficially, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such sale or disposition in substantially the
same proportion as their ownership of the Outstanding Capital Stock
and Voting Securities, as the case may be, immediately prior to such
sale or disposition.
d. OPTIONS VEST UPON CHANGE OF CONTROL. In the event a Change of
Control occurs during the Term of this Agreement, notwithstanding the
vesting period provided for in any Company stock option plan and any
related stock option agreements between the Company and Employee for
Options, all Options (including without limitation the Option Shares) and
Rights shall become immediately exercisable upon the occurrence of a Change
of Control. In addition, Employee will have the right to exercise all
Options and Rights for the remainder of the period of their exercisability
under the terms of the appropriate documents that grant such Options.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while employed by
the Company both prior to termination of employment and during the effective
Term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have accrued
but remain unpaid and a prorated amount of targeted bonus under the Company's
Management Bonus Program through the month in which his death occurs, plus three
additional months of the fixed salary and targeted bonus. All benefits under
7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate as described in
such paragraphs. In addition, Employee's eligible dependents shall receive
continued benefit plan coverage under Paragraph 7b.iii. for three months from
the date of Employee's death.
10. TERMINATION BY DISABILITY. Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given except that all benefits under Paragraphs 7b.ii, 7b.iii,
7b.iv. and 7b.v. shall be extended to Employee as described in such paragraphs.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an officer of
the Company on a substantially full-time basis for six (6) consecutive
months; and
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
<PAGE> 8
11. RETIREMENT. A voluntary termination by Employee for reasons of
retirement shall be treated as a voluntary termination without Good Reason and
the provisions of Paragraph 7a. shall apply. If during the Term or any extension
thereof, the Company adopts a retirement plan with respect to executive officers
of the Company, Employee shall have the right to participate in such plan.
12. INDEMNIFICATION. If litigation shall be brought, in the event of breach
or to enforce or interpret any provision contained herein, the non-prevailing
party shall indemnify the prevailing party for reasonable attorney's fees
(including those for negotiations, trial and appeals) and disbursements incurred
by the prevailing party in such litigation, and hereby agrees to pay prejudgment
interest on any money judgment obtained by the prevailing party calculated at
the generally prevailing NationsBank of Florida, N.A. base rate of interest
charged to its commercial customers in effect from time to time from the date
that payment(s) to him should have been made under this Agreement.
13. (Omitted Intentionally)
14. NON-COMPETITION.
a. At all times during Employee's employ ment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner,
operator, shareholder, director, partner, creditor, consultant, agent or
any capacity whatsoever that manufactures products designed to compete
directly with products of the Company or markets such products anywhere in
the world where the Company (i) is engaged in business or (ii) has
evidenced an intention of engaging in business. Employee acknowledges that
he has read the foregoing and agrees that the nature of the geographical
restrictions are reasonable given the international nature of the Company's
business.
In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions which
are reasonable.
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to be a
competitor of the Company as described in the previous sentence
("Competitor"), so long as (i) the Competitor has had annual revenues of at
least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition
with the Company does not exceed 50% of its total revenues and (iii)
Employee's responsibilities are solely for divisions or subsidiaries of the
Competitor that do not compete with the Company.
15. NON-SOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times during
Employee's employment hereunder, or for such additional periods as may otherwise
be set forth in this Agreement in reference to this Paragraph 15, Employee shall
not, directly or indirectly, for himself or for any other person, firm,
corporation, partnership, association or other entity (a) attempt to employ,
employ or enter into any contractual arrangement with any employee or former
employee of the Company, its affiliates, subsidiaries or predecessors in
interest, unless such employee or former employee has not been employed by the
Company, its affiliates, subsidiaries or predecessors in interest during the
twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
<PAGE> 9
matters related to or competitive with the business of the Company.
16. CONFIDENTIALITY.
a. NONDISCLOSURE. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity any proprietary or confidential information
relating to the Company or any information concerning the Company's
financial condition or prospects, the Company's customers, the design,
development, manufacture, marketing or sale of the Company's products or
the Company's methods of operating its business (collectively "Confidential
Information"). Confidential Information shall not include information
which, at the time of disclosure, is known or available to the general
public by publication or otherwise through no act or failure to act on the
part of Employee.
b. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and
all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the
foregoing materials have in fact been returned or destroyed.
c. BOOKS AND RECORDS. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company upon termination of Employee's employment hereunder or upon the
Company's request at any time.
17. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately or
reasonably compensated at law. Therefore, Employee agrees that the Company shall
be entitled, if any such breach shall occur or be threatened or attempted, to a
decree of specific performance and to a temporary and permanent injunction,
without the posting of a bond, enjoining and restraining such breach by Employee
or his agents, either directly or indirectly, and that such right to injunction
shall be cumulative to whatever other remedies for actual damages to which the
Company is entitled. Employee further agrees that the Company may set off
against or recoup from any amounts due under this Agreement to the extent of any
losses incurred by the Company as a result of any breach by Employee of the
provisions of Paragraphs 14, 15 or 16 hereof.
18. SEVERABILITY. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
<PAGE> 10
19. SUCCESSORS. This Agreement shall be binding upon Employee and inure to
his and his estate's benefit, and shall be binding upon and inure to the benefit
of the Company and any permitted successor of the Company. Neither this
Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the Company.
The foregoing sentence shall not be deemed to have any effect upon the rights of
Employee upon a Change of Control.
20. CONTROLLING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
21. NOTICES. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2000 West Commercial Boulevard
Fort Lauderdale, Florida 33309
Attention: Chief Financial Officer
To Employee: David R. Proctor
[at such address as appears in the records of the Company as being the
last-known address of the Employee]
22. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
23. WAIVER. A waiver by any party of any of the terms and conditions hereof
shall not be construed as a general waiver by such party.
24. COUNTERPARTS. This Agreement may be executed in counter parts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
25. INTERPRETATION. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties of
Employee or the Company upon Employee's termination, the rights and duties set
forth in this Agreement shall control.
26. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason. It
is the intention of this Agreement that if the Company terminates Employee other
than for Cause (and other than as a consequence of Employee's death or
disability) or if Employee terminates his employment with Good Reason, then the
payments and other benefits set forth
<PAGE> 11
in Paragraph 7b. shall constitute the sole and exclusive remedies of Employee.
27. SURVIVAL. Notwithstanding the provisions of Paragraph 2, the provisions
of Paragraphs 14, 15, and 16 shall survive the expiration or early termination
of this Agreement.
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY:
CYBERGUARD CORPORATION
By:
----------------------------
Its:
EMPLOYEE:
-------------------------------
DAVID R. PROCTOR
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT ("Amendment"), dated as of May 4, 1999, amends the
EMPLOYMENT AGREEMENT (the "Agreement") that was made and entered into as of
March 11, 1999 by and between CyberGuard Corporation, a Florida corporation (the
"Company"), and David R. Proctor (the "Employee").
WHEREAS, the Company, through its Board of Directors, desires to amend the
Agreement and Employee also desires to amend the Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
A. Section 1 of the Agreement shall be amended by deleting Section 1 in its
entirety and substituting the following in its place:
"1. EMPLOYMENT. During his employment hereunder, Employee will
serve as the Chief Executive Officer, President and Chairman of the
Board of Directors of the Company."
B. Section 4a of the Agreement shall be amended by deleting the words "a
base salary of $182,000 per year" and substituting in its place: "a base salary
of $5,000 per week".
C. Section 4 of the Agreement shall be amended by adding the following
subsection 4g:
g. ADDITIONAL OPTION. In addition to salary, bonus and options
described in the Agreement, Employee is hereby awarded an option to
acquire 100,000 shares ("Additional Option Shares") of Company common
stock under the Stock Option Plan, at an exercise price of $1.00 per
share. The Additional Option Shares shall become exercisable in 1/3
increments on the first, second and third
<PAGE> 12
anniversaries of the date on which Employee becomes President of the
Company ( by way of example, if Employee became President of the
Company on May 12, 1999, 33,333 Additional Option Shares would become
exercisable on May 11, 2000, 33,334 Additional Option Shares would
become exercisable on May 11, 2001, and the remaining 33,333
Additional Option Shares would become exercisable on May 11, 2002).
The Additional Option Shares shall become immediately exercisable upon
the occurrence of certain events described in sections 7 and 8 of this
Agreement. An agreement shall be prepared providing for other terms
and conditions regarding the Option Shares that are typical of other
executives option agreements, and this option agreement shall also
provide for anti-dilution in the event that shares of Company stock
are issued in settlement of any lawsuit pending against the Company.
D. This amendment shall become effective as soon as Employee becomes
President of the Company.
E. Other than as stated in this Amendment, the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, this Amendment to Employment Agreement has been executed by
the parties as of the date first above written.
COMPANY:
CYBERGUARD CORPORATION
By:
----------------------------
Its:
EMPLOYEE:
-------------------------------
DAVID R. PROCTOR
<PAGE> 1
EXHIBIT 10.04
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
September 8, 1998 by and between CyberGuard Corporation, a Florida corporation
(the "Company"), and Terrence A. Zielinski (the "Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain the
services of Employee, and Employee desires to be retained by the Company, on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment, as Vice President of Finance and acting Chief Financial
Officer upon the terms of and subject to this Agreement.
2. TERM. The term (the "Term") of this Agreement shall commence on
September 8, 1998, and shall continue until otherwise terminated in accordance
with the terms of this Agreement.
3. DUTIES. During his employment hereunder, Employee will serve in such
capacity and with such duties as shall be assigned from time to time by the
Chairman of the Board of the Company. The Company acknowledges that Employee is
also an officer and principal of an accounting/consulting firm (the "Accounting
Firm"), and that the Accounting Firm requires that he devote some portion of his
business efforts. Employee shall diligently perform his duties as Chief
Financial Officer and shall devote the substantial portion of his business time
and effort to his employment with the Company and his duties hereunder. With the
exception of his work with the Accounting Firm, during the Term Employee shall
not, directly or indirectly, alone or as a member of a partnership, or as an
officer, director, employee or agent of any other person, firm or business
organization engage in any other business activities or pursuits requiring his
personal service that materially conflict with his duties hereunder or the
diligent performance of such duties.
4. COMPENSATION.
a. SALARY. During his employment hereunder, Employee shall be paid a
salary of $150,000 per year, payable in equal installments not less than
monthly ("Base Salary"). The Employee's Base Salary shall be reviewed at
least annually by the Board of Directors or any Committee of the Board
delegated the authority to review executive compensation.
b. OPTION AND BONUS. In addition to salary, Employee shall be entitled
to participate in the Company's Employee Stock Option Plan (the "Stock
Option Plan"). In addition, Employee shall participate in the management
bonus program established by the Company with an initial annual targeted
bonus equal to 40% of Employee's Base Salary (hereafter the "Management
Bonus Program").
<PAGE> 2
c. INSURANCE. During his employment hereunder, Employee shall be
entitled to participate in all such health, life, disability and other
insurance programs, if any, that the Company may offer to other key
executive employees of the Company from time to time.
d. OTHER BENEFITS. During his employment hereunder, Employee shall be
entitled to all such other benefits, if any, that the Company may offer to
other key executive employees of the Company from time to time.
e. VACATION. Employee shall be entitled to four weeks' vacation leave
(in addition to holidays) in each calendar year during the Term; however,
Employee may take only two weeks' vacation leave within any calendar month.
Except with respect to vacation time unused as the result of a request by
the Company to postpone a vacation, any unused vacation from one calendar
year shall not carry-over to any subsequent calendar year.
f. EXPENSE REIMBURSEMENT. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in the performance of his duties
hereunder in accordance with policies established by the Company. Such
expenses shall include, without limitation, reasonable entertainment
expenses, gasoline and toll expenses and cellular phone use charges, if
such charges are directly related to the business of the Company.
5. GROUNDS FOR TERMINATION. The Board of Directors of the Company may
terminate this Agreement for Cause. As used herein, "Cause" shall mean any of
the following: (i) an act of willful misconduct or gross negligence by Employee
in the performance of his material duties or obligations to the Company; if such
act is capable of cure, Employee shall be given written notice and such act
shall not be deemed a basis for Cause if cured within 60 days after written
notice is received by Employee specifying the alleged failure in reasonable
detail (and during such 60 day period, Employee shall continue to be employed by
the Company at full pay), or (ii) conviction of Employee of a felony involving
moral turpitude or (iii) a material act of dishonesty or breach of trust on the
part of Employee resulting or intended to result directly or indirectly in
personal gain or enrichment at the expense of the Company.
6. TERMINATION BY EMPLOYEE. Employee may terminate this Agreement with Good
Reason. In the event of termination by Employee for Good Reason, Employee shall
be entitled to the benefits of Paragraph 7b. of this Agreement. "Good Reason"
means:
a. The Company materially breaches the provisions of this Agreement
(except those set forth in Paragraph 4a.) and Employee provides at least 15
days' prior written notice to the Company of the existence of such breach
and his intention to terminate this Agreement (no such termination shall be
effective if such breach is cured during such period); or
b. The Company fails to comply with the provisions of Paragraph 4a. or
to pay any amounts due under the Management Bonus Program provisions of
Paragraph 4b. for an uninterrupted 10 day period; or
c. The Company requires Employee to work in a non-supervisory or
non-management position; or
d. The Company decreases Employee's compensation (salary or percentage
of bonus opportunity); or
<PAGE> 3
e. The Company materially reduces Employee's welfare benefits,
including without limitation: paid vacation; paid sick time; paid legal and
float holidays; medical, dental and cancer insurance, hospital indemnity,
Flexible Spending, Short- and Long-term Disability insurance, Basic Group
Term Life/Accidental Death & Dismemberment insurance, Supplemental
Life/AD&D insurance, Spouse Life/Spouse AD&D insurance, Dependent Life
insurance, Vision Plan, 401k plan, Employee Assistance Program; education
reimbursement program (collectively, the "Benefits"); provided, however,
that any change in Benefits that is made by the Company that applies to its
employees generally, shall not be considered as giving rise to "Good
Reason"; or
f. The Employee is required, without his prior written consent, to
relocate his office more than seventy-five miles from the office Employee
currently reports to.
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in
Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7a. shall apply. These same
provisions shall apply if Employee terminates his employment without Good
Reason as described in Paragraph 6.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company
shall pay in a lump sum to Employee at the time of Employee's
termination such amount of compensation due Employee for services
rendered to the Company, as well as compensation for unused vacation
time and earned bonus, as has accrued but remains unpaid. Any and all
other rights granted to Employee under this Agreement shall terminate
as of the date of termination.
ii. NON-COMPETITION/NON-SOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period of
up to six months following the date of termination, so long as the
Company: (x) provides a written notice to Employee within 5 business
days after Employee's termination that the Company wishes to exercise
its right to require that Employee not compete and not solicit in
accordance with Paragraphs 14 and 15 hereof; and (y) Company
thereafter pays to Employee in periodic installments, without
interest, in accordance with the regular salary payment practices of
the Company an amount equal to (.1) the amount of Employee's annual
Base Salary as in effect immediately prior to Employee's date of
termination, multiplied by (.2) the number of months that the Company
is requiring the non-competition and non-solicitation covenants to
remain in place, divided by 12. The first such installment of Base
Salary and target bonus shall be paid on or before the delivery of the
notice described in the prior sentence of this Paragraph 7a(ii). The
non-competition and non-solicitation provisions of this Agreement
shall no longer apply to Employee if the Company fails to pay the
amounts required under this Section 7a(ii) for an uninterrupted 10-day
period and such failure is not cured with 5 days after written notice
of such failure is delivered to the Company.
b. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for any reason other than for
Cause as provided in Paragraph 5 and other than as a consequence of
Employee's death, disability, or normal retirement under the Company's
retirement plans and practices, then the following provisions apply. These
same provisions shall apply if Employee terminates his employment with Good
Reason as described in Paragraph 6. In addition to the
<PAGE> 4
amounts stated below, Employee shall be paid any other amounts by the
Company to which he is entitled.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. On or before
Employee's last day of employment with the Company, the Company shall
pay in a lump sum to Employee as compensation for services rendered to
the Company a cash amount equal to one-half the amount of Employee's
annual Base Salary and the greater of (x) one-half the target bonus
under the Management Bonus Program as in effect immediately prior to
his date of termination or (y) the amount of the bonus under the
Management Bonus Program to which he is entitled but which remains
unpaid. At the election of the Company, the cash amount referred to in
this Paragraph 7b.i. may be paid to Employee in periodic installments,
without interest, in accordance with the regular salary payment
practices of the Company, with the first such installment to be paid
on or before Employee's last day of employment with the Company, and
no interest shall be paid with respect to any amount not paid on the
Employee's date of termination.
ii. VESTING OF OPTIONS AND RIGHTS. Notwithstanding the vesting
period provided for in the Stock Option Plan and any related stock
option agreements between the Company and Employee for stock options
("options") and stock appreciation rights ("rights") granted Employee
by the Company, all options and stock appreciation rights that were
exercisable at the date of termination or within 12 months thereafter
shall be immediately exercisable upon termination of employment. In
addition, Employee will have the right to exercise all such options
and rights for the shorter of (a) six months following his termination
of employment or (b) with respect to each option, the remainder of the
period of exercisability under the terms of the appropriate documents
that grant such options.
iii. BENEFIT PLAN COVERAGE. The Company shall maintain in full
force and effect for Employee and his dependents for six months after
the date of termination, all life, health, accident, and disability
benefit plans and other similar employee benefit plans, programs and
arrangements in which Employee or his dependents were entitled to
participate immediately prior to the date of termination, in such
amounts as were in effect immediately prior to the date of
termination, provided that such continued participation is possible
under the general terms and provisions of such benefit plans, programs
and arrangements.
In the event that participation in any benefit plan, program or
arrangement described above is barred, or any such benefit plan,
program or arrangement is discontinued or the benefits thereunder
materially reduced, the Company shall arrange to provide Employee and
his dependents for six months after the date of termination with
benefits substantially similar to those that they were entitled to
receive under such benefit plans, programs and arrangements
immediately prior to the date of termination. Notwithstanding any time
period for continued benefits stated in this Paragraph 7b.iii., all
benefits in this Paragraph 7b.iii. will terminate on the date that
Employee becomes an employee of another employer and eligible to
participate in the employee benefit plans of such other employer. To
the extent that Employee was required to contribute amounts for the
benefits described in this Paragraph 7b.iii. prior to his termination,
he shall continue to contribute such amounts for such time as these
benefits continue in effect after termination.
iv. OTHER COMPENSATION. Any awards previously made to Employee
under any of the Company's compensation plans or programs and not
previously paid shall immediately vest on the date of his termination
and shall be paid on that date and included as compensation in the
year paid.
v. SAVINGS AND OTHER PLANS. Except as otherwise more specifically
provided herein or under the terms of the respective plans relating to
termination of employment, Employee's active participation in any
applicable savings, retirement, profit sharing or supplemental
employee
<PAGE> 5
retirement plans or any deferred compensation or similar plan of the
Company or any of its subsidiaries shall continue only through the
last day of his employment. All other provisions, including any
distribution and/or vested rights under such plans, shall be governed
by the terms of those respective plans.
vi. NON-COMPETITION/NON-SOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall continue, beyond the time periods set forth
in such paragraphs, to apply with respect to Employee for six (6)
months following the date of termination. The non-competition and
non-solicitation provisions of this Agreement shall no longer apply to
Employee if the Company fails to pay the amounts required under the
provisions of Paragraph 7b.i. for an uninterrupted 10-day period and
such failure is not cured within 5 days after written notice of such
failure is delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior to or more than one year after the
occurrence of a Change of Control (as defined in Paragraph 8c.). From the
occurrence of any Change of Control until the first anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of
this Paragraph 7, EXCEPT THAT in the event that Employee's employment is
terminated by Employee after a Change of Control without Good Reason, then
the provisions of Paragraph 8 shall not apply and the provisions of
Paragraph 7a. shall apply. Termination upon death, disability and
retirement are covered by Paragraphs 9, 10, and 11, respectively.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANGE OF CONTROL.
a. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. In the event
Employee's employment with the Company is terminated within one year
following the occurrence of a Change of Control (other than as a
consequence of his death or disability, or of his normal retirement under
the Company's retirement plans and practices) either (i) by the Company for
any reason whatsoever or (ii) by Employee with Good Reason as provided in
Paragraph 6, then Employee shall be entitled to receive from the Company,
the following:
i. BASE SALARY. An amount equal to one-half the Employee's annual
Base Salary as in effect at the date of termination shall be paid on
the date of termination;
ii. TARGET BONUS. An amount equal to one-half the Employee's
target bonus under the Management Bonus Program for the fiscal year in
which the date of termination occurs shall be paid on the date of
termination; and
iii. OTHER BENEFITS. All benefits under Paragraphs 7b.i, 7.b.ii.,
7b.iii. 7b.iv. and 7b.v. shall be extended to Employee as described in
such paragraphs except that all options and rights shall be immediately
exercisable and the period for exercise of options and rights described
in the last sentence of Paragraph 7b.ii and benefit plan coverage as
described in Paragraph 7.b.iii shall be one half year.
b. NON-COMPETITION/NON-SOLICITATION PERIOD. In the event of a
termination under the circumstances described in Paragraph 8a., the
provisions of Paragraphs 14 and 15 shall be without force and effect and
shall not apply to Employee.
c. For purposes of this Agreement, the term "Change of Control" shall
mean:
i. The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
Section 14(d)(2) of the Securities Exchange Act of 1934, as amended
<PAGE> 6
(the "Exchange Act")) of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) (any of the foregoing
described in this Paragraph hereafter a "Person") of 30% or more of
either (a) the then outstanding shares of Capital Stock of the Company
(the "Outstanding Capital Stock") or (b) the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Voting Securities"),
PROVIDED, HOWEVER, that any acquisition by (x) the Company or any of
its subsidiaries, or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any of its subsidiaries or
(y) any Person that is eligible, pursuant to Rule 13d-1(b) under the
Exchange Act, to file a statement on Schedule 13G with respect to its
beneficial ownership of Voting Securities, whether or not such Person
shall have filed a statement on Schedule 13G, unless such Person shall
have filed a statement on Schedule 13D with respect to beneficial
ownership of 30% or more of the Voting Securities or (z) any
corporation with respect to which, following such acquisition, more
than 60% of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock and Voting Securities immediately prior to
such acquisition in substantially the same proportion as their
ownership, immediately prior to such acquisition, of the Outstanding
Capital Stock and Voting Securities, as the case may be, shall not
constitute a Change of Control; or
ii. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a
director subsequent to the date hereof whose election or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of
Regulation 14A, or any successor section, promulgated under the
Exchange Act); or
iii. Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in
each case, with respect to which all or substantially all holders of
the Outstanding Capital Stock and Voting Securities immediately prior
to such Business Combination do not, following such Business
Combination, beneficially own, directly or indirectly, more than 60%
of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company or
(b) a sale or other disposition of all or substantially all of the
assets of the Company other than to a corporation with respect to
which, following such sale or disposition, more than 60% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors is then owned
beneficially, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such sale or disposition in substantially the
same proportion as their ownership of the Outstanding Capital Stock
and Voting Securities, as the case may be, immediately prior to such
sale or disposition.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while employed by
the Company both prior to termination of employment and during the effective
Term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have
<PAGE> 7
accrued but remain unpaid and a prorated amount of targeted bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus three additional months of the fixed salary and targeted bonus. All
benefits under 7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate as
described in such paragraphs. In addition, Employee's eligible dependents shall
receive continued benefit plan coverage under Paragraph 7b.iii. for three months
from the date of Employee's death.
10. TERMINATION BY DISABILITY. Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given EXCEPT that all benefits under Paragraphs 7b.ii, 7b.iii,
7b.iv. and 7b.v. shall be extended to Employee as described in such paragraphs.
In addition, the non-competition and non-solicitation provisions of Paragraphs
14 and 15 shall continue to apply to Employee for a period of one year from the
date of termination.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an officer of
the Company on a substantially full-time basis for six (6) consecutive
months; and
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
11. RETIREMENT. Retirement by Employee, whether occurring as a result of a
voluntary termination by Employee or an involuntary termination as the result of
reaching the age retirement as set forth in the Company's retirement policies,
shall be treated as a voluntary termination without Good Reason and the
provisions of Paragraph 7a. shall apply. If during the Term or any extension
thereof, the Company adopts a retirement plan with respect to executive officers
of the Company, Employee shall have the right to participate in such policy and
the provisions of such policy shall supersede the provisions of the preceding
sentence.
12. INDEMNIFICATION. If litigation shall be brought, in the event of breach
or to enforce or interpret any provision contained herein, the non-prevailing
party shall indemnify the prevailing party for reasonable attorney's fees
(including those for negotiations, trial and appeals) and disbursements incurred
by the prevailing party in such litigation, and hereby agrees to pay prejudgment
interest on any money judgment obtained by the prevailing party calculated at
the generally prevailing NationsBank of Florida, N.A. base rate of interest
charged to its commercial customers in effect from time to time from the date
that payment(s) to him should have been made under this Agreement.
13. (Omitted Intentionally)
14. NON-COMPETITION.
a. At all times during Employee's employment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner,
operator, shareholder, director, partner, creditor, consultant, agent or
any capacity whatsoever that manufactures products designed to compete
directly with products of the Company or markets such products anywhere in
the world where the Company (i) is engaged in business or (ii) has
evidenced an intention of engaging
<PAGE> 8
in business. Employee acknowledges that he has read the foregoing and
agrees that the nature of the geographical restrictions are reasonable
given the international nature of the Company's business.
In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions which
are reasonable.
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to be a
competitor of the Company as described in the previous sentence
("Competitor"), so long as (i) the Competitor has had annual revenues of at
least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition
with the Company does not exceed 50% of its total revenues and (iii)
Employee's responsibilities are solely for divisions or subsidiaries of the
Competitor that do not compete with the Company.
15. NON-SOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times during
Employee's employment hereunder, or for such additional periods as may otherwise
be set forth in this Agreement in reference to this Paragraph 15, Employee shall
not, directly or indirectly, for himself or for any other person, firm,
corporation, partnership, association or other entity (a) attempt to employ,
employ or enter into any contractual arrangement with any employee or former
employee of the Company, its affiliates, subsidiaries or predecessors in
interest, unless such employee or former employee has not been employed by the
Company, its affiliates, subsidiaries or predecessors in interest during the
twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
matters related to or competitive with the business of the Company.
16. CONFIDENTIALITY.
a. NONDISCLOSURE. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity any proprietary or confidential information
relating to the Company or any information concerning the Company's
financial condition or prospects, the Company's customers, the design,
development, manufacture, marketing or sale of the Company's products or
the Company's methods of operating its business (collectively "Confidential
Information"). Confidential Information shall not include information
which, at the time of disclosure, is known or available to the general
public by publication or otherwise through no act or failure to act on the
part of Employee.
b. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and
all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the
foregoing materials have in fact been returned or destroyed.
<PAGE> 9
c. BOOKS AND RECORDS. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company upon termination of Employee's employment hereunder or upon the
Company's request at any time.
17. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately or
reasonably compensated at law. Therefore, Employee agrees that the Company shall
be entitled, if any such breach shall occur or be threatened or attempted, to a
decree of specific performance and to a temporary and permanent injunction,
without the posting of a bond, enjoining and restraining such breach by Employee
or his agents, either directly or indirectly, and that such right to injunction
shall be cumulative to whatever other remedies for actual damages to which the
Company is entitled. Employee further agrees that the Company may set off
against or recoup from any amounts due under this Agreement to the extent of any
losses incurred by the Company as a result of any breach by Employee of the
provisions of Paragraphs 14, 15 or 16 hereof.
18. SEVERABILITY. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
19. SUCCESSORS. This Agreement shall be binding upon Employee and inure to
his and his estate's benefit, and shall be binding upon and inure to the benefit
of the Company and any permitted successor of the Company. Neither this
Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the Company.
The foregoing sentence shall not be deemed to have any effect upon the rights of
Employee upon a Change of Control.
20. CONTROLLING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
21. NOTICES. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2000 West Commercial Boulevard
Fort Lauderdale, Florida 33309
Attention: President
To Employee: Terrence A. Zielinski
P.O. Box 9017
Coral Springs, FL 33075
22. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
<PAGE> 10
23. WAIVER. A waiver by any party of any of the terms and conditions hereof
shall not be construed as a general waiver by such party.
24. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
25. INTERPRETATION. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties of
Employee or the Company upon Employee's termination, the rights and duties set
forth in this Agreement shall control.
26. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason. It
is the intention of this Agreement that if the Company terminates Employee other
than for Cause (and other than as a consequence of Employee's death, disability
or normal retirement) or if Employee terminates his employment with Good Reason,
then the payments and other benefits set forth in Paragraph 7b. shall constitute
the sole and exclusive remedies of Employee.
27. SURVIVAL. Notwithstanding the provisions of Paragraph 2, the provisions
of Paragraphs 14, 15, and 16 shall survive the expiration or early termination
of this Agreement.
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY:
CYBERGUARD CORPORATION
-------------------------------
By: C. Shelton James
Its: Chairman
EMPLOYEE:
-------------------------------
Terrence A. Zielinski
<PAGE> 1
EXHIBIT 10.05
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
September 30, 1998 by and between CyberGuard Corporation, a Florida corporation
(the "Company") and Mike Wittig ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain the
services of Employee, and Employee desires to be retained by the Company, on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment, as Vice President Development upon the terms of and subject
to this Agreement
2. TERM. The term (the "Term") of this Agreement shall commence on
September 30, 1998 and shall continue until otherwise terminated in accordance
with the terms of this Agreement.
3. DUTIES. During his employment hereunder, Employee will serve in such
capacity and with such duties as shall be assigned from time to time by the
President and Chief Operating Officer of the Company. Employee shall diligently
perform such duties and shall devote his entire business skill, time and effort
to his employment and his duties hereunder and shall not during the Term,
directly or indirectly, alone or as a member of a partnership, or as an officer,
director, employee or agent of any other person, firm or business organization
engage in any other business activities or pursuits requiring his personal
service that materially conflict with his duties hereunder or the diligent
performance of such duties.
4. COMPENSATION.
a. SALARY. During his employment hereunder Employee shall be paid a
salary of One Hundred Twenty-one Thousand Dollars ($121,000) per year,
payable in equal installments not less than monthly ("Base Salary"). The
Employee's Base Salary shall be reviewed at least annually by the Board of
Directors or any Committee of the Board delegated the authority to review
executive compensation.
b. OPTION AND BONUS. In addition to salary, Employee was awarded, on
September 8, 1998, an additional option to purchase 50,000 shares of common
stock of the Company at an exercise price of $1.31 and subject to the
conditions contained in a separate stock option agreement between Employee
and the Company. In addition, Employee shall be eligible to receive a
targeted incentive bonus that will be established at the beginning of each
fiscal year. To be eligible to receive the targeted incentive bonus, in
full or in part, Employee will be required to fulfill performance goals to
be established by the Company.
c. INSURANCE. During his employment hereunder, Employee shall be
entitled to participate in all such health, life, disability and other
insurance programs, if any, that the Company may offer to executive
employees of the Company from time to time.
<PAGE> 2
d. OTHER BENEFITS. During his employment hereunder, Employee shall be
entitled to all such other benefits, if any, that the Company may offer to
executive employees of the Company from time to time.
e. VACATION. Employee shall be entitled to that number of weeks'
vacation leave (in addition to holidays) in each calendar year during the
Term in accordance with the Company's vacation policy for employees as it
may be in effect from time to time.
f. EXPENSE REIMBURSEMENT. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in the performance of his duties
hereunder in accordance with policies established by the Company. Such
expenses shall include, without limitation, reasonable entertainment
expenses, gasoline and toll expenses and cellular phone use charges, if
such charges are directly related to the business of the Company.
5. GROUNDS FOR TERMINATION. The President of the Company may terminate this
Agreement for Cause. As used herein, "Cause" shall mean any of the following:
(i) conviction of Employee of a felony involving moral turpitude; or (ii) a
material act of dishonesty or breach of trust on the part of Employee resulting
or intended to result directly or indirectly in personal gain or enrichment at
the expense of the Company; or (iii) the material failure to faithfully perform
such duties as may be duly assigned to the Employee; if such act is capable of
cure, Employee shall be given written notice and such act shall not be deemed a
basis for Cause if cured within 60 days after written notice is received by
Employee specifying the alleged failure in reasonable detail (and during such 60
day period, Employee shall continue to be employed by the Company at full pay).
6. TERMINATION BY EMPLOYEE.
a. TERMINATION WITH GOOD REASON. Employee may terminate this Agreement
with Good Reason. "Good Reason" means:
(i) A material breach of the provisions of this Agreement by the
Company (except those set forth in Paragraph 4a above) and Employee
provides at least 15 days' prior written notice to the Company of the
existence of such breach and his intention to terminate this Agreement
(no such termination shall be effective if such breach is cured during
such period); or
(ii) The failure of the Company to comply with the provisions of
Paragraph 4a or to pay any amounts due under the Management Bonus
Program provisions of Paragraph 4b for an uninterrupted 10 day period.
b. TERMINATION WITHOUT GOOD REASON. Employee may terminate this
Agreement without Good Reason on 30 days notice.
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. TERMINATION FOR CAUSE. In the event Employee's employment with the
Company (including its subsidiaries) is terminated by the Company for Cause
as provided in Paragraph 5 then, on or before Employee's last day of
employment with the Company, the provisions of this Paragraph 7 a. shall
apply. These same provisions shall apply if Employee terminates his
employment with the Company without Good Reason.
(i) SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company
shall pay in a lump sum to Employee at the time of Employee's
termination (a) an amount
<PAGE> 3
equal the unpaid salary due to the Employee for services performed
prior to the date of termination of employment plus (b) such amount of
Employee's target incentive bonus as has been earned based upon
fulfilling performance goals, and been accrued but remains unpaid plus
(c) compensation for unused vacation time. Any and all other rights
granted to Employee under this Agreement shall terminate as of the
date of termination.
(ii) NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 12 and 13 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period of
six months.
b. TERMINATION WITHOUT CAUSE. In the event Employee's employment with
the Company (including its subsidiaries) is terminated by the Company for
any reason other than for Cause as provided in Paragraph 5 and other than
as a consequence of Employee's death, disability, or normal retirement
under the Company's retirement plans and practices, then the following
provisions apply. These same provisions shall apply if Employee terminates
his employment with Good Reason as described in Paragraph 6. In addition to
the amounts stated below, Employee shall be paid an amount equal the unpaid
salary due to the Employee for services performed prior to the date of
termination of employment plus compensation for unused vacation time.
(i) SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company
shall pay to Employee as compensation for services rendered to the
Company a cash amount equal to one-half (1/2) of the Employee's annual
base salary as then in effect plus the greater of (x) one-half (1/2)
the amount of Employee's targeted incentive bonus for the fiscal year
in which such employment is terminated, or (y) the amount of the
targeted incentive bonus to which he is entitled but which remains
unpaid. At the election of the Company, the cash amount referred to in
this Paragraph 7 (b) (i) may be paid to Employee in one lump sum or in
periodic installments, without interest, in accordance with the
regular salary payment practices of the Company, with the first such
installment to be paid on or before Employee's last day of employment
with the Company, and no interest shall be paid with respect to any
amount not paid on the Employee's date of termination.
(ii) VESTING OF OPTIONS AND RIGHTS. Notwithstanding the vesting
period provided for in the Stock Incentive Plan and any related stock
option agreements between the Company and Employee for stock options
("options") and stock appreciation rights ("rights") granted Employee
by the Company, all options and stock appreciation rights that were
exercisable at the date of termination or within six months thereafter
shall be immediately exercisable upon termination of employment. In
addition, Employee will have the right to exercise all such options
and rights for the shorter of (a) six months following his termination
of employment or (b) with respect to each option, the remainder of the
period of exercisability under the terms of the appropriate documents
that grant such options.
<PAGE> 4
(iii) BENEFIT PLAN COVERAGE. The Company shall maintain in full
force and effect for Employee and his dependents for six months after
the date of termination, all life, health, accident, and disability
benefit plans and other similar employee benefit plans, programs and
arrangements in which Employee or his dependents were entitled to
participate immediately prior to the date of termination, in such
amounts as were in effect immediately prior to the date of
termination, provided that such continued participation is possible
under the general terms and provisions of such benefit plans, programs
and arrangements. In the event that participation in any benefit plan,
program or arrangement described above is barred, or any such benefit
plan, program or arrangement is discontinued or the benefits
thereunder materially reduced, the Company shall arrange to provide
Employee and his dependents for six months after the date of
termination with benefits substantially similar to those that they
were entitled to receive under such benefit plans, programs and
arrangements immediately prior to the date of termination.
Notwithstanding any time period for continued benefits stated in this
Paragraph 7 (b)(iii), all benefits in this Paragraph 7(b)(iii), will
terminate on the date that Employee becomes an employee of another
employer and eligible to participate in the employee benefit plans of
such other employer. To the extent that Employee was required to
contribute amounts for the benefits described in this Paragraph
7(b)(iii), prior to his termination, he shall continue to contribute
such amounts for such time as these benefits continue in effect after
termination.
(iv) SAVINGS AND OTHER PLANS. Except as otherwise more
specifically provided herein or under the terms of the respective
plans relating to termination of employment, Employee's active
participation in any applicable savings, retirement, profit sharing or
supplemental employee retirement plans or any deferred compensation or
similar plan of the Company or any of its subsidiaries shall continue
only through the last day of his employment. All other provisions,
including any distribution and/or vested rights under such plans,
shall be governed by the terms of those respective plans.
(v) NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 12 and 13 shall continue, beyond the time periods set forth
in such paragraphs, to apply with respect to Employee for six months.
The noncompetition and nonsolicitation provisions of this Agreement
shall no longer apply to Employee if the Company fails to pay the
amounts required under the provisions of Paragraph 7b(i) for an
uninterrupted 10-day period and such failure is not cured within 10
days after written notice of such failure is delivered to the Company.
<PAGE> 5
c. THIS SECTION DOES NOT ADDRESS TERMINATIONS AFTER A CHANGE IN
CONTROL. The provisions of this Paragraph 7 shall apply if Employee's
employment is terminated prior to or more than one year after the
occurrence of a Change of Control (as defined in Paragraph 8). From the
occurrence of any Change of Control until the first anniversary of such
Change of Control, the provisions of Paragraph 8 shall apply in place of
this Paragraph 7, EXCEPT THAT in the event that Employee's employment is
terminated by Employee after a Change of Control without Good Reason, then
the provisions of Paragraph 8 shall not apply and the provisions of
Paragraph 7a shall apply. Termination upon death, and disability are
covered by Paragraphs 9 and 10 and respectively.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANGE OF CONTROL.
a. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. In the event
Employee's employment with the Company is terminated following the
occurrence of a Change of Control (other than as a consequence of his death
or disability) either (i) by the Company for any reason whatsoever or (ii)
by Employee with Good Reason as provided in Paragraph 6, then all benefits
under Paragraphs 7 (b) (i), (ii), (iii) and (iv) shall be extended to
Employee as described in such Paragraphs except that all options and rights
shall be immediately exercisable.
b. NONCOMPETITION PERIOD. In the event Employee's employment with the
Company is terminated following the occurrence of a Change of Control
either by the Company for any reason whatsoever or by Employee for any
reason whatsoever, the provisions of Paragraphs 12 and 13 shall be without
force and effect and shall not apply to Employee.
c. DEFINITION OF "CHANGE OF CONTROL." For purposes of this Agreement,
the term "Change of Control" shall mean
(i) The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of ss. 13(d)(3) orss.
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) (any of the foregoing
described in this Paragraph 8c(i) hereafter a "Person") of 30% or more
of either (a) the then outstanding shares of Capital Stock of the
Company (the "Outstanding Capital Stock") or (b) the combined voting
power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Voting
Securities"), PROVIDED, HOWEVER, that any acquisition by (x) the
Company or any of its subsidiaries, or any employee benefit plan (or
related trust) sponsored or maintained by the Company or any of its
subsidiaries or (y) any Person that is eligible, pursuant to Rule
13d-1(b) under the Exchange Act, to file a statement on Schedule 13G
with respect to its beneficial ownership of Voting Securities, whether
or not such Person shall have filed a statement on Schedule 13G,
unless such Person shall have filed a statement on Schedule 13D with
respect to beneficial ownership of 30% or more of the Voting
Securities or (z) any corporation with respect to which, following
such acquisition, more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition,
of the Outstanding Capital Stock and Voting Securities, as the case
may be, shall not constitute a Change of Control; or
<PAGE> 6
(ii) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a
director subsequent to the date hereof whose election or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of
Regulation 14A, or any successor section, promulgated under the
Exchange Act); or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in
each case, with respect to which all or substantially all holders of
the Outstanding Capital Stock and Voting Securities immediately prior
to such Business Combination do not, following such Business
Combination, beneficially own, directly or indirectly, more than 60%
of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from Business Combination; or
(iv) (a) a complete liquidation or dissolution of the Company or
(b) a sale or other disposition of all or substantially all of the
assets of the Company other than to a corporation with respect to
which, following such sale or disposition, more than 60% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors is then owned
beneficially, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such sale or disposition in substantially the
same proportion as their ownership of the Outstanding Capital Stock
and Voting Securities, as the case may be, immediately prior to such
sale or disposition.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while employed by
the Company both prior to termination of employment and during the effective
term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have accrued
but remain unpaid and a prorated amount of targeted incentive bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus three additional months of the fixed salary and targeted bonus. All
benefits under 7 (b)(ii) and (iv) shall be extended to Employee's estate as
described in such paragraphs. In addition, Employee's eligible dependents shall
receive continued benefit plan coverage under Paragraph 7 (b) (iii) for three
months from the date of Employee's death.
10. TERMINATION BY DISABILITY. Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given EXCEPT that all benefits under Paragraphs 7 (b)(ii), (iii),
and (iv) shall be extended to Employee as described in such paragraphs. For
purposes of this Agreement, "disability" is defined to mean that, as a result of
Employee's incapacity due to physical or mental illness (a) Employee shall have
been absent from his duties as an officer of the Company on a substantially
full-time basis for six (6) consecutive months; and (b) within thirty (30) days
after the Company notifies Employee in writing that it intends to replace him,
Employee shall not have returned to the performance of his duties as an officer
of the Company on a full-time basis.
11. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7(b) provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company under the
<PAGE> 7
circumstances described therein. It is the intention of this Agreement that if
the Company terminates Employee other than for Cause then the payments and other
benefits set forth in Paragraph 7(b) shall constitute the sole and exclusive
remedies of Employee.
12. NONCOMPETITION.
a. At all times during Employee's employment hereunder, and for such
additional periods beyond the expiration or early termination of this
Agreement as may otherwise be required under this Agreement in reference to
this Paragraph 12, Employee shall not, directly or indirectly, engage or
agree to engage in any business or enterprise or be employed by or agree to
be employed by any business or enterprise (a "Competitor"), whether as
owner, operator, shareholder, director, partner, creditor, employee,
consultant, agent or in any capacity whatsoever, that manufactures products
designed to compete directly with products of the Company or markets such
products anywhere in the world where the Company (i) is engaged in business
or (ii) has evidenced an intention of engaging in business. For purposes of
this Paragraph, the parties hereto acknowledge and agree that Concurrent
Computer Corporation is a Competitor. Employee acknowledges that he has
read the foregoing and agrees that the nature of the geographical
restrictions are reasonable given the international nature of the Company's
business.
b. In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions which
are reasonable.
c. Notwithstanding the provisions of the preceding Paragraph 12a,
Employee may accept employment with a company that would be deemed to be a
Competitor of the Company so long as (i) the Competitor has had annual
revenues of at least $1 billion in each of the prior two fiscal years, (ii)
the Competitor's revenues for products and maintenance in direct
competition with the Company does not exceed 50% of its total revenues and
(iii) Employee's responsibilities are solely for divisions or subsidiaries
of the Competitor that do not compete with the Company.
13. NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times during
Employee's employment hereunder, for six months after termination or expiration
of this Agreement, and for such additional periods as may otherwise be required
under this Agreement in reference to this Paragraph 13, Employee shall not,
directly or indirectly, for himself or for any other person, firm, corporation,
partnership, association or other entity (a) attempt to employ, employ or enter
into any contractual arrangement with any employee or former employee of the
Company, its affiliates, subsidiaries or predecessors in interest, unless such
employee or former employee has not been employed by the Company, its
affiliates, subsidiaries or predecessors in interest during the twelve months
prior to Employee's attempt to employ him, or (b) call on or solicit any of the
actual or targeted prospective customers of the Company or its affiliates,
subsidiaries or predecessors in interest with respect to any matters related to
or competitive with the business of the Company.
<PAGE> 8
14. CONFIDENTIALITY.
a. NONDISCLOSURE. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity any proprietary or confidential information
relating to the Company or any information concerning the Company's
financial condition, business line, business strategy or prospects, the
Company's customers, the design, research, development, manufacture,
marketing or sale of the Company's products, or the Company's methods of
operating its business, or intellectual property of any kind, which shall
include, without limitation, inventions, improvements, discoveries,
creations, computer programs, computer hardware, design specifications,
concepts, formulas, trade secrets, ideas, processes, know-how, methods,
proprietary data, software code, source code, products, future products,
techniques, any and all derivative works therefrom and any and all patents
and copyrights therein or any improvements thereof (collectively
"Confidential Information"). Confidential Information shall not include
information which, at the time of disclosure, is known or available to the
general public by publication or otherwise through no act or failure to act
on the part of Employee.
b. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and
all copies and other reproductions and extracts thereof, prepared by
Employee and shall provide the Company with a certificate that the
foregoing materials have in fact been returned or destroyed.
c. BOOKS AND RECORDS. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company upon termination of Employee's employment hereunder or upon the
Company's request at any time.
15. INJUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges that a
breach of any of the provisions of Paragraphs 12, 13 and 14 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately or
reasonably compensated at law. Therefore, Employee agrees that the Company shall
be entitled, if any such breach shall occur or be threatened or attempted, to a
decree of specific performance and to a temporary and permanent injunction,
without the posting of a bond, enjoining and restraining such breach by Employee
or his agents, either directly or indirectly, and that such right to injunction
shall be cumulative to whatever other remedies for actual damages to which the
Company is entitled. Employee further agrees that the Company may set off
against or recoup from any amounts due under this Agreement to the extent of any
losses incurred by the Company as a result of
<PAGE> 9
any breach by Employee of the provisions of Paragraphs 12, 13 and 14 hereof.
Employee further acknowledges that the Company may have additional remedies set
forth in other agreements that may be in effect between Employee and the Company
(including without limitation a Stock Option Agreement between Employee and the
Company) that are available to the Company in the event of a breach of any or
all of the provisions of Paragraphs 12, 13 or 14 and that nothing herein shall
be deemed a waiver of such remedies set forth in such other agreements.
16. SEVERABILITY. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
17. SUCCESSORS. This Agreement shall be binding upon Employee and inure to
his and his estate's benefit, and shall be binding upon and inure to the benefit
of the Company and any permitted successor of the Company. Neither this
Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the Company.
The foregoing sentence shall not be deemed to have any effect upon the rights of
Employee upon a Change of Control.
18. NOTICES. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2000 West Commercial Boulevard
Fort Lauderdale, Florida 33309
Attention: President
To Employee: To the address listed for
Employee in the records of the Company
19. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
20. WAIVER. A waiver by any party of any of the terms and conditions hereof
shall not be construed as a general waiver by such party.
21. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
22. INTERPRETATION. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties of
Employee or the Company upon Employee's termination, the rights and duties set
forth in this Agreement shall control. This Section 22 is not intended to: waive
or amend the requirement regarding May 6, 1998 as described in Section 1a of the
Non-Statutory Stock Option Agreement dated September 4, 1998 between Employee
and the Company; or reduce Employee's rights regarding options' exercisability
on termination of employment to the extent such rights are more favorable under
any option agreement or option plan.
<PAGE> 10
23. SURVIVAL. Notwithstanding the provisions of Paragraph 2, the provisions
of Paragraphs 12, 13 and 14 shall survive the expiration or early termination of
this Agreement.
IN WITNESS WHEREOF, this Employment Agreement has been executed by the parties
as of the date first above written.
COMPANY:
CYBERGUARD CORPORATION
- -----------------------------------
By: Tommy D. Steele
Its: President
EMPLOYEE:
- -----------------------------------
Mike Wittig
<PAGE> 1
EXHIBIT 10.08
AMENDMENT TO STOCK INCENTIVE PLAN
TO: All CyberGuard Corporation's Employees, Directors, Officers, and
Consultants that have stock options under the CyberGuard Corporation's
Stock Incentive Plan
The following Amendment to Stock Incentive Plan is effective as of March 20,
1998.
AMENDMENT TO STOCK INCENTIVE PLAN
WHEREAS, the Board of Directors of CyberGuard Corporation (the "Company")
is responsible for administering, interpreting, and amending the Company's Stock
Incentive Plan (the "Plan");
WHEREAS, in general, the period for exercisability of options under the
Plan is more favorable to retiring employees than those terminated for other
reasons;
WHEREAS, the Board of Directors has determined that it would be in the best
interests of the Company to define the term "retirement" for the purposes of the
Plan;
WHEREAS, the Board of Directors also believes that it would be in the best
interests of the Company to clarify certain issues under the Plan with respect
to the Company's Insider Trading Policy;
NOW THEREFORE, pursuant to Section 11 of the Plan, the Board of Directors
of the Company has approved the following amendments (the "Amendments") to the
terms of the Plan, and such Amendments shall become effective March 20, 1998,
without the requirement that these Amendments also be approved by the
shareholders of the Company.
1. The following definition of "Retirement" and "Termination upon
Retirement" is hereby added to Section 2 of the Plan:
"RETIREMENT" and "TERMINATION UPON RETIREMENT" shall be deemed to have
occurred at anytime when each of the following three events (a, b, and c) has
occurred:
(a) an employee: (i) is terminated without cause, or
(ii) resigns his or her position with the Company, or
(iii) resigns for reasons of disability;
and
(b) such termination occurs on or after his or her sixtieth (60th)
birthday;
and
(c) either (i) employee has at least ten (10) years of service with
the Company, or
(ii) employee has been continuously in the employ of the
Company since July 1, 1996.
This provision shall apply only to employees, not consultants or others (that
is, consultants or others under no circumstances may be deemed to have "retired"
under the Plan).
<PAGE> 2
2. New section 5.8, entitled "INSIDER TRADING POLICY", is hereby added to
the Plan as follows:
Employee shall not purchase or sell any of the Company's securities without
first completing the "Form for Securities Transactions by CyberGuard Corporation
Employees" and obtaining approval from the Company's Chief Financial Officer,
which requirements are more fully set forth in the Company's Insider Trading and
Confidentiality Policy ("Policy"). After termination of Employment, the Employee
shall continue to abide by the Policy's prohibition on sales of Company
securities without prior approval, until the sooner to occur of:
(a) the passage of three (3) business days after the issuance of the
first press release reporting earnings of the Company; or
(b) ninety (90) days after termination of Employee's Employment.
<PAGE> 1
EXHIBIT 10.09
CYBERGUARD CORPORATION
EMPLOYEE STOCK OPTION PLAN
September 4, 1998
1. PURPOSE
The purpose of the CyberGuard Corporation Employee Stock Option Plan
(the "Plan") is to promote the long-term growth and performance of CyberGuard
Corporation (the "Corporation") and its affiliates and to attract and retain
outstanding individuals by awarding stock options, stock appreciation rights,
performance awards, restricted stock and/or other stock-based awards.
2. DEFINITIONS
The following definitions are applicable to the Plan:
"Award" means the grant of Options, SARs, Performance Awards, Restricted
Stock or other stock-based award under the Plan.
"Board" means the Board of Directors of the Corporation.
"Board Committee" means the Compensation Committee of the Board, or in
lieu thereof, the Board may appoint any committee of at least two directors to
administer the Plan.
"Change of Control" means any of the events set forth below; PROVIDED,
HOWEVER, that the Board Committee, in its sole discretion, may specify a more
restrictive definition of Change of Control in any Award agreement and, in such
event, the definition of Change of Control set forth in the Award agreement
shall apply to the Award granted under such Award agreement:
(a) The acquisition in one or more transactions, other than from the
Corporation, by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of either (i) 20% of
the Outstanding Corporation Common Stock or (ii) 20% of the Corporation Voting
Securities; PROVIDED, HOWEVER, that the following shall not constitute a Change
of Control: any acquisition by (1) the Corporation or any of its Subsidiaries,
any employee benefit plan (or related trust) sponsored or maintained by the
Corporation or any of its Subsidiaries, or (2) any corporation with respect to
which, following such acquisition, more than 80% of, respectively, the then
outstanding shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Corporation Common
Stock and Corporation Voting Securities immediately prior to such acquisition in
substantially the same proportion as their ownership, immediately prior to such
acquisition, of the Outstanding Corporation Common Stock and Corporation Voting
Securities, as the case may be; or
<PAGE> 2
(b) Individuals who constitute the Incumbent Board cease for any reason
to constitute in excess of three-fourths (3/4) of the Board; PROVIDED, HOWEVER,
that any individual becoming a director subsequenT to September 4, 1998 whose
election or nomination for election by the Corporation was approved by a vote of
AT least a majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of
office is in connection with an actual or threatened election contest relating
to the election of members of the Board; or
(c) Approval by the stockholders of the Corporation of a reorganization,
merger or consolidation, unless, following such reorganization, merger or
consolidation, all or substantially all of the individuals and entities who were
the respective beneficial owners of the Outstanding Corporation Common Stock and
Corporation Voting Securities immediately prior to such reorganization, merger
or consolidation, following such reorganization, merger or consolidation
beneficially own, directly or indirectly, more than 80% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such
reorganization, merger or consolidation in substantially the same proportion as
their ownership of the Outstanding Corporation Common Stock and Corporation
Voting Securities immediately prior to such reorganization, merger of
consolidation, as the case may be; or
(d) Approval by the stockholders of the Corporation of (i) a complete
liquidation or dissolution of the Corporation or (ii) a sale or other
disposition of 60% or more by value of the assets of the Corporation other than
to a corporation with respect to which, following such sale or disposition, more
than 80% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors is then owned beneficially, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Corporation Common Stock
and Corporation Voting Securities immediately prior to such sale or disposition
in substantially the same proportion as their ownership of the Outstanding
Corporation Common Stock and Corporation Voting Securities, as the case may be,
immediately prior to such sale or disposition.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock of the Corporation, $.01 par value
per share.
"Corporation Voting Securities" means the combined voting power of all
outstanding voting securities of the Corporation entitled to vote generally in
the election of directors for the Board.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, on any date, the closing sale price of one
share of Common Stock, as reported in the NASDAQ National Market System or any
national securities exchange on which the Common Stock is then listed, as
published in the Wall Street Journal or another newspaper of general
circulation, as of such date or, if there were no sales reported as of such
date, as of the last date preceding such date as of which a sale was reported.
In the event that the Common Stock is not listed on the NASDAQ National Market
System or a national securities exchange, Fair Market Value shall be determined
in good faith by the Board Committee in its sole discretion.
<PAGE> 3
"Grant Date" means the date on which an Option under Section 5.1 hereof
or a SAR under Section 6.1 hereof is granted.
"Incumbent Board" means the Board as constituted as of September 4,
1998.
"Non-Statutory Stock Option" means an option to purchase shares of
Common Stock which is not an Incentive Stock Option.
"Option" means any option to purchase shares of Common Stock granted
under Sections 5.1 and 10.1 hereof.
"Option Price" means the purchase price of each share of Common Stock
under an Option.
"Outstanding Corporation Common Stock" means, at any time, the issued
and outstanding shares of Corporation Common Stock.
"Participant" means any employee or consultant of the Corporation and
its affiliates designated by the Board Committee to receive an Award under the
Plan.
"Performance Award" means an Award of shares of Common Stock granted
under Section 7 hereof.
"Performance Period" means the period of time established by the Board
Committee for achievement of certain objectives under Section 7.1 hereof.
"Restriction Period" means the period of time specified in a Performance
Share Award Agreement or a Restricted Stock Award Agreement, as the case may be,
between the Participant and the Corporation during which the following
conditions remain in effect: (i) certain restrictions on the sale or other
disposition of shares of Common Stock awarded under the Plan, and (ii) subject
to the terms of the applicable agreement, a requirement of continued employment
of the Participant in order to prevent forfeiture of the Award.
"Retirement" and "Termination upon Retirement" shall be deemed to have
occurred at anytime when all of the following three events (a, b and c) have
occurred:
(a) an employee: (i) is terminated without cause, or (ii) resigns his
or her position with the Corporation, or (iii) resigns for
reasons of disability; and
(b) such termination occurs on or after his or her sixtieth (60th)
birthday; and
(c) either (i) employee has at least ten (10) years of service with
the Corporation, or (ii) employee has been continuously in the
employ of the Corporation since July 1, 1996.
This provision shall apply only to employees, not consultants or others (that
is, consultants or others under no circumstances may be deemed to have "retired"
under the Plan.)
"Stock Appreciation Rights" or "SARs" means the right to receive a cash
payment from the Corporation equal to the excess of the Fair Market Value of a
stated number of shares of Common Stock at the exercise date over a fixed price
for such shares.
"Subsidiary" means any corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation if each of the
corporations (other than the last corporation in the chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
<PAGE> 4
3. SHARES SUBJECT TO PLAN
3.1 SHARES RESERVED UNDER THE PLAN. Subject to adjustment as provided in
Section 3.2, no more than one million four hundred thousand (1,400,000) shares
of Common Stock shall be cumulatively available for the grant of Stock Options
under the Plan. Any Common Stock issued by the Corporation through the
assumption or substitution of outstanding grants from an acquired corporation or
entity shall not reduce the shares available for grants under the Plan. Shares
of Common Stock to be issued pursuant to the Plan may be authorized and unissued
shares, treasury shares, or any combination thereof. Subject to Section 6.2
hereof, if any shares of Common Stock subject to an Award hereunder are
forfeited or any such Award otherwise terminates without the issuance of such
shares of Common Stock to a Participant, or if any shares of Common Stock are
surrendered by a Participant in full or partial payment of the Option Price of
an Option, such shares, to the extent of any such forfeiture, termination or
surrender, shall again be available for grant under the Plan; PROVIDED HOWEVER,
that shares of Common Stock surrendered by a Participant who is subject to
Section 16 of the Exchange Act, or any successor thereto, in payment of the
Option Price, shall be available for grant under the Plan only to Participants
not subject to such Section.
3.2 ADJUSTMENTS. Subject to Section 12 hereof, the aggregate number of
shares of Common Stock which may be awarded under the Plan and outstanding
Awards shall be adjusted by the Board Committee to reflect a change in the
capitalization of the Corporation, including but not limited to, a stock
dividend or split, recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, spin-off, spin-out or other distribution of
assets to shareholders.
4. ADMINISTRATION OF PLAN
4.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board Committee; PROVIDED HOWEVER, the Board Committee may delegate some or all
of its authority and responsibility under the Plan with respect to Awards to
Participants who are not subject to Section 16 of the Exchange Act to the Chief
Executive Officer of the Corporation. The Board Committee shall have authority
to interpret the Plan, to establish, amend, and rescind any rules and
regulations relating to the Plan, to prescribe the form of any agreement or
instrument executed in connection herewith, and to make all other determinations
necessary or advisable for the administration of the Plan. All such
interpretations, rules, regulations and determinations shall be conclusive and
binding on all persons and for all purposes. In addition, the Board Committee
shall have authority, without amending the Plan, to grant Awards hereunder to
Participants who are foreign nationals or employed outside the United States or
both, on terms and conditions different from those specified herein as may, in
the sole judgment and discretion of the Board Committee, be necessary or
desirable to further the purpose of the Plan.
4.2 DESIGNATION OF PARTICIPANTS. Participants shall be selected, from
time to time, by the Board Committee, from those employees and consultants of
the Corporation and its affiliates who, in the opinion of the Board Committee,
have the capacity to contribute materially to the continued growth and
successful performance of the Corporation.
5. STOCK OPTIONS
5.1 GRANTS. Options may be granted, from time to time, to such employees
and consultants of the Corporation and its affiliates as may be selected by the
Board Committee. The Option Price shall be determined by the Board Committee
effective on the Grant Date; PROVIDED HOWEVER, that such price shall not
<PAGE> 5
be less than fifty (50%) of the Fair Market Value of a share of Common Stock on
the Grant Date. The number of shares of Common Stock subject to each option
granted to each Participant, the terms of each option, and any other terms and
conditions of an Option granted hereunder shall be determined by the Board
Committee, in its sole discretion, effective on the Grant Date; PROVIDED
HOWEVER, that no option shall be exercisable any later than ten (10) years from
the Grant Date. Each option shall be evidenced by a Stock Option Agreement
between the Participant and the Corporation which shall specify the Option
Price, the term of the Option, the number of shares of Common Stock to which the
Option pertains, the conditions upon which the Option becomes exercisable and
such other terms and conditions as the Board Committee shall determine.
5.2 PAYMENT OF OPTION PRICE. No shares of Common Stock shall be issued
upon exercise of an Option until full payment of the Option Price therefor by
the Participant. Upon exercise, the Option Price may be paid in cash, in shares
of Common Stock having a Fair Market Value equal to the Option Price, or in any
combination thereof.
5.3 RIGHTS AS SHAREHOLDERS. Participants shall not have any of the
rights of a shareholder with respect to any shares subject to an Option until
such shares have been issued upon the proper exercise of such Option.
5.4 TRANSFERABILITY OF OPTIONS. Options granted under the Plan may not
be sold, transferred, pledged, assigned, hypothecated or otherwise disposed of
except by will or by the laws of descent and distribution. All Options granted
to a Participant under the Plan shall be exercisable during the lifetime of such
Participant only by such Participant, his agent, guardian or attorney-in-fact.
5.5 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an employee
or a consultant of either the Corporation or of any of its affiliates, the
Options granted hereunder shall be exercisable in accordance with the Stock
Option Agreement between the Participant and the Corporation.
6. STOCK APPRECIATION RIGHTS
6.1 GRANTS. Stock Appreciation Rights may be granted, from time to time,
to such employees and consultants of the Corporation and its affiliates as may
be selected by the Board Committee. SARs may be granted at the discretion of the
Board Committee either (i) in connection with an Option or (ii) independent of
an Option. The price from which appreciation shall be computed shall be
established by the Board Committee at the Grant Date; PROVIDED HOWEVER, that
such price shall not be less than fifty percent (50%) of the Fair Market Value
of the number of shares of Common Stock subject of the grant on the Grant Date.
In the event the SAR is granted in connection with an Option, the fixed price
from which appreciation shall be computed shall be the Option Price. Each grant
of a SAR shall be evidenced by a Stock Appreciation Rights Agreement between the
Participant and the Corporation which shall specify the type of SAR granted, the
number of SARs, the conditions upon which the SARs vest and such other terms and
conditions as the Board Committee shall determine.
6.2 EXERCISE OF SARs. SARs may be exercised upon such terms and
conditions as the Board Committee shall determine; PROVIDED HOWEVER, that SARs
granted in connection with Options may be exercised only to the extent the
related Options are then exercisable. Notwithstanding Section 3.1 hereof, upon
exercise of a SAR granted in connection with an Option as to all or some of the
shares subject of such Award, the related Option shall be automatically canceled
to the extent of the number of shares subject of the exercise, and such shares
shall no longer be available for grant hereunder. Conversely, if the related
Option is
<PAGE> 6
exercised as to some or all of the shares subject of such Award, the related SAR
shall automatically be canceled to the extent of the number of shares of the
exercise, and such shares shall no longer be available for grant hereunder.
6.3 PAYMENT OF EXERCISE. Upon exercise of a SAR, the holder shall be
paid in cash the excess of the Fair Market Value of the number of shares subject
of the exercise over the fixed price, which in the case of a SAR granted in
connection with an Option shall be the Option Price for such, shares.
6.4 RIGHTS OF SHAREHOLDERS. Participants shall not have any of the
rights of a shareholder with respect to any Options granted in connection with a
SAR until shares have been issued upon the proper exercise of an Option.
6.5 TRANSFERABILITY OF SARs. SARs granted under the Plan may not be
sold, transferred, pledged, assigned, hypothecated or otherwise disposed of
except by will or by the laws of descent and distribution. All SARs granted to a
Participant under the Plan shall be exercisable during the lifetime of such
Participant only by such Participant, his agent, guardian, or attorney-in-fact.
6.6 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an employee
or a consultant of either the Corporation or of any of its affiliates, SARs
granted hereunder shall be exercisable in accordance with the Stock Appreciation
Rights Agreement between the Participant and the Corporation.
7. PERFORMANCE AWARDS
7.1 AWARDS. Awards of shares of Common Stock may be made, from time to
time, to such employees and consultants of the Corporation and its affiliates as
may be selected by the Board Committee. The release of such shares to the
Participant at the lapse of restriction on the sale or transfer of shares
subject to such Awards shall be contingent upon (i) achievement of such
corporate, sector, division or other objectives during the Performance Period as
shall be established by the Board Committee and (ii) the expiration of the
Restriction Period. Except as provided in the Performance Share Award Agreement
between the Participant and the Corporation, shares subject to such Awards under
this Section 7.1 shall be released to the Participant only after the expiration
of the relevant Restriction Period. Each Award under this Section 7.1 shall be
evidenced by a Performance Share Award Agreement between the Participant and the
Corporation which shall specify the applicable performance objectives, the
Performance Period, the Restriction Period, any forfeiture conditions and such
other terms and conditions as the Board Committee shall determine.
7.2 STOCK CERTIFICATES. Upon an Award of shares of Common Stock under
Section 7.1 of the Plan, the Corporation shall issue a certificate registered in
the name of the Participant bearing the following legend and any other legend
required by any federal or state securities laws or by the Florida Business
Corporation Act:
"The sale or other transfer of the shares of stock represented by this
certificate is subject to certain restrictions set forth in the
CyberGuard Corporation Employee Stock Option Plan, administrative
rules adopted pursuant to such Plan and a Performance Share Award
Agreement between the registered owner and CyberGuard Corporation. A
copy of the Plan, such rules and such Agreement may be obtained from
the Secretary of CyberGuard Corporation.
<PAGE> 7
Unless otherwise provided in the Performance Share Award Agreement between the
Participant and the Corporation, such certificates shall be retained by the
Corporation until the expiration of the Restriction Period. Upon the expiration
of the Restriction Period, the Corporation shall (i) cause the removal of the
legend from the certificates for such shares as to which a Participant is
entitled in accordance with the Performance Share Award Agreement between the
Participant and the Corporation and (ii) release such shares to the custody of
the Participant.
7.3 RIGHTS AS SHAREHOLDERS. Subject to the provisions of the
Performance Share Award Agreement between the Participant and the Corporation,
during the Performance Period, Participants may exercise full voting rights with
respect to all shares awarded thereto under Section 7.1 hereof and shall be
entitled to receive dividends and other distributions paid with respect to those
shares. During the period between the completion of the Performance Period and
the expiration of the Restriction Period, Participants may exercise full voting
rights and shall be entitled to receive dividends and other distributions only
as to the number of shares determined in accordance with the Performance Share
Award Agreement between the Participant and the Corporation.
7.4 TRANSFERABILITY OF SHARES. Certificates evidencing the shares of
Common Stock awarded under the Plan shall not be sold, exchanged, assigned,
transferred, pledged, hypothecated or otherwise disposed of until the expiration
of the Restriction Period.
7.5 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an
employee or a consultant of either the Corporation or of one of its affiliates,
the number of shares subject of the Award, if any, to which the Participant
shall be entitled shall be determined in accordance with the Performance Share
Award Agreement between the Participant and the Corporation.
7.6 TRANSFER OF EMPLOYMENT. If a Participant transfers employment from
one business unit of the Corporation or any of its affiliates to another
business unit during a Performance Period, such Participant shall be eligible to
receive such number of shares of Common Stock as the Board Committee may
determine based upon such factors as the Board Committee in its sole discretion
may deem appropriate.
8. RESTRICTED STOCK AWARDS
8.1 AWARDS. Awards of shares of Common Stock subject to such
restrictions as to vesting and otherwise as the Board Committee shall determine,
may be made, from time to time, to employees and consultants of the Corporation
and its affiliates as may be selected by the Board Committee. The Board
Committee may in its sole discretion at the time of the Award or at any time
thereafter provide for the early vesting of such Award prior to the expiration
of the Restriction Period. Each Award under this Section 8.1 shall be evidenced
by a Restricted Stock Award Agreement between the Participant and the
Corporation which shall specify the vesting schedule, any rights of
acceleration, any forfeiture conditions, and such other terms and conditions as
the Board Committee shall determine.
8.2 STOCK CERTIFICATES. Upon an Award of shares of Common Stock under
Section 8.1 of the Plan, the Corporation shall issue a certificate registered in
the name of the Participant bearing the following legend and any other legend
required by any federal or state securities laws or by the Florida Business
Corporation Act.
<PAGE> 8
"The sale or other transfer of the shares of stock represented
by this certificate is subject to certain restrictions set
forth in the CyberGuard Corporation Employee Stock Option
Plan, administrative rules adopted pursuant to such Plan and a
Restricted Stock Award Agreement between the registered owner
and CyberGuard Corporation. A copy of the Plan, such rules and
such agreement may be obtained form the Secretary of
CyberGuard Corporation."
Unless otherwise provided in the Restricted Stock Award Agreement between the
Participant and the Corporation, such certificates shall be retained by the
Corporation until the expiration of the Restriction Period. Upon the expiration
of the Restriction Period, the Corporation shall (i) cause the removal of the
legend from the certificates for such shares as to which a Participant is
entitled in accordance with the Restricted Stock Award Agreement between the
Participant and the Corporation and (ii) release such shares to the custody of
the Participant.
8.3 RIGHTS AS SHAREHOLDERS. During the Restriction Period, Participants
may exercise full voting rights with respect to all shares awarded thereto under
Section 8.1 hereof and shall be entitled to receive dividends and other
distributions paid with respect to those shares.
8.4 TRANSFERABILITY OF SHARES. Certificates evidencing the shares of
Common Stock awarded under the Plan shall not be sold, exchanged, assigned,
transferred, pledged, hypothecated or otherwise disposed of until the expiration
of the Restriction Period.
8.5 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an
employee or a consultant of either the Corporation or of any of its affiliates,
the number of shares subject of the Award, if any, to which the Participant
shall be entitled shall be determined in accordance with the Restricted Stock
Award Agreement between the Participant and the Corporation. All remaining
shares as to which restrictions apply at the date of termination of employment
shall be forfeited subject to such exceptions, if any, authorized by the Board
Committee.
9. OTHER STOCK-BASED AWARDS
Awards of shares of Common Stock and other awards that are valued in
whole or in part by reference to, or are otherwise based on, Common Stock, may
be made, from time to time, to employees and consultants of the Corporation and
its affiliates as may be selected by the Board Committee. Such Awards may be
made alone or in addition to or in connection with any other Award hereunder.
The Board Committee may in its sole discretion determine the terms and
conditions of any such Award. Each such Award shall be evidenced by an agreement
between the Participant and the Corporation which shall specify the number of
shares of Common Stock subject of the Award, any consideration therefor, any
vesting or performance requirements and such other terms and conditions as the
Board Committee shall determine.
10. (Omitted Intentionally)
11. AMENDMENT OR TERMINATION OF PLAN
Until such time as a Change of Control shall have occurred, the Board
or the Board Committee may amend, suspend or terminate the Plan or any part
thereof from time to time, provided that no change may be
<PAGE> 9
made which would impair the rights of a Participant to whom shares of Common
Stock have theretofore been awarded without the consent of said Participant.
12. MISCELLANEOUS
12.1 RIGHTS OF PARTICIPANTS. Nothing in the Plan shall interfere with
or limit in any way the right of the Corporation or any affiliate to terminate
any Participant's employment or consultancy at any time, nor confer upon any
Participant any right to continued employment or consulting status with the
Corporation or any affiliate.
12.2 TAX WITHHOLDING. The Corporation shall have the authority to
withhold, or to require a Participant to remit to the Corporation, prior to
issuance or delivery of any shares or cash hereunder, an amount sufficient to
satisfy federal, state and a local tax withholding requirements associated with
any Award. In addition, the Corporation may, in its sole discretion, permit a
Participant to satisfy any tax withholding requirements, in whole or in part, by
(i) delivering to the Corporation shares of Common Stock held by such
Participant having a Fair Market Value equal to the amount of the tax or (ii)
directing the Corporation to retain shares of Common stock otherwise issuable to
the Participant under the Plan.
12.3 STATUS OF AWARDS. Awards hereunder shall not be deemed
compensation for purposes of computing benefits under any retirement plan of the
Corporation or affiliate and shall not affect any benefits under any other
benefit plan now or hereafter in effect under which the availability or amount
of benefits is related to the level of compensation.
12.4 WAIVER OF RESTRICTIONS. The Board Committee may, in its sole
discretion, based on such factors as the Board Committee may deem appropriate,
waive in whole or in part, any remaining restrictions or vesting requirements in
connection with any Award hereunder.
12.5 DELEGATION TO MANAGEMENT. The Board Committee may delegate to one
or more officers of the Corporation or a committee of officers the right to
grant Awards hereunder to employees and consultants who are not officers or
directors of the Corporation and to cancel or suspend Awards to employees and
consultants who are not officers or directors of the Corporation.
12.6 ADJUSTMENT OF AWARDS. Subject to Section 11, the Board Committee
shall be authorized to make adjustments in performance award criteria or in the
terms and conditions of other Awards in recognition of unusual or nonrecurring
events affecting the Corporation or its financial statements or changes in
applicable laws, regulations or accounting principles; provided however, that no
such adjustment shall impair the rights of any Participant without his or her
consent. The Board Committee may also make Awards hereunder in replacement of,
or as alternatives to, Awards previously granted to Participants, including
without limitation, previously granted Options having higher Option Prices and
grants or rights under any other plan of the Corporation or of any acquired
entity. The Board Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Award in the manner and to the
extent it shall deem desirable to carry it into effect. In the event the
Corporation shall assume outstanding employee benefit awards or the right or
obligation to make future such awards in connection with the acquisition of
another corporation or business entity, the Board Committee may, in its
discretion, make such adjustments in the terms of Awards under the Plan as it
shall deem appropriate.
<PAGE> 10
12.7 CONSIDERATION FOR AWARDS. Except as otherwise required in any
applicable agreement or by the terms of the Plan, Participants under the Plan
shall not be required to make any payment or provide consideration for an Award
other than the rendering of services.
12.8 EFFECTIVE DATE AND TERM OF PLAN. The Plan shall be effective as of
September 4, 1998. Unless terminated under the provisions of Section 11 hereof,
the Plan shall continue in effect until terminated by the Board.
Approved by the Board of Directors this 4th day of September, 1998.
Attested:
-----------------------------------
<PAGE> 1
EXHIBIT 10.10
AMENDMENT NO. 1 TO EMPLOYEE STOCK OPTION PLAN
WHEREAS, the Board of Directors of CyberGuard Corporation ("Company") is
responsible for administering, interpreting, and amending the Company's Employee
Stock Option Plan that was initially adopted and approved on September 4, 1998
("Plan"); and
WHEREAS, the Board of Directors has determined that it would be in the best
interests of the Company to increase the number of shares in the Plan; and
NOW THEREFORE, pursuant to Section 11 of the Plan, the Board of Directors of the
Company has approved the following amendment ("Amendment") to the terms of the
Plan, and such Amendment shall become effective August 10, 1999, without the
requirement that this Amendment also be approved by the shareholders of the
Company:
1. Section 3.1 of the Plan, SHARES RESERVED UNDER THE PLAN, is hereby
amended to increase the number of shares of Common Stock cumulatively
available for the grant of Stock Options under the Plan from 1,400,000
to 2,500,000.
<PAGE> 1
EXHIBIT 10.12
STOCK OPTION AGREEMENTS
CYBERGUARD CORPORATION
NON-STATUTORY STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is entered into as of the
, 199 , between CyberGuard Corporation ("Corporation"), a Florida
corporation having its principal office in Ft. Lauderdale, Florida, and
, ("Employee") of the Corporation or one of its subsidiaries.
1. THE OPTION. Under and subject to the provisions of the Corporation's
Employee Stock Option Plan as in effect from time to time ("Plan"), the
Corporation hereby grants to Employee a non-statutory option to purchase an
aggregate of shares of Common Stock of the Corporation at the price of
U.S. $ per share ("Option"), subject to the following conditions:
(a) The Option shall not be exercisable to any extent until and unless
the Employee shall have remained continuously in the employ of the
Corporation for one year from the date of hire. Nothing herein shall limit
or restrict the Corporation's rights to terminate the Employee's
employment.
(b) During the lifetime of the Employee, the Option shall be
exercisable only by the Employee, and (except when Section 2 is applicable)
only while the Employee continues as an employee of the Corporation.
(c) Notwithstanding any other provision of this Agreement, the Option
shall expire no later than five years from the date hereof and shall not be
exercisable thereafter.
(d) The number of shares of Common Stock with respect to which the
Option may be exercised from time to time is limited to the following
percentages of the aggregate number of shares optioned hereby:
(i) After the end of one year and prior to the end of two years
from the date hereof, not more than thirty-three percent (33.333%);
(ii) After the end of two years and prior to the end of three
years from the date hereof, not more than sixty-six percent (66.666%);
(iii) After the end of three years from the date hereof,
one-hundred percent (100%).
2. TERMINATION OF EMPLOYMENT
(a) DEATH. In the event of the death of the Employee, the Option shall
be (i) exercisable only by the executor or administrator of the Employee's
estate or by the person or persons to whom the Employee's rights under the
Option shall pass by the Employee's will or the laws of descent and
distribution, (ii) exercisable if and to the extent that the
<PAGE> 2
Option was exercisable at the date of the Employee's death and (iii) shall
remain exercisable for the shorter of (a) one year following Employee's
death or (b) the remainder of the period of exercisability as stated in
Section 1(c).
(b) DISABILITY. In the event of termination of Employee's employment
due to disability of the Employee, the Option shall be exercisable by the
Employee only to the extent that the Option was exercisable at the date of
such cessation of employment, and no more, and shall remain exercisable for
the shorter of (i) one year following Employee's termination of employment
or (ii) the remainder of the period of exercisability as stated in Section
1(c).
(c) RETIREMENT. In the event of Retirement of the Employee, the Option
shall be exercisable by the Employee only to the extent that the Option was
exercisable at the date of such cessation of employment, and no more, and
shall remain exercisable for the shorter of (i) one year following
Employee's termination of employment or (ii) the remainder of the period of
exercisability as stated in Section 1(c). The term "Retirement" is
specially defined in the Plan; generally, a termination in service from the
Company will be covered by provisions regarding terminations for reasons
other than death, disability, or Retirement, and not this paragraph.
(d) TERMINATION OF EMPLOYMENT. In the event of termination of
Employee's employment for reasons other than death, disability or
Retirement, the Option shall be exercisable by the Employee only to the
extent that it was exercisable at the date of such cessation of employment,
and no more, and shall remain exercisable for the shorter of (i) three (3)
months following Employee's termination of employment or (ii) the remainder
of the period of exercisability as stated in Section 1(c).
(e) CHANGE OF CONTROL. If a "Change of Control" (as defined in the
Plan) shall occur and Employee's employment is thereafter terminated by the
Corporation, then the Options shall become 100% immediately exercisable in
full (to the extent that they otherwise have not expired) and shall remain
exercisable for the shorter of (i) one year following Employee's
termination of employment or (ii) the remainder of the period of
exercisability as stated in Section 1(c).
Notwithstanding the foregoing provisions of this section 2, in the event that:
(x) the Employee has entered into an Employment Agreement with the Corporation
(the "Employment Agreement"); and (y) if Employee's Employment Agreement is
terminated under circumstances that give Employee a longer period of exercise or
greater rights than those set forth in this Agreement, then the terms and
conditions governing exercisability and continuation of the Option after
termination of Employment contained in the Employment Agreement shall supersede
those set forth in this Agreement.
3. EXERCISE OF OPTION. The Option may be exercised by delivering to the
Corporation at the office of the Corporate Secretary (a) a written notice,
signed by the person entitled to exercise the Option, stating the number of
shares such person then elects to purchase hereunder, (b) payment in an amount
equal to the full purchase price of the shares then to be purchased, and (c) in
the event the Option is exercised by any person other than the Employee,
evidence satisfactory to the Corporation that such person has the right to
exercise the Option. If it is required (in the estimation of the Corporation),
the Corporation also may require
<PAGE> 3
the payment of any withholding or other applicable taxes at the time of exercise
of the Option. Payment shall be made (i) in cash, (ii) in previously acquired
shares of Common Stock of the Corporation, valued at their Fair Market Value on
the day preceding the exercise date of the Option, or (iii) in any combination
of cash and such shares. Shares tendered in payment of the purchase price which
have been acquired through an exercise of a stock option shall have been held at
least six (6) months prior to exercise of the Option. Upon the due exercise of
the Option, the Corporation shall issue in the name of the person exercising the
Option, and deliver to the Employee, one or more certificates for the shares in
respect of which the Option shall have been so exercised. The Employee
acknowledges that the Employee does not have any rights as a shareholder in
respect of any shares as to which the Option shall not have been duly exercised
and that no rights as a shareholder shall arise in respect of any such shares
until and except to the extent that a certificate or certificates for such
shares shall have been issued.
4. PROHIBITION AGAINST TRANSFER. The Option and rights granted by the
Corporation under this Agreement are not transferable except by will or the laws
of descent and distribution. Without limiting the generality of the foregoing,
the Option may not be assigned, transferred except as aforesaid, pledged or
hypothecated, shall not be assignable by operation of law, and shall not be
subject to execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of the Option contrary to
the provisions hereof, or the levy of any execution, attachment or similar
process upon the Option, shall be null and void and without effect.
5. ADJUSTMENTS. In case there shall be a merger, reorganization,
consolidation, recapitalization, stock dividend, a change in corporate structure
such that shares of Common Stock are changed into or become exchangeable for a
larger or smaller number of shares, or an issuance of Common Stock by the
Corporation in exchange for which the Corporation (or its then current
shareholders, on a pro-rata basis) does not receive cash or other property, the
number of shares subject to outstanding Options shall be increased or decreased
in direct proportion to the increase or decrease in the number of shares of
Common Stock by reason of such change in corporate structure. The number of
shares shall always be a whole number, and the purchase price per share of any
outstanding Options shall, in the case of an increase in the number of shares,
be proportionately reduced, and in the case of a decrease in the number of
shares, shall be proportionately increased.
6. EMPLOYMENT BY PARENT, SUBSIDIARY OR SUCCESSOR. For the purpose of this
Agreement, employment by a parent or subsidiary of or a successor to the
Corporation shall be considered employment by the Corporation. "Parent" and
"subsidiary" as used herein shall have the meaning of "parent" and "subsidiary
corporation," respectively, as defined in Section 424 of the Internal Revenue
Code of 1986, as amended, or subsequent comparable statute.
7. COMMITTEE. The Corporation's Board of Directors and the Committee
administering the Plan shall have authority, subject to the express provisions
of the Plan as in effect from time to time, to construe this Agreement and the
Plan, to establish, amend and rescind rules and regulations relating to the
Plan, and to make all other determinations in the judgment of the Committee
necessary or desirable for the administration of the Plan. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in this
Agreement in the manner and to the extent it shall deem expedient to carry the
Plan into effect, and it shall be the sole and final judge of such expediency.
8. INCORPORATION OF PLAN PROVISIONS. This Agreement is made pursuant to the
Plan, the terms and conditions of which are hereby incorporated by reference.
Capitalized terms not otherwise defined
<PAGE> 4
herein have the meanings set forth in the Plan. In the event of a conflict
between the terms of this Agreement and the Plan, the terms of the Plan shall
govern.
9. MISCELLANEOUS.
(i) Words such as "herein", "hereof" and "hereunder" when used in this
Agreement shall refer to this Agreement as a whole unless the context
requires otherwise.
(ii) This Agreement embodies the entire agreement between the parties
hereto with respect to the Option.
(iii) This Agreement shall be governed by and construed in accordance
with the laws of the State of Florida.
(iv) This Agreement may be amended or modified only in a written
document executed by both of the parties hereto.
(v) No waiver of any provision of this Agreement shall in any event be
effective unless the same shall be in writing and signed by the party
granting such waiver and then such waiver shall be effective only in the
specific instance and for the specific purpose for which given.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Option
Agreement in duplicate as of the day and year first above written.
CYBERGUARD CORPORATION EMPLOYEE
By:
------------------------------------- --------------------------------
Tommy D. Steele, President and
Chief Operating Officer
CYBERGUARD CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is entered into as of the
, 199 , between CyberGuard Corporation ("Corporation"), a Florida
corporation having its principal office in Ft. Lauderdale, Florida, and
, ("Employee") of the Corporation or one of its subsidiaries.
1. THE OPTION. Under and subject to the provisions of the Corporation's
Stock Incentive Plan as in effect from time to time ("Plan"), the Corporation
hereby grants to Employee an incentive stock option, that is intended to comply
with Section 422 of the Internal Revenue Code, to purchase an aggregate of
shares of Common Stock of the Corporation at the price of U.S. $ per share
("Option"), subject to the following conditions:
(a) The Option shall not be exercisable to any extent until and unless
the Employee shall have remained continuously in the employ of the
Corporation for one year from the date of hire. Nothing herein shall limit
or restrict the Corporation's rights to terminate the Employee's
employment.
<PAGE> 5
(b) During the lifetime of the Employee, the Option shall be
exercisable only by the Employee, and (except when Section 2 is applicable)
only while the Employee continues as an employee of the Corporation.
(c) Notwithstanding any other provision of this Agreement, the Option
shall expire no later than five years from the date hereof and shall not be
exercisable thereafter.
(d) The number of shares of Common Stock with respect to which the
Option may be exercised from time to time is limited to the following
percentages of the aggregate number of shares optioned hereby:
(iv) After the end of one year and prior to the end of two years
from the date hereof, not more than thirty-three percent (33.333%);
(v) After the end of two years and prior to the end of three
years from the date hereof, not more than sixty-six percent (66.666%);
(vi) After the end of three years from the date hereof,
one-hundred percent (100%).
2. TERMINATION OF EMPLOYMENT
(a) DEATH. In the event of the death of the Employee, the Option shall
be (i) exercisable only by the executor or administrator of the Employee's
estate or by the person or persons to whom the Employee's rights under the
Option shall pass by the Employee's will or the laws of descent and
distribution, (ii) exercisable if and to the extent that the Option was
exercisable at the date of the Employee's death and (iii) shall remain
exercisable for the shorter of (a) one year following Employee's death or
(b) the remainder of the period of exercisability as stated in Section
1(c).
(b) DISABILITY. In the event of termination of Employee's employment
due to disability of the Employee, the Option shall be exercisable by the
Employee only to the extent that the Option was exercisable at the date of
such cessation of employment, and no more, and shall remain exercisable for
the shorter of (i) one year following Employee's termination of employment
or (ii) the remainder of the period of exercisability as stated in Section
1(c).
(c) RETIREMENT. In the event of Retirement of the Employee, the Option
shall be exercisable by the Employee only to the extent that the Option was
exercisable at the date of such cessation of employment, and no more, and
shall remain exercisable for the shorter of (i) one year following
Employee's termination of employment or (ii) the remainder of the period of
exercisability as stated in Section 1(c). The term "Retirement" is
specially defined in the Plan; generally, a termination in service from the
Company will be covered by provisions regarding terminations for reasons
other than death, disability, or Retirement, and not this paragraph.
<PAGE> 6
(d) TERMINATION OF EMPLOYMENT. In the event of termination of
Employee's employment for reasons other than death, disability or
Retirement, the Option shall be exercisable by the Employee only to the
extent that it was exercisable at the date of such cessation of employment,
and no more, and shall remain exercisable for the shorter of (i) three (3)
months following Employee's termination of employment or (ii) the remainder
of the period of exercisability as stated in Section 1(c).
(e) CHANGE OF CONTROL. If a "Change of Control" (as defined in the
Plan) shall occur and Employee's employment is thereafter terminated by the
Corporation, then the Options shall become 100% immediately exercisable in
full (to the extent that they otherwise have not expired) and shall remain
exercisable for the shorter of (i) one year following Employee's
termination of employment or (ii) the remainder of the period of
exercisability as stated in Section 1(c).
Notwithstanding the foregoing provisions of this section 2, in the event that:
(x) the Employee has entered into an Employment Agreement with the Corporation
(the "Employment Agreement"); and (y) if Employee's Employment Agreement is
terminated under circumstances that give Employee a longer period of exercise or
greater rights than those set forth in this Agreement, then the terms and
conditions governing exercisability and continuation of the Option after
termination of Employment contained in the Employment Agreement shall supersede
those set forth in this Agreement.
3. EXERCISE OF OPTION. The Option may be exercised by delivering to the
Corporation at the office of the Corporate Secretary (a) a written notice,
signed by the person entitled to exercise the Option, stating the number of
shares such person then elects to purchase hereunder, (b) payment in an amount
equal to the full purchase price of the shares then to be purchased, and (c) in
the event the Option is exercised by any person other than the Employee,
evidence satisfactory to the Corporation that such person has the right to
exercise the Option. If it is required (in the estimation of the Corporation),
the Corporation also may require the payment of any withholding or other
applicable taxes at the time of exercise of the Option. Payment shall be made
(i) in cash, (ii) in previously acquired shares of Common Stock of the
Corporation, valued at their Fair Market Value on the day preceding the exercise
date of the Option, or (iii) in any combination of cash and such shares. Shares
tendered in payment of the purchase price which have been acquired through an
exercise of a stock option shall have been held at least six (6) months prior to
exercise of the Option. Upon the due exercise of the Option, the Corporation
shall issue in the name of the person exercising the Option, and deliver to the
Employee, one or more certificates for the shares in respect of which the Option
shall have been so exercised. The Employee acknowledges that the Employee does
not have any rights as a shareholder in respect of any shares as to which the
Option shall not have been duly exercised and that no rights as a shareholder
shall arise in respect of any such shares until and except to the extent that a
certificate or certificates for such shares shall have been issued.
4. PROHIBITION AGAINST TRANSFER. The Option and rights granted by the
Corporation under this Agreement are not transferable except by will or the laws
of descent and distribution. Without limiting the generality of the foregoing,
the Option may not be assigned, transferred except as aforesaid, pledged or
hypothecated, shall not be assignable by operation of law, and shall not be
subject to execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of the Option contrary to
the provisions hereof, or the levy of any execution, attachment or similar
process upon the Option, shall be null and void and without effect.
<PAGE> 7
5. ADJUSTMENTS. In case there shall be a merger, reorganization,
consolidation, recapitalization, stock dividend, a change in corporate structure
such that shares of Common Stock are changed into or become exchangeable for a
larger or smaller number of shares, or an issuance of Common Stock by the
Corporation in exchange for which the Corporation (or its then current
shareholders, on a pro-rata basis) does not receive cash or other property, the
number of shares subject to outstanding Options shall be increased or decreased
in direct proportion to the increase or decrease in the number of shares of
Common Stock by reason of such change in corporate structure. The number of
shares shall always be a whole number, and the purchase price per share of any
outstanding Options shall, in the case of an increase in the number of shares,
be proportionately reduced, and in the case of a decrease in the number of
shares, shall be proportionately increased.
6. EMPLOYMENT BY PARENT, SUBSIDIARY OR SUCCESSOR. For the purpose of this
Agreement, employment by a parent or subsidiary of or a successor to the
Corporation shall be considered employment by the Corporation. "Parent" and
"subsidiary" as used herein shall have the meaning of "parent" and "subsidiary
corporation," respectively, as defined in Section 424 of the Internal Revenue
Code of 1986, as amended, or subsequent comparable statute.
7. COMMITTEE. The Corporation's Board of Directors and the Committee
administering the Plan shall have authority, subject to the express provisions
of the Plan as in effect from time to time, to construe this Agreement and the
Plan, to establish, amend and rescind rules and regulations relating to the
Plan, and to make all other determinations in the judgment of the Committee
necessary or desirable for the administration of the Plan. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in this
Agreement in the manner and to the extent it shall deem expedient to carry the
Plan into effect, and it shall be the sole and final judge of such expediency.
8. INCORPORATION OF PLAN PROVISIONS. This Agreement is made pursuant to the
Plan, the terms and conditions of which are hereby incorporated by reference.
Capitalized terms not otherwise defined herein have the meanings set forth in
the Plan. In the event of a conflict between the terms of this Agreement and the
Plan, the terms of the Plan shall govern.
9. MISCELLANEOUS.
(iii) Words such as "herein", "hereof" and "hereunder" when used
in this Agreement shall refer to this Agreement as a whole unless the
context requires otherwise. (iv) This Agreement embodies the entire
agreement between the parties hereto with respect to the Option.
(iii) This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
(iv) This Agreement may be amended or modified only in a written
document executed by both of the parties hereto.
(v) No waiver of any provision of this Agreement shall in any
event be effective unless the same shall be in writing and signed by
the party granting such waiver and then such waiver shall be effective
only in the specific instance and for the specific purpose for which
given.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Option
Agreement in duplicate as of the day and year first above written.
CYBERGUARD CORPORATION EMPLOYEE
By:
----------------------------------- ----------------------------------
Tommy D. Steele, President and
Chief Operating Officer
<PAGE> 8
CYBERGUARD CORPORATION
NON-STATUTORY STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is entered into as of the ,
199 , between CyberGuard Corporation (the "Corporation"), a Florida corporation
having its principal office in Ft. Lauderdale, Florida, and ,
("Employee") of the Corporation or one of its subsidiaries.
WHEREAS, the Corporation and the Employee have previously entered into one
or more stock option agreement(s) as more fully described below ("Old Options");
WHEREAS, in consideration of Employee's agreement to fully terminate all
the Old Options, the Corporation hereby agrees to grant to Employee a "New
Option" (as defined below) to completely replace the Old Options.
NOW THEREFORE, the Corporation and Employee hereby agree as follows:
1. NEW OPTION. Under and subject to the provisions of the Corporation's
Employee Stock Option Plan as in effect from time to time ("Plan"), the
Corporation hereby grants to Employee a non-statutory option to purchase an
aggregate of the number of shares of Common Stock of the Corporation as set
forth on Exhibit B attached hereto at the price of U.S. $ per share ("New
Option"), subject to the following conditions:
(a) The New Option shall not be exercisable to any extent until and
unless the Employee shall have remained continuously in the employ of the
Corporation until at least May 6, 1999; provided, however, that if the
Employee's employment is terminated for any of the reasons stated in
subsections 2(a), 2(b), 2(c) or 2(d) of this Agreement, then the
requirement that Employee remain continuously in the employ of the
Corporation until at least May 6, 1999 shall be waived by the Corporation
and the New Options shall become exercisable to the extent and for the time
period stated in the applicable subsections of Section 2. Nothing herein
shall limit or restrict the Corporation's rights to terminate the
Employee's employment.
(b) During the lifetime of the Employee, the New Option shall be
exercisable only by the Employee, and (except when Section 2 is applicable)
only while the Employee continues as an employee of the Corporation.
(c) Notwithstanding any other provision of this Agreement, the New
Option shall expire in accordance with the schedule set forth on Exhibit B
hereof, but in no event later than five years from the date hereof, and
shall not be exercisable thereafter.
<PAGE> 9
(d) The number of shares of Common Stock with respect to which the New
Option may be exercised from time to time is limited to the percentages of
the aggregate number of shares optioned hereby as set forth in Exhibit B
attached hereto.
(e) By executing this Agreement, Employee acknowledges and agrees that
all Old Options are hereby fully and finally terminated, are void and are
of no further force or effect. The New Option granted to Employee herein
replaces the Old Options in their entirety. As used herein, the term "Old
Option" shall mean all options, rights and option agreements dated on or
before September 3, 1998 between Corporation and Employee under which
Employee has the right to purchase shares of Corporation Common Stock from
the Corporation at a stated exercise price per share (collectively, the
"Old Options"). Without limiting the generality of the foregoing sentence,
attached hereto as Exhibit A is a description of the Old Options.
Notwithstanding the attachment of Exhibit A, it is the intention of the
parties hereto that this Agreement shall terminate all options, rights and
option agreements dated on or before September 3, 1998 between Corporation
and Employee under which Employee has the right to purchase shares of
Corporation Common Stock from the Corporation at a stated exercise price
per share, whether or not such options, warrants or agreements are listed
on Exhibit A.
(f) This Agreement is not intended to terminate employment agreements
(if any) between the Employee and the Corporation that provide generally
for the rights and duties of the Employee and the Corporation with respect
to Employee's employment with the Corporation, but if any such employment
agreements are dated on or before September 3, 1998 and contain provisions
that grant options to Employee to purchase Corporation stock, then the
options granted by such provisions are intended to be Old Options under
this Agreement and are hereby terminated.
2. TERMINATION OF EMPLOYMENT. If any of the events described in subsections
(a), (b), (c), or (d) below occur on or before May 6, 1999, then the New Options
shall become immediately exercisable to the extent that they are otherwise
exercisable in accordance with the vesting schedule set forth in Exhibit B, and
shall remain exercisable for the period of time as stated in the applicable
subsection below. If any of the events described in subsections (a), (b), (c),
or (d) below occur after May 6, 1999, then the New Options, to the extent that
they are then otherwise exercisable in accordance with the vesting schedule set
forth in Exhibit B, shall remain exercisable for the period of time as stated in
the applicable subsection below. If the event described in subsection (e) below
occurs on or before May 6, 1999, then the New Options shall terminate at the
time of termination of employment. If a "Change of Control" (as defined in the
Plan) shall occur and Employee's employment is thereafter terminated, then the
provisions of subsection (f) below shall control.
(a) DEATH. In the event of the death of the Employee, the New Option
shall be (i) exercisable only by the executor or administrator of the
Employee's estate or by the person or persons to whom the Employee's rights
under the New Option shall pass by the Employee's will or the laws of
descent and distribution, (ii) exercisable if and to the extent that the
New Option was exercisable at the date of the Employee's death and (iii)
shall remain exercisable for the shorter of (a) one year following
Employee's death or (b) with respect to each option, the remainder of the
period of exercisability as stated in Exhibit B attached hereto.
<PAGE> 10
(b) DISABILITY. In the event of termination of Employee's employment
due to disability of the Employee, the New Option shall be exercisable by
the Employee only to the extent that the New Option was exercisable at the
date of such cessation of employment, and no more, and shall remain
exercisable for the shorter of (a) one year following Employee's
termination of employment or (b) with respect to each option, the remainder
of the period of exercisability as stated in Exhibit B attached hereto.
(c) RETIREMENT. In the event of Retirement of the Employee, the New
Option shall be exercisable by the Employee only to the extent that the New
Option was exercisable at the date of such cessation of employment, and no
more, and shall remain exercisable for the shorter of (a) one year
following Employee's termination of employment or (b) with respect to each
option, the remainder of the period of exercisability as stated in Exhibit
B attached hereto. The term "Retirement" is specially defined in the Plan;
generally, a termination in service from the Corporation will be covered by
provisions regarding terminations for reasons other than death, disability,
or Retirement, and not this paragraph.
(d) TERMINATION OF EMPLOYMENT BY THE CORPORATION. In the event of
termination of Employee's employment by the Corporation, the New Option
shall be exercisable only to the extent that it was exercisable at the date
of such cessation of employment, and no more, and shall remain exercisable
for the shorter of (a) three months following Employee's termination of
employment or (b) with respect to each option, the remainder of the period
of exercisability as stated in Exhibit B attached hereto.
(e) TERMINATION OF EMPLOYMENT BY THE EMPLOYEE. In the event of
termination of employment by the Employee for reasons other than death,
disability or Retirement, the New Option shall be exercisable only to the
extent that it was exercisable at the date of such cessation of employment,
and no more, and shall remain exercisable for the shorter of (a) three
months following Employee's termination of employment or (b) with respect
to each option, the remainder of the period of exercisability as stated in
Exhibit B attached hereto.
(f) CHANGE OF CONTROL. If a "Change of Control" (as defined in the
Plan) shall occur and Employee's employment is thereafter terminated by the
Corporation, then the New Options shall become 100% immediately exercisable
in full (to the extent that they otherwise have not expired) and shall
remain exercisable for the shorter of (a) one year following Employee's
termination of employment or (b) with respect to each option, the remainder
of the period of exercisability as stated in Exhibit B attached hereto.
Notwithstanding the foregoing provisions of this section 2, in the event that:
(x) the Employee has entered into an Employment Agreement with the Corporation
(the "Employment Agreement"); and (y) if Employee's Employment Agreement is
terminated under circumstances that give Employee a longer period of exercise or
greater rights than those set forth in this Agreement, then the terms and
conditions governing exercisability and continuation of the New Option after
termination of Employment contained in the Employment Agreement shall supersede
those set forth in this Agreement.
3. EXERCISE OF NEW OPTION. The New Option may be exercised by delivering to
the Corporation at the office of the Corporate Secretary (i) a written notice,
signed by the person entitled to
<PAGE> 11
exercise the New Option, stating the number of shares such person then elects to
purchase hereunder, (ii) payment in an amount equal to the full purchase price
of the shares then to be purchased, and (iii) in the event the New Option is
exercised by any person other than the Employee, evidence satisfactory to the
Corporation that such person has the right to exercise the New Option. If it is
required (in the estimation of the Corporation), the Corporation also may
require the payment of any withholding or other applicable taxes at the time of
exercise of the New Option. Payment shall be made (a) in cash, (b) in previously
acquired shares of Common Stock of the Corporation, valued at their Fair Market
Value on the day preceding the exercise date of the New Option, or (c) in any
combination of cash and such shares. Shares tendered in payment of the purchase
price which have been acquired through an exercise of a stock option shall have
been held at least six (6) months prior to exercise of the New Option. Upon the
due exercise of the New Option, the Corporation shall issue in the name of the
person exercising the New Option, and deliver to the Employee, one or more
certificates for the shares in respect of which the New Option shall have been
so exercised. The Employee acknowledges that the Employee does not have any
rights as a shareholder in respect of any shares as to which the New Option
shall not have been duly exercised and that no rights as a shareholder shall
arise in respect of any such shares until and except to the extent that a
certificate or certificates for such shares shall have been issued.
4. PROHIBITION AGAINST TRANSFER. The New Option and rights granted by the
Corporation under this Agreement are not transferable except by will or the laws
of descent and distribution. Without limiting the generality of the foregoing,
the New Option may not be assigned, transferred except as aforesaid, pledged or
hypothecated, shall not be assignable by operation of law, and shall not be
subject to execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of the New Option contrary
to the provisions hereof, or the levy of any execution, attachment or similar
process upon the New Option, shall be null and void and without effect.
5. ADJUSTMENTS. In case there shall be a merger, reorganization,
consolidation, recapitalization, stock dividend, a change in corporate structure
such that shares of Common Stock are changed into or become exchangeable for a
larger or smaller number of shares, or an issuance of Common Stock by the
Corporation in exchange for which the Corporation (or its current shareholders,
on a pro-rata basis) does not receive cash or other property, the number of
shares subject to outstanding New Options shall be increased or decreased in
direct proportion to the increase or decrease in the number of shares of Common
Stock by reason of such change. The number of shares shall always be a whole
number, and the purchase price per share of any outstanding New Options shall,
in the case of an increase in the number of shares, be proportionately reduced,
and in the case of a decrease in the number of shares, shall be proportionately
increased.
6. EMPLOYMENT BY PARENT, SUBSIDIARY OR SUCCESSOR. For the purpose of this
Agreement, employment by a parent or subsidiary of or a successor to the
Corporation shall be considered employment by the Corporation. "Parent" and
"subsidiary" as used herein shall have the meaning of "parent" and "subsidiary
corporation," respectively, as defined in Section 424 of the Internal Revenue
Code of 1986, as amended, or subsequent comparable statute.
7. COMMITTEE. The Corporation's Board of Directors and the Committee
administering the Plan shall have authority, subject to the express provisions
of the Plan as in effect from time to time, to construe this Agreement and the
Plan, to establish, amend and rescind rules and regulations relating to the
Plan, and to make all other determinations in the judgment of the Committee
necessary or desirable for the administration of the Plan. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in this
Agreement in the manner and to the extent it shall deem expedient to carry the
Plan into
<PAGE> 12
effect, and it shall be the sole and final judge of such expediency.
8. INCORPORATION OF PLAN PROVISIONS. This Agreement is made pursuant to the
Plan, the terms and conditions of which are hereby incorporated by reference.
Capitalized terms not otherwise defined herein have the meanings set forth in
the Plan. In the event of a conflict between the terms of this Agreement and the
Plan, the terms of the Plan shall govern.
9. MISCELLANEOUS.
(i) Words such as "herein", "hereof" and "hereunder" when used in
this Agreement shall refer to this Agreement as a whole unless the
context requires otherwise.
(ii) This Agreement embodies the entire agreement and
understanding of the parties with respect to the Old Options and the
New Options.
(iii) This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
(iv) This Agreement may be amended or modified only in a written
document executed by both of the parties hereto.
(v) No waiver of any provision of this Agreement shall in any
event be effective unless the same shall be in writing and signed by
the party granting such waiver and then such waiver shall be effective
only in the specific instance and for the specific purpose for which
given.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Option
Agreement in duplicate as of the day and year first above written.
CYBERGUARD CORPORATION EMPLOYEE
By:
----------------------------------- ----------------------------------
Tommy D. Steele, President and
Chief Operating Officer
DIRECTORS NON-STATUTORY STOCK OPTION AGREEMENT
UNDER THE
CYBERGUARD CORPORATION STOCK INCENTIVE PLAN
This Stock Option Agreement ("Agreement") is entered into as of the day
of , 199 , between CyberGuard Corporation (the "Corporation"), a
Florida corporation having its principal office in Ft. Lauderdale, Florida, and
, (the "Director"), a director of the Corporation.
1. THE OPTION. Under and subject to the provisions of the Corporation's
Stock Incentive Plan as in effect on the date hereof (the "Plan"), the
Corporation hereby grants to the Director a Non-Statutory Stock Option
("Option"), to acquire shares of the Corporation's Common Stock at the
price of $ per share, that was the fair market value of the Common Stock
on the date of grant, as follows:
(a) The Option shall be exercisable immediately and shall remain
exercisable for ten years from the date hereof, except in the event of the
Director's death, in which case
<PAGE> 13
it shall remain exercisable as described in the Plan.
(b) During the lifetime of the Director, the Option shall be
exercisable only by the Director; after the Director's death, the Option
shall be exercisable as described in the Plan.
(c) Notwithstanding any other provision of this Agreement, the Option
shall expire no later than ten years from the date of this Agreement, and
shall not be exercisable thereafter.
(d) Upon a Change in Control, any outstanding Option shall immediately
become exercisable.
2. EXERCISE OF OPTION. The Option may be exercised by delivering to the
Corporation at the office of the Corporate Secretary (i) a written notice,
signed by the person entitled to exercise the Option, stating the number of
shares such person then elects to purchase hereunder, (ii) payment in an amount
equal to the full purchase price of the shares then to be purchased, and (iii)
in the event the Option is exercised by any person other than the Director,
evidence satisfactory to the Corporation that such person has the right to
exercise the Option. Payment shall be made (a) in cash, (b) in previously
acquired shares of Common Stock of the Corporation, valued at their Fair Market
Value on the day preceding the exercise date of the Option, or (c) in any
combination of cash and such shares. Shares tendered in payment of the purchase
price which have been acquired through an exercise of a stock option shall have
been held at least six (6) months prior to exercise of the Option. Upon the due
exercise of the Option, the Corporation shall issue in the name of the person
exercising the Option, and deliver to the Director, one or more certificates for
the shares in respect of which the Option shall have been so exercised. The
Director acknowledges that the Director does not have any rights as a
shareholder in respect of any shares as to which the Option shall not have been
duly exercised and that no rights as a shareholder shall arise in respect of any
such shares until and except to the extent that a certificate or certificates
for such shares shall have been issued.
3. PROHIBITION AGAINST TRANSFER. The Option and rights granted by the
Corporation under this Agreement are not transferable except by will or the laws
of descent and distribution. Without limiting the generality of the foregoing,
the Option may not be assigned, transferred except as aforesaid, pledged or
hypothecated, shall not be assignable by operation of law, and shall not be
subject to execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of the Option contrary to
the provisions hereof, or the levy of any execution, attachment or similar
process upon the Option, shall be null and void and without effect.
4. ADJUSTMENTS. In case there shall be a merger, reorganization,
consolidation, recapitalization, stock dividend or other change in corporate
structure such that shares of Common Stock are changed into or become
exchangeable for a larger or smaller number of shares, the number of shares
subject to outstanding Options shall be increased or decreased in direct
proportion to the increase or decrease in the number of shares of Common Stock
by reason of such change in corporate structure. The number of shares shall
always be a whole number, and the purchase price per share of any outstanding
Options shall, in the case of an increase in the number of shares, be
proportionately reduced, and in the case of a decrease in the number of shares,
shall be proportionately increased.
5. COMMITTEE. The Committee administering the Plan shall have authority,
subject to the express provisions of the Plan as in effect from time to time, to
construe this Agreement and the Plan, to
<PAGE> 14
establish, amend and rescind rules and regulations relating to the Plan, and to
make all other determinations in the judgment of the Committee necessary or
desirable for the administration of the Plan. The Committee may correct any
defect or supply any omission or reconcile any inconsistency in this Agreement
in the manner and to the extent it shall deem expedient to carry the Plan into
effect, and it shall be the sole and final judge of such expediency.
6. INCORPORATION OF PLAN PROVISIONS. This Agreement is made pursuant to the
Plan, the terms and conditions of which are hereby incorporated by reference.
Capitalized terms not otherwise defined herein have the meanings set forth in
the Plan. In the event of a conflict between the terms of this Agreement and the
Plan, the terms of the Plan shall govern.
7. MISCELLANEOUS. Words such as "herein", "hereof" and "hereunder" when
used in this Agreement shall refer to this Agreement as a whole unless the
context otherwise requires. This Agreement, together with any written Employment
Agreement between Employee and Corporation, constitute the entire agreement and
supersede all prior agreements and understandings, both oral and written,
between the parties hereto with respect to the subject matter hereof, and,
except as expressly provided herein and therein, are not intended to confer upon
any person other than the parties hereto any rights or remedies. This Agreement
shall be governed by and construed in accordance with the laws of the State of
Florida. This Agreement may be amended or modified only in a written document
executed by both of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Option
Agreement in duplicate as of the day and year first above written.
CYBERGUARD CORPORATION
By:
--------------------------------
-----------------------------------
Director
<PAGE> 1
EXHIBIT 10.19
LOAN AGREEMENT
On this 17th day of December, 1998, the undersigned parties hereby
covenant and agree to issue a promissory note (the "Note"), in the form of
Exhibit A hereto, pursuant to the terms and conditions of this Loan Agreement
(the "Agreement") dated as of the date hereof (the Issue Date) by and between
the CyberGuard Corporation, a Florida Corporation and its Subsidiaries (the
"Company"), and Fernwood Partners, L.L.C., an Oklahoma Limited Liability Company
("Lender").
1. PROMISSORY NOTE
The Note will be secured indebtedness, secured second behind the
commercial bank debt ("Senior Debt", as defined herein below) of the Company,
and will be in the aggregate principal amount of $l,125,000. The Note will only
be subordinated in right of payment to the Senior Debt of the Company, as
described under "Subordination" below.
The Note will mature in accordance with the terms and conditions of the
Note. The Note will bear interest which will float at the Chase Manhattan Bank
prime rate plus 200 basis points, from the date of issuance or from the most
recent interest payment date to which interest has been paid or provided for,
payable quarterly on January 1, April 1, July 1 and October 1 of each year,
commencing January 1, 1999 to the entity or persons in whose names such Note is
issued. All principal and any accrued interest on the Note will be due in full
and will be payable on June 1, 2001 unless the Note has been converted in
accordance with the terms hereof or unless maturity occurs earlier in accordance
with the terms and conditions of the Note. The Note may be presented for
transfer or exchange, at the office of the Company, which office is currently
located at 2000 West Commercial Blvd., Suite 200, Ft. Lauderdale, Florida 33309.
Interest will be calculated on the basis of a 360-day year consisting of twelve
30-day months. No service charge ~l be made for transfer or exchange of the
Note.
2. CONVERSION RIGHTS
The Lender will have the right (Conversion Right), at the Lender's
option, to convert all or any portion of the principal and accrued interest into
shares of "registered common stock" of the Company ("Conversion Shares"), at any
time after twelve months from the SEC cure date as hereinafter defined (unless
earlier redeemed or repurchased) at the conversion price of $1.50 per share
("Conversion Price") of common stock of the Company (subject to adjustment as
described below). "Registered Common Stock" shall mean shares of the Company
registered pursuant to Section 15 of the Agreement.
The full face amount of the Note (exclusive of accrued and unpaid
interest) shall, after 12 months from the SEC cure date as hereinafter defined,
be convertible at Lender's option into 750,000 shares of registered common stock
of the Company and any portions of the principal amount of the Note to be
converted in to Conversion Shares shall be done so on a pro-rata basis. Any
accrued and
<PAGE> 2
unpaid interest converted by Lender in the registered common shares of the
Company shall be at the above stated Conversion Price.
The SEC cure date is the date the Company's Form 10K for its last
fiscal and Form l0Q for its first fiscal quarter of the now current fiscal year
will be filed with the SEC, which in no event shall be later than January 31,
1999, and in any event the Lender shall be able to exercise its Conversion Right
not later than February 1, 2000.
Notwithstanding the 12-month holding period, the registered share
requirement or any other contrary provision herein, the Lender shall have the
right to convert the Note into 750,000 common shares (subject to adjustment as
described below) of the Company at any time into non-registered shares of the
Company or to otherwise convert in the event of a Change of Control as defined
in Section 7 hereof, merger or sale of the Company.
The Company undertakes to use its best efforts to provide the Lenders
with registered stock upon conversion (as more fully described in Section 15
hereto), and the Lender acknowledges that certain limitations and regulatory
matters outside the control of the Company may result in a delay in the
Conversion Shares becoming fully registered shares.
If the Note that has been converted, then, with respect to the
principal amount of the Note which has been converted, any accrued interest not
otherwise converted into shares shall be payable on the next interest payment
date notwithstanding such conversion, and such interest shall be paid to the
Lender who held the Note on the Conversion Date.
The Conversion Price shall be subject to adjustment upon the occurrence
of the following events: (a) any payment of a dividend (or other distribution)
payable in cash or in common stock on any class of capital stock of the Company,
any subdivision, combination or reclassification of common stock, (c) any
issuance to all holders of common stock of rights, options or warrants entitling
them to subscribe for or purchase common stock at less than the then current
market price of common stock; provided, however, that if such options or
warrants are only exercisable upon the occurrence of certain triggering events,
then the Conversion Price will not be adjusted until such triggering events
occur, (d) any distribution to all holders of common stock of evidences of
indebtedness, shares of capital stock other than common stock, cash or other
assets' (including securities, but excluding those dividends, rights, options,
warrants and distributions referred to above and excluding regular dividends and
distributions paid exclusively in cash), (e) any distribution consisting
exclusively of cash (excluding any cash portion of distributions referred to in
(d) above, or cash distributed upon a merger or consolidation to which the
second succeeding paragraph applies) to all holders of common stock in an
aggregate amount that, combined together with (i) all other such all-cash
distributions made within the then preceding 12 months in respect of which no
adjustment has been made and (ii) any cash and the fair market value of other
consideration paid or payable in respect of any tender offer by the Company or
any of its Subsidiaries for common stock concluded within the preceding 12
months in respect of which no adjustment has been made, exceeds 5% of the
Company's market capitalization (defined as being the product of the then
current
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<PAGE> 3
market price of the common stock times the number of shares of common stock then
outstanding) on the record date of such distribution, and (f) the completion of
a tender or exchange offer made by the Company or any of its Subsidiaries for
common stock that involves an aggregate consideration that, together with (i)
any cash and the fair market value of other consideration payable in a tender or
exchange offer by the Company or any of its Subsidiaries for common stock
expiring within the 12 months preceding the expiration of such tender or
exchange offer in respect of which no adjustment has been made and (ii) the
aggregate amount of any such all-cash distributions referred to in (e) above to
all holders of common stock within the 12 months preceding the expiration of
such tender or exchange offer in respect of which no adjustments have been made,
exceeds 5% of the Company's market capitalization on the expiration of such
tender offer. No adjustment of the Conversion Price will be required to be made
until the cumulative adjustments amount to 1.0% or more of the Conversion Price
as last adjusted.
In the event that the Company distributes rights or warrants (other
than those referred to herein below or in (c) in the preceding paragraph) PRO
RATA to holders of common stock, so long as any such rights or warrants have not
expired or been redeemed by the Company, the Lender of any Note surrendered for
conversion will be entitled to receive upon such conversion, in addition to the
Conversion Shares, a number of rights or warrants to be determined as follows:
(i) if such conversion occurs on or prior to the date for the distribution to
the holders of rights or warrants of separate certificates evidencing such
rights or warrants (the "Distribution Date"), the same number of rights or
warrants to which a holder of a number of shares of common stock equal to the
number of Conversion Shares is entitled at the time of such conversion in
accordance with the terms and provisions of and applicable to the rights or
warrants, and (ii) if such conversion occurs after such Distribution Date, the
same number of rights or warrants to which a holder of the number of shares of
common stock into which such Note was convertible immediately prior to such
Distribution Date would have been entitled on such Distribution Date in
accordance with the terms and provisions of and applicable to the rights or
warrants. The Conversion Price of the Note will not be subject to adjustment on
account of any declaration, distribution or exercise of such rights or warrants.
In case of any reclassification, consolidation or merger of the Company
with or into another person or any merger of another person with or into the
Company, or in case of any sale, transfer or conveyance of all or substantially
all of the assets of the Company (computed on a consolidated basis), the Note
then outstanding will become convertible into the kind and amount of securities,
cash and other property receivable upon such reclassification, consolidation,
merger, sale, transfer or conveyance by a holder of the number of shares of
common stock into which such Note was convertible immediately prior thereto,
after giving effect to any adjustment event, who failed to exercise any rights
of election and received per share the kind and amount received per share by a
plurality of non-electing shares.
3. WARRANT RIGHTS
The Company will grant Lender a Common Stock Purchase Warrant (Warrant)
pursuant to Exhibit B hereto, that is exercisable into 500,000 shares of
Registered Common Stock of the
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<PAGE> 4
Company (Exercise Shares) at an exercise price of $2.00/share for a period of
thirty (30) months from the date of the Warrant (Warrant Period). The warrant
period shall not run and shall be stayed during such periods that the Company is
a party to any bankruptcy proceeding.
The Company undertakes to use its best efforts to provide registered
stock upon Lender's exercise in accordance with the provisions of Section 15
hereof, and the Lender acknowledges that certain regulatory matters and
limitations outside the control of the Company may result in a delay in the
Exercise Shares becoming fully registered shares. The Company acknowledges that
notwithstanding anything herein to the contrary, that Lender has the right to at
any time, exercise its warrant rights into non-registered shares of the Company.
The Exercise Price of the Warrant will be subject to adjustment upon
the occurrence of the following events: (a) any payment of a dividend (or other
distribution) payable in common stock on any class of capital stock of the
Company, (b) any subdivision, combination or reclassification of common stock,
(c) any issuance to all holders of common stock of rights, options or warrants
entitling them to subscribe for or purchase common stock at less than the then
current market price of common stock; provided, however, that if such options or
warrants are only exercisable upon the occurrence of certain triggering events,
then the Exercise Price will not be adjusted until such triggering events occur,
(d) any distribution to all holders of common stock of evidences of
indebtedness, shares of capital stock other than common stock, cash or other
assets (including securities, but excluding those dividends, rights, options,
warrants and distributions referred to above and excluding regular dividends and
distributions paid exclusively in cash), (e) any distribution consisting
exclusively of cash (excluding any cash portion of distributions referred to in
(d) above, or cash distributed upon a merger or consolidation to which the
second succeeding paragraph applies) to all holders of common stock in an
aggregate amount that, combined together with (i) all other such all-cash
distributions made within the then preceding 12 months in respect of which no
adjustment has been made and (ii) any cash and the fair market value of other
consideration paid or payable in respect of any tender offer by the Company or
any of its Subsidiaries for common stock concluded within the preceding 12
months in respect of which no adjustment has been made, exceeds 5% of the
Company's market capitalization (defined as being the product of the then
current market price of the Common stock times the number of shares of common
stock then outstanding) on the record date of such distribution, and (f) the
completion of a tender or exchange offer made by the Company or any of its
Subsidiaries for common stock that involves an aggregate consideration that,
together with (i) any cash and the fair market value of other consideration
payable in a tender or exchange offer by the Company or any of its Subsidiaries
for common stock expiring within the 12 months preceding the expiration of such
tender or exchange offer in respect of which no adjustment has been made and
(ii) the aggregate amount of any such all-cash distributions referred to in (e)
above to all holders of common stock within the 12 months preceding the
expiration of such tender or exchange offer in respect of which no adjustments
have been made, exceeds 5% of the Company's market capitalization on the
expiration of such tender offer. No adjustment of the Exercise Price will be
required to be made until the cumulative adjustments amount to 1.0% or more of
the Exercise Price as last adjusted.
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<PAGE> 5
The warrant shall be extended for a period of one (1) year if at the
end of the Warrant Period the underlying stock is not fully registered and for
subsequent (1) year extension if the underlying stock is not fully registered.
4. SUBORDINATION
The Note is a secured obligation of the Company, in priority second
only to the existing bank debt of the Company as limited by the terms and
conditions of its borrowing base (Senior Debt). The Note shall be subordinated
in right of payment to the Senior Debt of the Company. At December 15, 1998, the
Company had a loan availability of $868,000. The amount of the Senior Debt can
only increase to the extent the loan availability increases in accordance with
the terms and conditions thereof or to the extent additional financing replacing
and/or adding to Senior Debt is procured. Lender agrees to execute any
subordination agreement reasonably requested by any holder of Senior Debt or any
person or entity which replaces and/or adds to Senior Debt, regardless of the
amount, payment terms and nature of such additional financing. Such
subordination agreement shall supersede and control the provisions of this
Agreement.
This Agreement provides that no payment may be made by the Company on
account of the principal of and interest on the Note, unless and until the
principal of and interest of the Senior Debt is either current or until such
payment default has been cured or waived or otherwise has ceased to exist.
Upon any distribution of assets of the Company upon any dissolution,
winding up, liquidation or reorganization of the Company, whether voluntary or
involuntary, in bankruptcy, insolvency, receivership or a similar proceeding or
upon assignment for the benefit of creditors or any marshaling of assets or
liabilities, (i) the holders of all Senior Debt will first be entitled to
receive payment in full (or have such payment duly provided for) before the
Lender is entitled to receive any payment on account of the principal of,
premium, if any, or interest on, the Note and (ii) any payment or distribution
of assets of the Company of any kind or character, whether in cash, property or
securities to which the Lender would be entitled (by setoff or otherwise),
except for the subordination provisions contained in this Agreement, will be
paid by the liquidating trustee or agent or other person making such a payment
or distribution directly to the lenders of Senior Debt or their representative
to the extent necessary to make payment in full of all such Senior Debt
remaining unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Debt.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company shall be received by the Lender at a time
when such payment or distribution is prohibited by the foregoing provisions,
such payment or distribution shall be held in trust for the holders of Senior
Debt, and shall be paid or delivered by the Lender, as the case may be, to the
holders of the Senior Debt remaining unpaid or unprovided for or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of such Senior Debt
may have been issued, ratably according to the aggregate amounts remaining
unpaid
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<PAGE> 6
on account of the Senior Debt held or represented by each, for application to
the payment of all such Senior Debt remaining unpaid, to the extent necessary to
pay or to provide for the payment of all such Senior Debt in full after giving
effect to any concurrent payment or distribution to the holders of the Senior
Debt.
No provision contained in this Loan Agreement or the Note will affect
the obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of and premium, if any, and interest on the Note as and when the
same shall become due and payable. The subordination provisions of the Agreement
and the Note will not prevent the occurrence of any Default or Event of Default
under the Agreement or Note or limit the rights of the Lender, subject to the
preceding paragraphs, to pursue any other rights or remedies with respect to the
Note.
5. CONVERSION AT THE COMPANY'S OPTION
Once common shares of the Company close for twenty (20) consecutive
trading days at $4.00/share or above, and provided that the Conversion Shares
are registered shares, the Note (including accrued interest) will be convertible
at the option of the Company, in whole in exchange for 750,000 fully registered
shares, (exclusive of accrued interest) at the time of conversion (as adjusted
for dilution). Accrued and unpaid interest shall be converted into additional
registered shares of the Company on the basis of $4.00/share.
Notice of Company's exercise of its option to cause Lender's conversion
will be sent, by first-class mail and by facsimile at least 10 days and not more
than 30 days prior to the date fixed for conversion, to the Lender to such
Lender's address and facsimile number as set forth herein. The notice of
conversion must state the conversion date, the number of shares, and the amount
of accrued interest to be paid. Any notice must state the portion of the
principal amount to be converted and must state that on and after the conversion
date, upon surrender of such Note, a new Note or Notes in principal amount equal
to the remaining portion thereof will be issued. On and after the Conversion
Date, interest will cease to accrue on the Note or portions thereof called for
Conversion unless the Company defaults in its obligations with respect thereto.
6. EXERCISE OF WARRANT AT THE COMPANY'S OPTION
The Company has the option to cause Lender to exercise its Warrant into
fully registered common shares of the Company at the date of exercise and only
in the event that such shares close at a price in excess of $4.00/share for
twenty consecutive trading days prior to the exercise of the Warrant.
Notice of Company's exercise of its option to cause Lender's exercise
of the Warrant will be sent, by first-class mail and by facsimile at least 10
days and not more than 30 days prior to the date fixed for exercise of the
Warrant, to the Lender to such Lender's address and facsimile number as set
forth herein. The notice of exercise of the Warrant must state the exercise
date, and the number of registered shares to be issued. Additionally, the
Company's option to cause Lender to
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<PAGE> 7
exercise its Warrant shall be subject to the Company having fully paid the Note
or having converted the Note in accordance with the terms hereof.
7. REPURCHASE OF THE NOTE AT THE OPTION OF THE LENDER UPON A CHANGE OF CONTROL
In the event that a Change of Control (as defined below) has occurred,
Lender will have the right, at Lender's option, pursuant to an irrevocable and
unconditional offer by the Company (the "Repurchase Offer"), to require the
Company to repurchase all or any part of such Note on the date (the "Repurchase
Date") that is no later than 60 Business Days after the occurrence of such
Change of Control at a cash price (the "Repurchase Price") equal to 100% of the
principal amount thereof, together with accrued and unpaid interest to the
Repurchase Date. The Repurchase Offer must be made before or within 45 Business
Days following a Change of Control and must remain open for 15 Business Days
following its commencement (the "Repurchase Offer Period"). Upon expiration of
the Repurchase Offer Period, the Company must purchase all Notes timely tendered
in response to the Repurchase Offer. If required by applicable law, the
Repurchase Date and the Repurchase Offer Period may be extended as so required;
however, if so extended, it shall nevertheless constitute an Event of Default if
the Repurchase Date does not occur prior to or within 60 Business Days after the
Change of Control.
"Change of Control" occurs upon any of the following events: (i) upon
any merger or consolidation of the Company with or into any person or any sale,
transfer or other disposition, whether direct or indirect, of all or
substantially all of the assets of the Company, on a consolidated basis, in one
transaction or a series of related transactions, if, immediately after giving
effect to such transaction, any "person" or "group" is or becomes the
"beneficial owner," directly or indirectly, of more than 50% of the total voting
power in the aggregate normally entitled to vote in the election of directors,
managers, or trustees, as applicable, of the transferee or surviving entity,
(ii) when any "person" or "group" is or becomes the "beneficial owner," directly
or indirectly, of more than 50% of the total voting power in the aggregate
normally entitled to vote in the election of directors of the Company, (iii)
when, during any period of 12 consecutive months after the date hereof,
individuals who at the beginning of any such 12-month period constituted the
Board of Directors of the Company (together with any new directors whose
election by such Board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease (for
reasons relating to a conflict over management of the company) to constitute a
majority of the Board of Directors of the Company then in office, (iv) a sale,
transfer or other disposition, whether directly or indirectly, by the Company of
all or substantially all of its assets, on a consolidated basis, or (v) the PRO
RATA distribution by the Company to its stockholders of substantially all of its
assets.
For purposes of this definition of "Change of Control," (i) the terms
"person" and "group" shall have the meaning used for purposes of Rules I 3d-3
and 1 3D-5 of the Exchange Act as in effect on the Date hereof, whether or not
applicable; and (ii) the term "beneficial owner" shall have the meaning used in
Rules 13d-3 and 13d-5 under the Exchange Act as in effect on the Date hereof,
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<PAGE> 8
whether or not applicable, except that a "person" shall be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time or upon the occurrence of certain events.
On or before the Repurchase Date, the Company will (i) accept for
payment the Note or portion thereof properly tendered pursuant to the Repurchase
Offer and, (ii) pay to the Lender the Repurchase Price (together with accrued
and unpaid interest) of the Note or portion so tendered.
8. LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Company may not, directly or indirectly, consolidate with or merge
with or into another entity (other than an affiliate thereof) or sell, lease,
convey or transfer all or substantially all of its assets (computed on a
consolidated basis), whether in a single transaction or a series of related
transactions, to another entity, person, or group of affiliated persons, unless
(i) either (a) in the case of a merger or consolidation, the Company is the
surviving entity or the resulting, surviving or transferee entity expressly
assumes by supplemental agreement all of the payment obligations of the Company
in connection with the Note, or (c) the resulting, surviving or transferee
entity offers the holder of the Note the right to convert the Note on the same
basis, and receive the same consideration, as other shareholders of the Company
in such transaction.
Upon any consolidation or merger or any sale, lease, conveyance or
transfer of all or substantially all of the assets of the Company in accordance
with the foregoing, the successor corporation formed by such consolidation or
into which the Company is merged or to which such sale, lease, conveyance or
transfer is made, shall succeed to, and be substituted for, and may exercise
every right and power of, the Company, this Agreement with the same effect as if
such successor corporation had been named therein as the Company, and the
Company will be released from its obligations under this Agreement and the Note,
except as to any obligations that arise from or as a result of such transaction.
9. REPORTS
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company covenants and agrees to
deliver to the Lender, within 15 days after it is or would have been required to
file such with the Securities and Exchange Commission (the "Commission"), annual
and quarterly consolidated financial statements substantially equivalent to
financial statements that would have been included in reports filed with the
Commission if the Company was subject to the requirements of Section 13 or 15(d)
of the Exchange Act, including, with respect to annual information only, a
report thereon by the Company's certified independent public accountants as such
would be required in such reports to the Commission and, in each case, together
with a management's discussion and analysis of results of operations and
financial condition as such would be so required. In addition, the Company will
provide Lender with copies of any and all materials, documents, notices,
letters, etc. that are provided by the Company to holders of the Senior Debt at
the same time such materials are provided to the holders of the Senior Debt.
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<PAGE> 9
10. EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined as (i) the failure by the Company to
pay any installment of interest on the Note as and when due and payable and the
continuance of any such failure for ten (10) days, (ii) the failure by the
Company to pay all or any part of the principal on the Note when and as the same
become due and payable at maturity, redemption, by acceleration or otherwise,
including, without limitation, pursuant to any Repurchase Offer, (iii) subject
to the other provisions of the Agreement, the failure of the Company to perform
any conversion of the Note required under this Agreement and the continuance of
any such failure for 30 days, (iv) subject to the provisions of the Agreement
hereof, the failure by the Company to observe or perform any other covenant or
agreement contained in the Note or this Agreement and, the continuance of such
failure for a period of 60 days after written notice is given to the Company by
the Lender. If a Default occurs and is continuing, the Company must, within 90
days after the occurrence of such default or the date it has knowledge of such
default, whichever is later, give to the Lender notice of such default.
If an Event of Default occurs and is continuing (other than an Event
of Default specified in clause (v) above), then in every such case, unless the
principal of all of the Notes shall have already become due and payable, by
notice in writing to the Company, may declare all principal and accrued interest
thereon to be due and payable immediately. If an Event of Default specified in
clause (v) above occurs, all principal and accrued interest thereon will be
immediately due and payable on all outstanding Notes without any declaration or
other act on the part of the Lender. The Lender is authorized to rescind such
acceleration if all existing Events of Default, other than the nonpayment of the
principal of, and interest on, the Note that has become due solely by such
acceleration, has been cured or waived.
11. TRANSFER AND EXCHANGE
The Company covenants and agrees that, at any time, Lender may
transfer or exchange or transfer the Note (in increments of not less than
$200,000 each) and in such event, shall provide the Company with the appropriate
endorsements and transfer documents and shall pay any required taxes and fees.
Each transferee shall make the representation and warranties contained in
Section 14 hereof to the Company.
12. AFFIRMATIVE COVENANTS OF THE COMPANY
A. PAYMENT AND PERFORMANCE. The Company will pay all amounts due under
the Note and Loan Agreement in accordance with the terms thereof and will
observe, perform and comply with every covenant, term and condition expressed or
implied therein. The Company will cause each of its subsidiaries to observe,
perform and comply with every such term, covenant and condition.
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<PAGE> 10
B. BOOKS. FINANCIAL STATEMENTS AND REPORTS. The Company will at all
times maintain materially accurate books of account and records and will furnish
the following statements and reports to Lender at Company's expense:
(1) As soon as available, and in any event within ninety (90)
days after the end of each fiscal year, consolidated financial
statements of the Company together with all notes thereto, prepared in
reasonable detail in accordance with GAAP, together with an unqualified
opinion (except for qualification due to preexisting class action
matters), based on an audit using generally accepted auditing
standards, by Pricewaterhouse Coopers, or other independent certified
public accountants selected by the Company and reasonably acceptable to
the Lender.
(2) As soon as available, and in any event within forty-five
(45) days after the end of each fiscal quarter, the Company's
consolidated and consolidating balance sheet as of the end of such
fiscal quarter and consolidated and consolidating statements of the
Company's earnings and cash flows for the period from the beginning of
the then current fiscal year to the end of such fiscal quarter, all in
reasonable detail and prepared in accordance with GAAP, subject to
changes resulting from normal year-end adjustments.
C. SENIOR DEBT. The Company covenants and agrees that it will not
borrow from and be in debt to Coast Business Credit, Southern Pacific Bank, or
any affiliate thereof, or any other lender (1,esides Lender), which collectively
equals an amount which in the aggregate exceed $4,000,000.00.
D. OTHER INFORMATION AND INSPECTIONS. The Company will furnish to
Lender any information which the Lender may from time to time reasonably request
in writing concerning any covenant, provision or condition of the Note or Loan
Agreement or any matter in connection with the Company's businesses and
operations. Upon Lender giving the Company at least one week written notice, the
Company will permit representatives appointed by Lender (including independent
accountants, auditors, agents, attorneys, appraisers and any other Persons) to
visit and inspect during normal business hours the Company's property, including
its books of account, other books and records, and any facilities or other
business assets, and to make extra copies therefrom and photocopies and
photographs thereof, and to write down and record any information such
representatives obtain. The Lender agrees to maintain the confidentiality of all
such information disclosed to it and agrees and acknowledges that it will not
directly or indirectly trade in any of the Company's securities during any
period in which it has material information relating to the Company which is not
publicly available.
E. NOTICE OF MATERIAL EVENTS AND CHANGE OF ADDRESS. The Company will
promptly notify the Lender in writing, stating that such notice is being given
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<PAGE> 11
pursuant to this Agreement, of:
1. the occurrence of any material adverse change in the
business,
2. the occurrence of any default of which it has
knowledge,
3. the acceleration of the maturity of any indebtedness
owed by the Company or of any default by the Company
under any material indenture, mortgage, agreement,
contract or other instrument to which it is a party
of which it has knowledge,
4. any filing of any suit or proceeding against the
Company having a claim or potentially a claim of
$100,000 or more.
F. PAYMENT OF TRADE LIABILITIES. TAXES. ETC.. The Company will (a)
timely file all required tax returns; (b) timely pay all taxes, assessments, and
other governmental charges or levies imposed upon it or upon its income, profits
or property unless contested in good facts; and (c) maintain appropriate
accruals and reserves for all of the foregoing in accordance with GAAP.
G. INTEREST. The unpaid principal amount hereof shall bear interest
which will float from the date hereof at The Chase Manhattan Bank prime, plus
200 basis points, per annum (the "Base Rate"). Any amount of principal or
interest not paid when due (whether at the stated due date, at maturity, upon
acceleration, or otherwise) shall thereafter bear interest until paid in full at
the Base Rate plus 600 basis points, per annum. Interest shall be computed on
the actual number of days elapsed on the basis of a 60-day year consisting of
twelve 30-day months.
H. AGREEMENT TO DELIVER SECURITY DOCUMENTS. The Company agrees to
deliver and to further secure the Note whenever requested by the Lender, in its
sole and absolute discretion, with deeds of trust, mortgages, chattel mortgages,
security agreements, financing statements and other security documents in form
and substance reasonably satisfactory to Lender for the purpose of granting,
confirming, and perfecting liens or security interests in any real or personal
property now owned or hereafter acquired by the Company.
I. PERFECTION AND PROTECTION OF SECURITY INTERESTS AND LIENS. The
Company will from time to time deliver to Lender any financing statements,
continuation statements, extension agreements and other documents, properly
completed and executed (and acknowledged when required) by the Company in form
and substance reasonably satisfactory to the Lender.
J. SEC CURE DATE. The Company covenants and agrees that it will use its
best efforts to effect the SEC cure date as set forth in Section 2 of the
Agreement.
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K. REPORTING UNDER SECTION 13. The Company covenants and agrees that it
will provide to Lender any information required for the preparation and filing
of a schedule by Lender pursuant to Section 13 of the Securities Exchange Act of
1934, and that the Company will assume any and all costs incurred by Lender as
the result of the preparation and filing of such schedule.
13. REPRESENTATIONS AND WARRANTY OF THE COMPANY
A. AUTHORITY.
The Company represents and warrants that the undersigned
parties have the full authority of the Company and its Board of
Directors to accept and bind the Company to the terms and conditions of
the Note, Loan Agreement and its Exhibits.
B. CAPITALIZATION.
The Company represents and warrants that it has 20,000,000
authorized shares of common stock, having a par value of $.0 1 per
share.
C. COMMON STOCK.
The Company represents and warrants that as of November 30,
1998, there were 8,956,066 shares of Common stock issued and
outstanding. All of such outstanding shares of Common stock are, and
the shares of Common stock issuable upon conversion of the Note offered
hereby will be upon issuance, fully paid and nonassessable. Each share
of Common stock has an equal and ratable right to receive dividends
when, as and if declared by the Board of Directors of the Company out
of assets legally available therefor. The Company is subject to certain
restrictions on the payment of dividends on, and the repurchase or
redemption of; the Common stock under the provisions of the Senior
Debt.
In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common stock are entitled to share equally
and ratably in the assets available for distribution after payment of
all liabilities.
The holders of Common stock have no preemptive, subscription,
conversion or redemption rights, and are not subject to further calls
or assessments by the Company. There are no sinking fund provisions
applicable to the Common Stock. Each share of Common Stock is entitled
to one vote in the election of directors and on all other matters
submitted to a vote of stockholders. Holders of Common Stock have no
right to cumulate their votes in the election of directors.
-12-
<PAGE> 13
D. COMPANY FILINGS
Except as disclosed in Exhibit C hereof, the Company
represents and warrants that it has filed all reports, registrations
and statements, together with any amendments required to be made with
respect thereto, copies of which have been made available to Lender,
that were required to be filed with (a) the Securities and Exchange
Commission; and (b) any other federal, state or local governmental or
regulatory authority. All such reports, registrations and filings are
collectively referred to as the "Company Filings". Except as disclosed
in Exhibit C hereof, as of their respective filing dates, each of the
past Company Filings (a) was true and complete in all material
respects; and (b) complied in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the
governmental or regulatory authority with which it was filed (or was
amended so as to be so promptly following discovery of any such
noncompliance) and none contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, not misleading.
E. TRANSFER AGENT AND REGISTRAR.
The Company represents and warrants that the Transfer Agent
and Registrar for the Common stock is American Stock Transfer & Trust
Company, and further covenants and agrees to notify Lender in writing
within ten (10) days of any change of the Transfer Agent or Registrar.
14. REPRESENTATION AND WARRANTIES OF THE LENDER
A. INVESTMENT PURPOSE. The Lender represents and warrants that it is
making the loan and acquiring the Warrant and the shares of Common Stock
issuable upon conversion or exercise thereof for its own account for investment
only and not with a view towards the public sale or distribution thereof, except
pursuant to sales registered or exempted from registration under the Securities
Act of 1933, as amended (the "1933 Act").
B. ACCREDITED INVESTOR STATUS. The Lender is an "accredited investor"
as that term is defined in Rule 501(a) of Regulation D promulgated under the
1933 Act.
C. RELIANCE ON EXEMPTIONS. The Lender understands that the Note and the
Warrant are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of the United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of;
and the Lender's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Lender set forth herein in order to
determine the availability of such exemptions.
-13-
<PAGE> 14
D. INFORMATION. The Lender and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Note and
Warrant which have been requested by the Lender or its advisors. The Lender and
its advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received what the Lender believes to be satisfactory answers to
any such inquiries. The Lender understands that its investment in the Note and
Warrant involves a significant degree of risk. THE LENDER FURTHER ACKNOWLEDGES
RECEIPT OF THE "RISK FACTORS" SUPPLEMENT ATTACHED HERETO.
E. GOVERNMENTAL REVIEW. The Lender understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Note and the
Warrants.
F. TRANSFER OR RESALE. The Lender understands the limitations on resale
or transfer of the Note and the Warrant incorporated herein and those additional
restrictions applicable pursuant to securities laws.
G. LEGENDS. The Lender understands that the Note and Warrant and, until
such time as the shares of Common Stock issuable upon the conversion or exercise
of the Note and/or Warrant, have been registered under the 1933 Act as
contemplated herein, such shares may bear a restrictive legend in substantially
the following form (and a stop-transfer order may be placed against transfer of
the certificates for such securities):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be
sold, transferred or assigned in the absence of an effective
registration statement for the securities under said Act, or
an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, that registration is not required
under said Act or unless sold pursuant to Rule 144 under said
Act."
15. REGISTRATION RIGHTS
A. S-3 REGISTRATION. Notwithstanding any provisions contained in this
Agreement or any other document to the contrary, the Company shall use
reasonable efforts to cause a registration statement under Form S-3 to be filed
with the Securities and Exchange Commission ("Commission") permitting the resale
of the shares issuable upon conversion of the Note and/or the exercise of the
Warrant (collectively the
-14-
<PAGE> 15
"Registrable Securities"). The Lender agrees and acknowledges that the
Company has advised the Lender that it is presently not eligible to
utilize Form S-3 because, among other reasons, of its failure to timely
file its Form 10-K for its last fiscal year. The Lender further
acknowledges that the Company may not be eligible to use a Form S-3 for
at least one year after it has filed such Form 1 0-K, provided that it
otherwise meets the "registration eligibility" requirements set forth
in the general instructions to Form 5-3. The parties agree that the
Company shall not be required to register any Registrable Securities
except (i) pursuant to a Form S-3, as and when available to the Company
and (ii) pursuant to the piggyback registration rights granted below.
Additionally, the Company acknowledges that Lender may at its option
convert and exercise certain of its rights into non-registered shares
of the Company.
B. DEMAND. To the extent not otherwise registered, after two years from
the date hereof Lender shall have the right to demand from the Company, at its
expense, a registration of shares issuable upon conversion of the Note and/or
the Warrant Shares pursuant to a Form S-1.
C. PIGGYBACK REGISTRATION. Subject to the limitations set forth in this
Section I5, if the Company shall propose to issue and register shares of its
equity securities on its own behalf or to register equity securities on behalf
of any holder of its equity securities under the 1933 Act, the Company shall
give written notice as promptly as possible of such registration to each of the
holders of the Note and the Warrant (which notice shall include the anticipated
filing date of the Registration Statement and the number of its equity
securities proposed to be included in the Registration Statement), and will use
its best efforts to include in the offering such amount of the Registrable
Securities as any such holder (a "Participating Holder") shall request to be
included by written notice to the Company received within fifteen days after
receipt of the Company's notice, upon the same terms (including the method of
distribution) as the equity securities being sold by the Company or any such
holder pursuant to any such offering (a "Piggyback Registration").
D. REQUIREMENTS OF REQUEST. Each request delivered to the Company
pursuant to this Section 15 shall: (i) specify the amount of Registrable
Securities intended to be offered and sold by the Participating Holder; and (ii)
contain the undertaking of the Participating Holder to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the
commission and state securities and "blue sky" laws and to obtain acceleration
of the effective date of the Registration Statement.
E. LIMITATIONS ON INCIDENTAL REGISTRATIONS. The obligations of the
Company to cause Registrable Securities to be registered pursuant to this
Section 15 are subject to each of the following limitations, conditions and
qualifications:
-15-
<PAGE> 16
(i) The Company shall not be required to give notice or
include Registrable Securities in any registration if the proposed
registration is primarily: (A) a registration of a stock option,
thrift, employee benefit or compensation plan or of securities issued
or issuable pursuant to any such plan; (13) a registration of
securities proposed to be issued in connection with a dividend
reinvestment plan or stock purchase plan; (C) a registration of
securities proposed to be issued in exchange for securities or assets
of; or in connection with a merger or consolidation with, another
corporation or other entity; (D) a registration of securities to be
offered by the Company to its then existing security holders; or (E) a
registration of securities which is a combination of any of the above.
(ii) If the Company is advised by the managing underwriter or
its investment banking firm if the offering is not underwritten, that
the inclusion of Registrable Securities may, in the opinion of such
underwriter or investment banking firm, as the case may be, materially
adversely affect the successful marketing of the securities proposed to
be offered by the Company, the number of shares of Registrable
Securities to be included in the offering shall be reduced or
eliminated to the extent necessary as shall be reasonably determined by
such underwriter or investment banker, as the case may be, in good
faith; provided that as to the Participating Holders, such reduction
shall be pro rata with respect to all securities to be sold by persons
other than the Company; and, provided, further, that in such event, the
Participating Holders shall have the right to withdraw their requests
to participate in the offering.
(iii) The Company may, in its sole discretion and without the
consent of or prior notice to any Participating Holder, withdraw such
registration statement and abandon the proposed offering in which the
Participating Holder had requested to participate at any time.
F. Prohibitive Sales of Securities. Notwithstanding the foregoing, the
Company shall have the right to prohibit the sale of Registrable Securities
pursuant to any Registrationi Statement filed pursuant to Section 15, upon
notice to the applicable holder (A) if in the opinion of counsel for the
Company, the Company would thereby be required to disclose information not
otherwise then required by law to be publicly disclosed, provided that the
Company shall use its best efforts to minimize the period of time in which it
shall prohibit the sale of any shares of Registrable Securities pursuant to this
Clause (A), (13) for periods of up to 30 days if the Company reasonably believes
that such sale might reasonably be expected to have an adverse effect on any
significant proposal or plan of the Company to engage in an acquisition of
assets or any merger, consolidation, tender offer, financing, corporate
reorganization or similar transaction; (C) during the period starting with the
date 10 days prior to the Company's estimate of the date of filing of; and
ending on a date
-16-
<PAGE> 17
90 days after the effective date of, a Company initiated registration in which
the person requesting registration is entitled to participate in accordance with
the provisions of this Section 15 hereof, or such longer post-effective periods
as may be reasonably required by the underwriter or underwriters if such
offering is underwritten; or (D) upon the happening of any event, as a result of
which the Prospectus under the Registration Statement includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing (in which case, the Company shall
promptly provide the person requesting registration with revised or supplemental
prospectuses and such person shall promptly take action to cease making any
offers of the Registrable Securities until receipt and distribution of such
revised or supplemental prospectuses).
16. JURISDICTION AND VENUE; WAIVER
Any suit, action or proceeding against the Company with respect to this
Note shall be brought exclusively in the courts of the State of Oklahoma or in
the United States District Court with jurisdiction in Tulsa, Oklahoma. Company
hereby irrevocably waives any objections which it may now or hereafter have to
the jurisdiction or venue of any suit, action or proceeding, arising out of or
relating to this Note, brought in such courts, and hereby further irrevocably
waives any claim that such suit, action or proceeding brought in any such court
has been brought in any inconvenient forum.
17. NOTICE
TO LENDER: Fernwood Partners, L.L.C.
Attn: F. Stephen Allen, Manager
2540 E. 30th Street
Tulsa, OK 74114
TO COMPANY: CyberGuard Corporation
Attn: C. Shelton James
2000 West Commercial Blvd.
Suite 200
Ft. Lauderdale, FL 33309
18. AUDITOR
The terms hereof are conditioned upon PricewaterhouseCoopers becoming
the Company's independent auditors on or before funding of the Note, which
condition the parties acknowledge has been met.
-17-
<PAGE> 18
19. ATTORNEY FEES
Company agrees to pay all of Lender's legal expenses and out-of-pocket
expenses related to the proposed transaction upon the funding of the Note, up to
a maximum amount of $15,000.00.
COMPANY:
In Witness Whereof, the undersigned
has hereunto set his hand and seal; this
17th day of December, 1998.
Attest: CyberGuard Corporation,
------------------------------- a Florida corporation
- --------------------------------------
as Secretary of CyberGuard Corporation
By:
------------------------------
(S E A L) C. Shelton James
Chairman and
Acting Chief Executive Officer
LENDER: Fernwood Partners, L.L.C.,
an Oklahoma Limited Liability Company
By:
------------------------------
F. Stephen Allen
Manager
-18-
<PAGE> 19
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") is dated as of December 17, 1998,
between CYBERGUARD CORPORATION ("Debtor"), and FERNWOOD PARTNERS, L.L.C.
("Secured Party").
RECITALS:
a. Secured Party has loaned $1,125,000.00 to Debtor, which loan is
evidenced by Debtor's promissory note of even date herewith (the "Note").
b. Secured Party and Debtor have entered into a Loan Agreement, dated
as of the date hereof (as it may be flirther amended, restated or otherwise
modified from time to time, being hereinafter referred to as the "Loan
Agreement").
c. Pursuant to the Loan Agreement and the other documents and
agreements executed in connection therewith (collectively, as they may be
flirther amended, restated or otherwise modified from time to time, being
hereinafter referred to as the "Loan Documents"). Debtor is becoming indebted to
Secured Party.
d. The parties desire for Debtor to enter into this Agreement to, among
other things, grant a security interest in its assets to Secured Party.
NOW, THEREFORE, in consideration of the foregoing, including in order
to induce Secured Party to make the loan, Debtor hereby agrees with Secured
Party as follows:
1. Debtor hereby grants to Secured Party a security interest in all of
Debtor's presently owned or hereafter acquired assets and properties
(collectively, the "Collateral"), to secure the flill and prompt payment of all
obligations of Debtor to Secured Party, whether direct or indirect, contingent
or absolute, now or hereafter due or owing to Secured Party from Debtor pursuant
to the Loan Documents.
2. Debtor represents, covenants and warrants that:
a. Its principal place of business will continue to be 2000 W.
Commercial Blvd., Suite 200, Ft. Lauderdale, Florida 33309.
b. Debtor shall sign and execute any financing statement or
other documents required to perfect Secured Party's security interest
and pay all costs necessary to protect the security interest under this
Agreement against the rights or interests of third parties, other than
the rights of Debtor's existing secured lender.
c. Debtor authorizes Secured Party to file one or more
financing statements signed only by Secured Party describing the
Collateral in the same manner as it is described herein and Debtor
shall, from time to time, at the request of Secured Party, execute one
or more financing
<PAGE> 20
statements and such other documents (and pay the cost of filing or recording the
same in all public offices deemed necessary or desirable by Secured Party) and
do such other acts and things, all as Secured Party may request, to establish
and maintain a valid security interest in the Collateral. Secured Party is
hereby appointed Debtor's irrevocable attorney-in-fact, coupled with an
interest, to do all acts and things which Secured Party may deem necessary to
perfect and continue perfecting the security interest created hereby.
d. Debtor is and shall be the lawful owner of the Collateral,
with good right to pledge, sell, assign or transfer the same, and
Debtor will defend the Collateral against the claims and demands of all
persons at any time claiming the same (other than Debtor's existing
secured lender).
3. Debtor shall be in default under this Agreement upon the happening
of any of the following events, circumstances or conditions, to-wit:
a. Default shall occur if a default occurs under the any of
the Loan Documents which is not cured within any applicable grace
period, and Secured Party shall have accelerated Debtor's obligations
thereunder.
b. Secured Party shall have materially violated any covenant,
agreement, representation or warranty herein, and the same shall not
have been cured within ten (10) business days' prior written notice
from Secured Party.
4. Upon the occurrence of the events, circumstances and conditions of
default as set forth in Paragraph 3 above:
a. At Secured Party's option, and upon notice to Debtor, all
of the obligations and liabilities of Debtor to Secured Party evidenced
herein or secured hereby shall immediately be due and payable.
b. Secured Party shall have all the rights, remedies and
privileges accorded to (a) a Secured Party by the Uniform Commercial
Code in effect as of the date of this Agreement and as may be hereafter
amended and (1,)a creditor under any other applicable law.
-2-
<PAGE> 21
10. JURISDICTION AND VENUE: WAIVER. Any suit, action or proceeding
against the Maker with respect to this Note shall be brought exclusively in the
courts of the State of Oklahoma, or in the United States District Court with
jurisdiction in Tulsa, Oklahoma. Maker hereby irrevocably waives any objections
which it may now or hereafter have to the jurisdiction or venue of any Suit,
action or proceeding, arising out of or relating to this Note, brought in such
courts, and hereby further irrevocably waives any claim that such suit, action
or proceeding brought in any such court has been brought in any inconvenient
forum.
11. CONFLICT. In the event of a conflict as between the terms and
conditions hereof and the terms and conditions of the Loan Agreement, the terms
and conditions of the Loan Agreement shall control. In lieu of any such conflict
of terms both documents shall be of equal force and effect.
12. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of Oklahoma.
13. AMENDMENTS. Any amendment or modification to this Note shall not be
effective unless signed in writing by the parties hereto.
MAKER
CyberGuard Corporation,
a Florida Corporation
By:
----------------------------
C. Shelton James
Chairman and
Acting Chief Executive Officer
-------------------------------
Secretary
(S E A L)
"SECURED PARTY"
FERNWOOD PARTNERS, L.L.C.
By:
----------------------------
Name:
-------------------------
Title:
------------------------
<PAGE> 22
PROMISSORY NOTE
$1,125,000.00
FOR VALUE RECEIVED, on December 17, 1998, and pursuant to the terms and
conditions of the Loan Agreement entered into on this same date (the "Loan
Agreement"), the undersigned, CyberGuard Corporation, a Florida corporation
("Maker"), having a mailing address of 2000 West Commercial Blvd., Suite 200,
Ft. Lauderdale, Florida 33309, promises to pay to the order of Fernwood
Partners, L.L.C., an Oklahoma Limited Liability Company, or assigns ("Payee"),
at 2540 East 3Oth Street, Tulsa, Oklahoma 74114, or at such other place as the
Payee or the holder hereof may direct in writing, the aggregate principal sum of
One Million One Hundred Twenty-five Thousand Dollars ($1,125,000.00), together
with interest from the date hereof on the unpaid principal amount, as follows:
1. INTEREST. The unpaid principal amount hereof shall bear interest
which will float from the date hereof at The Chase Manhattan Bank prime, plus
200 basis points, per annum (the "Base Rate"). Any amount of principal or
interest not paid when due (whether at the stated due date, at maturity, upon
acceleration or otherwise) shall thereafter bear interest until paid in full at
the Base Rate plus 600 basis points, per annum. Interest shall be computed on
the actual number of days elapsed on the basis of a 360-day year consisting of
twelve 30-day months.
2. PRINCIPAL AND INTEREST PAYMENTS. Interest due hereunder shall be
payable quarterly on January 1, April 1, July 1 and October 1 of each year
commencing on January 1, 1999 and continuing on each January 1, April 1, July 1
and October 1 thereafter through the maturity date hereof. All principal due
hereunder together with all accrued but unpaid interest shall become immediately
due and payable without further notice on June 1, 2001. In the event that any
payment date shall fall due on a Saturday, Sunday, legal holiday or a day on
which federal banking institutions are not required to be open, payment shall be
made on the next business day, but interest will not accrue during the interim.
Notwithstanding anything in this Promissory Note to the contrary, all interest
and principal will become due and payable at any time a) the warrant agreement
dated December 17, 1998 (the "Agreement") expires except for expiration
resulting from the exercise of the warrant rights or a transfer or exchange of
the Agreement, or b) the Agreement is declared unenforceable by a court of
competent jurisdiction.
3. PAYMENTS. All payments of principal and interest are to be made in
lawful money of the United States of America. All payments received shall be
applied first to unpaid interest, then principal. This Note cannot be prepaid
without the written consent of Payee.
4. DEFAULT. In the event that (a) any payment of principal or interest
due hereunder is not paid within ten (10) days after becoming due and payable;
or (b) Maker becomes subject to any
<PAGE> 23
bankruptcy, insolvency, receivership or debtor relief proceedings and, in the
case of any such proceedings initiated against Maker, the same have not been
discharged within sixty (60) days after institution; or (c) Maker makes an
assignment for the benefit of creditors, or admits in writing an inability to
pay its debts generally as they become due; or (d) Maker fails to comply with or
perform any provision of this Note not constituting a default under the previous
items of this paragraph and such failure continues for sixty (60) days after
notice is received by Maker, then an event of default hereunder shall be deemed
to have occurred and then or thereafter, at the option of the Payee or the
holder hereof, the entire principal and accrued interest of this Note shall
become immediately due and payable, without further notice to Maker. The failure
of Payee or any holder to exercise any right or remedy hereunder shall not be
deemed to be a release or waiver of any obligation or liability of the Maker.
5. REMEDIES. Upon the occurrence of an event of default as described
above, Payee may exercise any rights and remedies available to it provided
herein or by law or in equity. To the extent permitted by applicable law, all
benefits, rights and remedies hereunder shall be deemed cumulative and not
exclusive of any other thereof.
6. OBLIGATIONS ABSOLUTE. All obligations of Maker hereunder are
absolute and unconditional, irrespective of any effect or counterclaim of Maker
against Payee. Maker hereby waives the right to enforce any right of offset,
counterclaim or breach in any action brought to enforce the obligations of Maker
under this Note.
7. WAIVERS. Except as provided in Section 4 hereof, the Maker and any
co-makers, sureties, endorsers and guarantors of this Note hereby jointly and
severally waive presentment for payment, notices of non-performance or
nonpayment, protests, notices of protest, notice of dishonor, diligence in
bringing suit hereon against any party hereto and notice of acceleration, and
further consent to any extension of time for payment hereunder (whether one or
more), any renewal hereof (whether one or more), any substitution or release of
any collateral, and any addition or release of any party liable for payment of
this Note. Any such extension, renewal, substitution or release may be made
without notice to any such party and without discharging such party's liability
hereunder.
8. COLLECTION COSTS: ATTORNEYS' FEES. Maker agrees to pay all expenses
and costs of collection, including all reasonable attorneys' fees and expenses
as awarded by a court, court costs, and similar costs incurred by Payee in
connection with the enforcement of this Note, endeavoring to collect any amounts
payable hereunder, whether by acceleration or otherwise.
9. PARTIAL INVALIDITY. If any provision of this Note or the application
thereof to any party or circumstances is held invalid or unenforceable, the
remainder of this Note and the application of any such provision to other
parties or circumstances shall not be affected thereby, the provisions of this
Note being severable in any such instance. No invalid provision hereof shall
affect or impair any other provision of this Note.
-2-
<PAGE> 24
c. Debtor shall remain liable for any deficiency remaining
after any sale or other disposition of the Collateral or any portion
thereof.
d. All of the rights, powers, remedies and privileges of
Secured Party in the event of default by Debtor, as provided under this
Agreement and under applicable law, including, but not limited to, the
Uniform Commercial Code, shall be cumulative and in addition one to the
other, and in addition to those rights, powers, remedies and privileges
afforded Secured Party under the provisions of any other Loan
Documents.
5. No waiver of or acquiescence in any default shall operate as a
waiver of; or acquiescence in, any other default then existing or thereafter
occurring, whether or not such other default be of the same type as that waived
or acquiesced in. No delay or omission on the part of Secured Party in
exercising any right, power, remedy or privilege hereunder or otherwise shall
operate as a waiver thereof, and no single or partial exercise by Secured Party
of any right, power, remedy or privilege shall preclude any other or further
exercise thereof or the exercise of any other right, power, remedy or privilege.
6. All rights of Secured Party in connection herewith shall be subject
to any and all subordination agreements, intercreditor agreements and similar
agreements executed by Secured Party in connection herewith.
7. For the purpose of enabling Secured Party to exercise rights and
remedies under this Agreement at such time as Secured Party shall be lawfully
entitled to exercise such rights and remedies and FOR NO other purpose, Debtor
hereby grants to Secured Party an irrevocable, nonexclusive license (exercisable
without payment of royalty or other compensation to Debtor) to use, assign or
sublicense any of the Collateral, now owned or hereafter acquired by Debtor and
wherever the same may be located, including in such license reasonable access to
all media in which any of the licensed items may be recorded or stored and to
all computer programs used for the compilation or printout thereof. Until such
time as Secured Party is entitled to exercise such rights and remedies Debtor is
entitled to use the Collateral without payment of royalty or other compensation
to Secured Party.
8. This Agreement shall be governed by the laws of the State of
Oklahoma.
IN WITNESS THEREOF, this Agreement has been duly executed by the parties as of
the date and year first above written.
"DEBTOR"
CYBERGUARD CORPORATION,
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
-3-
<PAGE> 25
CYBERGUARD CORPORATION 2000 West
Commercial Blvd.
Suite 200
Ft. Lauderdale, Florida
COMMON STOCK PURCHASE WARRANT
Dated December 17, 1998
THIS CERTIFIES that, for Ten Dollars ($10.00) and other good and valuable
consideration received, Femwood Partners, L.L.C., an Oklahoma Limited
Liability Company (the "ORIGINAL HOLDER") or registered ("Registered Common
Stock" shall mean shares of the Company registered pursuant to Section 15 of
the Loan Agreement) and permitted assigns (the Original Holder or such
registered assigns at the time being the registered holder or holders hereof
are hereinafter collectively referred to as the "Holder") is entitled, at
any time, to subscribe for and purchase from CyberGuard Corporation, a
Florida corporation (the "COMPANY"), 500,000 shares of the Company Common
Stock (subject to adjustment as provided herein) of the fully paid,
nonassessable and subject to the provisions of Sections 3 or 15 of that
certain Loan Agreement by and between the Company and the Original Holder
dated as of the date hereof (Warrant), registered shares of Common Stock
(hereinafter defined) of the Company at a price per share equal to the
Exercise Price (as hereinafter defined).
This Warrant is subject to the following terms and conditions:
SECTION 1.0. COMMON STOCK. WARRANT COMMON STOCK. AND OTHER DEFINED TERMS.
SECTION 1.1. For the purposes of this Warrant: (a) "COMMON STOCK" shall mean and
include the Company's Common Stock, par value $.01 per share, authorized as
at the date of this Warrant, and shall include also any capital stock of the
Company of any class which shall be authorized at any time after the date of
this Warrant and which shall have the right to participate in the
distribution of earnings and assets of the Company without limitation as to
amount; (b) "WARRANT COMMON STOCK" shall mean the Common Stock authorized as
at the date of this Warrant and issuable upon the exercise of this Warrant
or any warrants delivered in substitution or exchange therefor, and shall
include also any capital stock of any other class which may be issuable upon
such exercise; and (c) "WARRANT STOCK" shall mean Common Stock issued upon
any exercise of the Warrant.
SECTION 1.2. For the purposes of this Warrant, the following terms shall have
the respective meanings set forth below:
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of stock
(other than Common Stock) or other securities which are directly or
indirectly convertible into or exchangeable
<PAGE> 26
for, with or without payment of additional consideration, additional shares of
Common Stock, either immediately or upon the arrival of a specified date or the
happening of a specified event.
"EXERCISE PRICE" shall mean $2.00 per share subject to adjustment for dividend
payments and other adjustments as set forth in the Loan Agreement and the
Warrant.
"INITIAL WARRANT NUMBER" shall mean 500,000 shares of common stock which is
approximately 5.58% of the issued and outstanding common shares of the Company
on the date hereof.
"OUTSTANDING CONVERTIBLE SECURITIES" shall mean the Convertible Securities, if
any, which are outstanding on the date of this Warrant, all of which are listed
on Schedule III hereto.
"PROMISSORY NOTE" SHALL MEAN the Promissory Note which was executed by the
Company on the date of this Warrant.
"OUTSTANDING STOCK PURCHASE RIGHTS" shall mean the Stock Purchase Rights, if
any, which are outstanding on the date of this Warrant, all of which are listed
on Schedule III hereto.
"STOCK PURCHASE RIGHTS" shall mean warrants, options, or other rights to
subscribe for, purchase or otherwise acquire, either with or without the payment
of consideration or additional consideration, any shares of Common Stock or any
Convertible Securities.
"WARRANT NUMBER" shall mean the Initial Warrant Number as the same shall be
adjusted from time to time pursuant to Section 6 hereof.
SECTION 2.0. EXERCISE OF WARRANT. The purchase rights represented by this
Warrant are exercisable by the registered Holder hereof; at any time or from
time to time, but, subject to Section 3 and 15 of the Loan Agreement, not later
than June 1, 2001 by the surrender of this Warrant and the Form of Subscription
annexed hereto as Schedule I at the principal office of the Company at 2000 West
Commercial Blvd., Suite 200, Ft. Lauderdale, Florida or at such other office of
the Company as the Company shall designate by notice in writing to the Holder
hereof at the address of such Holder appearing on the books of the Company), and
upon payment to the Company of the Exercise Price for the shares thereby
purchased.
The Company covenants that, if at the time of such exercise the Holder hereof
shall be entitled to exercise this Warrant, the shares so purchased shall be and
be deemed to be issued to the Holder hereof as the record owner of such shares
as of the close of business of the Company on the date on which this Warrant
shall have been exercised as aforesaid. The Company further covenants that all
shares of Warrant Common Stock which may be issued upon the exercise of this
Warrant will, upon exercise of the rights represented by this Warrant and
payment by the Holder of the Purchase Price, be fully paid and nonassessable and
free from all taxes, liens and charges in respect of the issue thereof.
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<PAGE> 27
The certificates for the shares of Warrant Common Stock so purchased shall be
delivered to the Holder hereof within a reasonable time, not exceeding ten (10)
days, after the date on which the rights represented by this Warrant shall have
been so exercised.
Payment of the applicable Purchase Price may be made (a) by cash, or (b) by
certified check, or bank cashier's check, payable to the Company.
In the event of a partial exercise of this Warrant, Company shall issue and
deliver to Holder, on or within ten (10) days of the date on which such Warrant
was exercised, and in substitution of such Warrant, a new warrant or warrants
(at Holder's option), of even date herewith and with the terms identical to the
terms hereof, except that such new warrant or warrants shall be exercisable, in
the aggregate, for a percentage of all issued and outstanding Common Stock,
subject to the anti-dilution provisions of Section 6.0 hereof; which represents
the number of shares of Common Stock with respect to which this Warrant has not
yet been exercised.
The Company undertakes to use its best efforts to provide the Holder with
registered stock upon the exercise of this Warrant in accordance with the
provisions of Section 3 and 15 of the Loan Agreement, and the Holder
acknowledges that certain limitations matters and limitations outside the
control of the Company may result in a delay in the Warrant Stock becoming fully
registered shares.
The Company may cause the Holder or its assigns to exchange the Warrant for
Warrant Stock at the Exercise Price only in the event that the Company's common
shares closed at a price in excess of $4.00/share for twenty consecutive trading
days prior to the Company causing such exchange and provided that Holder
receives shares of the Company that are either registered under an applicable
registration statement under the Securities Act of 1933, as amended, or are
otherwise exempt from the registration requirements thereto.
SECTION 3.0. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
requesting fractional shares shall be issued upon the exercise of this Warrant.
With respect to any fraction of a share called for upon the exercise of this
Warrant, an amount equal to such fraction multiplied by the then current value
of a share of Warrant Common Stock (as determined in good faith by the Board of
Directors of the Company) shall be paid to the Holder hereof in cash by the
Company.
SECTION 4.0. CHARGES. TAXES AND EXPENSES. Issuance of certificates for shares of
Warrant Common Stock upon the exercise of this Warrant shall be made without
charge to the Holder hereof for any issue or transfer taxes or any other
incidental expenses in respect of the issuance of such certificates to and in
the name of the registered Holder of this Warrant, all of which transfer taxes
and expenses shall be paid by the Company, and such certificates shall be issued
in the name of the Holder of this Warrant. Certificates will be issued in a name
other than that of the Holder upon the request of a Holder and payment by the
Holder of any applicable transfer taxes.
SECTION 5.0. CERTAIN OBLIGATIONS OF THE COMPANV. The Company covenants that it
will at all times reserve and keep available out of its authorized and unissued
Common Stock, solely for
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<PAGE> 28
the purpose of issue upon exercise of the purchase rights evidenced by this
Warrant, the number of shares of Warrant Common Stock purchasable and
deliverable hereunder.
The Company will not, by amendment of its Certificate of Incorporation or
through reorganization, consolidation, merger, dissolution, issuance of capital
stock or sale of treasury stock (otherwise than upon exercise of this Warrant)
or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid
the performance or observance of any of the covenants, stipulations or
conditions in this Warrant to be observed or performed by the Company. The
Company will at all times in good faith assist in the carrying out of all of the
provisions of this Warrant and in the taking of all other action which may be
necessary in order to protect the rights of the Holder of this Warrant against
dilution consistent with the provisions of this Warrant.
The Company covenants and agrees to maintain, on a current basis, the reports,
notices and statements required to be filed with the Securities Exchange
Commission.
The Company will maintain an office where presentations and demands to or upon
the Company in respect of this Warrant may be made. The Company will give notice
in writing to the registered Holder of this Warrant, at the address of the
registered Holder of this Warrant appearing on the books of the Company, of each
change in the locations of such office.
SECTION 6.0. ADJUSTMENTS. The Exercise Price and the number of shares of Common
Stock covered by this Warrant are subject to adjustment from time to time upon
occurrence of the events enumerated in this Section 6.0.
6(a) STOCK DIVIDENDS -- SPLIT-UPS. If; after the
date hereof; the number of outstanding shares of Common Stock is
increased by a stock dividend payable in shares of Common Stock or by a
split-up of shares of Common Stock or other similar event, then, on the
day following the date fixed for the determination of holders of Common
Stock entitled to receive such stock dividend or split-up, the number
of shares issuable on exercise of the Warrant shall be increased in
proportion to such increase in outstanding shares and the then
applicable Exercise Price shall be correspondingly decreased.
6(b) AGGREGATION OF SHARES. If; after the date
hereof; the number of outstanding shares of Common Stock is decreased
by a consolidation, combination or reclassification of shares of Common
Stock or other similar event, then, after the effective date of such
consolidation, combination or reclassification, the number of shares
issuable on exercise of the Warrant shall be decreased in proportion to
such decrease in outstanding shares and the then applicable Exercise
Price shall be correspondingly increased.
SECTION 7.0. NOTICE OF ADJUSTMENT TO NUMBER OF SHARES PURCHASABLE. Upon any
increase or decrease in the Warrant Number, then, and in each such case, the
Company, within thirty (30) days thereafter, shall give notice thereof in
writing to the Holder of this Warrant stating the adjusted Warrant Number and
setting forth in reasonable detail the method of calculation and the facts upon
-4-
<PAGE> 29
which such calculation is based. Where appropriate and reasonable, such notice
may be given in advance and included as a part of the written notice required to
be given pursuant to Section 9.0 hereof. No adjustment to the Warrant Number
will be required to be made until the cumulative adjustments amount to 1.0% or
more of the Warrant Number as last adjustment.
SECTION 8.0. EFFECT OF REORGANIZATION. RECLASSIFICATION.
CONSOLIDATION. MERGER. ETC. If; at any time while this Warrant is outstanding,
there should be any capital reorganization or reclassification of the capital
stock of the Company or any consolidation or merger of the Company with another
corporation or any sale, conveyance, lease or other transfer by the Company of
all or substantially all of its property to any other corporation (a "Sale"),
the Holder of this Warrant shall thereafter, upon exercise of this Warrant, be
entitled to receive the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from such
consolidation or merger, as the case may be, to which the Warrant Common Stock
(and any other securities and property) of the Company, deliverable upon the
exercise of this Warrant, would have been entitled upon such Sale if this
Warrant had been exercised immediately prior to such Sale.
Notwithstanding the foregoing, in the event of a Sale, the Company may
require Holder to exercise all of the Warrant effective immediately prior to the
consummation of such Sale, and if the Holder fails to so exercise upon the
request of the Company, the Warrant shall notwithstanding any provisions
contained herein to the contrary be deemed expired.
SECTION 9.0. PRIOR NOTICE OF CERTAIN EVENTS. In the event that:
(a) the Company shall pay any dividend, whether payable in cash or in
any capital stock upon its Common Stock or make any other distribution to
the holders of its Common Stock; or
(b) there shall be any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with another corporation or a sale of all or substantially all its assets;
or
(c) there shall be a voluntary or involuntary dissolution, liquidation
or winding-up of the Company;
then, in any of said cases, the Company shall give prior written notice, by
first-class mail, postage prepaid, addressed to the registered Holder of this
Warrant at the address of such registered Holder as shown on the registration
books of the Company, of the date on which (i) the books of the Company shall
close or a record shall be taken for such stock dividend, distribution or
subscription rights, (ii) such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up shall be consummated, or
(iii) such other event shall be consummated, as the case may be. Such notice
shall also specify the date as of which the holders of the Common Stock of
record shall receive said dividend, distribution or subscription rights or shall
be entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization,
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<PAGE> 30
reclassification, consolidation, merger or sale, dissolution, liquidation or
winding-up, as the case may be. Such written notice shall be given, to the
extent reasonably practicable, at least thirty (30) days prior to the date of
the event in question and the record date or the date on which the Company's
transfer books are closed in respect thereto.
SECTION 10.0. NO RIGHTS OR RESPONSIBILITIES AS SHAREHOLDER. Except as
otherwise agreed in writing by the Holder and the Company, a Holder of this
Warrant, as such, shall not be subject to any responsibilities as a shareholder
of the Company and shall not be entitled to vote or be deemed the Holder of
Common Stock or any other securities of the Company which may at any time be
issuable on the exercise hereof; nor shall anything contained herein be
construed to confer upon the Holder of this Warrant, as such, the rights of a
shareholder of the Company or the right to vote for the election of directors or
upon any matter submitted to shareholders at any meeting thereof; or to give or
withhold consent to any corporate section (except as provided herein) or to
receive notice of meetings or other actions affecting shareholders (except as
provided herein), or to receive dividends or subscription rights or otherwise
(except as provided herein), until the date of exercise of this Warrant shall
have occurred.
SECTION 11.0. LOSS. THEFT. DESTRUCTION OR MUTILATION OF WARRANT. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new warrant of like tenor and date, in lieu of this Warrant.
SECTION 12.0. TRANSFER AND EXCHANGE OF WARRANT. Subject to the
provisions of the Loan Agreement, this Warrant and all rights hereunder are
transferable at the office or agency of the Company by the registered Holder
hereof in person or by a duly authorized attorney, upon surrender of this
Warrant togetheR with a properly endorsed assignment in the form attached hereto
as SCBEDULE II. The Company shall be entitled to receive, as a condition to any
transfer of this Warrant, an opinion of counsel reasonably satisfactory to the
Company that such transfer does not violate the registration requirements of the
Securities Act of 1933, as amended, or applicable State securities laws. Until
transfer hereof on the registration books of the Company, the Company may treat
the registered Holder as the owner hereof for all purposes. This Warrant is
exchangeable, upon the surrender hereof by Holder, at the principal offices of
the Company, together with a properly endorsed assignment in the form attached
hereto as SCHEDULE II, for new warrants, in such denominations as Holder shall
designate at the time of surrender for exchange, of like tenor and date
representing in the aggregate the right to subscribe for and purchase the number
of shares which may be subscribed for and purchased hereunder, each of such new
warrants to represent the right to subscribe for and purchase not less than one
hundred thousand (100,000) shares of Common Stock (except to the extent
necessary to round out the balance of the number of shares).
SECTION 13.0. INVESTMENT INTENT. Contemporaneously with the original
issuance of this Warrant to the Holder hereof; the Holder has executed and
delivered to the Company an investment
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<PAGE> 31
representation letter regarding the Holder's investment intent and imposing a
requirement that any transferee of this Warrant execute and deliver to the
Company a representation letter in form and substance similar to the contents of
such letter.
SECTION 14.0. COMMUNICATIONS AND NOTICES. All communications and
notices hereunder must be in writing, either delivered in hand or sent by
first-class mail, postage prepaid, or sent by facsimile and, if to the Company,
shall be addressed to it at the address set forth on the first page hereof;
Attention: C. Shelton James, or at such other address as the Company may
hereafter designate in writing by notice to the registered Holder of this
Warrant, and if to such registered Holder, addressed to such Holder at the
address of such Holder as shown on the books of the Company.
SECTION 15.0. SUNDAYS. HOLIDAYS. ETC. If the last or appointed day for
the taking of any action required or the expiration of any right granted herein
shall be a Sunday, or a Saturday or shall be a legal holiday or a day on which
barking institutions in Tulsa, Oklahoma, are authorized or required by law to
remain closed, then such action may be taken or right may be exercised on the
next succeeding day which is not a Sunday, a Saturday or a legal holiday and not
a day on which banking institutions in Tulsa, Oklahoma, are authorized or
required by law to remain closed.
SECTION 16.0. REMEDIES. The Company stipulates that the remedies at
law of the Holder of this Warrant in the event of any default or threatened
default by the Company in the performance of or compliance with any of the terms
of this Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
SECTION 17.0. MISCELLANEOUS. This Warrant shall be binding upon the
Company's successors. In case any provision of this Warrant shall be invalid,
illegal or unenforceable, or partially invalid, illegal or unenforceable, the
provision shall be unenforced to the extent, if any, that it may legally be
enforced, and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby. This Warrant
and any term hereof may be changed, waived, discharged or terminated only by a
statement in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought. The two (2) year term of
this Warrant shall be stayed during any bankruptcy proceedings involving the
Company. The headings in this Warrant are for purposes of reference only, and
shall not limit or otherwise affect any of the terms hereof. This Warrant shall
take effect as an instrument under seal.
SECTION 18.0. GOVERNING LAW. THIS WARRANT HAS BEEN EXECUTED, DELIVERED
AND ACCEPTED BY THE PARTIES IN OKLAHOMA, AND SHALL BE DEEMED TO HAVE BEEN MADE
IN TULSA, OKLAHOMA, AND SHALL BE INTERPRETED, AND THE RIGHTS OF THE PARTIES
DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES APPLICABLE THERETO
AND THE INTERNAL LAWS OF THE STATE OF OKLAHOMA APPLICABLE TO AN AGREEMENT
EXECUTED, DELIVERED AND PERFORMED IN SUCH STATE. THE
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<PAGE> 32
VENUE OF ANY DISPUTE HEREUNDER SHALL BE TULSA COUNTY DISTRICT COURT, TULSA,
OKLAHOMA.
SECTION 19.0. CONFLICT. In the event of a conflict of the terms and
conditions hereof and the terms and conditions of the Loan Agreement, the terms
and the conditions of the Loan Agreement shall prevail.
IN WITNESS WHEREOF, CyberGuard Corporation has caused this Warrant to
be signed in its corporate name and its corporate seal to be impressed hereon by
its duly authorized officers.
Date: December 17, 1998 CyberGuard Corporation,
a Florida Corporation
By:
-------------------------------
Terrence Zielinski
Vice President and CFO
ATTEST:
- ---------------------------------
Secretary
(SEAL)
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<PAGE> 33
SCHEDULE I
FORM OF SUBSCRIPTION
(To be signed only on exercise of
Common Stock Purchase Warrant)
TO: CyberGuard Corporation
The undersigned, the Holder of the within Common Stock Purchase
Warrant, hereby irrevocably elects to exercise this Common Stock Purchase
Warrant for, and to purchase thereunder ___________* shares of Common Stock of
CyberGuard Corporation, and herewith makes payment of $_______ therefor, and
requests that the certificates for such shares be issued in the name of; and
delivered to ________, whose address is ___________________
Dated:
------------------------------
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant)
------------------------------
Address)
- ----------------
*Insert here the number of shares (all shares called for in the
Common Stock Purchase Warrant) as to which the Common Stock Purchase Warrant is
being exercised without making any adjustment for any other stock or other
securities or property or cash which, pursuant to the adjustment provisions of
the Common Stock Purchase Warrant, may be deliverable on exercise.
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<PAGE> 34
SCHEDULE II
FORM OF ASSIGNMENT
(To be signed only on transfer of
Common Stock Purchase Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
__________ of _________ the right represented by the within Common Stock
Purchase Warrant to purchase -shares of Common Stock of CyberGuard Corporation,
to which the within Common Stock Purchase Warrant relates, and appoints
_____________ Attorney to transfer such right on the books of CyberGuard
Corporation, with full power of substitution in the premises.
Dated: __________________
(Signature must conform in all respects
to name of Holder as specified on
the face of the Warrant)
---------------------------------------
(Address)
Signed in the presence of
- ----------------------
Signature guaranteed by*
- ----------------------
*Signature guarantee by a bank is required for all Holders other than the
Original Holder.
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<PAGE> 35
SCHEDULE III
INVESTMENT REPRESENTATION LETTER
CyberGuard Corporation
Attn: Office of Corporate Secretary
2000 West Commercial Blvd.
Suite 200
Ft. Lauderdale, FL 33309
RE: Common Stock Purchase Warrant
Dated December ______, 1998
To: CyberGuard Corporation
The Common Stock Purchase Warrant (Warrant) and the rights to the underlying
shares has been acquired for investment for the Holder's own account, not as a
nominee or agent, and not with a view to the Holder's distribution of any part
thereof; and the Holder has no present intention of selling, granting any
participation in, or otherwise distributing the same. The Holder does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to the Warrant.
The Holder further undertakes to require any transferee of the Warrant to
execute and deliver to the CyberGuard Corporation a representation letter in
form and substance similar to the contents of this letter.
DATED December _____, 1998.
FERNWOOD PARTNERS, L.L.C.,
an Oklahoma Limited Liability Company
By: _______________________________
F. Stephen Allen
Manager
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<PAGE> 1
EXHIBIT 10.21
ORIGINAL EQUIPMENT MANUFACTURER AGREEMENT
This Original Equipment Manufacturer Agreement ("Agreement") is made and entered
into as of this 11th day of June, 1998, by and between CyberGuard Corporation, a
Florida corporation, whose registered office address is 2000 W. Commercial
Blvd., Ft. Lauderdale, Florida 33309 ("CYBG"), and Information Resource
Engineering, Inc., a Delaware corporation, whose registered office address is
8029 Corporate Drive, Baltimore, MD 21236 ("OEM").
WHEREAS OEM desires to obtain from CYBG, and CYBG desires to grant OEM, the
right to license the Licensed Software in territory listed in Exhibit E, on the
terms and conditions set out below.
OEM and CYBG agree as follows:
1. DEFINITIONS
1.1. "Code" means computer programming object code, which is substantially
or entirely in binary form, which is directly executable by a computer
without the intervening steps of compilation or assembly.
1.2. "Customer" means resellers, dealers, and end users.
1.3. "Licensed Software" means commercially available for distribution
Firewall software products and related user's manuals.
1.4. "Specification" means a description of any and all modifications to
the Licensed Software.
1.5. "Upgrade" means maintenance modifications and enhancements that
substantially modify the Licensed Software.
2. RESPONSIBILITIES OF OEM
2.1. OEM agrees to pay for the Licensed Software at the prices set forth in
Exhibit C.
2.2. OEM agrees to aggressively promote the sales of the Licensed Software
to Customers through promotional activities, advertisement, and sales
calls.
2.3. OEM agrees to participate in CYBG training programs for sales and
support.
2.4. OEM agrees to provide all support to Customers as defined in Exhibit
A.
2.5. OEM agrees to provide any and all warranty support to the OEM's
Customers.
2.6. OEM shall provide CYBG with a report of sales ("Sales Report") within
fifteen (15) days of the end of each month, which includes: dollar
amount, volume, geographic area, and any other pertinent information
that CYBG may request and is mutually agreed to by the parties hereto.
2.7. OEM shall comply with the terms and conditions of OEM's SafeNet
Partner Program, attached hereto and incorporated herein as Exhibit H
which may be amended from time to time by OEM, including without
limitation, the Discount Structure and Commitment Levels section.
3. RIGHTS TO MANUFACTURE
3.1 CYBG shall grant OEM the right to private brand Licensed Software.
Private branding allows the OEM to add product names and logo to
Licensed Software, subject to Section 5.4 herein.
3.2 OEM shall submit any private branding modifications to the Licensed
Software to CYBG as a Specification.
3.3 CYBG shall commence private branding modifications upon written
acceptance by OEM
<PAGE> 2
3.4 OEM shall pay to CYBG the Right to Manufacture Fee of $250,000.00,
subject to Section 7 herein. The payment for the initial equivalent
amount of Licensed Software is waived by CYBG on a dollar-for-dollar
basis. Shipments under both this Agreement and the Distribution
Agreement executed by the parties hereto will be applied toward the
Right to Manufacture Fee.
3.5 OEM shall distribute Licensed Software under the terms of this
Agreement herein immediately when CYBG completes tasks listed in
Exhibit G "Acceptance Criteria".
4. RESPONSIBILITIES OF CYBG
4.1. CYBG shall provide a reproducible binary version of the Licensed
Software for distribution.
4.2. CYBG shall provide OEM with the CYBG Software License Agreement as
seen in Exhibit B.
4.3. CYBG approves the right of the OEM to use the designation "Authorized
CyberGuard Original Equipment Manufacturer" during the term of this
Agreement.
4.4. CYBG shall provide training for technical and marketing support for a
fee.
4.5. CYBG shall complete the tasks listed in the Exhibit G herein no later
than December 31, 1998.
5. PUBLIC RELATIONS
5.1. The parties will work toward a common external message and timing of
public announcements.
5.2. OEM shall submit to CYBG for approval any and all advertising and
sales literature of OEM which refers to CYBG and/or includes the CYBG
mark. Such approval shall not be unreasonably withheld or delayed.
5.3. CYBG does not grant OEM any right to use and/or duplicate the CYBG
mark or certifications and evaluations. CYBG reserves the right to
change the CYBG mark.
5.4. OEM agrees not to delete or alter in any manner CYBG's copyright
notices on the Licensed Software or Upgrades.
6. OWNERSHIP AND LICENSES
6.1. Intellectual Property
6.1.1.CYBG retains sole and exclusive ownership of all worldwide
copyrights, patents, trademarks, trade secrets, know-how, and any
other intellectual property right in and to the Licensed Software
and Upgrades as they exist now or in the future.
6.1.2.OEM acknowledges that CYBG owns all right, title, and interest in
the CYBG name and logotype and mark and is the owner of certain
other CYBG registered or common law trademarks and tradenames.
OEM acknowledges that OEM will not use or acquire any interest in
any of these trademarks or trade names by virtue of this
Agreement, or the activities of either of us under it.
6.1.3.CYBG acknowledges that OEM owns all right, title, and interest in
the OEM name and logotype. CYBG acknowledges that it will not
acquire any interest in the OEM name or mark by virtue of this
Agreement or the activities of either of us under it.
7. CYBG GRANTS TO OEM
7.1. CYBG grants to OEM, and its subsidiaries, a territory-wide,
nonexclusive license with no right to sublicense under copyrights,
know-how and trade secrets to manufacture and sell copies of Licensed
Software in Code only to Customers.
7.2. CYBG grants to OEM, and its subsidiaries, a territory-wide,
nonexclusive license under copyrights, know-how, and trade secrets to
internally use, display, and execute in Code only five (5) copies of
the Licensed Software solely for demo purposes at no charge.
7.3. The licensing terms included in each agreement between OEM and
Customer shall be from CYBG or shall be legally sufficient to:
<PAGE> 3
7.3.1 Effectuate a license with restrictions specified herein, not a
transfer of ownership, to the Customer, and preserve all
copyright and other intellectual property right notices of
CYBG;
7.3.2. Prohibit reverse assembly, reverse compilation, or other
translation of the Licensed Software.
7.4. OEM shall distribute OEM product under a written agreement between
OEM and each Customer which shall contain the substantive terms and
conditions of the CyberGuard(TM) Software License Agreement as
providED in Exhibit B or as amended by CYBG from time to time.
7.5. OEM agrees not to reproduce, copy, modify, translate, disassemble,
reverse engineer or otherwise attempt, or permit others to attempt,
to discover the source code of the License Software and/or Upgrades.
8. FEES AND PAYMENTS
8.1 OEM shall purchase the Licensed Software and Upgrades for
distribution under this Agreement directly from CYBG.
8.2 OEM shall send all payments, referencing this Agreement to:
CyberGuard Corporation, 2000 West Commercial Blvd., Suite 200, Fort
Lauderdale, FL 33309-1892.
8.3 During the term of this Agreement and for one (1) year thereafter
CYBG shall have the right, at its expense and upon not less than
twenty (20) working days notice to OEM and no more than once per
year, to have an examination and audit conducted of OEM records
specifically relating to payments hereunder to determine compliance
with this section. Any such audit must be conducted during regular
business hours and in such a manner as not to interfere unreasonably
with OEM's normal business activities. Such audit will be conducted
by a member of the AICPA who has agreed to be bound by substantially
similar terms and conditions as those set out in the attached
Non-Disclosure Agreement in Exhibit F.
8.4 The fees payable by OEM hereunder are exclusive of taxes. OEM shall
pay or reimburse CYBG for all taxes, including sales or use taxes,
however designated, imposed as a result of the existence or operation
of this Agreement, except income and franchise tax imposed on CYBG by
any government entity. If applicable, OEM may, in lieu of paying
sales and/or use taxes, furnish to CYBG a tax exemption certificate
which is acceptable to the appropriate taxing authority.
8.5 Payment shall be made within thirty (30) days from the date of each
sale, as listed in the monthly Sales Report, without reduction or
offset for returns. All amounts over due shall bear interest at the
rate of 1.5% per month or, if lower, the highest rate permitted by
applicable law.
8.6 CYBG may change prices with (30) thirty days notification. Price
changes will not affect purchase orders that are in process and
accepted. OEM may place additional orders at the then current prices
during such notification period. Price changes will be consistent
with CYBG's price changes for other OEMs with similar sales volume
commitments.
8.7 OEM is granted purchase discounts off of list prices as set forth in
Exhibit C.
9. WARRANTY DISCLAIMER
9.1. Warranty Disclaimer
9.1.1 CYBG provides the Licensed Software and any Upgrades with no
warranties as specifically stated in the CyberGuard(TM)
Software License Agreement, attached hereto or as amended by
CYBG from time TO time.
10. TERM AND TERMINATION
10.1. This Agreement shall be effective as of the date first written above
herein ("Effective Date") and shall continue for five (5) years at
the rates and discounts provided herein subject to
<PAGE> 4
attainment of the annual unit volume commitments as specified in
Exhibit E. In the event OEM does not meet the annual unit volume
commitments, CYBG has the right to modify the terms and conditions of
this Agreement, including without limitation, the discount schedule
set forth herein in Exhibit C, on each anniversary date of the
Effective Date ("modifications"). The modifications will be
consistent with "Most Favored Nations" for comparable discounts, and
terms and conditions. CYBG will not modify the discount schedule
while license fees are being waived on the initial $250,000 Right to
Manufacture fee, as such waiver is more fully described in section
3.4 of this Agreement. In the event that parties agree to CYBG's
modifications in writing, this Agreement renews on the applicable
anniversary date of the Effective Date at the modified terms and
conditions. In the event that parties do not agree to CYBG's
modifications and state so in writing, this Agreement will terminate
in 90 days from the date of such writing, and neither party hereto
will have thereafter any recourse arising from such termination
except as otherwise stated in this Agreement.
10.2. Either party shall have the right to terminate this Agreement for
material breach by the other party hereto. Termination shall become
effective ninety (90) days after written notice is given by the
terminating party to the breaching party. Such notice shall
specifically identify the nature of the breach and state an intent to
terminate in the event the breach is not cured within said ninety
(90) days period. Written notice shall be signed by an authorized
representative of CYBG and shall be sent in accordance with
Subsection 15.13, "Notices."
10.3. Upon termination or expiration of this Agreement, the OEM will return
all confidential information given to it by CYBG.
10.4. Survival After Termination or Expiration:
The provisions of Section 6 "Ownership and Licenses," Section 8 "Fees
and Payments," Section 9 "Warranty and Indemnification," Section 10
"Term and Termination," Section 11 "Limitation of Liability," Section
12 "Compliance with Laws," Section 13 "Confidential Information,"
Section 14 "Force Majeure," Section 15 "General," shall survive and
continue beyond any expiration or termination of this Agreement,
except that licenses granted to OEM by CYBG shall not survive if this
Agreement is terminated for a material breach by OEM. End user
licenses are not affected.
11. LIMITATION OF LIABILITY
11.1. In no event will either party be liable to the other for any
incidental or special damages, actual losses, lost profits, lost
savings, or any other consequential damages regardless of the form of
action, even if such party has been advised of the possibility of
such damages, resulting from the subject matter of this Agreement.
12. COMPLIANCE WITH LAWS
12.1 Each party will comply with all applicable laws and regulations and
ordinances including, but not limited to, the regulations of the U.S.
Government relating to the export of commodities and technical data
insofar as they relate to the activities under this Agreement. Each
party hereby gives its written assurance that neither products nor
any technical data provided by the other party under this Agreement,
is intended to be shipped, directly or indirectly, to the prohibited
countries identified by the U.S. Government.
12.2 The Department of Commerce Bureau of Export Administration ("BXA")
has taken the position that software containing Application
Programming Interfaces
12.3 ("APIs") similar to CYBG's CENTRAL/REMOTE FIREWALL MANAGEMENT FEATURE
or are controlled by United States export laws, and therefore, such
source code and object code software cannot be exported without a
valid license or other authorization from the U.S. government. CYBG
hereby
<PAGE> 5
places OEM on notice that any item controlled under the U.S. laws and
regulations, including without limitation, the CENTRAL/REMOTE
FIREWALL MANAGEMENT FEATURE or any other encryption feature, or any
product containing the CENTRAL/REMOTE FIREWALL MANAGEMENT FEATURE or
any other encryption feature, cannot be exported (as defined in
section 734.2 (b) (9) of the Export Administration Regulations (15
CFR ss.734.2(b)(9)) without a valid license or other authorization
from the U.S. government.
12.4. OEM shall notify CYBG of any contract for sale of the CENTRAL/REMOTE
FIREWALL MANAGEMENT FEATURE and/or any other encryption feature or
any product containing the CENTRAL/REMOTE FIREWALL MANAGEMENT Feature
or any other encryption feature that is deemed an export under BXA
regulations; any application submitted to the U.S. government to
obtain an export license under BXA regulations or any other export
control laws or regulations; and any actual export under such license
obtained from the U.S. government for export.
12.5. OEM assumes all risk and cost associated with a violation of any U.S.
export control law or regulation, and will indemnify CYBG for the
full consequences of any export of the CENTRAL/REMOTE FIREWALL
MANAGEMENT FEATURE or any other encryption feature without CYBG's
knowledge.
12.6. Termination or cancellation of this Agreement or any Exhibits or
attachments hereto shall have no effect on the rights and obligations
of the parties under this section.
13. CONFIDENTIAL INFORMATION
13.1. All Confidential information exchanged by the parties shall be in
accordance with a Mutual Non-Disclosure Agreement attached hereto as
Exhibit F and incorporated herein by reference.
14. FORCE MAJEURE
14.1. Neither party to this Agreement shall be liable for its failure to
perform any of its obligations hereunder during any period in which
such performance is delayed by circumstances beyond its reasonable
control, including but not limited to: fire, act of nature, or,
embargo, riot or the intervention of any government authority,
provided that the party suffering such delay promptly notifies the
other party of the delay.
15. GENERAL
15.1 Neither party shall assign this Agreement nor any interest therein
without the prior written consent of the other party, except that
both parties may assign this Agreement or any interest therein in
connection with a merger, acquisition, sale of substantially all of
assets, or similar business combination; provided, however, that OEM
may not assign this Agreement or any interest therein to a third
party which is a competitor of CYBG or becomes a competitor of CYBG
as a result of this Agreement.
15.2. Except as otherwise expressly provided herein, the rights and
remedies of the parties provided in this Agreement shall not be
exclusive and are in addition to any other rights and remedies
provided at law or in equity.
15.3. Each party, including its servants, agents, and employees, is deemed
to be an independent contractor and not an agent, joint venturer,
employee, or representative of the other, and neither party may
create any obligations or responsibilities on behalf of or in the
name of the other party.
15.4. If any provision of this Agreement is held illegal or unenforceable
by any court of competent jurisdiction, such provision shall be
modified to the minimal extent required to make it legal and
enforceable, consistent with the spirit and intent of this Agreement.
If such provision cannot be so modified, the provision shall be
deemed separable from the remaining provisions
<PAGE> 6
of this Agreement and shall not affect or impair the validity or
enforceability of the remaining provisions of this Agreement.
15.5. This Agreement shall be governed by the laws of the State of Florida
applicable to agreements made and performed entirely within such
jurisdiction except that the conflict of laws provisions of the
State of Florida relating to determination of the applicable forum
law to be used shall not apply.
15.6. Supplemental terms are included in Exhibits A through H and are
incorporated herein by reference. In case of conflict between the
terms of Exhibits A through H and the body of this Agreement, the
body of this Agreement shall govern.
15.7 No rights or licenses are granted hereunder, expressly or by
implication or estoppel, to assign or grant any rights or licenses
to any trademarks of either party, or to any inventions of either
party, except as may be expressly provided herein.
15.8. The failure of either party to enforce, in any one or more
instances, any of the terms or conditions of the Agreement shall not
be construed as a waiver of the future performance of any such term
or condition.
15.9. Nothing contained in this Agreement shall prevent either party from
entering into agreements with third parties which are similar to
this Agreement, or from independently developing (either through
third parties or through the use of its own personnel), or from
acquiring from third parties, technologies or product or services
which are similar to and competitive with that of the other party.
15.10. Neither party shall disclose the existence or terms and conditions
of the Agreement to third parties except with prior written
agreement of the other party or in response to order of a court or
government agency or the disclosure rules and regulations of the
Securities and Exchange Commission, but in each such case only to
the extent so required.
15.11. Except for actions to recover payments under this Agreement, no
actions, regardless of form, arising out of this Agreement, may be
brought by either party more than two (2) years after the cause of
action has arisen.
15.12. This Agreement, together with its Exhibits; and the agreements
listed in Exhibit E of this Agreement, express the entire agreement
and understanding of the parties with respect to the subject matter
hereof and supersedes all prior oral or written agreements,
negotiations, commitments, and understandings pertaining to the
subject matter hereof. Any modifications of or changes to this
Agreement shall be in writing and signed by both parties.
15.13. Notices
15.13.1. Notices under this Agreement shall be addressed to:
To CYBG: CyberGuard Corporation
2000 West Commercial Blvd., Suite 200
Ft. Lauderdale, FL 33309
ATTN: Business Development
To OEM: Information Resource Engineering, Inc.
8029 Corporate Drive
Baltimore, MD 21236
ATTN: OEM Manager
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date first written above.
<PAGE> 7
CYBERGUARD CORPORATION INFORMATION RESOURCE ENGINEERING, INC.
By: By:
------------------------- ------------------------------
Signature Signature
------------------------- ------------------------------
Print or type name Print or type name
------------------------- ------------------------------
Title Title
EXHIBIT A
Support Agreement
1. Definitions
1.1. Level 1 shall mean the service provided in response to the initial
phone call placed by a Customer which identifies or documents an
error.
1.2. Level 2 shall mean the service provided to analyze or reproduce the
error or to determine that the error is not reproducible.
1.3. Level 3 shall mean the service provided that isolates the error to the
component level. An attempt shall be made to provide an error
correction or circumvention.
1.4. Error shall mean any of the following:
1.4.1. Code Error
1.4.1.1. A function described in the Licensed Software which is
omitted from the code;
1.4.1.2. A function which does not operate or gives incorrect
results; or
1.4.1.3. A function which does not operate satisfactorily in the
environment for which it was designed.
1.4.2. Documentation Error
1.4.2.1. A failure of the documentation to accurately describe
the functionality as described in the Licensed Software;
or
1.4.2.2. A failure of the documentation to enable the intended
user to correctly operate the code.
1.5. Error Severity Level shall mean classification of errors according to
the following definitions:
1.5.1. High Priority shall mean an emergency condition which causes
critical impact or which makes the performance or continued
performance of any one or more functions impossible.
1.5.2. Medium Priority shall mean a condition which significantly
affects or which makes the performance or continued performance
of any one or more functions difficult and which can be
circumvented or avoided on a temporary basis.
1.5.3. Low Priority shall mean a documentation error or a limited
problem condition which is not critical and which may be
circumvented or avoided on a temporary basis.
2. Support shall be provided based on reasonable commercial practices that may
change from time to time.
<PAGE> 8
EXHIBIT B
CyberGuard Software License Agreement
<PAGE> 9
EXHIBIT C
OEM Price Matrix
(Note: Model Numbers Refer to CyberGuard Distributor Price Book Parts)
<PAGE> 10
EXHIBIT E
Territory, Agreements and Volume Commitments
D1 Territory
Territory means world-wide, except prohibited countries
identified by the United States government.
D2 Agreements
The business relationship between Information Resource Engineering,
Inc. and CyberGuard Corporation is represented in this OEM Agreement
and a separate Distribution Agreement, dated June 11, 1998. These
agreements and their exhibits express the entire agreement and
understanding of the parties and supersede all prior oral or written
agreements, negotiations, commitments, and understandings pertaining
to the subject matter hereof. Any modifications of or changes to this
Agreement shall be in writing and signed by both parties.
D3 Annual Volume Commitments
First Year 500 units
Second Year 2,000 units
Third Year 5,000 units
Fourth Year 12,500 units
<PAGE> 11
EXHIBIT F
Mutual Non-Disclosure Agreement
THIS AGREEMENT is made and entered into by and between CyberGuard Corporation, a
Florida corporation, having a principal place of business at 2000 W. Commercial
Blvd., Suite 200, Fort Lauderdale, Florida, 33309 (hereinafter referred to as
"CyberGuard"), and Information Resource Engineering, Inc., a Delaware
corporation, having a principal place of business at 8029 Corporate Drive,
Baltimore, MD 21236 (hereinafter referred to as "Company").
WHEREAS, CyberGuard and Company are desirous of exchanging information for the
purpose of exploring the possibility of the two companies working together, to
the mutual benefit of both parties hereto.
AND WHEREAS, if the parties determine to work together, the exchange of
information will continue throughout the parties' working relationship.
AND WHEREAS, one party hereto (OWNER) may disclose to the other party hereto
(RECIPIENT), certain information pursuant to this Agreement which the OWNER
deems proprietary and confidential.
NOW, THEREFORE, the parties hereto agree as follows:
1. For a period of three (3) years from the date of receipt of any
"Confidential Information" (as defined below), each RECIPIENT shall use
reasonable efforts to prevent the disclosure to any other person, firm or
corporation of any Confidential Information which it receives from OWNER.
RECIPIENT shall also use the same degree of care to avoid disclosure of
such information as RECIPIENT employs with respect to its own proprietary
and confidential information of like importance and shall limit disclosure
of the Confidential Information to those of its personnel and personnel of
its affiliated companies and its outside professional firms who have an
actual need to know and have an obligation to protect the confidentiality
of such Information consistent with the requirements of this Agreement.
RECIPIENT also agrees not to use the Confidential Information for any
purpose other than the purpose described in the recitals to this Agreement.
2. Any reports or other documents resulting from such exchange of information
between the parties shall be governed by the same terms and conditions with
respect to confidentiality as is the exchange of Confidential Information
between the parties.
3. Notwithstanding the foregoing, information shall not be deemed Confidential
Information and RECIPIENT shall have no obligation with respect to any such
information which
a. is already known to RECIPIENT, and such prior knowledge can be
demonstrated through physical evidence that pre-dates this
Agreement, or
b. is or becomes publicly known through publication or otherwise and
through no wrongful act of RECIPIENT, or
<PAGE> 12
c. is received from a third party without similar restriction and
without breach of this Agreement, or
d. is independently developed by RECIPIENT, or
e. is furnished to a third party by OWNER without a similar
restriction on the third party's rights, or
f. is approved for release by written authorization of OWNER (so long
as such release complies with any requirements of the
authorization), or
g. is disclosed pursuant to the lawfully imposed requirement of a
governmental agency or disclosure is required by operation of law.
4. Each of the Parties hereto acknowledge that irreparable harm, for which
there would be no adequate remedy at law, would arise from a violation of
this Agreement. Therefore, each Party acknowledges that a breach of this
Agreement would give rise to a right to an injunction in favor of the
non-breaching party. Notwithstanding the foregoing, the parties are
entitled to pursue any appropriate remedies at law or in equity for breach
of this Agreement. This Agreement constitutes the entire agreement of the
parties hereto with respect to confidentiality of business information and
supersedes any prior agreements or understandings of the parties hereto
regarding such information. This Agreement shall be construed in accordance
with the laws of the State of Florida. This Agreement may be amended or
modified only in a writing signed by both parties.
5. All Confidential Information that is in any reproducible form (including
without limitation, written or electronic form) delivered by one party
hereto to the other party shall be and remain the property of the
delivering party, and all such data, and any copies thereof, shall be
promptly returned to the delivering party upon written request, or
destroyed at the delivering party's option.
6. This Agreement shall not be construed as granting or conferring any rights
by license or otherwise, expressly, impliedly, or otherwise for any
invention, discovery or improvement made, conceived or acquired prior to or
after the date of this Agreement.
7. Nothing contained in this Agreement shall constitute a commitment by either
party to the development or release of any future products and/or programs
disclosed thereby or restrict either party in its efforts to improve its
existing products and systems and to conceive and develop new products and
systems. Additionally, participation in the information exchange pursuant
to this Agreement shall not constitute or imply a commitment by either
party to favor or recommend any product or service of the other party.
8. For the purposes of this Agreement, "Confidential Information" shall mean
any information that is disclosed to RECIPIENT by the OWNER that has been
created, developed, discovered, discerned, acquired, licensed or purchased
by the OWNER, including without limitation, information relating to any
product, process, development, research work, business line, business
strategy or intellectual property of any kind, and shall include, without
limitation, inventions, improvements, discoveries, creations, computer
programs, computer hardware, design specifications, concepts, formulas,
trade secrets, ideas, processes, know-how, methods, proprietary data,
software code, source code, products,
<PAGE> 13
future products, techniques, any and all derivative works therefrom and any
and all patents and copyrights therein or any improvements thereof.
IN WITNESS WHEREOF, the parties hereto agree that the effective date of this
Agreement shall be the 11th day of June, 1998.
CyberGuard Corporation Information Resource Engineering, Inc.
By: By:
------------------------- ------------------------------
Signature Signature
------------------------- ------------------------------
Print or type name Print or type name
------------------------- ------------------------------
Title Title
<PAGE> 14
EXHIBIT G
OEM Acceptance Criteria
Both companies want IRE to operate as an OEM with an IRE branded version of
CyberGuard's firewalls.
1. CyberGuard will provide support to IRE consistent with CYBG's commercial
practices as listed in (a) Escalation and call handling Statement, (b)
hardware certification procedure, (c) hardware certification presentation,
(d) installation guide, (e) Business Partner Program(TM) Guide, (f)
CyberGuard partner web sitE, which may be amended from time to time.
2. CyberGuard will apply engineering effort to change the logo and name,
provided that IRE supplies CyberGuard with name and logo data in the proper
format. CyberGuard will be provide documentation as machine readable source
to allow IRE to do IRE's own customization. Machine readable source remains
the property of CyberGuard.
3. CyberGuard will negotiate with its 3rd party suppliers in good faith or
supply a list of points of contacts for IRE to negotiate terms and
conditions.
4. CyberGuard will supply available documentation of the software publishing
process; the software support process; list of all supported hardware
configurations and a process for updating the list; the RIQ process; and
the product delivery dates for planning purposes.
5. CyberGuard will provide custom programming support at CyberGuard's retail
rates. Special support requirements (eg. TR turnaround times) will be
provided at CyberGuard's custom programming retail rates or will be
negotiated on a task basis.
6. CyberGuard will conduct Year 2000 compliance tests on Licensed Software and
will make available documentation of such Year 2000 tests. At the time of
this Agreement, the Year 2000 compliance tests used are derived from
Citicorp's compliance requirements. CyberGuard reserves the right to amend
the Year 2000 compliance testing criteria from time to time.
<PAGE> 15
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made and entered into as of this
11th day of June, 1998, between CyberGuard Corporation, a Florida corporation,
whose registered office address is 2000 W. Commercial Blvd., Ft. Lauderdale,
Florida 33309 ("CYBG"), and Information Resource Engineering, Inc., a Delaware
corporation, whose registered office address is 8029 Corporate Drive, Baltimore,
MD 21236 ("Distributor").
WHEREAS Distributor desires to obtain from CYBG, and CYBG desires to grant
Distributor, the right to resell the Licensed Software in territory listed in
Exhibit G, on the terms and conditions set out below.
Distributor and CYBG agree as follows:
1. DEFINITIONS
1.1. "Code" means computer programming object code, which is substantially
or entirely in binary form, which is directly executable by a computer
without the intervening steps of compilation or assembly.
1.2. "Customer" means resellers, dealers, and end users.
1.3. "CyberGuard Authorized Master Distributor" means a CYBG's distributor
with unique terms and conditions unilaterally determined by
CyberGuard.
1.4. "Licensed Software" means commercially available for distribution
Firewall software products and related user's manuals.
1.5. "RMA" means return materials authorization number assigned by CYBG.
1.6. "Upgrade" means maintenance modifications and enhancements that
substantially modify the Licensed Software.
2. RESPONSIBILITIES OF DISTRIBUTOR
2.1. Distributor agrees to pay for the Licensed Software and the Upgrades
at the prices set forth on the CYBG published price book as set forth
in Exhibit C of this Agreement.
2.2. Distributor agrees to aggressively promote the sales of the Licensed
Software to Customers through promotional activities, advertisement,
and sales calls.
2.3. Distributor may rotate stock of the Licensed Software four times per
year at one hundred percent (100%) of the price of the Licensed
Software paid by Distributor to CYBG and exclusive of all shipping,
insurance, tariff, and other similar charges associated with
Distributor's purchase and rotation of the License Software.
2.4. Distributor agrees to participate in CYBG training programs for sales
and support in accordance with the terms and conditions of the CYBG's
Program Guide, attached hereto and incorporated herein as Exhibit I,
that CYBG may amend from time to time.
2.5. Distributor agrees to provide the level 1 and level 2 support to
Customers as defined in Exhibit A.
2.6. Distributor agrees to provide ninety (90) day warranty support to the
Distributor's Customers. The warranty period begins with the
installation of the Licensed Software.
2.7. Distributor shall provide CYBG with a report of sales within fifteen
(15) days of the end of each month, which shall include: dollar
amount, volume, geographic area, and any other pertinent information
that CYBG may request and is mutually agreed to by the parties hereto.
<PAGE> 16
2.8. Distributor shall issue to CYBG purchase orders identifying the title
and quantity of the Licensed Software and include such billing,
shipping, pricing, and other information as requested by CYBG.
2.9. Distributor shall pay all charges for shipping and transportation of
the Licensed Software.
2.10. Distributor shall provide the initial order volumes equal to
$250,000.00 upon signing the Agreement. This initial order is waived
upon the condition that Distributor executes the CyberGuard
Corporation Original Equipment Manufacturer Agreement prior to or
simultaneously with the execution of this Agreement.
2.11. Distributor must notify CYBG within twenty (20) days after accepting
delivery of visibly incomplete or damaged goods. All goods will be
shipped EXW, 2000 West Commercial Blvd., Suite 200, Fort Lauderdale,
FL 33309.
2.12. Licensed Software shall be returned by Distributor to CYBG unopened,
in original packaging, within sixty (60) days of CYBG notification of
an Upgrade availability.
2.13. Distributor has thirty (30) days to provide CYBG with the number of
unused/unopened copies Distributor wishes to return as a result of
CYBG notification of Upgrade.
2.14. Distributor shall comply with the terms and conditions of
Distributor's SafeNet Partner Program, attached hereto and
incorporated herein as Exhibit H which may be amended from time to
time by Distributor, including without limitation, the Discount
Structure and Commitment Levels section. The published list prices
referenced in the Discount Structure and Commitment Levels section
shall be the list prices provided by CYBG to Distributor under this
Agreement.
3. RESPONSIBILITIES OF CYBG
3.1. CYBG shall provide to Distributor copies of the Licensed Software for
distribution.
3.2. CYBG shall provide to Distributor copies of Upgrades to the Licensed
Software for distribution.
3.3. CYBG shall issue an RMA to Distributor when required for section 2.12
and 2.13.
3.4. CYBG shall provide Distributor with the CYBG Software License
Agreement as set out in Exhibit B.
3.5. CYBG approves the right of the Distributor to use the designation
"Authorized CyberGuard Software Distributor" during the term of this
Agreement.
3.6. CYBG shall provide Level 3 support to Distributor as defined in
Exhibit A.
3.7. CYBG shall provide training for technical and marketing support for a
fee as set out in the CYBG's Program Guide, attached hereto as
Exhibit I, that CYBG may amend from time to time.
3.8. CYBG shall provide warranty support as described in Exhibit A.
3.9. CYBG shall provide marketing collateral as it becomes available.
4. PUBLIC RELATIONS
4.1. The parties will work toward a common external message and timing of
public announcements.
4.2. CYBG reserves the right to require the Distributor to submit to CYBG
for approval any and all advertising and sales literature of
Distributor which refers to CYBG and/or includes the CYBG mark. Such
approval shall not be unreasonably withheld or delayed.
4.3. CYBG grants the right to Distributor to duplicate the CYBG mark as
described in Exhibit F. CYBG reserves the right to change the CYBG
mark.
4.4. Distributor agrees not to change or remove any CYBG mark on Licensed
Software or Upgrades.
5. OWNERSHIP AND LICENSES
5.1. Intellectual Property
<PAGE> 17
5.1.1. CYBG retains sole and exclusive ownership of all worldwide
copyrights, patents, trademarks, trade secrets, know-how, and
any other intellectual property right in and to the Licensed
Software and Upgrades as they exist now or in the future.
5.1.2. Distributor acknowledges that CYBG owns all right, title, and
interest in the CYBG name and logotype and mark and is the owner
of certain other CYBG registered or common law trademarks and
tradenames. Distributor acknowledges that Distributor will not
use or acquire any interest in any of these trademarks or trade
names by virtue of this Agreement, or the activities of either
of us under it.
5.1.3. CYBG acknowledges that Distributor owns all right, title, and
interest in the Distributor name and logotype. CYBG acknowledges
that it will not acquire any interest in the Distributor name or
mark by virtue of this Agreement or the activities of either of
us under it.
6. CYBG GRANTS TO DISTRIBUTOR
6.1. CYBG grants to Distributor, and its subsidiaries, a territory-wide,
nonexclusive license under copyrights, know-how and trade secrets to
sell copies of Licensed Software in Code only to Customers.
6.2. CYBG grants to Distributor, and its subsidiaries, a territory-wide,
nonexclusive license under copyrights, know-how, and trade secrets to
internally use, display, and execute in Code only one copy of the
Licensed Software solely for demo purposes at no charge.
6.3. Distributor shall not remove and shall provide to Customers the
CyberGuard(TM) Software License AgreemeNT supplied by CYBG with the
Licensed Software and/or Upgrades as set out in Exhibit B or as
amended by CYBG from time to time.
7. FEES AND PAYMENTS
7.1. Distributor shall purchase the Licensed Software for distribution
under this Agreement from a CyberGuard Authorized Master Distributor
or directly from CYBG.
7.2. CYBG agrees to set aside 2% of the Distributor's net purchases for
deposit into the Distributor's co-op promotion account per Exhibit D.
7.3. CYBG agrees to furnish Distributor limited advertising and promotional
material in connection with its activities hereunder. Such materials
shall be provided at no charge. Additional quantities shall reduce
funds described in 7.2 by an amount equal to CYBG cost of the
materials.
7.4. Distributor shall send all payments, referencing this Agreement to:
CyberGuard Corporation, 2000 West Commercial Blvd., Suite 200, Fort
Lauderdale, FL 33309-1892.
7.5. During the term of this Agreement and for one (1) year thereafter CYBG
shall have the right, at its expense and upon not less than twenty
(20) working days notice to Distributor and no more than once per
year, to have an examination and audit conducted of Distributor
records specifically relating to payments hereunder to determine
compliance with this section. Any such audit must be conducted during
regular business hours and in such a manner as not to interfere
unreasonably with Distributor's normal business activities. Such audit
will be conducted by a member of the AICPA who has agreed to be bound
by substantially similar terms and conditions as those set out in the
attached Non-Disclosure Agreement in Exhibit E. 7.6. The fees payable
by Distributor hereunder are exclusive of taxes. Distributor shall pay
or reimburse CYBG for all taxes, including sales or use taxes, however
designated, imposed as a result of the existence or operation of this
Agreement, except income and franchise tax imposed on CYBG by any
government entity. If applicable, Distributor may, in lieu of paying
sales and/or use taxes, furnish to CYBG a tax exemption certificate
which is acceptable to the appropriate taxing authority.
<PAGE> 18
7.7. Payments shall be made within thirty (30) days from the date of each
shipment without reduction or offset for returns. All amounts over due
shall bear interest at the rate of 1.5% per month or, if lower, the
highest rate permitted by applicable law.
7.8. In the event payment is not made when due, CYBG may defer shipment of
additional Licensed Software until all outstanding amounts, including
late charges, are paid.
7.9. CYBG may change prices with (30) thirty days notification. Price
changes will not affect purchase orders that are in process and
accepted.
7.10. Distributor is granted purchase discounts off of list prices as set
forth in Exhibit C.
8. WARRANTY DISCLAIMER
8.1. Warranty Disclaimer
8.2.1 CYBG provides the Licensed Software and any Upgrades with no
warranties as specifically stated in the CyberGuard(TM)
Software License Agreement, attached hereto or as amended by
CYBG from time to time.
9. TERM AND TERMINATION
9.1. This Agreement shall be effective as of the date first written above
herein ("Effective Date") and shall continue until the earlier of
December 31, 1998 or the date upon which CYBG completes the tasks
listed in the Exhibit G of the CyberGuard Corporation Original
Equipment Manufacturer Agreement.
9.2. Either party shall have the right to terminate this Agreement for
material breach by the other party hereto. Termination shall become
effective ninety (90) days after written notice is given by the
terminating party to the breaching party. Such notice shall
specifically identify the nature of the breach and state an intent to
terminate in the event the breach is not cured within said ninety (90)
days period. Written notice shall be signed by an authorized
representative of CYBG and shall be sent in accordance with Subsection
14.13, "Notices."
9.3. Upon termination or expiration of this Agreement, each party will
return all confidential information given to it by the other party.
9.4. Survival After Termination or Expiration
9.4.1. The provisions of Section 5 "Ownership and Licenses," Section 7
"Fees and Payments," Section 8 "Warranty and Indemnification,"
Section 9 "Term and Termination," Section 10 "Limitation of
Liability," Section 11 "Compliance with Laws," Section 12
"Confidential Information," Section 13 "Force Majeure," Section
14 "General," shall survive and continue beyond any expiration
or termination of this Agreement, except that licenses granted
to Distributor by CYBG shall not survive if this Agreement is
terminated for a material breach by Distributor. End user
licenses are not affected.
10. LIMITATION OF LIABILITY
10.1. In no event will either party be liable to the other for any
incidental or special damages, actual losses, lost profits, lost
savings, or any other consequential damages regardless of the form of
action, even if such party has been advised of the possibility of
such damages, resulting from the subject matter of this Agreement.
11. COMPLIANCE WITH LAWS
11.1 Each party will comply with all applicable laws and regulations and
ordinances including, but not limited to, the regulations of the U.S.
Government relating to the export of commodities and technical data
insofar as they relate to the activities under this Agreement. Each
party hereby gives its written assurance that neither products nor
any technical data provided by
<PAGE> 19
the other party under this Agreement, is intended to be shipped,
directly or indirectly, to the prohibited countries identified by the
U.S. Government.
11.2 The Department of Commerce Bureau of Export Administration ("BXA")
has taken the position that software containing Application
Programming Interfaces ("APIs") similar to CYBG's CENTRAL/REMOTE
FIREWALL MANAGEMENT FEATURE are controlled by United States export
laws, and therefore, such source code and object code software cannot
be exported without a valid license or other authorization from the
U.S. government. CYBG hereby places Distributor on notice that any
item controlled under the U.S. laws and regulations, including
without limitation, the CENTRAL/REMOTE FIREWALL MANAGEMENT FEATURE or
any other encryption feature, or any product containing the
CENTRAL/REMOTE FIREWALL MANAGEMENT FEATURE or any other encryption
feature, cannot be exported (as defined in section 734.2 (b) (9) of
the Export Administration Regulations (15 CFR ss.734.2(b)(9)) without
a valid license or other authorization from thE U.S. government.
11.3 Until Distributor obtains its own authorization from the U.S.
government to export CYBG's Licensed Software and Upgrades with the
encryption features, Distributor shall notify CYBG of any contract
for sale of the CENTRAL/REMOTE FIREWALL MANAGEMENT FEATURE, and/or
any other encryption feature or any product containing the
CENTRAL/REMOTE FIREWALL MANAGEMENT FEATURE or any other encryption
feature that is deemed an export under BXA regulations; any
application submitted to the U.S. government to obtain an export
license under BXA regulations or any other export control laws or
regulations; and any actual export under such license obtained from
the U.S. government for export.
11.4 Distributor assumes all risk and cost associated with a violation of
any U.S. export control law or regulation, and will indemnify CYBG
for the full consequences of any export of the CENTRAL/REMOTE
FIREWALL MANAGEMENT FEATURE, or any other encryption feature without
CYBG's knowledge.
11.5 Termination or cancellation of this Agreement or any Exhibits or
attachments hereto shall have no effect on the rights and obligations
of the parties under this section.
12. CONFIDENTIAL INFORMATION
12.1. All Confidential information exchanged by the parties shall be in
accordance with a Mutual Non-Disclosure Agreement attached hereto as
Exhibit E and incorporated herein by reference.
13. FORCE MAJEURE
13.1. Neither party to this Agreement shall be liable for its failure to
perform any of its obligations hereunder during any period in which
such performance is delayed by circumstances beyond its reasonable
control, including but not limited to: fire, act of nature, or,
embargo, riot or the intervention of any government authority,
provided that the party suffering such delay promptly notifies the
other party of the delay.
14. GENERAL
14.1 Neither party shall assign this Agreement nor any interest therein
without the prior written consent of the other party, except that
both parties may assign this Agreement or any interest therein in
connection with a merger, acquisition, sale of substantially all of
assets, or similar business combination; provided, however, that
Distributor may not assign this Agreement or any interest therein to
a third party which is competitor of CYBG or becomes a competitor of
CYBG as a result of this Agreement.
<PAGE> 20
14.2 Except as otherwise expressly provided herein, the rights and
remedies of the parties provided in this Agreement shall not be
exclusive and are in addition to any other rights and remedies
provided at law or in equity.
14.3. Each party, including its servants, agents, and employees, is deemed
to be an independent contractor and not an agent, joint venturer,
employee, or representative of the other, and neither party may
create any obligations or responsibilities on behalf of or in the
name of the other party.
14.4. If any provision of this Agreement is held illegal or unenforceable
by any court of competent jurisdiction, such provision shall be
modified to the minimal extent required to make it legal and
enforceable, consistent with the spirit and intent of this
Agreement. If such provision cannot be so modified, the provision
shall be deemed separable from the remaining provisions of this
Agreement and shall not affect or impair the validity or
enforceability of the remaining provisions of this Agreement.
14.5. This Agreement shall be governed by the laws of the State of Florida
applicable to agreements made and performed entirely within such
jurisdiction except that the conflict of laws provisions of the
State of Florida relating to determination of the applicable forum
law to be used shall not apply.
14.6. Supplemental terms are included in Exhibits A through I and are
incorporated herein by reference. In case of conflict between the
terms of Exhibits A through I and the body of this Agreement, the
body of this Agreement shall govern.
14.7. No rights or licenses are granted hereunder, expressly or by
implication or estoppel, to assign or grant, any rights or licenses
to any trademarks of either party, or to any inventions of either
party, except as may be expressly provided herein.
14.8. The failure of either party to enforce, in any one or more
instances, any of the terms or conditions of the Agreement shall not
be construed as a waiver of the future performance of any such term
or condition.
14.9. Nothing contained in this Agreement shall prevent either party from
entering into agreements with third parties which are similar to
this Agreement, or from independently developing (either through
third parties or through the use of its own personnel), or from
acquiring from third parties, technologies or product or services
which are similar to and competitive with that of the other party.
14.10. Neither party shall disclose the existence or terms and conditions
of the Agreement to third parties except with prior written
agreement of the other party or in response to order of a court or
government agency or the disclosure rules and regulations of the
Securities and Exchange Commission, but in each such case only to
the extent so required.
14.11. Except for actions to recover payments under this Agreement, no
actions, regardless of form, arising out of this Agreement, may be
brought by either party more than two (2) years after the cause of
action has arisen.
14.12. This Agreement, together with its Exhibits; and agreements listed in
Exhibit I express the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersede all
prior oral or written agreements, negotiations, commitments, and
understandings pertaining to the subject matter hereof. Any
modifications of or changes to this Agreement shall be in writing
and signed by both parties.
14.13. Notices
14.13.1. Notices under this Agreement shall be addressed to:
To CYBG: CyberGuard Corporation
2000 West Commercial Blvd., Suite 200
<PAGE> 21
Ft. Lauderdale, FL 33309
ATTN: Product Marketing Manager
To Distributor: Information Resource Engineering, Inc.
8029 Corporate Drive
Baltimore, MD 21236
ATTN: Inside Sales Manager
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date first written above.
CYBERGUARD CORPORATION INFORMATION RESOURCE ENGINEERING, INC.
By: By:
------------------------- ------------------------------
Signature Signature
------------------------- ------------------------------
Print or type name Print or type name
------------------------- ------------------------------
Title Title
<PAGE> 22
EXHIBIT A
Support Agreement
1. Definitions
1.1. Level 1 shall mean the service provided in response to the initial
phone call placed by a Customer which identifies or documents an
error.
1.2. Level 2 shall mean the service provided to analyze or reproduce the
error or to determine that the error is not reproducible.
1.3. Level 3 shall mean the service provided that isolates the error to the
component level. An attempt shall be made to provide an error
correction or circumvention.
1.4. Error shall mean any of the following:
1.4.1. Code Error
1.4.1.1. A function described in the Licensed Software which is
omitted from the code;
1.4.1.2. A function which does not operate or gives incorrect
results; or
1.4.1.3. A function which does not operate satisfactorily in the
environment for which it was designed.
1.4.2. Documentation Error
1.4.2.1. A failure of the documentation to accurately describe the
functionality as described in the Licensed Software; or
1.4.2.2. A failure of the documentation to enable the intended
user to correctly operate the code.
1.5. Error Severity Level shall mean classification of errors as assigned
by CYBG according to the following definitions:
1.5.1. High Priority shall mean an emergency condition which causes
critical impact or which makes the performance or continued
performance of any one or more functions impossible.
1.5.2. Medium Priority shall mean a condition which significantly
affects or which makes the performance or continued performance
of any one or more functions difficult and which can be
circumvented or avoided on a temporary basis.
1.5.3. Low Priority shall mean a documentation error or a limited
problem condition which is not critical and which may be
circumvented or avoided on a temporary basis.
2. Clientele
2.1. Clientele is a secure database tracking system that is accessible
through the World Wide Web. It is used to deliver fixes, contains a
Technical Answer book, product updates and announcements.
3. CYBG will provide warranty support through the support hot line for the 90
day warranty period.
4. Support shall be provided based on reasonable commercial practices
that may change from time to time.
<PAGE> 23
EXHIBIT B
CyberGuard? Software License Agreement
EXHIBIT C
Distributor Price Book
EXHIBIT D
PROGRAM CONDITIONS
o Cooperative funds are to be used only for the promotion of CyberGuard
Corporation products.
o Funds remaining in the Distributor's co-op account upon termination of
the relationship between the Distributor and CyberGuard Corporation
will revert back to CyberGuard Corporation.
o CyberGuard Corporation will not be held responsible for the contents of
any marketing activity other than those produced by CyberGuard
Corporation and featured without modification.
o CyberGuard Corporation reserves the right to refuse authorization or
reimbursement for activities that CyberGuard Corporation determines to
contain material errors, improper identification or treatment
detrimental to the image of CyberGuard Corporation and its products.
o CyberGuard Corporation reserves the right to modify this program at any
time.
o It is the responsibility of the Distributor to notify CyberGuard
Corporation of personnel changes regarding co-op contacts.
o Accrued funds can only be used to reimburse the Distributor for
preauthorized activities, which meet the criteria set forth by this
policy.
o The CyberGuard Corporation name and authorized logo must be displayed
prominently and in accordance with the guidelines of logo usage as
stated in this policy.
o To qualify for reimbursement by cooperative funding, all advertising
and promotional activities must receive prior authorization from
CyberGuard Corporation.
o Cooperative funds cannot be deducted from CyberGuard Corporation
invoices without prior written consent.
o Funds earned during the first half of the fiscal year are available for
spending during the half earned and the half that follows. Funds earned
during the last half of the fiscal year are available for spending
during the half earned and the half that follows.
o Claims for reimbursement must be submitted on a CyberGuard Corporation
claim form within sixty (60) days of the activity's execution with all
appropriate documentation attached.
o Co-op reimbursement will be issued via credit memo unless otherwise
stated. o CyberGuard Corporation will issue statements of account for
co-op funding on a quarterly basis.
<PAGE> 24
EXHIBIT E
MUTUAL NON-DISCLOSURE AGREEMENT
THIS AGREEMENT is made and entered into by and between CyberGuard Corporation, a
Florida corporation, having a principal place of business at 2000 W. Commercial
Blvd., Suite 200, Fort Lauderdale, Florida, 33309 (hereinafter referred to as
"CyberGuard"), and Information Resource Engineering, Inc., a Delaware
corporation, having a principal place of business at 8029 Corporate Drive,
Baltimore, MD 21236 ___________ (hereinafter referred to as "Company").
WHEREAS, CyberGuard and Company are desirous of exchanging information for the
purpose of exploring the possibility of the two companies working together, to
the mutual benefit of both parties hereto.
AND WHEREAS, if the parties determine to work together, the exchange of
information will continue throughout the parties' working relationship.
AND WHEREAS, one party hereto (OWNER) may disclose to the other party hereto
(RECIPIENT), certain information pursuant to this Agreement which the OWNER
deems proprietary and confidential.
NOW, THEREFORE, the parties hereto agree as follows:
1. For a period of three (3) years from the date of receipt of any
"Confidential Information" (as defined below), each RECIPIENT shall use
reasonable efforts to prevent the disclosure to any other person, firm or
corporation of any Confidential Information which it receives from OWNER.
RECIPIENT shall also use the same degree of care to avoid disclosure of
such information as RECIPIENT employs with respect to its own proprietary
and confidential information of like importance and shall limit disclosure
of the Confidential Information to those of its personnel and personnel of
its affiliated companies and its outside professional firms who have an
actual need to know and have an obligation to protect the confidentiality
of such Information consistent with the requirements of this Agreement.
RECIPIENT also agrees not to use the Confidential Information for any
purpose other than the purpose described in the recitals to this Agreement.
2. Any reports or other documents resulting from such exchange of information
between the parties shall be governed by the same terms and conditions with
respect to confidentiality as is the exchange of Confidential Information
between the parties.
3. Notwithstanding the foregoing, information shall not be deemed Confidential
Information and RECIPIENT shall have no obligation with respect to any such
information which
a. is already known to RECIPIENT, and such prior knowledge can be
demonstrated through physical evidence that pre-dates this
Agreement, or
h. is or becomes publicly known through publication or otherwise and
through no wrongful act of RECIPIENT, or
i. is received from a third party without similar restriction and
without breach of this Agreement, or
<PAGE> 25
j. is independently developed by RECIPIENT, or
k. is furnished to a third party by OWNER without a similar
restriction on the third party's rights, or
l. is approved for release by written authorization of OWNER (so long
as such release complies with any requirements of the
authorization), or
m. is disclosed pursuant to the lawfully imposed requirement of a
governmental agency or disclosure is required by operation of law.
4. Each of the Parties hereto acknowledge that irreparable harm, for which
there would be no adequate remedy at law, would arise from a violation of
this Agreement. Therefore, each Party acknowledges that a breach of this
Agreement would give rise to a right to an injunction in favor of the
non-breaching party. Notwithstanding the foregoing, the parties are
entitled to pursue any appropriate remedies at law or in equity for breach
of this Agreement. This Agreement constitutes the entire agreement of the
parties hereto with respect to confidentiality of business information and
supersedes any prior agreements or understandings of the parties hereto
regarding such information. This Agreement shall be construed in accordance
with the laws of the State of Florida. This Agreement may be amended or
modified only in a writing signed by both parties.
5. All Confidential Information that is in any reproducible form (including
without limitation, written or electronic form) delivered by one party
hereto to the other party shall be and remain the property of the
delivering party, and all such data, and any copies thereof, shall be
promptly returned to the delivering party upon written request, or
destroyed at the delivering party's option.
6. This Agreement shall not be construed as granting or conferring any rights
by license or otherwise, expressly, impliedly, or otherwise for any
invention, discovery or improvement made, conceived or acquired prior to or
after the date of this Agreement.
7. Nothing contained in this Agreement shall constitute a commitment by either
party to the development or release of any future products and/or programs
disclosed thereby or restrict either party in its efforts to improve its
existing products and systems and to conceive and develop new products and
systems. Additionally, participation in the information exchange pursuant
to this Agreement shall not constitute or imply a commitment by either
party to favor or recommend any product or service of the other party.
8. For the purposes of this Agreement, "Confidential Information" shall mean
any information that is disclosed to RECIPIENT by the OWNER that has been
created, developed, discovered, discerned, acquired, licensed or purchased
by the OWNER, including without limitation, information relating to any
product, process, development, research work, business line, business
strategy or intellectual property of any kind, and shall include, without
limitation, inventions, improvements, discoveries, creations, computer
programs, computer hardware, design specifications, concepts, formulas,
trade secrets, ideas, processes, know-how, methods, proprietary data,
software code, source code, products, future products, techniques, any and
all derivative works therefrom and any and all patents and copyrights
therein or any improvements thereof.
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto agree that the effective date of this
Agreement shall be the 11th day of June, 1998.
CyberGuard Corporation Information Resource Engineering, Inc.
By: By:
------------------------- ------------------------------
Signature Signature
------------------------- ------------------------------
Print or type name Print or type name
------------------------- ------------------------------
Title Title
<PAGE> 27
EXHIBIT G
Territory and Agreements
D1 Territory
Territory means world-wide, except the prohibited countries identified
by the United States government, with the following restrictions and
exclusions:
a) Distributor shall purchase UNIX-based firewall products for
sale in Japan from CyberGuard's regional Authorized
Distributor at the regional Authorized Distributor's terms and
conditions. The discount level is established in Exhibit C of
this Agreement.
D2 Agreements
The business relationship between Information Resource Engineering,
Inc. and CyberGuard Corporation is represented in this Distributor
Agreement and a separate OEM Agreement, dated June 11, 1998. These
agreements and their exhibits express the entire agreement and
understanding of the parties and supersede all prior oral or written
agreements, negotiations, commitments and understandings pertaining to
the subject matter hereof. Any modifications of or changes to this
Agreement shall be in writing and signed by both parties.
<PAGE> 28
June 11, 1998
Anthony A. Caputo
Information Resource Engineering, Inc.
8029 Corporate Drive
Baltimore, MD 21236
Dear Mr. Caputo:
CyberGuard Corporation ("CyberGuard") acknowledges that on August 6, 1996,
Information Resource Engineering, Inc. ("IRE") has paid to CyberGuard a prepaid
license fee in the amount of $1,000,000.00 (one million US dollars) ("Prepaid
License Fee").
The Prepaid License Fee, less amounts already credited, shall represent a
prepayment of the amounts that will become due under the June 11, 1998
Distribution Agreement and the June 11, 1998 OEM Agreement executed by IRE and
CyberGuard, including the $250,000 Right-to-Manufacture Fee, and shall be
credited to IRE's account on a dollar-for-dollar basis against any amounts that
otherwise will become due to CyberGuard under the two agreements referenced
above. CyberGuard agrees to repay to IRE the unused balance of the Prepaid
License Fee, if any, on or before December 31, 1998.
Please indicate by your signature below your acceptance of the above terms.
Sincerely,
Tommy D. Steele
President and Chief Operating Officer
CyberGuard Corporation
ACCEPTED AND AGREED TO:
/s/ Anthony Caputo, CEO
<PAGE> 1
EXHIBIT 10.22
SETTLEMENT AGREEMENT
This Settlement Agreement ("Agreement") is entered into as of June 30,
1999 by and between Information Resource Engineering, Inc., a
Delaware corporation with its principal place of business at 8029
Corporate Drive, Baltimore, MD 21236 ("IRE") and CyberGuard
Corporation, a Florida corporation with its principal place of
business at 2000 W. Commercial Blvd., Suite 200, Fort Lauderdale,
FL 33309 ("CyberGuard").
WHEREAS, a dispute has arisen with regard to amounts due and owing in
connection with a debt owed to IRE by CyberGuard; and
WHEREAS, IRE has made a demand for payment; and
WHEREAS, CyberGuard has disputed the amount of the debt; and
WHEREAS, IRE and CyberGuard desire to resolve the dispute between them
and to fully and finally settle the subject matter of the aforementioned dispute
and all claims which could be made in connection therewith, with no party
admitting any liability to the other party, other than for the obligations
agreed to under this Agreement.
NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein, IRE and CyberGuard hereby agree as follows:
1. SETTLEMENT AMOUNT. CyberGuard will pay to IRE the total sum of six
hundred fifty thousand dollars ($650,000.00) in accordance with the
terms described in the attached Promissory Note, which is
incorporated herein by reference.
2. RELEASE BY IRE. For and in consideration of the sum of six hundred
fifty thousand dollars ($650,000.00) paid to it by CyberGuard in
accordance with the terms described in the attached Promissory
Note, and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged by IRE, IRE does
hereby fully and forever remise, release and discharge, and by
these presents, does for its agents, servants, past, present or
future officers, shareholders, directors, employees, attorneys,
representatives, parents, subsidiaries, subdivision, affiliated or
related entities, affiliates, executors, administrators,
predecessors, successors and assigns, remise, release and discharge
CyberGuard and any of its agents, servants, past, present or future
officers, shareholders, directors, employees, attorneys,
representatives, parents, subsidiaries, subdivision, affiliated or
related entities, affiliates, executors, administrators,
predecessors, successors and assigns, from any and all actions,
causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses,
damages, judgments, extents, executions, claims and demands
whatsoever in law or in equity, under federal or state
constitutions, statutes, laws, ordinances or regulations, or under
common law, whether known or unknown, foreseen or unforeseen, which
IRE ever had, has or could have against CyberGuard in connection
with the subject matter relating to the aforementioned dispute, but
does not release CyberGuard from claims arising from a breach of
this Agreement.
<PAGE> 2
3. RELEASE BY CYBERGUARD. For and in consideration of the release set
forth above and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by
CyberGuard, CyberGuard does hereby fully and forever remise,
release and discharge, and by these presents, does for its agents,
servants, past, present or future officers, shareholders,
directors, employees, attorneys, representatives, parents,
subsidiaries, subdivision, affiliated or related entities,
affiliates, executors, administrators, predecessors, successors and
assigns, remise, release and discharge, IRE and any of its agents,
servants, past, present or future officers, shareholders,
directors, employees, attorneys, representatives, parents,
subsidiaries, subdivision, affiliated or related entities,
affiliates, executors, administrators, predecessors, successors and
assigns, from any and all actions, causes of action, suits, debts,
dues, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, extents,
executions, claims and demands whatsoever in law or in equity,
under federal or state constitutions, statutes, laws, ordinances or
regulations, or under common law, whether known or unknown,
foreseen or unforeseen, which CyberGuard ever had, has or could
have against IRE in connection with the subject matter relating to
the aforementioned dispute.
4. EFFECTIVE TIME OF RELEASES. The releases described above shall
become effective immediately upon the execution of this Agreement
and the payment to IRE of the $650,000.00 settlement amount.
5. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs,
successors and assigns.
6. SEVERABILITY. If any provision of this Agreement is held illegal or
unenforceable by any court of competent jurisdiction, such
provision shall be modified to the minimal extent required to make
it legal and enforceable, consistent with the spirit and intent of
the Agreement. If such provision cannot be so modified, the
provision shall be deemed separable from the remaining provisions
of this Agreement and shall not affect or impair the validity or
enforceability of the remaining provisions of this Agreement.
Notwithstanding the foregoing, the obligation to pay the settlement
amount as described in section 1 of this Agreement and the releases
contained in sections 2 and 3 of this Agreement are not separable
obligations.
7. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Florida, without regard
to its conflict of laws provisions.
8. AMENDMENTS. This Agreement shall not be amended except by a written
agreement signed by both parties.
9. NOTICES. All notices under this Agreement shall be in writing and
delivered by certified mail, return receipt requested, to the
following:
(a) If to IRE:
David A. Skalitzky, Secretary/Treasurer
Information Resource Engineering, Inc.
8029 Corporate Drive
<PAGE> 3
Baltimore, MD 21236
(b) If to CyberGuard:
Terrence A. Zielinski, Chief Financial Officer
CyberGuard Corporation
2000 W. Commercial Blvd., Suite 200
Fort Lauderdale, FL 33309
10. NOT EVIDENTIARY. This Agreement shall not be introduced in evidence
or otherwise be used in litigation for the purposes of establishing
or construing rights and obligations of the parties, except in an
action to enforce the provisions of this Agreement or the attached
Promissory Note.
11. ENTIRE AGREEMENT. IRE and CyberGuard intend that this Agreement be
a novation and not an accord and satisfaction. As of the date of
this Agreement, any and all prior agreements with respect to the
subject matter hereof, whether written or oral, between IRE and
CyberGuard are hereby fully discharged and this Agreement, together
with the attached Promissory Note, shall supersede all agreements
and negotiations between the parties with respect to the subject
matter hereof.
12. DISCLOSURE. The parties each agree that, without the prior written
consent of the other party hereto, neither of them will voluntarily
disclose the existence or content of this Agreement to any third
party. This provision shall not preclude such disclosure (a) to the
independent accountants or attorneys for the disclosing party, (b)
in any regulatory filing, if counsel for the disclosing party
reasonably advises the disclosing party that such disclosure is
necessary, (c) to any existing or prospective lender or investor of
the disclosing party, (d) in any legal proceeding if required by
judicial order or (e) pursuant to the requirement of a governmental
agency.
13. COUNTERPARTS. This Agreement may be executed in counterparts, in
which case each executed counterpart will be deemed an original and
all executed counterparts will constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have executed this Agreement as of the date first above written.
CYBERGUARD CORPORATION INFORMATION RESOURCE ENGINEERING, INC.
By: By:
--------------------------------- ------------------------------------
Name: Name:
------------------------------- ----------------------------------
Title: Title:
------------------------------ ---------------------------------
Date: Date:
------------------------------- ----------------------------------
<PAGE> 4
STATE OF MARYLAND
COUNTY OF
------------------
On this day of June, 1999, before me personally appeared , an
authorized representative of Information Resource Engineering, Inc., signer of
the foregoing Instrument on behalf of Information Resource Engineering, Inc.,
and acknowledged the same to be his free act and deed.
-----------------------------------
Notary public
My Commission Expires:
STATE OF FLORIDA
COUNTY OF
------------------
On this day of June, 1999, before me personally appeared , an
authorized representative of CyberGuard Corporation, signer of the foregoing
Instrument on behalf of CyberGuard Corporation, and acknowledged the same to be
his free act and deed.
-----------------------------------
Notary public
My Commission Expires:
PROMISSORY NOTE
$650,000.00 Date: June 30, 1999
FOR VALUE RECEIVED, the undersigned, CyberGuard Corporation, a Florida
corporation (the "Borrower"), hereby promises to pay to Information Resource
Engineering, Inc. ("Creditor") at Creditor's offices at 8029 Corporate Drive,
Baltimore, MD 21236, or such other place or places as Creditor may designate, in
lawful money of the United States of America, the principal sum of Six Hundred
Fifty Thousand and 00/100 Dollars ($650,000.00) as follows:
July 30, 1999 $100,000
September 30, 1999 $137,500
November 30, 1999 $137,500
January 31, 2000 $137,500
March 31, 2000 $137,500
<PAGE> 5
This Note shall bear interest from the date hereof on the unpaid principal
balance hereof at a rate of eight percent (8%) per annum. Borrower may prepay
the principal balance hereof, in whole or in part, without paying any prepayment
penalty or finance charge.
If Borrower pays Creditor the principal amount of $650,000.00, together with the
applicable interest, on or before March 31, 2000, this Note shall have been
discharged in full and Creditor shall mark this Note "Paid" and return this Note
to Borrower. This Note is not intended to be negotiable. This Note shall be
governed by and construed in accordance with the laws of the State of Florida.
CYBERGUARD CORPORATION
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
STATE OF FLORIDA
COUNTY OF
-------------------
On this day of , 1999, before me personally appeared , an authorized
representative of CyberGuard Corporation, signer of the foregoing instrument on
behalf of CyberGuard Corporation, and acknowledged the same to be his free act
and deed.
Notary Public:
-------------------------
My Commission Expires:
-----------------
<PAGE> 1
EXHIBIT 10.23
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
CYBERGUARD CORPORATION
AND
AHN PARTNERS, L.P.
SEPTEMBER 11, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
1. PURCHASE OF ASSETS..............................................................................1
1.1 Purchased Assets...........................................................................1
1.2 Assumed Liabilities.......................................................................2
1.3 Excluded Liabilities......................................................................3
1.4 Purchase Price............................................................................3
2. CLOSING.........................................................................................3
2.1 Closing...................................................................................3
2.2 Actions of Seller at Closing..............................................................3
2.3 Actions of Buyer at Closing...............................................................4
3. REPRESENTATIONS AND WARRANTIES OF SELLER........................................................5
3.1 Existence and Capacity....................................................................5
3.2 Powers; Consents; Absence of Conflicts With Other Agreements, Etc.........................5
3.3 Binding Agreement.........................................................................5
3.4 Equipment.................................................................................6
3.5 Intellectual Property.....................................................................6
3.6 Documentation Warranty....................................................................7
3.7 Contracts.................................................................................7
3.8 Mailing Lists.............................................................................7
3.9 Title to Assets...........................................................................8
3.10 System "Load"Report......................................................................8
3.11 Litigation or Proceedings................................................................8
3.12 Taxes....................................................................................8
3.13 Full Disclosure..........................................................................8
4. REPRESENTATIONS AND WARRANTIES OF BUYER.........................................................9
4.1 Existence and Capacity....................................................................9
4.2 Powers; Consents; Absence of Conflicts With Other Agreements, Etc.........................9
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
4.3 Binding Agreement.........................................................................9
5. COVENANTS PRIOR TO CLOSING......................................................................9
5.1 Information...............................................................................9
5.2 Preservation of Purchased Assets.........................................................10
5.3 Offers of Employment.....................................................................10
5.4 Exploitation of Intellectual Property....................................................10
5.5 No-Shop Clause...........................................................................11
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER...................................................11
6.1 Representations/Warranties...............................................................11
6.2 Actions/Proceedings......................................................................11
6.3 Insolvency...............................................................................11
6.4 Consents to Assignments..................................................................11
6.5 Vesting/Recordation......................................................................11
6.6 Due Diligence............................................................................12
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER..................................................12
7.1 Representations/Warranties...............................................................12
7.2 Actions/Proceedings......................................................................12
7.3 Insolvency...............................................................................12
7.4 Consents to Assignments..................................................................12
8. ADDITIONAL AGREEMENTS..........................................................................12
8.1 Allocation of Purchase Price.............................................................12
8.2 Post Closing Access to Information.......................................................13
8.3 Reproduction of Documents................................................................13
8.4 Cooperation on Tax Matters...............................................................13
8.5 Use of Name..............................................................................13
9.2 Indemnification by Seller................................................................14
</TABLE>
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TABLE OF CONTENTS
<TABLE>
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SECTION PAGE
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10. MISCELLANEOUS.................................................................................14
10.1 Schedules and Other Instruments.........................................................14
10.2 Additional Assurances...................................................................14
10.3 Consented Assignment....................................................................15
10.4 Consents, Approvals and Discretion......................................................15
10.5 Legal Fees and Costs....................................................................15
10.6 Choice of Law...........................................................................15
10.7 Benefit/Assignment......................................................................15
10.8 No Brokerage............................................................................15
10.9 Cost of Transaction.....................................................................15
10.10 Confidentiality........................................................................16
10.11 Public Announcements...................................................................16
10.12 Waiver of Breach.......................................................................16
10.13 Notice.................................................................................16
10.14 Severability...........................................................................17
10.15 Gender and Number......................................................................17
10.16 Divisions and Headings.................................................................17
10.17 Survival...............................................................................18
10.18 Waiver of Jury Trial...................................................................18
10.19 No Third Party Beneficiaries...........................................................18
10.20 Entire Agreement/Amendment.............................................................18
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<TABLE>
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<S> <C>
EXHIBITS
Trademark License Agreement.......................................................................................A
Consulting Agreement..............................................................................................B
SCHEDULES
DESCRIPTION SCHEDULE
Allocation of Purchase Price....................................................................................8.1
Assumed Liabilities.............................................................................................1.2
Contracts....................................................................................................1.1(e)
Deferred Revenues............................................................................................1.1(d)
Equipment....................................................................................................1.1(a)
Equipment Encumbrances..........................................................................................3.4
Intellectual Property........................................................................................1.1(b)
Intellectual Property Encumbrances...........................................................................3.5(a)
Infringements................................................................................................3.5(c)
Litigation or Proceedings......................................................................................3.11
Mailing Lists...................................................................................................3.8
System "Load" Report...........................................................................................3.10
Taxes..........................................................................................................3.12
Trademarks...................................................................................................1.1(c)
Year 2000 Defect.............................................................................................3.5(h)
GLOSSARY OF DEFINED TERMS
DEFINED TERM SECTION
Agreement..............................................................................................Introduction
Assumed Liabilities.............................................................................................1.2
Business..................................................................................................Recital B
Buyer..................................................................................................Introduction
Closing...........................................................................................................2
Closing Date......................................................................................................2
Closing Documents..............................................................................................3.13
Contracts....................................................................................................1.1(e)
Equipment....................................................................................................1.1(a)
Galaxy....................................................................................................Recital A
Indemnified Party...............................................................................................9.1
Indemnifying Party................................................................................................9
Intellectual Property........................................................................................1.1(b)
Mailing Lists................................................................................................1.1(f)
Purchased Assets................................................................................................1.1
Purchase Price..................................................................................................1.4
Seller.................................................................................................Introduction
</TABLE>
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<PAGE> 6
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into as
of September 11, 1998, by and between CYBERGUARD CORPORATION, a Florida
corporation ("Seller"), and AHN PARTNERS, L.P., a Delaware limited partnership,
d/b/a America's Health Network ("Buyer").
RECITALS:
A. Seller owns an internet search engine and certain other assets related
thereto (collectively, "Galaxy").
B. Galaxy includes, among other things, a healthcare industry-related
website known as "HealthWave" (Galaxy and HealthWave are hereinafter
collectively referred to as the "Business").
C. Seller desires to sell to Buyer all of the assets and properties which
are directly or indirectly related to, necessary for or used exclusively in
connection with, the operation of the Business, on the terms and conditions set
forth in this Agreement.
AGREEMENT:
NOW, THEREFORE, for and in consideration of the premises and the
agreements, covenants, representations, and warranties hereinafter set forth and
other good and valuable consideration, the receipt and adequacy of which are
forever acknowledged and confessed, the parties hereto agree as follows:
1. PURCHASE OF ASSETS.
1.1 PURCHASED ASSETS. Subject to the terms and conditions of this
Agreement, as of Closing (as defined in SECTION 2.1 hereof), Seller agrees to
sell, convey, transfer and deliver to Buyer, and Buyer agrees to purchase, all
of the assets owned or used exclusively in connection with the operation of the
Business, which assets shall include, without limitation, the following (the
"Assets"):
(a) all tangible personal property, including, but not limited to,
all computer hardware, equipment and supplies, necessary for or used exclusively
in the operation and support of the Business as of the Closing Date (as defined
in SECTION 2.1), including, without limitation, those items more specifically
described on SCHEDULE 1.1(a) (collectively, the "Equipment");
(b) all computer software (including object code and source code,
in machine readable and listing form), derivative works, operating systems,
application programs and program documentation, routines and subroutines,
directories, databases, hyperlinks, screen displays, user interfaces and machine
interfaces, system documentation (including internal documentation,
documentation made available to customers and training materials), all rights to
other related technology including, without limitation, all algorithms,
tradenames, trademarks, servicemarks, registered or unregistered, including
applications and registrations therefor, and other related intellectual property
rights, utilized by Seller in connection with the development, operation and
support of Galaxy, HealthWave and the Business as of the Closing Date,
including, without limitation, those items more specifically described on
SCHEDULE 1.1(B) hereto (collectively, the "Intellectual Property") (the term
"derivative works" shall have the same meaning ascribed it in the United States
Copyright Act, 17 U.S.C. 101);
<PAGE> 7
(c) the names "Galaxy," "Einet.net" and "HealthWave" and any
variants thereof and all copyrights, copyright applications, tradenames,
tradename applications, trademarks, trademark applications, service marks,
service mark applications and logos (each whether registered or unregistered,
national or international), advertising and artwork related thereto, including,
without limitation, those items more specifically described on SCHEDULE 1.1(c)
hereto (collectively, the "Trademarks"); PROVIDED, however, that Buyer and
Seller shall have executed the Trademark License Agreement described in SECTION
2.2(c) ;
(d) any and all advance payments received by Seller in connection
with the Business for services which are to be delivered subsequent to the
Closing Date, as more specifically identified on SCHEDULE 1.1(d) hereto (the
"Deferred Revenues");
(e) all contracts, agreements and commitments, whether written or
oral, to which Seller is directly or indirectly a party, or by which it or the
Assets are otherwise bound, including, without limitation, any lease agreements,
service agreements, advertising agreements, commerce agreements, and the like,
related to the Business, as specifically listed on SCHEDULE 1.1(e)
(collectively, the "Contracts"); and
(f) all marketing lists, advertising lists and mailing lists
(including, without limitation, electronic or "e-mail" lists) used in connection
with the Business, as specifically listed on SCHEDULE 1.1(F) hereto
(collectively, the "Mailing Lists").
1.2 ASSUMED LIABILITIES. In connection with the conveyance of the Assets
to Buyer, Buyer agrees to assume, as of Closing, the future payment and
performance of the following liabilities (the "Assumed Liabilities") of Seller:
(a) all of Seller's obligations under the Contracts, provided that
such obligations relate solely to the period after the Closing Date and are not
the result of any breach by Seller prior to the Closing Date; and
(b) those liabilities or obligations set forth on SCHEDULE 1.2
hereto.
Buyer shall not be liable for (i) any claims arising from Seller's assignment
and Buyer's assumption of the Contracts; (ii) uncured defaults in the
performance of the Contracts for periods prior to Closing; (iii) unpaid amounts
in respect of the Contracts that are due as of Closing; and/or (iv) rights or
remedies claimed by third parties under any of the Contracts which broaden or
vary the rights and remedies such third parties would have had against Seller if
the sale and purchase of the Assets were not to occur.
1.3 EXCLUDED LIABILITIES. Seller shall be responsible for all the
obligations and liabilities of Seller whether now existing or previously or
hereafter incurred other than the Assumed Liabilities, including, but not
limited to (a) all taxes that result from or have accrued in connection with the
operation of the Business prior to the Closing Date; (b) liabilities and
obligations arising under the Contracts transferred to Buyer in accordance with
this Agreement to the extent such liabilities and obligations arise during or
relate to or have occurred in connection with any period prior to Closing; (c)
all liabilities and obligations occurring with respect to the operation of the
Business prior to Closing and (d) all liabilities and obligations of Seller
under this Agreement and any other agreement entered into in connection herewith
(collectively, the "Excluded Liabilities").
<PAGE> 8
1.4 PURCHASE PRICE. The purchase price (the "Purchase Price") for the
Assets shall be Two Million and No/100 Dollars ($2,000,000). Included in this
Purchase Price is a pre-payment for consulting assistance services and other
property valued at One Hundred Eighty Thousand Dollars ($180,000.00). To the
extent Buyer terminates the Consulting Agreement (as described below) prior to
exhausting the full value of services prepaid hereby, the parties agree to
negotiate in good faith to determine the application of any such unused
consideration. The Purchase Price shall be due and payable at Closing by wire
transfer of immediately available funds.
2. CLOSING.
2.1 CLOSING. Subject to the satisfaction or waiver by the appropriate
party of all of the conditions precedent to Closing specified in SECTIONS 6 AND
7 hereof, the consummation of the transactions contemplated by and described in
this Agreement (the "Closing") shall take place at the offices of Greenebaum
Doll & McDonald, PLLC, 1300 SunTrust Center, 424 Church Street, Nashville,
Tennessee 37219, at 10:00 a.m. local time, on or before September 15, 1998, or
at such other date or at such other location as the parties may mutually
designate in writing (the date of consummation is referred to herein as the
"Closing Date").
2.2 ACTIONS OF SELLER AT CLOSING. At the Closing and unless otherwise
waived in writing by Buyer, Seller shall deliver to Buyer the following:
(a) A General Bill of Sale and Assignment, fully executed by
Seller, conveying to Buyer good and marketable title to the Assets free and
clear of all liabilities, claims, liens, security interests and restrictions
other than the Assumed Liabilities;
(b) A Trademark Assignment, fully executed by Seller, conveying to
Buyer Seller's interest in the Trademarks;
(c) A Trademark License Agreement, in substantially the form of
Exhibit A hereto, granting Seller a license for limited use of the name
"Einet.net" in accordance with the terms thereof;
(d) An Assignment of Contracts, fully executed by Seller,
conveying to Buyer Seller's interest in the Contracts;
(e) A Consulting Agreement, fully executed by Seller, in
substantially the form of APPENDIX B attached hereto;
(f) Copies of resolutions duly adopted by the Board of Directors
of Seller authorizing and approving its performance of the transactions
contemplated hereby and the execution and delivery of this Agreement and the
documents described herein, certified as true and in full force as of Closing,
by the appropriate officers of Seller;
(g) Certificate of the President or a Vice President of Seller
certifying that each covenant and agreement of Seller to be performed prior to
or as of Closing pursuant to this Agreement has been performed in all material
respects;
(h) Certificate of incumbency for the officers of Seller executing
this Agreement or making certifications for Closing, dated as of the Closing
Date;
<PAGE> 9
(i) Certificates of existence and good standing of Seller from the
State of Florida, dated the most recent practical date prior to Closing;
(j) Certificates of qualification to do business and good
standing, as applicable, of Seller from the State of Texas, dated the most
recent practical date prior to Closing; and
(k) Such other instruments and documents as Buyer reasonably deems
necessary to effect the transactions contemplated hereby.
2.3 ACTIONS OF BUYER AT CLOSING. At the Closing and unless otherwise
waived in writing by Seller, Buyer shall deliver to Seller the following:
(a) An amount equal to the Purchase Price in immediately available
funds;
(b) The Trademark License Agreement described in SECTION 2.2(C),
above,;
(c) An Assumption Agreement, fully executed by Buyer, pursuant to
which Buyer shall assume the future payment and performance of the Assumed
Liabilities as herein provided;
(d) Copies of resolutions duly adopted by the Board of Directors
of the general partner of Buyer, authorizing and approving its performance of
the transactions contemplated hereby and the execution and delivery of this
Agreement and the documents described herein, certified as true and in full
force as of Closing, by appropriate representatives of Buyer;
(e) Certificate of the President or a Vice President of the
general partner of Buyer certifying that each covenant and agreement of Buyer to
be performed prior to or as of Closing pursuant to this Agreement has been
performed in all material respects;
(f) Certificate of incumbency for the officers of the general
partner of Buyer executing this Agreement or making certifications for Closing,
dated as of the Closing Date; and
(g) Such other instruments and documents as Seller reasonably
deems necessary to effect the transactions contemplated hereby.
3. REPRESENTATIONS AND WARRANTIES OF SELLER. As of the date hereof, and,
when read in light of any Schedules which have been updated in accordance with
the provisions of SECTION 10.1 hereof, as of the Closing Date, Seller represents
and warrants to Buyer the following:
3.1 EXISTENCE AND CAPACITY. Seller is a corporation, duly organized and
validly existing in good standing under the laws of the State of Florida. Seller
is qualified to do business in the State of Texas. Seller has the requisite
power and authority to enter into this Agreement, to perform its obligations
hereunder and to conduct its business as now being conducted.
3.2 POWERS; CONSENTS; ABSENCE OF CONFLICTS WITH OTHER AGREEMENTS, ETC.
The execution, delivery, and performance of this Agreement by Seller and all
other agreements referenced herein, or ancillary hereto, to which Seller is a
party and the consummation of the transactions contemplated herein by Seller:
(a) are within its corporate powers, are not in contravention of
law or of the terms of Articles of Incorporation or Bylaws and have been duly
authorized by all appropriate corporate action;
<PAGE> 10
(b) do not require any approval or consent of, or filing with, any
governmental agency or authority bearing on the validity of this Agreement which
is required by law or the regulations of any such agency or authority;
(c) will neither conflict with, nor result in, any breach or
contravention of, or the creation of any lien, charge, or encumbrance under, any
indenture, agreement, lease, instrument or understanding to which it is a party
or by which it is bound;
(d) will not violate any statute, law, rule, or regulation of any
governmental authority to which it or the Assets may be subject; and
(e) will not violate any judgment, decree, writ or injunction of
any court or governmental authority to which it or the Assets may be subject.
3.3 BINDING AGREEMENT. This Agreement and all agreements to which Seller
will become a party pursuant hereto are and will constitute the valid and
legally binding obligations of Seller, and are and will be enforceable against
Seller in accordance with the respective terms hereof or thereof.
3.4 EQUIPMENT. Set forth on SCHEDULE 1.1(a) is a true and complete list
of all the Equipment constituting a part of the Purchased Assets. Title to the
Equipment is held exclusively by Seller, free and clear of all options, liens,
security interests, agreements, restrictions and other encumbrances, except as
specifically set forth on SCHEDULE 3.4. All the Equipment (including all
tangible property) listed on SCHEDULE 3.4 is free from defects and in good
operating condition and repair, reasonable wear and tear excepted.
3.5 INTELLECTUAL PROPERTY.
(a) Set forth on SCHEDULE 1.1(b) is a true and complete list of
all the Intellectual Property constituting a part of the Assets. Title to the
Intellectual Property is held exclusively by Seller, free and clear of all
options, liens, security interests, agreements, restrictions and other
encumbrances, except as specifically set forth on SCHEDULE 3.5(a). Seller
currently owns, licenses or otherwise has the legal right to use, all of the
software constituting a part of the Intellectual Property (including any
upgrades, alterations or enhancements with respect thereto), and all of the
software is being used in compliance with any applicable licenses or other
agreements.
(b) Seller has furnished to Buyer a true and complete list of all
software used or required to be used by Seller in connection with the Business.
(c) Seller's use of any of the Intellectual Property does not
conflict with or infringe any patents, copyrights, trademarks or other
intellectual property rights, including trade secrets, privacy or similar
rights, of any person or entity. Except as set forth on SCHEDULE 3.5(c), there
are no challenges, proceedings or infringement suits pending or threatened with
respect to the Intellectual Property, and Seller is not aware of any conflict
with the rights of others that would result from this or Buyer's use of the
Intellectual Property. Except as disclosed in SCHEDULE 3.5(c), all trademark
infringements prior to the date hereof have been aggressively and successfully
defended.
(d) The software component of the Intellectual Property has been
developed exclusively by Seller and such software does not conflict, infringe or
violate the rights of any other party.
<PAGE> 11
(e) Seller has not granted a license to any party with respect to
all or any part of the Intellectual Property.
(f) All software, operating systems, codes, applications, etc.
which constitute a part of the Assets shall be capable of operating upon
installation and shall be capable of performing in accordance with the
specifications and parameters set forth in the accompanying documentation.
(g) As of the Closing Date, neither Seller nor any other person or
entity other than Buyer shall have any claim to, rights under or interest in the
Intellectual Property.
(h) To the best of Seller's knowledge, except as set forth on
SCHEDULE 3.5(h), all software, software applications, operating systems and
interfaces are free and clear of any Year 2000 Defect. To the extent there is
any Year 2000 Defect as disclosed on SCHEDULE 3.5(H), Seller represents and
warrants that it will use commercially reasonable efforts to correct any such
Defect(s) in the course of providing the consulting services described in
SECTIONS 1.4 AND 2.2(e) hereof. As used herein, the term "Year 2000 Defect"
means the inability to perform any of the following functions: (i) to handle
consistently date information before, during and after January 1, 2000,
including, but not limited to, accepting date input, provided date output and
performing calculations on dates or portions of dates; (ii) to function
accurately without interruption (or disruption of other software or systems)
before, during and after January 1, 2000, without any change in operations
associated with the advent of the new century; (iii) to respond to two-digit
date input in a way that resolves any ambiguity as to century; and (iv) to store
and provide output of date information in ways that are unambiguous as to
century.
(i) Seller has previously disclosed to Buyer that certain
"Unix"-based operating systems may contain a defect that relates to the Year
2042. Seller represents that, to the best of its knowledge and with the
exception of any such software written using a Unix-based operating system, all
software, software applications, operating systems and interfaces are clear of
any such defect.
3.6 DOCUMENTATION WARRANTY. Documentation provided to Buyer by Seller
will be sufficient to enable a reasonably skilled programmer familiar with
standard website engineering practices to maintain and modify any of the
systems, software, codes, etc., and derivative works therefrom, associated with
the Galaxy network and any of the Assets.
3.7 CONTRACTS. SCHEDULE 1.1(E) hereto sets forth a true and complete
list of all of the Contracts included as part of the Assets. True and complete
copies of each Contract required to be listed on SCHEDULE 1.1(e) (or a true and
complete narrative description of any oral Contract) have previously been
provided to Buyer. Neither Seller nor, to the best knowledge of Seller, any
other party to any of the Contracts, (a) is in default under (nor does there
exist any condition that, with notice or lapse of time or both, would cause such
a default under) any of the Contracts, or (b) has waived any right it may have
under any of the Contracts. All of the Contracts constitute the valid and
binding obligations of Seller, enforceable in accordance with their respective
terms. Except as set forth on SCHEDULE 1.1(e), all of the Contracts are
assignable to Buyer without the consent or approval of any other person in
connection with the transactions contemplated by this Agreement.
3.8 MAILING LISTS. SCHEDULE 1.1(f) hereto sets forth a listing of all
the Mailing Lists constituting a portion of the Assets. To Seller's knowledge,
the Mailing Lists are and will be accurate, complete and up-to-date as of the
Closing.
<PAGE> 12
3.9 TITLE TO ASSETS. Seller has good and marketable title to all the
Assets and, upon consummation of the transactions contemplated hereby, good and
marketable title thereto shall be transferred to Buyer free and clear of all
liens, security interests and encumbrances. No consent or approval of any third
party is necessary to, and there exists no restriction on, the transfer of any
of the Assets to Buyer. No governmental permits or filings (which have not
previously been made) are required on the part of Seller prior to the Closing to
effect the transactions contemplated hereby.
3.10 SYSTEM "LOAD" REPORT. Set forth on SCHEDULE 3.10 is an accurate
report for the months of October, 1997 and June, July and August, 1998, with
respect to daily frequency and website visits, number of daily "hits" or "page
views," volume of information requests that have not been indexed, available
hyperlinks and ___________________. Seller warrants that, as of the Closing
Date, the average daily number of "hits" or "page views" for the thirty (30)
days prior to Closing will be no less than __________ and __________,
respectively, and the number of unindexed information requests as of Closing
will be no greater than __________.
3.11 LITIGATION OR PROCEEDINGS. There is no suit, claim, action or
proceeding pending or, to the knowledge of Seller, threatened before any court,
administrative or regulatory body, arbitration panel or governmental agency, to
which Seller is a party and which, if adversely determined, would have a
material adverse effect upon the Assets or prevent the consummation of the
transactions contemplated by this Agreement.
3.12 TAXES. All federal, state, local and foreign tax returns and tax
reports required to be filed by Seller on or before the date hereof have been
timely filed with the appropriate governmental agencies in all jurisdictions in
which such returns and reports are required to be filed, and all amounts shown
as owing thereon have been paid, provided that if such taxes have not been paid,
such taxes are described on SCHEDULE 3.12 and are being validly contested by
Seller. All taxes (including, without limitation, income, accumulated earnings,
property, sales, use, franchise, value added, fuel, employees' income
withholding and social security taxes) which have become due or payable or are
required to be collected by Seller or are otherwise attributable to any periods
ending on or before the Closing Date and all interest and penalties thereon,
whether disputed or not, have been paid or will be paid in full.
3.13 FULL DISCLOSURE. This Agreement and Schedules hereto and all
Closing Documents (as defined below) furnished and to be furnished to Buyer and
its representatives by Seller pursuant hereto do not and will not include any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements made and to be made not misleading. To the best knowledge
of Seller, all other information furnished or to be furnished to Buyer and its
representatives pursuant to or in connection with this Agreement does not and
will not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements made and to be made not
misleading. The term "Closing Documents" means those documents executed and
delivered at the Closing pursuant to SECTION 2 above.
4. REPRESENTATIONS AND WARRANTIES OF BUYER. As of the date hereof and, when
read in light of any Schedules which have been updated in accordance with the
provisions of SECTION 10.1 hereof, as of the Closing Date, Buyer represents and
warrants to Seller the following:
4.1 EXISTENCE AND CAPACITY. Buyer is a limited partnership, duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Buyer has the requisite power and authority to enter into this
Agreement, to perform its obligations hereunder, and to conduct its business as
now being conducted.
<PAGE> 13
4.2 POWERS; CONSENTS; ABSENCE OF CONFLICTS WITH OTHER AGREEMENTS, ETC.
The execution, delivery and performance of this Agreement by Buyer and all other
agreements referenced herein, or ancillary hereto, to which it is party, and the
consummation of the transactions contemplated herein by Buyer:
(a) are within its partnership authority, are not in contravention
of law or of the terms of its organizational documents, and have been duly
authorized by all appropriate corporate action;
(b) do not require any approval or consent of, or filing with, any
governmental agency or authority bearing on the validity of this Agreement which
is required by law or the regulations of any such agency or authority;
(c) will neither conflict with, nor result in, any breach or
contravention of, or the creation of any lien, charge or encumbrance under, any
indenture, agreement, lease, instrument or understanding to which it is a party
or by which it is bound;
(d) will not violate any statute, law, rule, or regulation of any
governmental authority to which it may be subject; and
(e) will not violate any judgment, decree, writ, or injunction of
any court or governmental authority to which it may be subject.
4.3 BINDING AGREEMENT. This Agreement and all agreements to which Buyer
will become a party pursuant hereto are and will constitute the valid and
legally binding obligations of Buyer, and are and will be enforceable against
Buyer in accordance with the respective terms hereof and thereof.
5. COVENANTS PRIOR TO CLOSING. Between the date of this Agreement and the
Closing:
5.1 INFORMATION. Seller shall afford to the officers and authorized
representatives and agents (which shall include accountants, attorneys, bankers
and other consultants) of Buyer full and complete access to and the right to
inspect the plants, properties, books and records of the Business, and will
furnish Buyer with such additional financial and operating data and other
information as to the business and properties of Seller pertaining to the
Business as Buyer may from time to time reasonably request without regard to
where such information may be located. Buyer's right of access and inspection
shall be exercised in such a manner as not to interfere unreasonably with the
operation of the Business. Buyer agrees that no inspections shall take place and
no employees or other personnel of the Business shall be contacted by Buyer
without Buyer first coordinating such inspection or contact with Seller.
5.2 PRESERVATION OF PURCHASED ASSETS. Seller agrees that from and after
the date of this Agreement and until the Closing Date:
(a) Seller shall:
(i) continue to operate the Business in the ordinary course of
its business and consistent with its past practices;
(ii) use its best efforts to keep available the services of
its employees employed in connection with the Business and to preserve the
goodwill of any customers, suppliers or others having business relationships
with the Business; and
<PAGE> 14
(iii) on a basis consistent with Seller's past practices,
maintain all of the tangible property constituting a portion of the Assets in
good condition and repair, ordinary wear and tear excepted.
(b) Without the prior written approval of Buyer, Seller shall not:
(i) sell, transfer, assign or permit the creation of any lien,
charge or encumbrance upon any of the Assets; or
(ii) except as specifically provided for herein, modify, amend
or cancel any Contract or other agreement which is included with the Assets or
agree to incur any liability, except as provided herein or in the ordinary
course of business.
5.3 OFFERS OF EMPLOYMENT. Buyer shall have the right (but no obligation
whatsoever) to discuss and enter into negotiations with and finalize agreements
to hire Mr. Wayne Allen and Ms. Stephanie Walker, two individuals who from time
to time provide certain services in connection with the Business to Seller, on
an independent contractor basis. As of the Closing Date, Seller agrees to
release such independent contractors, from any restrictive covenants reasonably
requested by Buyer.
5.4 EXPLOITATION OF INTELLECTUAL PROPERTY. From and after the date of
this Agreement, Seller shall not incorporate any of the Intellectual Property
into any software or software application. Seller acknowledges and agrees that
any breach of the provisions of this SECTION 5.4 would cause substantial and
irreparable injury to Buyer which would not be fully compensable by money
damages. Accordingly, Buyer may enforce the provisions of this SECTION 5.4 or
any breach hereof by obtaining specific, injunctive or other equitable relief
from a court of competent jurisdiction, without the necessity of posting bond or
proving lack of adequate remedy at law. Such relief shall be cumulative and not
exclusive of any other remedy available to the injured party at law, equity or
under this Agreement.
5.5 NO-SHOP CLAUSE. From and after the date of the execution and
delivery of this Agreement by Seller until the termination of this Agreement,
Seller will not, without the prior written consent of Buyer or except as
otherwise permitted by this Agreement: (i) offer for sale or lease all or any
portion of the Assets, (ii) solicit offers to buy all or any portion of the
Assets, or (iii) enter into any agreement with any party (other than Buyer) with
respect to the sale, assignment, or other disposition of any of the Assets.
Seller will promptly communicate to Buyer the substance of any inquiry or
proposal concerning any such transaction.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. Notwithstanding anything
herein to the contrary, the obligations of Buyer to consummate the transactions
described herein are subject to the fulfillment, on or prior to the Closing
Date, of the following conditions precedent unless (but only to the extent)
waived in writing by Buyer at Closing:
6.1 REPRESENTATIONS/WARRANTIES. The representations and warranties of
Seller contained in this Agreement shall be true when made and, when read in
light of any Schedules which have been updated in accordance with the provisions
of SECTION 10.1 hereof, as of the Closing Date, as though such representations
and warranties had been made on and as of such Closing Date. Each and all of the
terms, covenants and conditions of this Agreement to be complied with or
performed by Seller on or before the Closing Date pursuant to the terms hereof
shall have been duly complied with and performed.
6.2 ACTIONS/PROCEEDINGS. No action or proceeding before a court or any
other governmental agency or body shall have been instituted or threatened to
restrain or prohibit the transactions herein
<PAGE> 15
contemplated, and no governmental agency or body shall have taken any other
action or made any request of any party hereto as a result of which Buyer
reasonably and in good faith deems it inadvisable to proceed with the
transactions hereunder.
6.3 INSOLVENCY. Seller shall not (i) be in receivership or dissolution,
(ii) have made any assignment for the benefit of creditors, (iii) admitted in
writing its inability to pay its debts as they mature, (iv) have been
adjudicated a bankrupt, or (v) have filed a petition in voluntary bankruptcy, a
petition or answer seeking reorganization, or an arrangement with creditors
under the federal bankruptcy law or any other similar law or statute of the
United States or any state, nor shall any such petition have been filed against
Seller.
6.4 CONSENTS TO ASSIGNMENTS. All consents, waivers and estoppels of
third parties which are reasonably necessary, in the opinion of Buyer, to
complete effectively the transactions herein contemplated shall have been
obtained and shall be in form and substance reasonably satisfactory to Buyer.
6.5 VESTING/RECORDATION. Seller shall have furnished to Buyer, in form
and substance reasonably satisfactory to Buyer, assignments or other instruments
of transfer and consents and waivers by others, necessary or appropriate to
transfer to and effectively vest in Buyer all right, title and interest in and
to the Assets, in proper statutory form for recording if such recording is
necessary or appropriate.
6.6 DUE DILIGENCE. Buyer shall have completed its own due diligence
investigation of the operation of the Business, the results of which shall have
been deemed satisfactory in the sole discretion of Buyer, its agents, employees
and representatives.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. Notwithstanding anything
herein to the contrary, the obligations of Seller to consummate the transactions
described herein are subject to the fulfillment, on or prior to the Closing
Date, of the following conditions precedent unless (but only to the extent)
waived in writing by Seller at Closing:
7.1 REPRESENTATIONS/WARRANTIES. The representations and warranties of
Buyer contained in this Agreement shall be true when made and, when read in
light of any Schedules which have been updated in accordance with the provisions
of SECTION 10.1 hereof, as of the Closing Date, as though such representations
and warranties had been made on and as of such Closing Date. Each and all of the
terms, covenants and conditions of this Agreement to be complied with or
performed by Buyer on or before the Closing Date pursuant to the terms hereof
shall have been duly complied with and performed.
7.2 ACTIONS/PROCEEDINGS. No action or proceeding before a court or any
other governmental agency or body shall have been instituted or threatened to
restrain or prohibit the transactions herein contemplated, and no governmental
agency or body shall have taken any other action or made any request of any
party hereto as a result of which Seller reasonably and in good faith deems it
inadvisable to proceed with the transactions hereunder.
7.3 INSOLVENCY. Buyer shall not (i) be in receivership or dissolution,
(ii) have made any assignment for the benefit of creditors, (iii) have admitted
in writing its inability to pay its debts as they mature, (iv) have been
adjudicated a bankrupt, or (v) have filed a petition in voluntary bankruptcy, a
petition or answer seeking reorganization, or an arrangement with creditors
under the federal bankruptcy law or any other similar law or statute of the
United States or any state, nor shall any such petition have been filed against
Buyer.
<PAGE> 16
7.4 CONSENTS TO ASSIGNMENTS. All consents, waivers and estoppels of
third parties which are reasonably necessary, in the opinion of Seller, to
complete effectively the transactions herein contemplated shall have been
obtained and shall be in form and substance reasonably satisfactory to Seller.
8. ADDITIONAL AGREEMENTS.
8.1 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among the various classes of Assets in accordance with and as provided by
Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), as
set forth on SCHEDULE 8.1 hereto, which Schedule shall be agreed to and
delivered by the parties hereto at the Closing. The parties agree that any tax
returns or other tax information they may file or cause to be filed with any
governmental agency shall be prepared and filed consistently with such agreed
upon allocation. In this regard, the parties agree that, to the extent required,
they will each properly prepare and timely file Form 8594 in accordance with
Section 1060 of the Code.
8.2 POST CLOSING ACCESS TO INFORMATION. Seller and Buyer acknowledge
that subsequent to Closing each party may need access to information or
documents in the control or possession of the other party for purposes of
concluding the transactions herein contemplated, audits, compliance with
governmental requirements and regulations, and the prosecution or defense of
third party claims. Accordingly, Seller and Buyer agree that for a period of six
(6) years after Closing each will make reasonably available to the other's
agents, independent auditors, counsel and/or governmental agencies upon written
request and at the expense of the requesting party such documents and
information as may be available relating to the Assets for periods prior and
subsequent to Closing to the extent necessary to facilitate concluding the
transactions herein contemplated, audits, compliance with governmental
requirements and regulations and the prosecution or defense of claims.
8.3 REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating
hereto, including, without limitation, (a) consents, waivers and modifications
which may hereafter be executed, (b) the documents delivered at the Closing, and
(c) financial statements, certificates and other information previously or
hereafter furnished to Seller or to Buyer, may, subject to the provisions of
SECTION 10.10 hereof, be reproduced by Seller and by Buyer by any photographic,
photostatic, microfilm, micro-card, miniature photographic or other similar
process, and Seller and Buyer may destroy any original documents so reproduced.
Seller and Buyer agree and stipulate that any such reproduction shall be
admissible in evidence as the original itself in any judicial, arbitral or
administrative proceeding (whether or not the original is in existence and
whether or not such reproduction was made by the Seller or Buyer in the regular
course of business) and that any enlargement, facsimile or further reproduction
of such reproduction shall likewise be admissible in evidence.
8.4 COOPERATION ON TAX MATTERS. Following the Closing, the parties shall
cooperate fully with each other and shall make available to the other, as
reasonably requested and at the expense of the requesting party, and to any
taxing authority, all information, records or documents relating to tax
liabilities or potential tax liabilities of Seller for all periods on or prior
to the Closing, and any information which may be relevant to determining the
amount payable under this Agreement. The parties shall preserve all such
information, records and documents (to the extent a part of the Assets delivered
to Buyer at Closing) at least until the expiration of any applicable statute of
limitations or extensions thereof.
<PAGE> 17
8.5 USE OF NAME. Except as otherwise provided by SECTION 2.2(C) hereof,
from and after the Closing Date, Seller shall in no manner or capacity
whatsoever use the names "HealthWave", "Einet.net" or "Galaxy" or any variant
thereof.
9. INDEMNIFICATION.
9.1 INDEMNIFICATION BY BUYER. Buyer shall defend and indemnify and hold
Seller and its officers, employees, agents or independent contractors wholly
harmless from and against any and all losses, liabilities, damages, costs
(including, without limitation, court costs and costs of appeal) and expenses
(including, without limitation, reasonable attorneys' fees) that Seller and its
officers, employees, agents or independent contractors incur as a result of, or
with respect to (i) any misrepresentation or breach of warranty by Buyer under
this Agreement, (ii) any breach by Buyer of, or any failure by Buyer to perform,
any covenant or agreement of, or required to be performed by, Buyer under this
Agreement, and (iii) any of the Assumed Liabilities.
9.2 INDEMNIFICATION BY SELLER. Seller shall defend and indemnify and
hold Buyer and its officers, employees, agents, or independent contractors,
wholly harmless from and against any and all losses, liabilities, damages, costs
(including, without limitation, court costs and costs of appeal) and expenses
(including, without limitation, reasonable attorneys' fees) that Buyer and its
respective officers, employees, agents, or independent contractors incur as a
result of, or with respect to (i) any misrepresentation or breach of warranty by
Seller under this Agreement, (ii) any breach by Seller of, or any failure by
Seller to perform, any covenant or agreement of, or required to be performed by,
Seller under this Agreement, and (iii) any of the Excluded Liabilities.
10. MISCELLANEOUS.
10.1 SCHEDULES AND OTHER INSTRUMENTS. Each Schedule to this Agreement
shall be considered a part hereof as if set forth herein in full. Any other
provision herein to the contrary notwithstanding, all Schedules or other
instruments provided for herein and not delivered at the time of execution of
this Agreement or which are incomplete at the time of execution of this
Agreement shall be delivered or completed within ten (10) days after the date
hereof or prior to Closing, whichever is sooner. It shall be deemed a condition
precedent to the obligations of the parties hereto that each of the Schedules
and related documents, instruments, books and records shall meet with the
approval of such parties. If a party, in its sole discretion, determines that it
should not consummate the transactions contemplated by this Agreement because of
any information contained in a Schedule or other instrument that is delivered to
such party after the execution of this Agreement, then such party may terminate
this Agreement on or before Closing by giving written notice thereof to the
other party.
10.2 ADDITIONAL ASSURANCES. The provisions of this Agreement shall be
self-operative and shall not require further agreement by the parties except as
may be herein specifically provided to the contrary; provided, however, at the
request of a party, the other party shall execute such additional instruments
and take such additional actions as the requesting party may deem necessary to
effectuate this Agreement. In addition, and from time to time after Closing,
Seller shall execute and deliver such other instruments of conveyance and
transfer, and take such other actions as Buyer reasonably may request, more
effectively to convey and transfer full right, title and interest to, vest in,
and place Buyer in legal and actual possession of, any and all of the Assets.
10.3 CONSENTED ASSIGNMENT. Anything contained herein to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign any
claim, right, contract, license, lease,
<PAGE> 18
commitment, sales order, or purchase order if an attempted assignment thereof
without the consent of the other party thereto would constitute a breach thereof
or in any material way affect the rights of Seller thereunder, unless such
consent is obtained. Each of Seller and Buyer shall use its best efforts to
obtain any third party consents to the transactions contemplated by this
Agreement. If such consent is not obtained, or if an attempted assignment would
be ineffective or would materially affect the rights thereunder of Seller so
that Buyer would not in fact receive all such rights, Seller and Buyer shall
cooperate in good faith in any reasonable arrangement designed to provide for
Buyer the benefits under any such claim, right, contract, license, lease,
commitment, sales order, or purchase order, including, without limitation,
enforcement of any and all rights of Seller against the other party or parties
thereto arising out of the breach or cancellation by such other party or
otherwise.
10.4 CONSENTS, APPROVALS AND DISCRETION. Except as herein expressly
provided to the contrary, whenever this Agreement requires any consent or
approval to be given by a party, or whenever a party must or may exercise
discretion, the parties agree that such consent or approval shall not be
unreasonably withheld or delayed and such discretion shall be reasonably
exercised.
10.5 LEGAL FEES AND COSTS. In the event a party elects to incur legal
expenses to enforce or interpret any provision of this Agreement by judicial
proceedings, the prevailing party will be entitled to recover such legal
expenses, including, without limitation, reasonable attorneys' fees, costs and
necessary disbursements at all court levels, in addition to any other relief to
which such party shall be entitled.
10.6 CHOICE OF LAW. The parties agree that this Agreement shall be
governed by and construed in accordance with the laws of the State of Tennessee,
without giving effect to such state's conflicts of laws principles.
10.7 BENEFIT/ASSIGNMENT. Subject to provisions herein to the contrary,
this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective legal representatives, successors and assigns. No
party may assign this Agreement without the prior written consent of the other
party, which consent shall not be unreasonably withheld; provided, however, that
any party may, without the prior written consent of the other parties, assign
its rights and delegate its duties hereunder to one or more affiliates.
10.8 NO BROKERAGE. The parties hereto represent to each other that no
broker has in any way been contacted in connection with the transactions
contemplated hereby. Each party agrees to indemnify the other party from and
against all loss, cost, damage, or expense arising out of claims for fees or
commissions of brokers employed or alleged to have been employed by such
indemnifying party.
10.9 COST OF TRANSACTION. Whether or not the transactions contemplated
hereby shall be consummated, the parties agree as follows: (i) Seller shall pay
the fees, expenses and disbursements of Seller and its agents, representatives,
accountants and legal counsel incurred in connection with the subject matter
hereof and any amendments hereto; and (ii) Buyer shall pay the fees, expenses
and disbursements of Buyer and its agents, representatives, accountants and
legal counsel incurred in connection with the subject matter hereof and any
amendments hereto.
10.10 CONFIDENTIALITY. It is understood by the parties hereto that the
information, documents and instruments delivered to Buyer by Seller and its
agents and the information, documents and instruments delivered to Seller by
Buyer and its agents are of a confidential and proprietary nature. Each of the
parties hereto agrees that both prior and subsequent to the Closing it will
maintain the confidentiality of all such confidential information, documents, or
instruments delivered to it by each of the other parties
<PAGE> 19
hereto or their agents in connection with the negotiation of this Agreement or
in compliance with the terms, conditions and covenants hereof and will only
disclose such information, documents and instruments to its duly authorized
officers, members, directors, representatives and agents (including consultants,
attorneys and accountants of each party) and applicable governmental authorities
in connection with any required notification or application for approval or
exemption therefrom. Each of the parties hereto further agrees that if the
transactions contemplated hereby are not consummated, it will return all such
documents and instruments and all copies thereof in its possession to the other
parties to this Agreement. Each of the parties hereto recognizes that any breach
of this SECTION 10.10 would result in irreparable harm to the other party to
this Agreement and its affiliates and that therefore either Seller or Buyer
shall be entitled to an injunction to prohibit any such breach or anticipated
breach, without the necessity of posting a bond, cash, or otherwise, in addition
to all of its other legal and equitable remedies. Nothing in this SECTION 10.10,
however, shall prohibit the use of such confidential information, documents, or
information for such governmental filings as in the opinion of Seller's counsel
or Buyer's counsel are required by law or governmental regulations or are
otherwise required to be disclosed pursuant to applicable state law.
10.11 PUBLIC ANNOUNCEMENTS. Seller and Buyer mutually agree that no party
hereto shall release, publish, or otherwise make available to the public in any
manner whatsoever any information or announcement regarding the transactions
herein contemplated without the prior written consent of Seller and Buyer,
except for information and filings reasonably necessary to be directed to
governmental agencies fully and lawfully to effect the transactions herein
contemplated or required in connection with securities and other laws. Nothing
herein shall prohibit either party from responding to questions presented by the
press or media without first obtaining prior consent of the other party hereto.
10.12 WAIVER OF BREACH. The waiver by any party of a breach or violation
of any provision of this Agreement shall not operate as, or be construed to
constitute, a waiver of any subsequent breach of the same or any other provision
hereof.
10.13 NOTICE. Any notice, demand, or communication required, permitted,
or desired to be given hereunder shall be deemed effectively given when
personally delivered, when received by receipted overnight delivery, or five (5)
days after being deposited in the United States Mail, with postage prepaid
thereon, certified or registered mail, return receipt requested, addressed as
follows:
Seller: CyberGuard Corporation
2000 West Commercial Boulevard
Suite 200
Ft. Lauderdale, Florida 33309
Attention: President
With a simultaneous
copy to: CyberGuard Corporation
2000 West Commercial Boulevard
Suite 200
Ft. Lauderdale, Florida 33309
Attention: General Counsel
Buyer: AHN Partners, L.P.
28 White Bridge Road, Suite 208
Nashville, Tennessee 37205
Attention: General Partner
<PAGE> 20
With a simultaneous
copy to: America's Health Network
Executive Offices
2500 Universal Studios Plaza
Orlando, Florida 32819
Attention: Director of Business and Legal Affairs
or to such other address, and to the attention of such other person or officer
as any party may designate, with copies thereof to the respective counsel
thereof as notified by such party.
10.14 SEVERABILITY. In the event any provision of this Agreement is held
to be invalid, illegal or unenforceable for any reason and in any respect, such
invalidity, illegality, or unenforceability shall in no event affect, prejudice,
or disturb the validity of the remainder of this Agreement, which shall be and
remain in full force and effect, enforceable in accordance with its terms.
10.15 GENDER AND NUMBER. Whenever the context of this Agreement requires,
the gender of all words herein shall include the masculine, feminine and neuter
and the number of all words herein shall include the singular and plural.
10.16 DIVISIONS AND HEADINGS. The divisions of this Agreement into
sections and subsections and the use of captions and headings in connection
therewith are solely for convenience and shall have no legal effect in
construing the provisions of this Agreement.
10.17 SURVIVAL. All of the representations, warranties, covenants and
agreements made by the parties in this Agreement or pursuant hereto in any
certificate, instrument, or document shall survive the consummation of the
transactions described herein, and may be fully and completely relied upon by
Seller and Buyer, as the case may be, notwithstanding any investigation
heretofore or hereafter made by any of them or on behalf of any of them, and
shall not be deemed merged into any instruments or agreements delivered at
Closing or thereafter. Notwithstanding anything in this SECTION 10.17 which may
be to the contrary, any claim, demand, or cause of action with respect to a
breach of any warranty or representation made in this Agreement (other than
representations or warranties contained in SECTIONS 3.1, 3.2, 3.3, 3.9, 3.12,
4.1, 4.2 AND 4.3, which shall survive indefinitely) must be made or brought, if
at all, within three (3) years after the Closing Date.
10.18 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES
ANY AND ALL RIGHTS IT MAY HAVE TO DEMAND THAT ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE
RELATIONSHIPS OF THE PARTIES HERETO BE TRIED BY JURY. THIS WAIVER EXTENDS TO ANY
AND ALL RIGHTS TO DEMAND A TRIAL BY JURY ARISING FROM ANY SOURCE INCLUDING, BUT
NOT LIMITED TO, THE CONSTITUTION OF THE UNITED STATES OR ANY STATE THEREIN,
COMMON LAW OR ANY APPLICABLE STATUTE OR REGULATIONS. EACH PARTY HERETO
ACKNOWLEDGES THAT IT IS KNOWINGLY AND VOLUNTARILY WAIVING ITS RIGHT TO DEMAND
TRIAL BY JURY.
10.19 NO THIRD PARTY BENEFICIARIES. The terms and provisions of this
Agreement are intended solely for the benefit of Buyer and Seller and their
respective permitted successors or assigns, and it is not the intention of the
parties to confer, and this Agreement shall not confer, third-party beneficiary
rights upon any other person.
<PAGE> 21
10.20 ENTIRE AGREEMENT/AMENDMENT. This Agreement supersedes all previous
contracts, and constitutes the entire agreement of whatsoever kind or nature
existing between or among the parties respecting the within subject matter, and
no party shall be entitled to benefits other than those specified herein. As
between or among the parties, no oral statements or prior written material not
specifically incorporated herein shall be of any force and effect. The parties
specifically acknowledge that in entering into and executing this Agreement, the
parties rely solely upon the representations and agreements contained in this
Agreement and no others. All prior representations or agreements, whether
written or verbal, not expressly incorporated herein are superseded, and no
changes in or additions to this Agreement shall be recognized unless and until
made in writing and signed by all parties hereto. This Agreement may be executed
in two or more counterparts, each and all of which shall be deemed an original
and all of which together shall constitute but one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in multiple originals by their authorized officers, all as of the date first
above written.
CYBERGUARD CORPORATION
By:
----------------------------------------------
________________________, President
("Seller")
AHN PARTNERS, L.P.
By: America's Health Network, Inc., its
Managing General Partner
By:
----------------------------------------------
Title:
-------------------------------------------
("Buyer")
<PAGE> 1
EXHIBIT 10.24
AGREEMENTS RELATING TO SALE OF ARCA SYSTEMS, INC.
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "AGREEMENT") is made as of October 2,
1998 (the "EFFECTIVE DATE"), by and between CyberGuard Corporation, a Florida
corporation ("CYBERGUARD"), Arca Systems, Inc., a California corporation and
wholly-owned subsidiary of CyberGuard ("ARCA," and, together with CyberGuard,
"SELLER"), Exodus Communications, Inc., a Delaware corporation ("EXODUS"), and
EC Acquisitions Corp., a Delaware corporation and wholly-owned subsidiary of
Exodus ("SUB," and together with Exodus, "BUYER").
R E C I T A L S
A. Arca is engaged in the business of network security consulting (such
business as engaged in by Arca is hereinafter referred to as the "BUSINESS").
CyberGuard also conducts, and after consummation of the Closing contemplated
under this Agreement will continue to conduct, lines of business other than the
Business.
B. Seller desires to sell to Buyer, and Buyer desires to purchase from
Seller, certain assets (including customer lists, technology, software products,
product designs, contracts and intellectual properties) of Arca related to the
Business, on the terms and conditions set forth in this Agreement, including but
not limited to assets related to Arca's facilities currently located in San
Jose, California; Vienna, Virginia; Columbia, Maryland; and Bedford,
Massachusetts (the "FACILITIES"). Such purchased assets are to be held by Sub.
NOW, THEREFORE, in consideration of the above recitals and the mutual
covenants hereinafter set forth, Buyer and Seller hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS.
1.1 AGREEMENT TO SELL AND PURCHASE ASSETS. Subject to the terms and
conditions of this Agreement, and in reliance on the representations, warranties
and covenants set forth in this Agreement, Seller agrees to sell, assign,
transfer and convey to Sub at the Closing (as defined in Section 2.3 below), and
Buyer agrees to purchase and acquire from Seller at the Closing, all right,
title and interest in and to all of the Assets (as defined below). The Assets
will be sold, assigned, transferred and conveyed to Buyer (subject to Section
1.3(b)) on the Closing Date (as hereinafter defined).
1.2 ASSETS DEFINED. As used in this Agreement, the term "ASSETS" means,
collectively, all of the assets, rights and properties of Seller described in
the following paragraphs of this Section 1.2; PROVIDED, HOWEVER, that,
notwithstanding anything to the contrary set forth in this Agreement or any
agreement, document, schedule or exhibit relating hereto, "Assets" expressly
excludes any assets of CyberGuard (i) owned by CyberGuard before the Prior
Acquisition Date or (ii) which are owned by CyberGuard and are not related
primarily to the Business, in either case unless such assets are specifically
referenced and identified on the Schedules hereto.
(a) CUSTOMER LISTS, MARKETING INFORMATION. All of Seller's
customer lists (whether current or prior) and customer account histories for
customers or prospective customers of the Business (including, but not limited
to, customers and prospective customers of Seller's product lines and services
related to the Business), including all data regarding such customers, and all
other marketing, promotional and sales information, whether completed or in
process and whether stored in written form, magnetic or electronic media or in
any other form, that have been or now are related to the Business or that have
been or now are used, developed or purchased in connection with the Business.
Upon the Closing, Buyer shall
-2-
<PAGE> 2
acquire and have sole and exclusive ownership of, access to and use of all
assets, customer lists and other information described in this Section 1.2(a)
(collectively, the "CUSTOMER LIST ASSETS").
(b) INVENTORY. All inventories of Seller of tangible finished
products and marketing and product literature that are related to or used,
developed or purchased in connection with the Business and all work in process
and spare parts that have been marked for the Business (collectively, the
"INVENTORY").
(c) CONTRACTS. Subject to Section 1.3(b) hereof, all of the
contracts, agreements, engagements, leases and licenses relating to the Business
that are listed on SCHEDULE 1.2(C) hereto and all outstanding proposals for
contracts, agreements, engagements, leases and licenses related to the Business
that are listed on Schedule 1.2(c) (collectively, the "CONTRACTS"), together
with all claims, causes of action and rights of Seller now existing or hereafter
arising out of such Contracts or the performance thereof, all warranties and
representations made to Seller by third parties under such Contracts, and all
rights, remedies, setoffs, allowances, rebates, discounts and credits granted to
Seller by third parties in relation to such Contracts. Schedule 1.2(c) also
identifies the termination dates of the Contracts and those Contracts that
require third party consents to assign and transfer such Contracts to Buyer.
(d) TECHNOLOGY; PRODUCTS AND INTELLECTUAL PROPERTY. Subject to
Section 1.3(b) hereof, all copies of documentation, drafts, papers, designs,
drawings, schematics, diagrams, models, prototypes, software (in both source
code and object code form and in any media or format and for all hardware
platforms, software platforms and operating environments) including but not
limited to the software products and services listed in SCHEDULE 1.2(D)(I)
hereto that are related to or used, developed or purchased in connection with
the Business, all Seller's "shrinkwrap" or other use licenses or other rights to
use object code or executable code copies of third party personal computer
software (and the copies of such software) used or located at Seller's
Facilities or such other properties used to conduct the Business on the
Effective Date, computer stored data, diskettes, manuscripts and other items
describing any product, development tools, testing tool or suite, application,
operating system, routine, subroutine, module or other proprietary technology,
together with any derivative works made or developed therefrom, that are related
to or used, developed, sold, marketed or purchased in connection with the
Business and all of Seller's rights, title and interest in and to all
Intellectual Property (as defined in Section 5.8 below) that is related to or
used, developed or purchased in connection with the Business (such Intellectual
Property includes, but is not limited to, those items set forth in SCHEDULE
1.2(d)(ii) hereto).
(e) BUSINESS RECORDS. All logs, books, records, files,
supplier lists and files, product component lists, engineering and design
drawings, diagrams and other documentation depicting or specifying the designs
and components of all the Business products and services, and all sales
literature and sales aids, pictures, negatives, camera ready proofs, product
catalogs, product sheets and documentation, product displays, advertising
materials, manuals, computer and electronic data processing materials and
correspondence relating to the Business products, all copies of all sales and
customer records relating to the Business. In addition, Assets shall include
copies of all the Financial Records (as defined below); PROVIDED that Seller
shall retain title to and ownership of the Financial Records and may retain
copies of the Financial Records for Seller's use in compliance with this
Agreement. As used herein, the term "FINANCIAL RECORDS" means all Seller's
business, accounting and financial records and analyses pertaining to the
operation of the Business but not including those items included in the first
sentence of this Section 1.2(e).
(f) OTHER TANGIBLE ASSETS. All of the tangible assets and
tangible embodiments of intangible assets (including but not limited to personal
computers, furniture and equipment) not described in the preceding subparagraphs
of this Section 1.2 that, on the Effective Date, are located at the Facilities
or other locations, including, but not limited to, all such assets used in
support of the Business, exclusive of inventory, training documentation and
other materials not related to the Business (the "TANGIBLE ASSETS"). A list of
the Tangible Assets as of the Closing Date is listed on SCHEDULE 1.2(f) hereto.
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(g) TRADEMARKS; TRADE NAMES. All of the trademarks and trade
names used by the Business, including without limitation, the exclusive right to
use the names "Arca" and "Arca Systems", or any substantially similar name,
trademark or variant thereof, and the exclusive right for Buyer to hold itself
out as the successor to the Business.
(h) ACCOUNTS RECEIVABLE. The debts and other money which on or
before the Closing Date are or become owing to Arca in relation to products or
services sold or provided by the Seller in respect of the Business that are
listed on SCHEDULE 1.2(H) hereto.
(i) PERMITS, LICENSES AND OTHER ASSETS. Subject to Section
1.3(b) hereof, all governmental licenses, permits, filings, authorizations,
approvals or indicia of authority related to the Business or necessary for the
conduct of the business (the "PERMITS AND LICENSES"); and all other assets
listed on SCHEDULE 1.2(i) hereto.
1.3 ASSET TRANSFER; PASSAGE OF TITLE; DELIVERY.
(a) TITLE PASSAGE. Except as otherwise provided in Section
1.3(b), upon the Closing, title to all of the Assets shall pass to the Buyer;
and the Seller shall deliver to the Buyer possession of all of the Assets as
provided in subsection 1.3(c), and shall further deliver to the Buyer proper
assignments, conveyances and bills of sale sufficient to convey to the Buyer
good and marketable title to all the Assets, as well as such other instruments
of conveyance as counsel for the Buyer may reasonably deem necessary or
desirable (both at and after the Closing) to effect or evidence the transfers
contemplated hereby;
(b) NON-TRANSFERABLE AND NON-ASSIGNABLE ASSETS. To the extent
that any of the Assets transferred to the Buyer hereunder, or any claim, right
or benefit arising under or resulting from such Assets (collectively, the
"RIGHTS") is not capable of being transferred without the approval, consent or
waiver of any third person, or if the transfer of a Right would constitute a
breach of any obligation under, or violation of, any applicable law unless the
approval, consent or waiver of such third person is obtained, then, except as
expressly otherwise provided in this Agreement and without limiting the rights
and remedies of the Buyer contained elsewhere in this Agreement, this Agreement
shall not constitute an agreement to transfer such Right unless and until such
approval, consent or waiver has been obtained (which approval, consent or waiver
shall be obtained at the Buyer's cost, which costs shall be subject to Buyer's
prior approval; provided, however, that costs of personnel (including legal
advisors) and other non-out-of-pocket costs incurred by Seller in seeking such
approvals, consents or waivers shall be at Seller's expense and not at Buyer's
cost). After the Effective Date and until all such Rights are transferred to
Buyer, the Seller shall use its reasonable efforts (to the extent permitted by
law and applicable contract terms) to:
(i) maintain its existence and hold the Rights in trust
for the Buyer;
(ii) comply in all material respects with the terms and
provisions of the Rights as agent for the Buyer at
the Buyer's cost and for the Buyer's benefit;
(iii) cooperate with the Buyer at the expense of the Buyer
in any reasonable and lawful arrangements designed to
provide the benefits of such Rights solely and
exclusively to the Buyer;
(iv) enforce, at the request of the Buyer and for the
account of the Buyer at the expense of the Buyer, any
rights of the Seller arising from such Rights against
any third person, including the right to elect to
terminate any such rights in accordance with the
terms of such rights upon the written direction of
the Buyer; and
(v) not knowingly waive, alter or amend any obligations
of third parties, whether expressly or impliedly
without the written consent of the Buyer.
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In order that the full value of the Rights may be realized for
the benefit of the Buyer, the Seller shall, at Buyer's expense, at the request
and under the direction of the Buyer, in the name of the Seller or otherwise as
the Buyer may specify, take all such action and do or cause to be done all such
things as are reasonable, necessary, proper and prudent in order that the
obligations of the Seller under such Rights may be performed in such manner that
the value of such Rights is preserved and inures to the benefit of the Buyer,
and that any moneys due and payable and to become due and payable to the Buyer
in and under the rights are received by the Buyer. At the end of each calendar
month after the Closing Date, the Seller shall supply Buyer with written reports
regarding all moneys collected by or paid to the Seller in respect of every such
Right and shall promptly pay to the Buyer all such moneys collected.
With respect to the Contracts which will not have been
assigned to Buyer as of the Closing Date (the "UNASSIGNED CONTRACTS") listed on
SCHEDULE 1.3(b) hereto and which by their terms require Seller to perform
consulting services thereunder (the "UNASSIGNED SERVICES CONTRACTS"), to the
extent permitted by law and the terms of the Unassigned Services Contracts,
Seller hereby hires and authorizes Buyer to perform the services specified in
such Unassigned Services Contracts, on Seller's behalf, pursuant to the terms of
such Unassigned Services Contracts, and Buyer hereby agrees to use its
reasonable efforts to perform such services in accordance with the terms of the
Unassigned Services Contracts. Buyer also agrees to use its reasonable efforts
to comply with the terms of the Unassigned Contracts to the extent that such
compliance is within the control of Buyer. In addition, Seller hereby authorizes
and directs Buyer to collect payment for services rendered pursuant to the
Unassigned Services Contracts for Buyer's own account. Buyer's obligation to
perform such services pursuant to an Unassigned Services Contract shall
terminate upon the valid assignment of such Unassigned Services Contract to
Buyer; provided, however, that Buyer shall have the right to terminate its
obligations under this paragraph to perform services under the Unassigned
Services Contracts in the event that (i) payment for such services has been
remitted to Seller by the other party to the contract and Buyer has not received
from Seller the amounts due to it for such services for a period in excess of 60
days following Seller's receipt of the payment and (ii) Buyer has notified
Seller of its intention to terminate its obligations to perform such services
hereunder as a result of such nonpayment, and a period of 10 days has passed
since such notification, in which time Seller has not paid Buyer such past due
payments.
Buyer shall indemnify and hold Seller harmless for any costs,
damages, liabilities, expenses or obligations incurred by Seller (the "COSTS")
in connection with the Unassigned Contracts and with respect to any Rights which
have not been assigned as described above, to the extent that such Costs are due
to any acts or the failure to act by Buyer under this Section 1.3(b), following
the date hereof and until such Unassigned Contracts or Rights are assigned to
Buyer, including the performance of, or the failure to perform, the services
required to be performed by Buyer under the Unassigned Services Contracts
pursuant to the preceding paragraph. Buyer shall use its best efforts to obtain
all consents with respect to Rights, Unassigned Contracts and Unassigned
Services Contracts necessary to assign such Rights, Unassigned Contracts and
Unassigned Services Contracts to Buyer, including, where reasonably necessary or
advisable, causing Exodus to guarantee any obligations of Sub with respect
thereto.
Notwithstanding anything to the contrary set forth herein and
except as provided below in this Section 1.3(b), so long as Seller provides
cooperation to Buyer (as described in this Section 1.3(b) and in Section 7.1) in
obtaining the approval, consent or waiver of any third person to the assignment
to Buyer of the Unassigned Contracts and Rights, Seller shall not be liable to
Buyer if any such consents are not obtained. Buyer shall indemnify and hold
Seller harmless for any Costs incurred by Seller in connection with the
Unassigned Contracts or with respect to any Rights which have not been assigned
as described above, to the extent that such Costs are due to the violation as a
result of the transactions contemplated by this Agreement of (i) any "change of
control" provisions or (ii) any provisions requiring the consent of a third
party to assign the Unassigned Contracts or Rights to Buyer, that are contained
in the Unassigned Contracts or included within such Rights, as long as Seller
has not breached this Section 1.3(b) or Section 7.1 of this Agreement; provided,
however, that the foregoing indemnification obligations shall not have any force
or effect until Seller has incurred, and paid, an aggregate of $150,000 of Costs
associated with such
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violations, and then such indemnification obligation shall be effective only
with respect to any such Costs which exceed such $150,000 amount.
(c) DELIVERY OF ASSETS. The Assets shall be delivered by
Seller to Buyer as follows, and all Assets shall be delivered by Seller to Buyer
on the Closing Date:
(i) All of the original Customer List Assets and all
of the original software products, documentation and other assets described in
Section 1.2(d) and Section 1.2(e) and all of the Inventory and Tangible Assets
shall be delivered to Buyer by Seller at the Facilities; and
(ii) All other Assets shall be delivered to Buyer by
Seller at such location as Buyer may reasonably request in writing; PROVIDED,
HOWEVER, that if such location is other than at the location at which such
Assets are located on the Effective Date, then Buyer shall promptly reimburse
Seller for all shipping expenses Seller incurs in delivering such Assets to
Buyer at the location specified by Buyer.
2. PURCHASE PRICE; PAYMENT.
2.1 PURCHASE PRICE. In consideration of the sale, transfer, conveyance
and assignment of all the Assets to Buyer at the Closing, upon the consummation
of the Closing, Buyer agrees to pay or transfer, as appropriate, to Seller the
following, the aggregate total of which shall be defined as the "PURCHASE
PRICE":
(a) the sum of Three Million Two Hundred Fifty-Eight Thousand
Four Hundred and Seventy Dollars ($3,258,470) in cash (which includes Five
Hundred Thousand Dollars ($500,000) in cash already delivered by the Buyer to
the Seller on or about September 2, 1998). Of the Purchase Price, Two Hundred
Fifty Eight Thousand Dollars ($258,000) shall be withheld in escrow (the "ESCROW
FUNDS") for a period of time not to exceed one (1) year pursuant to an escrow
agreement attached hereto as EXHIBIT A (the "ESCROW AGREEMENT") until required
to be delivered pursuant to Sections 9.3 hereof;
(b) the sum of One Hundred Sixty-Five Thousand Six Hundred
Nineteen Dollars ($165,619.00) in cash which represents the aggregate amount to
be paid by the Seller immediately after the Closing Date to satisfy all of its
accounts payable known by Seller to exist, which amounts and the parties to whom
they are owed are listed on Schedule 7.3 hereto (the "ACCOUNTS PAYABLE"); and
(c) all of the "TRANSFERRED INTERESTS AND ASSETS" (as that
term is defined in the Claims and Stock Purchase Agreements of even date
herewith to which the Buyer and the persons listed on Schedule 2.1 are parties
(the "CLAIMS AND STOCK PURCHASE AGREEMENT")) which have been assigned or
otherwise transferred to Buyer under such Claims and Stock Purchase Agreements.
2.2 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
to the Assets in the manner to be set forth on SCHEDULE 2.2, which shall be
completed by Buyer and consented to by Seller (which consent shall not be
unreasonably withheld) as soon thereafter as is reasonably practicable. When
final, Schedule 2.2 will be attached to this Agreement and form a part hereof.
Each party agrees not to take any position that varies from or is inconsistent
with such allocation in any tax return or other filing made by such party with
the Internal Revenue Service ("IRS") or with any other governmental, tax or
regulatory authority. Nothing herein contained shall impose on either party the
duty or obligation to contest any action which the IRS or any other taxing
authority may take or any adjustment or change in such allocation which the IRS
or any other taxing authority may make or propose.
2.3 CLOSING. The consummation of the purchase and sale of the Assets
contemplated hereby is taking place at a closing to be held simultaneously with
the execution of this Agreement at the offices of Buyer's counsel, Fenwick &
West LLP, Two Palo Alto Square, Palo Alto, California (the "CLOSING") on October
2, 1998 (such date being the "CLOSING DATE" or "EFFECTIVE DATE").
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3. OBLIGATIONS ASSUMED.
3.1 LIABILITIES. Buyer agrees, upon consummation of, and effective as of,
the Closing, to assume those (and only those) obligations of Seller arising
after the Closing under those (and only those) Contracts specifically listed in
Schedule 1.2(c) (and to discharge the same in accordance with their terms),
OTHER THAN obligations arising from any breach or default of any of such
Contracts by Seller that occurred (or arose from facts occurring) prior to the
Closing (collectively, the "ASSUMED LIABILITIES").
3.2 LIABILITIES AND OBLIGATIONS NOT ASSUMED. Except as expressly set
forth in Section 3.1 above, the Buyer shall not assume or become obligated in
any way to pay any liabilities, debts or obligations of Seller or of the
Business whatsoever, including but not limited to any liabilities or obligations
now or hereafter arising from or with respect to, (i) the sale or license of any
products or services of Seller that occurred prior to the Closing, (ii) the
termination by Seller of the employment of any current or future employees of
Seller or any of its affiliates, any other claims brought against Seller arising
from Seller's employment of any person, any duties or obligations under any
existing or future Employee Plans (as term is defined in Section 5.14) or other
employee benefit plans of Seller or any of its affiliates, whether or not under
the Employee Retirement Income Security Act of 1974 ("ERISA"), any present or
future obligations or liabilities of Seller or any of its affiliates to existing
or future employees of Seller or any of its affiliates under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), the Federal
Worker Adjustment and Retraining Act ("WARN") or any severance pay obligations
of Seller or any of its affiliates (together, "EMPLOYEE LIABILITIES") or (iii)
any obligations or liabilities arising from any breach or default by Seller of
any contract, agreement or commitment of Seller (including but not limited to
the Contracts) that occurred prior to the Closing. All liabilities, debts and
obligations of Seller not expressly assumed by Buyer hereunder are hereinafter
referred to as the "EXCLUDED LIABILITIES".
3.3 NO OBLIGATIONS TO THIRD PARTIES. The execution and delivery of this
Agreement shall not be deemed to confer any rights upon any person or entity
other than the parties hereto, or make any person or entity a third party
beneficiary of this Agreement, or to obligate the parties to any person or
entity other than the parties to this Agreement. Assumption by Buyer of any
liabilities or obligations of Seller under Section 3.1 shall in no way expand
the rights or remedies of third parties against Buyer as compared to the rights
and remedies such parties would have against Seller if the Closing were not
consummated.
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer hereby represents and warrants to Seller that all the following
statements are true, accurate and correct:
4.1 CORPORATE ORGANIZATION. Each of Exodus and Sub is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware. Each Buyer has all necessary corporate power and authority to enter
into this Agreement and all assignments or other documents that the Buyer is
required to execute and deliver hereunder (the "ANCILLARY DOCUMENTS"), and holds
all permits, licenses, orders and approvals of all federal, state and local
governmental or regulatory bodies necessary and required therefor.
4.2 POWER AND AUTHORITY; NO DEFAULT. The execution, delivery and
performance by Buyer of this Agreement and the Ancillary Documents, and the
consummation of all the transactions contemplated hereby and thereby, have been
duly and validly authorized by the Buyer by all necessary corporate action of
each Buyer's Boards of Directors. This Agreement and the Ancillary Documents,
when executed and delivered by the Buyer, will be duly and validly executed and
delivered and will be the valid and binding obligations of the Buyer,
enforceable against Buyer in accordance with their respective terms, except as
the same may be limited by applicable bankruptcy, moratorium, fraudulent
conveyance and other laws affecting creditors and general principles or equity.
Neither the execution and delivery of this Agreement or the Ancillary Documents
by the Buyer, nor the performance by the Buyer of its obligations under this
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Agreement, will (i) violate the Buyer's Certificate of Incorporation or Bylaws,
(ii) to the Buyer's knowledge, materially violate any law, statute, rule or
regulation or order, writ, judgment, injunction or decree of any court,
administrative agency or government body applicable to the Buyer.
4.3 BROKERAGE AND FINDER'S FEES. Except for employing the services of
NationsBanc Montgomery Securities LLC, neither Buyer nor any of its affiliates
has employed any broker, finder or agent, or agreed to pay or incurred any
brokerage fee, finder's fee or commission with respect to the transactions
contemplated by this Agreement, or dealt with anyone purporting to act in the
capacity of a broker, finder or agent with respect thereto as a result of which
any claim for a fee can be asserted against Seller.
4.4 AUTHORIZATION FOR THIS AGREEMENT. No authorization, approval, consent
of, or filing with any governmental department, bureau, agency, public board,
authority or other third party is required for the consummation by the Buyer of
the transactions contemplated by this Agreement.
4.5 TRANSFERRED INTERESTS AND ASSETS. To the Buyer's knowledge, and based
solely on the representations and warranties of the parties (other than the
Buyer) to the Claims and Stock Purchase Agreement, the Transferred Interests and
Assets are being transferred to the Seller free and clear of all mortgages,
claims, pledges, liens, licenses, rights of possession, security interests,
restrictions, encumbrances, charges, title retention, conditional sale or other
security arrangements and all other claims or agreements of any nature
whatsoever ("ENCUMBRANCES"), except as otherwise provided in the Claims and
Stock Purchase Agreement; and the Buyer has not granted any Encumbrance upon or
transferred any right, title or interest in or to, any Transferred Interests or
Assets.
4.6 NON-RELIANCE. In entering into this Agreement, the Buyer has not
relied upon any oral representations or warranties, or any projections, with
respect to the Business.
4.7 BUYER'S KNOWLEDGE. The Buyer is not aware of any breach by the Seller
of any representation, warranty, covenant or agreement made herein or in
connection herewith.
4.8 EMPLOYEES. The Buyer has no present intent to terminate any employees
of Arca listed on Schedule 5.16 hereto, all of which are being offered
employment by the Buyer immediately following the Closing.
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5. REPRESENTATIONS AND WARRANTIES OF SELLER.
Each of CyberGuard and Arca, jointly and severally, represents and
warrants to Buyer that, except as set forth in SCHEDULE 5 attached hereto (the
"SELLER'S SCHEDULE OF EXCEPTIONS"), all of the statements in this Section 5 are
true, accurate and correct:
5.1 CORPORATE ORGANIZATION. CyberGuard is a corporation duly organized,
validly existing, and in good standing under the laws of the state of Florida.
CyberGuard owns all of the capital stock of Arca. Arca is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
California. Each of CyberGuard and Arca is duly qualified to transact business
as a foreign corporation, and is in good standing, in all jurisdictions where
the failure to be so qualified would materially and adversely affect the
Business. Each Seller has all necessary corporate power and authority to own and
use the Assets and to operate the Business and to enter into this Agreement and
all assignments or other documents that each Seller is required to execute and
deliver hereunder (the "ANCILLARY DOCUMENTS"), and each Seller holds all
permits, licenses, orders and approvals of all federal, state and local
governmental or regulatory bodies necessary and required therefor. Each Seller
has delivered true and correct copies of its Articles of Incorporation and
By-laws, as in effect on the date hereof. Arca has no interest in any
corporation, partnership or other entity except as set forth in Schedule 5
hereto.
5.2 POWER AND AUTHORITY; NO DEFAULT UPON TRANSFER. The execution,
delivery and performance by each Seller of this Agreement and the Ancillary
Documents, and the consummation of all the transactions contemplated hereby and
thereby, have been duly and validly authorized by Seller by all necessary
corporate action of each Seller's Board of Directors. This Agreement and the
Ancillary Documents, when executed and delivered by Seller, will be duly and
validly executed and delivered and will be the valid and binding obligations of
each Seller, enforceable against Seller in accordance with their respective
terms, except as the same may be limited by applicable bankruptcy, moratorium,
fraudulent conveyance and other laws affecting creditors and general principles
or equity. Neither the execution and delivery of this Agreement or the Ancillary
Documents by the Seller, nor the performance by Seller of its obligations under
this Agreement, will (i) violate the Seller's Articles of Incorporation or
By-Laws, (ii) result in a material violation or breach of, or permit any third
party to rescind any term or provision of, or constitute a default under, any
loan, note, indenture, mortgage, deed of trust, security agreement, lease or
material contract, Contract, license, lease or other agreement to which Seller
is a party or by which Seller or any of the Assets is bound or (iii) to the
Seller's knowledge, materially violate any law, statute, rule or regulation or
order, writ, judgment, injunction or decree of any court, administrative agency
or government body applicable to the Seller or the Business.
5.3 TITLE. Except as set forth on SCHEDULE 5, Seller has good and
marketable title to all of the Assets, free and clear of all Encumbrances. Title
to all the Assets is freely transferable from the Seller to the Buyer without
obtaining the consent or approval of any person or party, except such consents
and approvals as will be obtained by the Seller prior to the Closing or those
consents otherwise identified in the Schedules as required in connection with
the transactions contemplated hereunder. Except for the "shrinkwrap" or other
use licenses or other rights to use object code or executable code copies of
third party personal computer software programs (and the copies of such
software) that are used or located on the Effective Date at a location other
than the Facilities, the Assets include all of the intangible assets used in the
Business to use, create, enhance and modify the software programs set forth on
Schedule 1.2(d)(i) and all information (including but not limited to identities)
that the Seller possesses on the Closing Date regarding the customers of the
Business.
5.4 FINANCIAL STATEMENTS. Attached hereto as SCHEDULE 5.4 is (i) an
unaudited balance sheet of Arca as of August 31, 1998 and (ii) an unaudited
income statement of Arca covering the period from July 1, 1998 to August 31,
1998. The foregoing financial statements (i) are, in all material respects, in
accordance with the books and records of Seller, (ii) are true, correct and
complete and present fairly in all material respects the financial condition of
Arca and the Business at the date or dates therein indicated and the results of
operations for the period or periods therein specified, and (iii) have been
prepared in
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accordance with generally accepted accounting principles consistently applied
("GAAP"), except that the above-referenced unaudited financial statements do not
include notes or statements of cash flows required by GAAP and are subject to
year-end audit adjustments. Also included in Schedule 5.4 is a listing of all
debts, liabilities and obligations of Arca and the Business of any nature,
whether due or to become due (including without limitation absolute liabilities,
accrued liabilities and contingent liabilities) as of the Closing Date.
5.5 CONDITION OF ASSETS. Taken as a whole, all of the tangible personal
property included in the Assets are in good working condition and repair,
ordinary wear and tear excepted.
5.6 LITIGATION. Except as set forth on Schedule 5.6, there is no claim,
action, suit or proceeding pending or, to Seller's knowledge, threatened,
against Seller (including but not limited to any claim, action, suit or
proceeding relating to or affecting the Business or the Assets), at law, in
equity, by way of arbitration or before any governmental department, commission,
board or agency that could reasonably be expected to have a material adverse
effect on the Seller or the Business, nor is Seller aware of any reasonable
basis therefor. There are no judgments, decrees, injunctions or orders of any
court, governmental department, commission, agency, instrumentality or
arbitrator against Seller affecting the Assets or the Business.
5.7 CONTRACTS AND COMMITMENTS. SCHEDULE 5.7 attached hereto sets forth a
description of all contracts, agreements, understandings and commitments of
Seller related to the Business, whether written or oral (other than oral
agreements to employ employees of Seller): (i) that involve the payment by any
party thereto of consideration in an aggregate amount of $50,000 or more during
any year; (ii) under which performance must or is scheduled to extend beyond six
(6) months after the Closing Date; (iii) that involve the lending or borrowing
of money or any guarantees by Arca or the payment of indebtedness or performance
of an obligation of any third party in excess of $10,000; (iv) that involve
transactions not in the ordinary course of the Business; (v) that involve the
lease or purchase of real estate; or (vi) that involve the purchase or license
of any Intellectual Property (as defined in Section 5.8 below). The Seller is
not in violation, breach or default of any of the Contracts or any other
contracts, agreements or understandings required to be listed on Schedule 5.7 or
that are listed on Schedule 1.2(c). Arca has delivered to the Buyer a true and
correct copy of each written Contract included in the Assets and listed on
Schedule 1.2(c) and has obtained, or by Closing will obtain, all written
consents of third parties required to assign and transfer all Contracts to Buyer
without the breach or violation of any such Contract, except as set forth on
Schedule 5.7. Seller also represents and warrants that the Contracts listed on
Schedule 1.2(c) as requiring third party consents to assign and transfer such
Contracts to Buyer are the only Contracts requiring such consents for
assignment.
5.8 INTELLECTUAL PROPERTY. The term "INTELLECTUAL PROPERTY" means and
includes, collectively, the worldwide rights to all patents, patent applications
(including but not limited to continuations, continuations-in-part, divisionals
and reissues), trademarks (whether or not registered), trade names, service
marks (whether or not registered), copyrights (whether or not registered), moral
rights, trademark and service mark registrations (and pending applications
therefor), mask works and mask work registrations, computer software in object
and source code form (whether owned by Seller, or authored or developed for
Seller by any of its employees, contractors or agents), licenses, sublicenses,
and franchise agreements of Seller, and all know-how, formulae, recipes,
compositions by matter, processes, techniques, confidential business
information, designs, patterns, shapes, inventions (whether or not patented or
patentable), trade secrets, and other proprietary information (including without
limitation customer lists) and technology owned by or licensed to Seller that is
related to the Business. Schedule 1.2(d)(i) contains a true and accurate list of
all products and services currently offered as part of the Business and Schedule
1.2(d)(ii) sets forth a true and accurate list of all Intellectual Property
referred to in Section 1.2(d). Seller owns, possesses, has the exclusive right
to make, use, sell and license, has the right to bring actions for the
infringement of, and where necessary, has made timely and proper application
for, all Intellectual Property rights that are used in the Business and that are
not Excluded Assets or that comprise the Assets. Seller has not granted any
third party any outstanding licenses or other rights to any of its Intellectual
Property and
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Seller is not liable, nor has it made any contract or arrangement whereby it may
become liable, to any person for any royalty or other compensation for the use
of any Intellectual Property. Seller has not received notice of any claim that
any Intellectual Property infringes any patent, copyright, moral right, mask
work, trade secret or proprietary right of any third party and there is no
reasonable basis for such claim known to Seller. All employees and consultants
of Seller and any other third parties who have been involved in providing
services for the Business have executed invention assignment agreements and all
employees and consultants who have access to confidential or trade secret
information concerning technology or products related to the Business have
executed nondisclosure agreements.
5.9 BROKERAGE AND FINDER'S FEES. Except for employing the services of
Goldblum Lentz & Co., neither Seller nor any of its affiliates has employed any
broker, finder or agent, or agreed to pay or incurred any brokerage fee,
finder's fee or commission with respect to the transactions contemplated by this
Agreement, or dealt with anyone purporting to act in the capacity of a broker,
finder or agent with respect thereto as a result of which any claim for a fee
can be asserted against Buyer.
5.10 COMPLIANCE WITH LAWS. In the operation of the Business, to Seller's
knowledge, Seller has duly complied with all applicable laws, rules, regulations
and orders of federal, state, local and foreign governments (including but not
limited to all export control laws and regulations of the United States of
America or any governmental, authority or agency of the United States
government), except where the failure to comply would not have a materially
adverse effect on the Assets or the Business, and, to Seller's knowledge, Seller
is not in default with respect to any order, judgment, writ, injunction, decree,
award, rule or regulation of any court, governmental or regulatory body or
arbitrator which restrains or limits the operations of the Business or the use
of the Assets.
5.11 LABOR AND EMPLOYEE RELATIONS. There are no agreements between any
union, labor organization or other collective bargaining agent in respect of any
employee of Seller.
5.12 AUTHORIZATION FOR THIS AGREEMENT. Except as set forth on Schedule
1.2(c) hereto, no authorization, approval, consent of, or filing with any
governmental department, bureau, agency, public board, authority or other third
party is required for the consummation by Seller of the transactions
contemplated by this Agreement.
5.13 TAXES. At the Closing, and upon the date of any subsequent transfer
of Assets to Buyer in accordance with this Agreement, there will be no federal,
state or local tax liens against any of the Assets to be transferred to Buyer
hereunder, except for taxes which are not yet due and payable. Seller has paid
or will pay, when due, any federal, state or local taxes attributable to periods
prior to the Effective Date with respect to the Assets or the Business which, if
unpaid, may result in a lien against any of the Assets.
5.14 EMPLOYEE BENEFIT PLANS. Set forth on Schedule 5 is a list of all
pension, retirement, profit sharing, deferred compensation agreements,
severance, stock, stock options, bonus or other incentive plans or other
employee benefit plans or other employee benefit plans or arrangements
maintained by Seller for the employees of the Arca including all "Employee
Benefit Plans" as defined in Section 3(3) of ERISA (collectively, the "EMPLOYEE
PLANS"). With respect to all "Employee Plans" as defined in ERISA in which any
employee of Arca is or was eligible to participate in, the Seller or any entity
which, within the last 5 years, has been under common control of or affiliated
with the Seller (an "ERISA AFFILIATE") within the meaning of Section 414(b), (c)
or (m) of the Code, is in material compliance with the requirements prescribed
by any and all statutes, orders or governmental rules or regulations currently
in effect, including, but not limited to, ERISA and the Code, applicable to such
Employee Plans and the Seller is in material compliance with its obligations
under the terms of such plans. None of the Employee Plans maintained by the
Seller or its ERISA Affiliates are subject to Title IV of ERISA. Neither the
Seller nor any ERISA Affiliate has ever been obligated to contribute to any
"multi-employer plan" as such term is defined in Section III(37) of ERISA. To
Seller's knowledge, no Employee Plan of the Seller or any ERISA Affiliate has
engaged in any prohibited transaction as such term is defined in Section 4975 of
the Code or Section 406 of ERISA.
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5.15 ENVIRONMENTAL MATTERS. There have been no disposals, releases or
threatened releases of Hazardous Materials (as defined below) on, from or under
any such Facilities in violation of law that would have a material adverse
effect on the Assets, the Business or the Buyer. Seller has no knowledge of any
presence, disposals, releases or threatened releases of Hazardous Materials on,
from or under any of the Facilities in violation of law. For purposes of this
Section, the terms "DISPOSAL," "RELEASE" and "THREATENED RELEASE" have the
definitions assigned thereto by the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., as
amended ("CERCLA"). For the purposes of this Section, "HAZARDOUS MATERIALS"
means any hazardous or toxic substance, material or waste that is, or becomes
prior to the Closing Date, regulated under, or defined as a "hazardous
substance," "pollutant", "contaminant", "toxic chemical", "hazardous material",
"toxic substance" or "hazardous chemical" or similar hazardous substance under
(i) CERCLA; (ii) the Emergency Planning and Community Right-to-Know Act, 42
U.S.C. Section 11001 et seq.; (iii) the Hazardous Materials Transportation Act,
49 U.S.C. Section 1801 et seq.; (iv) the Toxic Substances Control Act, 15 U.S.C.
Section 2601 et. seq., (v) the Occupational Safety and Health Act of 1970, 29
U.S.C. Section 651 et seq., (vi) regulations promulgated under any of the above
statutes; or (vii) any other applicable federal, state or local statute,
ordinance, rule or regulation that has a scope or purpose similar to those
identified.
None of the Facilities is in violation of any federal, state or local
law, ordinance, regulation or order relating to industrial hygiene or to the
environmental conditions on, under or about the Facilities, including, but not
limited to, soil and ground water condition, which would have a material adverse
effect on the Assets, the Business or the Buyer.
Neither Seller nor, to Seller's knowledge, any third party, has used,
generated, manufactured or stored on, under or about the Facilities or
transported to or from such Facilities any Hazardous Materials in violation of
the law, which would have a material adverse effect on the Assets, the Business
or the Buyer.
There has been no litigation, proceeding or administrative action brought
or threatened against Seller, or any settlement reached by Seller with, any
party or parties alleging the presence, disposal, release or threatened release
of any Hazardous Materials on, from or under any of the Facilities which is
reasonably likely to have a material adverse effect on the Assets, the Business
or the Buyer.
5.16 EMPLOYEES. Attached hereto as SCHEDULE 5.16 is a list, which is
complete in all material respects, of Arca's employees, contractors and
subcontractors whose work relates to the Business as of the Closing, including a
description of the title and responsibilities of each such employee, contractor
and subcontractor, the current compensation payable to each such employee,
contractor and subcontractor, the amount of accrued and unused vacation time for
each such employee, contractor and subcontractor, the date of hire and the date
and amount of last compensation adjustment and any contract, agreement,
understanding or ongoing commitment of Seller to such employee, contractor or
subcontractor, whether or not in written form. To the Seller's knowledge, no
employee of Arca has any claims pending against the Seller (whether under any
law, any agreements between such employee and the Seller or otherwise) on
account of or for (i) overtime pay, other than overtime pay for the current
payroll period, (ii) wages or salary (excluding bonuses and amounts accruing
under annual bonus plans) for any period other than the current payroll,
including any bonuses, benefits or other compensation payable with respect to
the period prior to the Closing Date, (iii) vacation, time off or pay in lieu of
vacation or time off other than that earned in respect of the current fiscal
year (for any period other than the current payroll period), (iv) any violation
of any statute, ordinance or regulation relating to minimum wages or maximum
hours of work or (v) a violation of ERISA. CyberGuard's human resources
department has not received written notification from any employee of Arca to
the effect that such employee presently plans to terminate his or her
relationship with the Seller.
5.17 ACCESS TO CODE. To the Seller's knowledge, no former employee or
consultant of Arca has possession of any software (in source code or object code
form) that is owned by Arca or used in the Business and material to the
Business.
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5.18 NO DEFAULT UNDER LEASES. Seller has not materially breached or been
in material default of any provision of, and is currently in material compliance
with and not in breach or default of, the real property leases for the
Facilities or other properties leased for the conducting of the Business (the
"LEASES") and, except for the consents specifically referenced in Schedule
1.2(c) hereto, nothing in such lease restricts or prevents Seller from selling
and transferring the Assets to Buyer free and clear of any claims or liens of
the lessors under such Leases. No written notice of violation of any ordinance
or administrative regulation (including any zoning or building law) has been
received by Seller with respect to any of the Facilities or other properties
leased for the conducting of the Business. The Facilities and other properties
leased for the conducting of the Business are in a state of good maintenance and
repair and are adequate and suitable for the purposes for which they are
presently being used, taken as a whole. To Seller's knowledge, neither the whole
nor any portion of such Facilities or other properties leased for the conducting
of the Business is being condemned or otherwise taken by any public authority,
nor is any such condemnation or taking to Seller's knowledge threatened or
contemplated.
5.19 PERMITS AND LICENSES. The Permits and Licenses represent all
material licenses, franchises, approvals, certificates, permits, planning
permissions and authorizations necessary for the conduct of the Business and are
presently in full force and effect and no action or claim is pending, and no
notice of any such claim or action has been received which threatens to revoke,
vary, modify or terminate any material Permit or License or declare any material
Permit or License invalid in any respect. The Business is being operated in
material compliance with all Permits and Licenses. Neither the execution,
delivery nor performance of this Agreement shall adversely affect the status of
any material Permit or License nor permit such material Permits or Licenses to
be terminated whether or not following the giving of notice or making of
payment.
5.20 YEAR 2000 COMPLIANCE. None of the Contracts contain obligations with
any customers or other persons which require the Assets of Arca to be Year 2000
compliant. In the event the Assets of Arca are required to be Year 2000
compliant, Seller has taken all necessary steps to comply with the requirements
and terms of the Contracts.
5.21 COMPLIANCE; GOVERNMENT AUTHORIZATION. Arca (and the properties used
by it) is, and has been in material compliance with all federal, state, local
and foreign laws, ordinances, regulations, judgments, rulings, orders and other
legal requirements applicable to it, its properties or its operations. Seller
has furnished Buyer with true and correct copies of all correspondence from
governmental authorities asserting that Arca is not or was not in material
compliance with any laws, ordinances, regulations, judgments, rulings, orders or
other requirements. All material deficiencies noted in any such report furnished
to Buyer in accordance with this Section 5.21 have been corrected. There is no
existing governmental or judicial order or decree directed expressly at Arca or
the Assets. Arca is, and during the past five years, has been, in material
compliance with all defense contract accounting standards and all related and
similar standards, laws, rules, regulations, guidelines and the like. A list of
all material investigations, proceedings, actions, notices, reports, assessments
and correspondence or other communications from or to any governmental entity
during the past five years with respect to defense contract accounting standards
is set forth on Schedule 5.21, no material deficiency has been asserted against
Arca with respect to the foregoing matters, and each such deficiency has been
corrected without cost or adverse impact to Arca.
6. COVENANTS OF BUYER.
Buyer covenants and agrees with Seller as follows:
6.1 CONFIDENTIAL INFORMATION. All copies of financial information,
marketing and sales information, pricing, marketing plans, business plans,
financial and business projections, manufacturing processes and procedures,
formulae, methodologies, inventions, product designs, product specifications and
drawings, and other confidential and/or proprietary information of Seller
disclosed to Buyer in the course
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of negotiating the transaction contemplated by this Agreement ("SELLER
CONFIDENTIAL INFORMATION") will be held in confidence and not used or disclosed
by Buyer or any of its employees, affiliates or stockholders for a period of two
(2) years from the Effective Date and will be promptly destroyed by Buyer or
returned to Seller, upon Seller's written request to Buyer; PROVIDED, HOWEVER
that from and after the Closing, the foregoing covenant shall not be applicable
to any Seller Confidential Information included in the Assets. Buyer's
employees, affiliates and stockholders will not be given access to Seller
Confidential Information except on a "need to know" basis. It is agreed that
Seller Confidential Information will NOT include information that: (a) is proven
to have been known to Buyer prior to receipt of such information from Seller;
(b) is disclosed by a third party having the legal right to disclose such
information and who owes no obligation of confidence to Seller; (c) is now, or
later becomes part of the general public knowledge or literature in the art,
other than as a result of a breach of this Agreement by Buyer; or (d) is
required by law, including the rules and regulations of the Securities and
Exchange Commission, a securities exchange or the Nasdaq Stock Market to be
disclosed by any party. The provisions of this Section 6.1 supersede the
Non-Disclosure Agreement between the parties dated June 4, 1998. The covenants
set forth in this Section 6.1 shall survive the execution and delivery of this
Agreement.
6.2 POST-CLOSING ACCESS AND COOPERATION. After the Closing, the Buyer
shall permit the Seller reasonable access to all books and records related to
the Business and employees, accountants and agents related to the Business as
may be necessary or advisable in connection with the preparation of tax returns,
and audited financial statements in accordance with GAAP, related to the
Business or the prosecution or defense of tax audits or third party claims
related to the Business or as otherwise reasonably requested by the Seller.
7. COVENANTS OF SELLER.
Seller covenants and agrees with Buyer as follows:
7.1 CONSENT OF THIRD PARTIES. Seller shall use its best efforts to obtain
the consents for the transfer of Assets set forth in Schedule 5.7 as soon as
practicable after the Closing.
7.2 FURTHER ASSURANCES. From and after the Closing Date, the Seller and
the Buyer shall promptly execute and deliver to the other any and all such
further assignments, endorsements and other documents as the other may
reasonably request for the purpose of effecting the transfer of Seller's title
to the Assets to Buyer and/or carrying out the provisions of the Agreements.
Seller hereby appoints Buyer as its attorney-in-fact for the limited purpose of
executing such assignments, endorsements and other documents should Seller be
unable or unwilling to do so.
7.3 PAYMENT OF ACCOUNTS PAYABLE. Seller hereby acknowledges that all
accounts payable known to Seller (the "ACCOUNTS PAYABLE") related to the
Business as of the Effective Date are listed on SCHEDULE 7.3 hereto and hereby
agrees to pay all such Accounts Payable immediately following the Effective
Date, whether or not yet due, and shall provide a written report to Buyer within
one week thereafter confirming that all such Accounts Payable have been
discharged.
7.4 NON-SOLICITATION. As a material inducement and consideration for the
Buyer to enter into this Agreement, for a period of three (3) years from and
after the Closing Date, the Seller shall not (and shall not allow its then
current employees to) (i) encourage, induce, attempt to induce, solicit or
attempt to solicit (on the Seller's behalf or on behalf of any other person or
entity) anyone who is employed at the time, or was employed during the previous
three months, by the Buyer or any of the Buyer's subsidiaries, to leave his or
her employment with the Buyer or any of the Buyer's subsidiaries; or (ii)
solicit the business of any customers or prospective customers of Arca as of the
Closing Date with respect to network security services, except for services
related to installation, maintenance and use of CyberGuard's network security
products.
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7.5 USE OF NAMES "ARCA" AND "ARCA SYSTEMS". From and after the Closing
Date, Seller shall cease to use the trademarks and trade names "Arca", "Arca
Systems" or any similar name, without the prior written consent of Buyer, and
Seller shall file an amendment to its Articles of Incorporation with the
Secretary of State of California to change the name of the Arca corporate entity
within 10 days after the Closing Date.
7.6 CONFIDENTIAL INFORMATION. All copies of financial information,
marketing and sales information, pricing, marketing plans, business plans,
financial and business projections, manufacturing processes and procedures,
formulae, methodologies, inventions, product designs, product specifications and
drawings, and other confidential and/or proprietary information of Buyer
disclosed to Seller in the course of negotiating the transaction contemplated by
this Agreement ("BUYER CONFIDENTIAL INFORMATION") will be held in confidence and
not used or disclosed by Seller or any of its employees, affiliates or
stockholders for a period of two (2) years from the Closing Date and will be
promptly destroyed by Seller or returned to Buyer, upon Buyer's written request
to Seller. Seller's employees, affiliates and stockholders will not be given
access to Buyer Confidential Information except on a "need to know" basis. It is
agreed that Buyer Confidential Information will NOT include information that:
(a) is proven to have been known to Seller prior to receipt of such information
from the Buyer; (b) is disclosed by a third party having the legal right to
disclose such information and who owes no obligation of confidence to the Buyer;
(c) is now, or later becomes part of the general public knowledge or literature
in the art, other than as a result of a breach of this Agreement by Seller; or
(d) is required by law, including the rules and regulations of the Securities
and Exchange Commission, a securities exchange or the Nasdaq Stock Market to be
disclosed by any party. The provisions of this Section 7.6 supersede the
Non-Disclosure Agreement between the parties dated June 4, 1998.
7.7 TAXES. Seller agrees to promptly pay all sales, use or other similar
taxes imposed on the sale of the Assets to Buyer under this Agreement (the
"SALES TAXES"), and Buyer hereby agrees to reimburse Seller promptly upon
written request for one-half of the amount of such Sales Taxes paid by Seller
(the "BUYER SALES TAX REIMBURSEMENT"). Except for the Buyer Sales Tax
Reimbursement, Seller agrees to defend, indemnify and hold Buyer harmless from
and against any Sales Taxes or claims for payment thereof, or penalties
associated therewith, by any tax authority.
8. CLOSING OBLIGATIONS.
8.1 BUYER'S CLOSING OBLIGATIONS. At the Closing, the Buyer shall deliver
to the Seller the following:
(a) A certified copy of the resolutions of the Boards of
Directors of Buyer authorizing the execution and delivery by Buyer of this
Agreement, and all related agreements, and the consummation of the transactions
contemplated hereby and thereby;
(b) Payment of the Purchase Price;
(c) the Escrow Agreement, substantially in the form attached
hereto as EXHIBIT A signed by authorized officers of Buyer on behalf of Buyer;
(d) The Assignment, Bill of Sale and Assumption Agreement,
substantially in the form attached hereto as EXHIBIT B, signed by authorized
officers of Buyer on behalf of Buyer;
(e) Good Standing Certificates for Exodus from the Secretaries
of State of the States of California and Delaware and for EC Acquisitions Corp.
from the Secretary of State of the State of Delaware, of recent date; and
(f) Incumbency certificates of Exodus and Sub.
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8.2 SELLER'S CLOSING OBLIGATIONS. At the Closing, the Seller shall
deliver to the Buyer the following:
(a) The Assets, or if Seller has delivered the Assets to Buyer
prior to the Closing, a certificate signed by an officer of Seller, on behalf of
Seller, to the effect that the Assets have been earlier delivered to Buyer;
(b) A Good Standing Certificate for CyberGuard from the
Secretaries of State of the States of Florida and California and for Arca from
the Secretary of State of the States of California, Virginia, Maryland and
Massachusetts, of recent date;
(c) Incumbency Certificates of CyberGuard and Arca;
(d) A certified copy of the resolutions of the Boards of
Directors of Seller authorizing the execution and delivery by Seller of this
Agreement, and all related agreements, and the consummation of the transactions
contemplated hereby and thereby;
(e) the Escrow Agreement, substantially in the form attached
hereto as EXHIBIT A, signed by authorized officers of the Seller on behalf of
the Seller;
(f) The Assignment, Bill of Sale and Assumption Agreement,
substantially in the form attached hereto as EXHIBIT B, signed by authorized
officers of the Seller on behalf of the Seller.
(g) A copy of an opinion from Goldblum Lentz & Co., the
Seller's investment banker, stating that the sale of Assets related to the
Business for the Purchase Price stated herein is fair to the Seller.
(h) Such specific assignments and other instruments of
conveyance as the Buyer and/or Buyer's counsel may reasonably request.
(i) All consents obtained by the Seller up to and as of the
Closing Date.
(j) A written opinion of Seller's counsel, addressed to the
Buyer and dated the Closing Date in the form of Schedule 8.2(j).
(k) The Seller shall have delivered, and the Buyer shall have
received, a solvency certificate substantially in the form attached hereto as
EXHIBIT C, signed by an authorized officer of the Seller on behalf of Seller.
9. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations and warranties made by the Seller or the Buyer herein, or in any
certificate, schedule or exhibit delivered pursuant hereto, shall survive the
Closing for a period of one (1) year after the Closing Date except that all
representations relating to taxes or tax liens in Section 5.13 shall survive
until the expiration of the applicable statute of limitations (including
extensions). Each of the covenants set forth in Sections 1, 2, 3, 6 and 7 hereof
shall survive the Closing and until the expiration of the applicable statutes of
limitations (including extensions).
9.2 INDEMNIFIED CLAIMS. For the purpose of this Section 9.2 and when used
elsewhere in this agreement, "CLAIM" shall mean and include any and all
liability, loss, damage, claim, expense, cost, fine, fee, penalty, obligation or
injury including, without limitation, those resulting from any and all actions,
suits, proceedings, demands, assessments, judgments, awards or arbitrations,
together with reasonable costs and expenses including the reasonable attorneys'
fees and other legal costs and expenses relating thereto, net of any insurance
benefits.
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9.3 INDEMNIFICATION BY SELLER.
9.3.1 GENERAL INDEMNIFICATION. Subject to the provisions and
limitations set forth in this Section 9, Seller agrees to defend, indemnify and
hold harmless Buyer, any parent, subsidiary or affiliate of Buyer and any
director, officer, employee, stockholder, agent or attorney of Buyer or of any
parent, subsidiary or affiliate of Buyer (collectively, the "BUYER INDEMNIFIED
PERSONS") from and against any Claim which arises out of or results from:
(a) any breach of any covenant, or the material inaccuracy or
untruth of any representation or warranty of Seller made herein or pursuant to
any certificate, exhibit or schedule delivered hereunder;
(b) any demand, claim, debt, suit, cause of action or
proceeding made or asserted by a person, including, but not limited to a
shareholder, creditor, receiver, or trustee in bankruptcy of Seller, asserting
that the transfer of the Assets to Buyer hereunder constitutes a fraudulent
conveyance, fraudulent transfer, or constitutes a preference under any
applicable state or federal law, including but not limited to the United States
Bankruptcy Code;
(c) any demand, claim, debt, suit, cause of action or
proceeding made or asserted by any employee or independent contractor or any
former employee or independent contractor of Seller, to the extent that it
relates in any manner to any termination by Seller in connection with the
transactions contemplated by this Agreement of his, her or its employment or the
services of such employee or independent contractor;
(d) any demand, claim, debt, suit, cause of action or
proceeding arising from the Excluded Liabilities, except as otherwise provided
in Section 9.4.3 hereof;
(e) any demand, claim, debt, suit, cause of action or
proceeding brought by shareholders of Seller (other than Buyer, Arca, the Stock
Sellers (as defined below) or the shareholders of Buyer) against Seller and/or
Buyer with respect or related in any way to the fairness of the transactions
contemplated herein and in connection herewith, including the Claims and Stock
Purchase Agreement and the other agreements listed on EXHIBIT A thereto; and
(f) taxes, assessments and other governmental charges of any
kind or nature whatsoever imposed on Seller and arising out of the transactions
contemplated by this Agreement, except for the Buyer Sales Tax Reimbursement.
9.3.2 LIMITATIONS. Except as provided under the first
paragraph of Section 9.3.3, this Section 9.3 sets forth the sole and exclusive
remedies of the Buyer Indemnified Persons for misrepresentation or breach of or
default in connection with any of the representations, warranties or covenants
given by or on behalf of the Seller pursuant hereto and in connection with the
other events requiring indemnification under Section 9.3.1 hereof. Except as
provided under the first paragraph of Section 9.3.3, Seller shall not incur
liability with respect to such misrepresentation or breach of or default in
connection with any of the representations, warranties and covenants or the
indemnification obligations set forth in Section 9.3.1 (a), (c), and (d) beyond
$258,000 in the aggregate and shall not incur liability with respect to the
indemnification obligations set forth in Section 9.3.1 (b) and (e) beyond $1.0
million in the aggregate.
9.3.3 EXCEPTIONS TO LIMITATIONS. None of the provisions of
this Section 9 or of the Escrow Agreement shall in any manner limit the
liability or indemnification obligations of the Seller with respect to (i) fraud
or (ii) any criminal matters or (iii) any claim concerning the breach of the
representations, warranties or covenants set forth in Sections 1.3, 7.1, 7.2,
7.4, 7.5, 7.6 and 7.7 or (iv) Seller's failure to discharge the Accounts Payable
listed on SCHEDULE 7.3 hereto.
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Notwithstanding anything to the contrary set forth herein, the
Seller shall not incur liability with respect to a misrepresentation or breach
of or default in connection with the representations or warranties of Seller
herein to the extent that such misrepresentation, breach or default is due to an
action, omission or circumstance which existed, occurred or arose on or prior to
the Prior Acquisition Date and of which CyberGuard has no knowledge (either of
the misrepresentation, breach, default, act, omission or circumstance, to the
extent it related to CyberGuard, or of the misrepresentation, breach or default,
to the extent it related to Arca). In addition, with the exception of the
representations, warranties and covenants contained (i) in the first two
sentences of Section 5.1, (ii) in the fourth, fifth and sixth sentences of
Section 5.1 solely with respect to CyberGuard (excluding Arca), (iii) in the
first two sentences of Section 5.2, (iv) in the third sentence of Section 5.2
solely with respect to representations and warranties related to CyberGuard
(excluding Arca), (v) in Section 5.12, excluding the references therein to
"other third party" and otherwise solely with respect to representations and
warranties related to authorizations, approvals, consents and filings referenced
therein that are not specific to the nature of Arca's business and (vi) in
Section 5.14, to the extent that the representations and warranties are affected
by ERISA Plans of CyberGuard or its affiliates (other than Arca) not by their
terms designed to cover Arca, Seller shall not incur liability with respect to a
misrepresentation or breach of or default in connection with the representations
or warranties of Seller herein to the extent that such misrepresentation, breach
or default is due to an action (other than of CyberGuard (excluding any employee
of Arca)), omission or circumstance which occurred after the Prior Acquisition
Date and of which CyberGuard had no knowledge (either of the misrepresentation,
breach, default, act, omission or circumstance, to the extent it relates to
CyberGuard, or of the misrepresentation, breach or default, to the extent it
relates to Arca), unless and until Buyer follows the procedures as set forth
below. The Seller shall not have liability under the circumstances described in
the immediately preceding sentence unless (i) the Buyer Indemnified Person
seeking indemnification shall first have made a written demand with respect to
any Claim both against the Sellers under the Claims and Stock Purchase Agreement
(the "STOCK SELLERS") and against the Seller hereunder, (ii) Buyer shall have
fully pursued and exhausted its rights to seek recovery of its Claims under the
procedures set forth under the Claims and Stock Purchase Agreement against the
Stock Sellers (which requirements would not preclude Buyer from settling such
Claims pursuant to the terms of such Agreement; provided, however, that any
settlement of such Claims between Buyer and the Stock Sellers shall not be made
without the written consent of the Seller hereunder, which consent shall not be
unreasonably withheld or delayed), but all or a portion of such Claims remain
unsatisfied. In such event, subject to the conditions of this Section 9.3
(including Section 9.3.2), Seller shall be liable for any portion of the Claims
which remain unsatisfied; provided, however, that with respect to any Claims
which are subject to a settlement agreement between the Buyer and the Stock
Sellers, such liability shall only apply to the extent that the Buyer has as of
such time sought recovery of the full amount of the Escrowed Consideration and
Additional Indemnity Amounts under the Claims and Stock Purchase Agreement, and
provided further, that such liability shall only apply to the extent that (i)
Buyer has irrevocably been paid the entire $300,000 of Escrowed Consideration
under the Claims and Stock Purchase Agreement and (ii) the Founders have an
obligation to pay the $200,000 Additional Indemnity Amounts to Buyer under the
Claims and Stock Purchase Agreement and have either paid such amount to the
Buyer or the Buyer has reasonably determined that they are financially unable to
do so. The Seller will be subrogated to the rights of the Buyer Indemnified
Persons under Section 6 of the Claims and Stock Purchase Agreement to the extent
any indemnity payments are made by Seller following the foregoing procedure
(excluding rights under the Escrow Agreement referenced therein). For purposes
only of this paragraph of Section 9.3.3 and Section 9.4.3, the words "knowledge"
or "known" as it relates to CyberGuard shall mean the actual knowledge of Tommy
Steele, Steve Gallers, David Proctor, Shelley James, Terry Zielinski, Dick
Rifenburgh, Lee Risevig, Adriana Kovalovska and Brian Foremny.
9.3.4 THRESHOLD. In seeking indemnification for Claims under
this Section, the Buyer Indemnified Persons shall make no claims unless and
until such Claims aggregate at least $50,000, in which event such Buyer
Indemnified Persons may recover all Claims at their option, and in their sole
discretion, and not merely the portion that exceeds $50,000, and shall exercise
their remedies first with respect to the Escrow Funds deposited in escrow
pursuant to the Escrow Agreement.
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9.4 INDEMNIFICATION BY BUYER.
9.4.1 GENERAL INDEMNIFICATION. Subject to the provisions and
limitations set forth in this Section 9, Buyer agrees to defend, indemnify and
hold harmless Seller, any parent, subsidiary or affiliate of Seller and any
director, officer, employee, stockholder, agent or attorney of Seller or of any
parent, subsidiary or affiliate of Seller (collectively, the "SELLER INDEMNIFIED
PERSONS") from and against any Claim which arises out of or results from (i) any
breach of any covenant, or the material inaccuracy or untruth of any
representation or warranty of the Buyer made herein or pursuant to any
certificate, exhibit or schedule delivered hereunder or (ii) taxes, assessments
and other governmental charges of any kind or nature whatsoever imposed on Buyer
and arising out of the transactions contemplated by this Agreement, except for
Sales Taxes (other than the Buyer Sales Tax Reimbursement).
9.4.2 LIMITATIONS. Except as provided in this Section 9.4.2,
this Section 9.4 sets forth the sole and exclusive remedies of the Seller
Indemnified Persons for misrepresentation or breach of or default in connection
with any of the representations, warranties or covenants given by or on behalf
of the Seller pursuant hereto. Buyer shall not incur liability with respect to
such misrepresentation or breach of or default in connection with any of the
representations, warranties and covenants beyond $258,000 in the aggregate.
However, none of the provisions of this Section 9 shall in any manner limit the
liability or indemnification obligations of the Buyer with respect to (i) fraud,
(ii) criminal matters, (iii) any claim concerning the breach of the
representations, warranties or covenants set forth in Sections 1.3, 6.1 or 6.2
hereof (except to the extent the terms of any of such Sections provide for
specific limitations with respect to the indemnification obligations of the
Buyer thereunder), (iv) Buyer's failure to discharge Assumed Liabilities or (v)
any obligations arising under Section 9.4.3 hereof (except to the extent the
terms of such Section provide for specific limitations with respect to the
indemnification obligations of the Buyer thereunder).
9.4.3 EXCLUDED LIABILITIES. In addition, subject to the
provisions of this Section 9.4.3, Buyer agrees to indemnify and hold harmless
CyberGuard and Arca for any debts, liabilities or obligations of Arca related to
the Business, including absolute, accrued and contingent liabilities, that
existed prior to the Closing Date (and specifically excluding liabilities or
obligations arising as a result of the transactions contemplated hereby or in
connection herewith (other than the obligations created by this Section 9.4.3)
and any Employee Liabilities) and: (i) that are not assumed by Buyer under this
Agreement; (ii) that are not included on Schedule 7.3 hereto; (iii) the
existence of which does not constitute a breach of any representation, warranty
or covenant of Seller contained in this Agreement except to the extent such
misrepresentation, breach or default is of a representation or warranty only
(exclusive of the covenants set forth in Sections 1.3, 7.2, 7.4, 7.5 7.6 or
7.7), does not involve fraud and does not involve criminal matters and (a) is
due to an action or omission which existed, occurred or arose on or prior to the
Prior Acquisition Date and of which CyberGuard has no knowledge (either of the
misrepresentation, breach, default, act, omission or circumstance, to the extent
it related to CyberGuard, or of the misrepresentation, breach or default, to the
extent it related to Arca) or (b) with the exception of the representations,
warranties and covenants contained in (A) the first two sentences of Section
5.1, (B) the fourth, fifth and sixth sentences of Section 5.1 solely with
respect to CyberGuard (excluding Arca), (C) the first two sentences of Section
5.2, (D) the third sentence of Section 5.2 solely with respect to
representations and warranties related to CyberGuard (excluding Arca), (E)
Section 5.12, excluding the references therein to "other third party" and
otherwise solely with respect to representations and warranties related to
authorizations, approvals, consents and filings referenced therein that are not
specific to the nature of Arca's business, and (F) Section 5.14, to the extent
that the representations and warranties are affected by ERISA Plans of
CyberGuard or its affiliates not by their terms designed to cover Arca, is due
to an action (other than of CyberGuard (excluding any employee of Arca)),
omission or circumstance which occurred after the Prior Acquisition Date and of
which CyberGuard had no knowledge (either of the misrepresentation, breach,
default, act, omission or circumstance, to the extent it relates to CyberGuard,
or of the misrepresentation, breach or default, to the extent it relates to
Arca); and (iv) of which CyberGuard had no knowledge, (the "UNKNOWN
LIABILITIES"); provided, however, that the foregoing indemnification obligations
shall not have any force or effect until Seller has fully discharged an
aggregate of $300,000 of such Unknown Liabilities, and then such indemnification
obligation shall be effective only with respect to any Unknown Liabilities
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which exceed such $300,000 amount. Notwithstanding anything to the contrary set
forth in this Section 9, the indemnification obligations set forth in this
Section 9.4.3 shall terminate one year after the Closing Date, as provided in
Section 9.6(a) hereof.
9.5 PROCEDURES FOR INDEMNIFICATION.
9.5.1 INDEMNIFICATION PURSUANT TO ESCROW AGREEMENT. As long as
the Escrow Agreement is still in effect and Escrow Funds remain outstanding
thereunder, promptly after the receipt by Buyer of notice or discovery of any
Claim giving rise to indemnification rights under this Agreement Buyer will give
Seller and the Escrow Agent written notice of such Claim in accordance with
Section 3 of the Escrow Agreement. The procedures regarding the defense and
settlement of any such Claim shall be governed by Section 1 of the Escrow
Agreement. Buyer may assert a Claim at any time prior to the applicable
expiration date as set forth in Section 9.6.
9.5.2 INDEMNIFICATION NOT INVOLVING ESCROW. With respect to
indemnification by the Buyer, or by the Seller in the event that the Escrow
Agreement is no longer in effect, promptly upon becoming aware of any Claim
giving rise to indemnification rights under this Agreement, the Buyer
Indemnified Persons or Seller Indemnified Persons, as applicable (the
"INDEMNIFIED PARTY"), will give the other party (the "INDEMNIFYING Party")
notice of such Claim as provided for in Section 9.5.2(2) hereof (the "NOTICE OF
CLAIM").
(1) THIRD PARTY CLAIMS AND DIRECT CLAIMS.
(A) THIRD PARTY CLAIMS. In the case of a
Third Party Claim (as defined in Section 9.5.2(2) herein), within ten days of
receipt of a Notice of Claim, the Indemnifying Party may, by written notice to
the Indemnified Party, elect to, at its own expense, participate in or assume
control of the negotiation, settlement or defense of the Claim and, in such
event, the Indemnifying Party shall reimburse the Indemnified Party for all of
the Indemnified Party's out-of-pocket expenses as a result of such participation
or assumption. If the Indemnifying Party elects to assume such control, the
Indemnified Party shall have the right to participate in the negotiation,
settlement or defense of such Third Party Claim and to retain counsel to act on
its behalf, provided that the fees and disbursements of such counsel shall be
paid by the Indemnified Party unless the Indemnifying Party consents to the
retention of such counsel at its expense. If the Indemnifying Party, having
elected to assume such control, thereafter fails to defend the Third Party Claim
within a reasonable time, the Indemnified Party shall be entitled to, at the
expense of the Indemnifying Party, assume such control and the Indemnifying
Party shall be bound by the results obtained by the Indemnified Party with
respect to such Third Party Claim. If either party makes a payment, resulting in
settlement of the Third Party Claim, which precludes a final determination of
the merits of the Third Party Claim and the Indemnified Party and the
Indemnifying Party are unable to agree whether such payment was unreasonable in
the circumstances having regard to the amount and merits of the Third Party
Claim, then such dispute shall be referred to and finally settled by binding
arbitration (as provided for in Section 9.5.2(4) herein) from which there shall
be no appeal.
(B) SETTLEMENT OF THIRD PARTY CLAIMS. If
the Indemnifying Party fails to assume control of the defense of any Third Party
Claim, the Indemnified Party shall have the exclusive right, at the expense of
the Indemnifying Party, to contest, settle or pay the amount claimed in each
case on a reasonable basis. Whether or not the Indemnifying Party assumes
control of the negotiation, settlement or defense of any Third Party Claim,
neither party shall settle any Third Party Claim without the written consent of
the other party, which consent shall not be unreasonably withheld or delayed;
provided, however, that the liability of such party shall be limited to the
proposed settlement amount if any such consent is not obtained for any reason
within a reasonable time after the request therefor.
(C) DIRECT CLAIMS. In the case of a Direct
Claim (as defined in Section 9.5.2(2) herein), the Indemnifying Party shall have
60 days from receipt of the Notice of Claim within which to make such
investigation of the Claim as the Indemnifying Party considers necessary or
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desirable. For the purpose of such investigation, the Indemnified Party shall
make available to the Indemnifying Party the information relied upon by the
Indemnified Party to substantiate the Claim, together with all such other
information as the Indemnifying Party may reasonably request. If both Parties
agree at or before the expiration of such 60 day period (or any mutually agreed
upon extension thereof) to the validity and amount of such Claim, the
Indemnifying Party shall immediately pay to the Indemnified Party the full
agreed upon amount of the Claim or it will be settled pursuant to Section
9.5.2(3)(A) below. Failing such agreement, the matter shall be referred to
binding arbitration as provided for in Section 9.5.2(4) herein.
(2) NOTICE OF CLAIM. Each Notice of Claim by the
Indemnified Party will be in writing delivered to the Indemnifying Party, will
specify whether the Claim arises as a result of a claim by a person against the
Indemnified Party (a "THIRD PARTY CLAIM") or whether the Claim does not so arise
(a "DIRECT CLAIM"), and shall also specify with reasonable particularity (to the
extent that the information is available):
(A) the factual basis for the Claim; and
(B) the amount of the Claim, if known, or
if not known, the Indemnified Party's good faith estimate of the reasonably
foreseeable maximum amount of the alleged damages arising from such Claim (which
amount may be the amount of damages claimed by a third party plaintiff in an
action brought against the Indemnified Party based on alleged facts, which if
true, would result in liability to the Indemnified Party under Sections 9.3 or
9.4 of this Agreement) (the "ESTIMATED DAMAGES"), the basis thereof and
documentation supporting same.
The parties agree that if, through the fault of the
Indemnified Party, the Indemnifying Party does not receive a notice of any Claim
in time effectively to contest the determination of any liability susceptible of
being contested, then the liability of the Indemnifying Party to the Indemnified
Party under Sections 9.3 or 9.4 of this Agreement shall be reduced by the amount
of any losses incurred by the Indemnifying Party resulting from the Indemnified
Party's failure to give such notice on a timely basis.
(3) RESOLUTION OF NOTICE OF CLAIM. Any Notice of
Claim received by the Indemnifying Party, will be resolved as follows:
(A) UNCONTESTED CLAIM. In the event that the
Indemnifying Party does not either (i) contest a Notice of Claim in writing to
the Indemnified Party or (ii) pay the amount demanded (as certified by the
Indemnifying Party to the Indemnified Party in writing, all within 60 days after
Notice of Claim was received by the Indemnifying Party (an "UNCONTESTED CLAIM"),
then the Indemnifying Party will promptly pay to the Indemnified Party that
amount equal to the amount of the Claim and/or Estimated Damages specified in
the Notice of Claim.
(B) CONTESTED CLAIMS. In the event that the
Indemnifying Party delivers written notice contesting all, or a portion of, a
Notice of Claim to the Indemnified Party Agent within the 60-day period provided
above, matters that are subject to Third Party Claims brought against the
Indemnified Party in a litigation or arbitration will await the final decision,
award or settlement of such litigation or arbitration and shall be subject to
the provisions and procedures set forth in this Agreement. Matters that are
subject to Direct Claims and that are not resolved by the Indemnifying Party and
the Indemnified Party as provided for in Section 9.5.2(1)(C) herein will be
settled by binding arbitration which will be conducted as provided in Section
9.5.2(4) herein. Any portion of the Notice of Claim that is not contested will
be resolved as set forth above in Section 9.5.2(3)(A). The final decision of the
arbitrator will be furnished to the Indemnifying Party and the Indemnified Party
in writing and will constitute a conclusive determination of the issue in
question, binding upon the Indemnifying Party and the Indemnified Party.
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<PAGE> 21
(C) DETERMINATION OF AMOUNT OF CLAIMS. Any
amount owed to the Indemnified Party hereunder, as finally determined pursuant
to Section 9.5.2(3)(A) or 9.5.2(3)(B) above, will constitute an Uncontested
Claim under Section 9.5.2(3)(A) hereof.
(4) ARBITRATION. The parties agree that they shall
use best reasonable efforts to settle amicably disagreements arising from or in
connection with this Agreement. To this effect, following notice of either to
the other of a disagreement, which shall include any failure to agree upon a
matter to be agreed upon (a "DISPUTE") the parties hereto shall consult and
negotiate with one another in good faith an understanding to reach a just and
equitable solution. If those attempts fail after a period of ten (10) Business
Days from the time the parties have been notified of the Dispute, then every
such Dispute shall be settled by arbitration in accordance with the commercial
arbitration rules of American Arbitration Association then in effect. Any
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction over the subject matter thereof. The arbitrator shall have
the authority to grant any equitable and legal remedies that would be available
in a judicial proceeding instituted to resolve the Dispute.
(A) SELECTION OF ARBITRATOR. The American
Arbitration Association will have the authority to select an arbitrator from a
list of arbitrators who are lawyers familiar with relevant state contract law;
provided, however, that such lawyers cannot work for a firm then performing
services for either party, that each party will have the opportunity to make
such reasonable objection to any of the arbitrators listed as such party may
wish and that the American Arbitration Association will select the arbitrator
from the list of arbitrators as to whom neither party makes any such objection.
In the event that the foregoing procedure is not followed, each party will
choose one person from the list of arbitrators provided by the American
Arbitration Association (provided that such person does not have a conflict of
interest), and the two persons so selected will select from the list provided by
the American Arbitration Association the person who will act as arbitrator.
(B) PAYMENT OF COSTS. Exodus and CyberGuard
will bear the expense of deposits and advances required by the arbitrator in
equal proportions, but either party may advance such amounts, subject to
recovery as an addition or offset to any award. The arbitrator will award to the
prevailing party, as determined by the arbitrator, all costs, fees and expenses
related to the arbitration, including reasonable fees and expenses of attorneys,
accountants and other professionals incurred by the prevailing party.
(C) BURDEN OF PROOF. For any Dispute
submitted to arbitration, the burden of proof will be as it would be if the
claim were litigated in a judicial proceeding.
(D) AWARD. Upon the conclusion of the
arbitration proceedings hereunder, the arbitrator will render findings of fact
and conclusions of law and a written opinion setting forth the basis and reasons
for any decision reached and will deliver such documents to each of Exodus and
CyberGuard along with a signed copy of the award.
(E) TERMS OF ARBITRATION. The arbitrator
chosen in accordance with these provisions will not have the power to alter,
amend or otherwise affect the terms of these arbitration provisions or the
provisions of this Agreement.
(F) EXCLUSIVE REMEDY. Except as specifically
otherwise provided in this Agreement, arbitration will be the sole and exclusive
remedy to the Indemnified Party or the Indemnifying Party for any Dispute
arising out of this Section 9.5.
9.6 PERIOD FOR MAKING CLAIMS. A Claim under this Section 9:
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(a) must be brought, if at all, at any time within one (1)
year after the Closing Date, with respect to any claim or claims for
indemnification under this Section 9 not described in subSection 9.6(b) below;
(b) may be brought at any time up to expiration of the
applicable statute of limitations (including extensions) with respect to any
claim for indemnification relating to or based upon the provisions of Sections
5.13 or the covenants included in Sections 1, 2, 3, 6 and 7.
Notwithstanding anything to the contrary, if, an Indemnified
Person makes a Claim for indemnification under either this Agreement or the
Escrow Agreement within such time period, then the Indemnified Person's rights
to indemnification under this Section 9.6 for such Claim shall survive any
expiration of such representation or warranty.
10. MISCELLANEOUS.
10.1 EXPENSES. Each of the parties hereto shall bear its own expenses
(including without limitation attorneys' fees) in connection with the
negotiation and consummation of the transaction contemplated hereby.
10.2 NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be delivered personally or sent by
certified or registered United States mail, postage prepaid, or sent by
nationally recognized overnight express courier and addressed as follows:
(a) IF TO SELLER:
CyberGuard Corporation
2000 West Commercial Blvd., Suite 200
Ft. Lauderdale, FL 33309
Attention: President and General Counsel
WITH COPY TO:
Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A.
150 West Flagler Street
Miami, FL 33130
Attention: Teddy D. Klinghoffer, Esq.
(b) IF TO BUYER:
Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, CA 95051
Attention: General Counsel
WITH COPY TO:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attention: Eileen Duffy Robinett, Esq.
10.3 ENTIRE AGREEMENT; CAPTIONS; COOPERATION. This Agreement, the
Exhibits and Schedules hereto (which are incorporated herein by reference) and
the agreements to be executed and delivered in connection herewith, together
constitute the entire agreement and understanding between the parties and
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<PAGE> 23
there are no agreements or commitments with respect to the transactions
contemplated herein except as set forth in this Agreement. This Agreement
supersedes any prior offer, agreement or understanding between the parties with
respect to the transactions contemplated hereby, including the Term Sheet dated
as of August 30, 1998 between Exodus and CyberGuard. The captions in this
Agreement are for convenience only and shall not be considered a part of or
affect the construction or interpretation of any provision of this Agreement.
Buyer and Seller agree to cooperate in good faith in interpreting the provisions
of this Agreement.
10.4 AMENDMENT; WAIVER. Any term or provision of this Agreement may be
amended only by a writing signed by Seller and Buyer. The observance of any term
or provision of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by a writing
signed by the party to be bound by such waiver. No waiver by a party of any
breach of this Agreement will be deemed to constitute a waiver of any other
breach or any succeeding breach.
10.5 NO THIRD PARTY BENEFICIARIES. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or to give any
person, firm or corporation, other than the parties hereto, any rights or
remedies under or by reason of this Agreement.
10.6 EXECUTION IN COUNTERPARTS. For the convenience of the parties, this
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
instrument.
10.7 ASSIGNMENT. This Agreement may not be assigned by any party hereto
without the prior written consent of each other party; EXCEPT that Buyer may
assign this Agreement (and all related agreements) by operation of law or in
connection with any merger, consolidation or sale of all or substantially all
Buyer's assets or in connection with any similar transaction.
10.8 BENEFIT AND BURDEN. This Agreement shall be binding upon, shall
inure to the benefit of, and be enforceable by and against, the parties hereto
and their respective successors and permitted assigns.
10.9 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware (excluding
application of any choice of law doctrines that would make applicable the law of
any other state or jurisdiction) and, where appropriate, applicable federal law.
10.10 SEVERABILITY. If any provision of this Agreement is for any reason
and to any extent deemed to be invalid or unenforceable, then such provision
shall not be voided but rather shall be enforced to the maximum extent then
permissible under then applicable law and so as to reasonably effect the intent
of the parties hereto, and the remainder of this Agreement will remain in full
force and effect. Nothing herein will be deemed to contradict the provisions of
Section 7.4 hereof.
10.11 ATTORNEYS' FEES. Should a suit or arbitration be brought to enforce
or interpret any provision of this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' fees to be fixed in amount by the
Court or the Arbitrator(s) (including without limitation costs, expenses and
fees on any appeal). The prevailing party will be entitled to recover its costs
of suit or arbitration, as applicable, regardless of whether such suit or
arbitration proceeds to a final judgment or award.
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<PAGE> 24
10.12 SCHEDULES. Notwithstanding any provision to the contrary set forth
herein, any matter, fact, event or other information disclosed in any schedule
to this Agreement shall be deemed disclosed in each schedule to this Agreement.
IN WITNESS WHEREOF, Buyer and Seller executed and delivered this
Agreement by their duly authorized representatives as of the Effective Date.
CYBERGUARD CORPORATION: EXODUS COMMUNICATIONS, INC:
By: By:
-------------------------- --------------------------
Richard S. Stoltz
Chief Operating Officer and
Chief Financial Officer
ARCA SYSTEMS: EC ACQUISITIONS CORP.:
By: By:
-------------------------- --------------------------
Adam W. Wegner, President
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EXHIBITS
--------
Exhibit A Escrow Agreement
Exhibit B Assignment, Bill of Sale and Assumption Agreement
Exhibit C Form of Solvency Certificate
SCHEDULES
---------
Schedule 1.2(c) Contracts
Schedule 1.2(d)(i) Seller's Business Products
Schedule 1.2(d)(ii) Seller's Intellectual Property
Schedule 1.2(f) Tangible Assets
Schedule 1.2(h) Accounts Receivable
Schedule 1.2(i) Other Assets
Schedule 1.3(b) Non-Transferable and Non-Assignable Assets
Schedule 2.2 Allocation of Purchase Price
Schedule 5 Seller's Schedule of Exceptions
Schedule 5.4 Financial Statements and List of Material Liabilities
Schedule 5.7 Seller's Material Contracts and Commitments
Schedule 5.16 Seller's Employee List
Schedule 7.3 Accounts Payable
Schedule 8.2(j) Opinion of Seller's Counsel
<PAGE> 26
EXHIBIT B
ASSIGNMENT, BILL OF SALE AND ASSUMPTION AGREEMENT
This Assignment, Bill of Sale and Assumption Agreement (this
"AGREEMENT") is made as of September [29,] 1998 by and between CyberGuard
Corporation, a Florida corporation ("CYBERGUARD"), Arca Systems, Inc., a
California corporation and a wholly-owned subsidiary of CyberGuard ("ARCA" and
together with CyberGuard, the "SELLER"), Exodus Communications, Inc., a Delaware
corporation ("EXODUS"), and EC Acquisitions Corp., a Delaware corporation and a
wholly-owned subsidiary of Exodus ("SUB" and together with Exodus, the "BUYER").
Seller and Buyer are parties to a certain Asset Purchase Agreement dated as of
September [29,] 1998 (the "PURCHASE Agreement"). Capitalized terms used without
definitions herein shall have the meanings ascribed to such terms in the
Purchase Agreement.
1. SALE AND ASSIGNMENT OF ASSETS. Pursuant to the Purchase Agreement,
Exodus, on behalf of Sub, has on the date hereof purchased the Assets of Arca
from CyberGuard. In accordance with and subject to the terms and conditions set
forth in the Purchase Agreement, for good and valuable consideration, the
receipt of which is hereby acknowledged, Seller does hereby sell, assign,
bargain, transfer, convey and deliver unto Sub all of the right, title and
interest in and to the Assets.
2. ASSUMPTION OF ASSUMED LIABILITIES. In accordance with and subject to
the terms and conditions set forth in the Purchase Agreement, in partial
consideration for such transfer of the Assets by Seller to Buyer, Sub and Buyer
hereby undertake to assume, pay, perform, satisfy and discharge, all of the
Assumed Liabilities. Buyer does not agree to assume or pay any Excluded
Liabilities or any other debts, obligations or liabilities of Seller not
expressly assumed by Buyer in the Purchase Agreement.
3. COOPERATION. Buyer and Seller agree to cooperate with each other to
execute and deliver such other documents and instruments and to do such further
acts and things as may be reasonably requested by the other to evidence,
document or carry out the sale of the Assets and the assumption of the Assumed
Liabilities.
4. EFFECT OF AGREEMENT. Nothing in this Agreement shall, or shall be
deemed to, modify or otherwise affect any provisions of the Purchase Agreement
or affect the rights of the parties under the Purchase Agreement. In the event
of any conflict between the provisions hereof and the provisions of the Purchase
Agreement, the provisions of the Purchase Agreement shall govern and control.
IN WITNESS WHEREOF, Seller and Buyer have caused this Assignment, Bill
of Sale and Assumption Agreement to be executed on the date first written above.
CYBERGUARD CORPORATION: EXODUS COMMUNICATIONS, INC.
By: By:
-------------------------- --------------------------
Richard S. Stoltz
Chief Operating Officer and
Chief Financial Officer
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ARCA SYSTEMS: EC ACQUISITIONS CORP.
By: By:
-------------------------- ----------------------
Adam W. Wegner
President
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<PAGE> 28
SCHEDULE 8.1 (c)
OPINION OF SELLER'S COUNSEL
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<PAGE> 29
ESCROW AGREEMENT
----------------
This Escrow Agreement (this "AGREEMENT") is entered into as of
September 28, 1998 (the "EFFECTIVE DATE"), by and among Exodus Communications,
Inc., a Delaware corporation ("EXODUS"), EC Acquisitions Corp., a Delaware
corporation and wholly-owned subsidiary of Exodus ("SUB"), CyberGuard
Corporation, a Florida corporation ("CYBERGUARD"), and State Street Bank and
Trust Company of California, N.A., as escrow agent (the "ESCROW AGENT").
A. Exodus, Sub, CyberGuard and its wholly-owned subsidiary,
Arca Systems, Inc. ("ARCA") have entered into an Asset Purchase Agreement dated
as of September 28, 1998 (the "ASSET PURCHASE AGREEMENT") pursuant to which Sub
will acquire certain assets of Arca from CyberGuard. The capitalized terms used
in this Agreement and not otherwise defined herein will have the meanings given
them in the Asset Purchase Agreement, a copy of which is attached hereto as
EXHIBIT A; provided, however, that the Escrow Agent shall not be charged with
knowledge of, or under any obligations to determine or interpret, the meaning of
any such terms as so defined in the Asset Purchase Agreement for purposes of
performing or observing its duties hereunder.
B. Pursuant to the Asset Purchase Agreement, a payment of a
certain amount of cash is to be made by Exodus to CyberGuard (the "CASH
PAYMENT").
C. The Asset Purchase Agreement provides for Two Hundred and
Fifty-Eight Thousand Dollars ($258,000) of the Cash Payment (the "ESCROW FUNDS")
to be withheld by Exodus and placed in an escrow account (the "ESCROW ACCOUNT").
D. The parties hereto desire to establish the terms and
conditions pursuant to which the Escrow Funds will be deposited, held in, and
disbursed from the Escrow Account.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. ESCROW AND INDEMNIFICATION
(a) ESCROW OF FUNDS. On the Effective Date,
notification of which shall have been given to the Escrow Agent in writing,
Exodus will deposit the Escrow Funds with the Escrow Agent, who will hold them
in escrow until required to be released pursuant to Section 9.3 of the Asset
Purchase Agreement and Section 4 hereof. The Escrow Agent agrees to accept
delivery of the Escrow Funds and to hold such Escrow Funds in escrow subject to
the terms and conditions of this Agreement.
(b) INDEMNIFICATION. Each of the parties to this
Agreement other than the Escrow Agent (collectively, the "INTERESTED PARTIES")
agrees that, (i) Exodus and any parent, subsidiary or affiliate of Exodus and
any director, officer, employee, stockholder, agent or attorney of Exodus or of
any parent, subsidiary or affiliate of Exodus (collectively, the "INDEMNIFIED
PERSONS") are indemnified pursuant to the terms of Section 9.3 of the Asset
Purchase Agreement (which terms and the terms defined therein are incorporated
herein by reference) from and against any Claims, subject to the limitations set
forth in Section 9.3 of the Asset Purchase Agreement and herein, (ii) for
purposes of this Agreement, references to Exodus will include all other
Indemnified Persons, as applicable, and (iii) the Escrow Funds will be security
for this indemnity obligation, subject to the limitations, and in the manner
provided, in Section 9.3 of the Asset Purchase Agreement and this Agreement. The
foregoing incorporation by reference of Section 9.3 of the Asset Purchase
Agreement (and the terms defined therein) by the Interested Parties shall not in
any way be deemed to cause the Escrow Agent to be charged with knowledge
thereof, or under any duty to determine or interpret, or to determine or compel
compliance with, such terms. Promptly upon becoming aware of any Claim giving
rise to indemnification rights under the Asset Purchase Agreement, Exodus will
give CyberGuard notice of such Claim as provided for in Section 3 hereof (the
"NOTICE OF CLAIM") and will also provide the Escrow Agent with a copy of the
Notice of Claim. The Escrow Agent will not transfer any of the Escrow Funds held
in the Escrow Account pursuant to a Notice of Claim until such Notice of Claim
has been finally resolved in accordance with Section 4 below.
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(c) THIRD PARTY CLAIMS. In the case of a Third Party
Claim (as defined in Section 3 herein), within ten days of receipt of a Notice
of Claim, CyberGuard may, by written notice to Exodus, elect to, at its own
expense, participate in or assume control of the negotiation, settlement or
defense of the Claim and, in such event, CyberGuard shall reimburse Exodus for
all of Exodus's out-of-pocket expenses as a result of such participation or
assumption. If CyberGuard elects to assume such control, Exodus shall have the
right to participate in the negotiation, settlement or defense of such Third
Party Claim and to retain counsel to act on its behalf, provided that the fees
and disbursements of such counsel shall be paid by Exodus unless CyberGuard
consents to the retention of such counsel at its expense. If CyberGuard, having
elected to assume such control, thereafter fails to defend the Third Party Claim
within a reasonable time, Exodus shall be entitled to, at the expense of
CyberGuard, assume such control and CyberGuard shall be bound by the results
obtained by Exodus with respect to such Third Party Claim. If either Party makes
a payment, resulting in settlement of the Third Party Claim, which precludes a
final determination of the merits of the Third Party Claim and Exodus and
CyberGuard are unable to agree whether such payment was unreasonable in the
circumstances having regard to the amount and merits of the Third Party Claim,
then such dispute shall be referred to and finally settled by binding
arbitration (as provided for in Section 5 herein) from which there shall be no
appeal.
(d) SETTLEMENT OF THIRD PARTY CLAIMS. If CyberGuard
fails to assume control of the defense of any Third Party Claim, Exodus shall
have the exclusive right, at the expense of CyberGuard, to contest, settle or
pay the amount claimed. Whether or not CyberGuard assumes control of the
negotiation, settlement or defense of any Third Party Claim, neither Party shall
settle any Third Party Claim without the written consent of the other Party,
which consent shall not be unreasonably withheld or delayed; provided, however,
that the liability of such Party shall be limited to the proposed settlement
amount if any such consent is not obtained for any reason within a reasonable
time after the request therefor.
(e) DIRECT CLAIMS. In the case of a Direct Claim (as
defined in Section 3 herein), CyberGuard shall have 60 days from receipt of the
Notice of Claim within which to make such investigation of the Claim as
CyberGuard considers necessary or desirable. For the purpose of such
investigation, Exodus shall make available to CyberGuard the information relied
upon by Exodus to substantiate the Claim, together with all such other
information as CyberGuard may reasonably request. If both Parties agree at or
before the expiration of such 60 day period (or any mutually agreed upon
extension thereof) to the validity and amount of such Claim, CyberGuard shall
immediately pay to Exodus the full agreed upon amount of the Claim or it will be
settled pursuant to Section 4(a) below. Failing such agreement, the matter shall
be referred to binding arbitration as provided for in Section 5 herein.
(f) The Escrow Agent shall have no responsibility for
or with respect to compliance by the Interested Parties with the terms or
requirements of this Section 1.
2. DEPOSIT OF ESCROW FUNDS; RELEASE FROM ESCROW;
INVESTMENTS
(a) DELIVERY OF ESCROW FUNDS. Promptly after the
Effective Date, the Escrow Funds will be delivered by Exodus to the Escrow Agent
in the form of a check or wire transfer in the amount of Two Hundred and
Fifty-Eight Thousand Dollars ($258,000) and the Escrow Agent shall deposit the
Escrow Funds in a separate escrow account with the Escrow Agent (or an affiliate
or custodian acting on its behalf).
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The Escrow Funds shall be maintained in such account until the release of the
Escrow Funds in accordance with Sections 2(b) and 2(c) hereof.
(b) TERMINATION OF ESCROW. On the first anniversary
of the Effective Date (the "FINAL RELEASE DATE"), the Escrow Agent will deliver
the Escrow Funds to CyberGuard less (A) any Escrow Funds delivered to Exodus in
accordance with Section 4 hereof in satisfaction of Claims and (B) any Escrow
Funds subject to delivery to Exodus in accordance with Section 4 hereof with
respect to any then pending but unresolved Claims of Exodus, subject to the
Escrow Agent's receipt of written instructions from Exodus and CyberGuard as
provided in Section 2(c) below. Any Escrow Funds held as a result of clause (B)
will be delivered to CyberGuard or Exodus (as appropriate) promptly upon
resolution of each specific Claim involved pursuant to Section 4.
(c) RELEASE OF ESCROW FUNDS. The Escrow Funds will be
held by the Escrow Agent until released pursuant to Section 2(b) above or
Section 4, below. On the Final Release Date (in the case of Section 2(b)) or
after the applicable release condition is met (in the case of Section 4), as the
case may be, the Escrow Agent will deliver to CyberGuard the amount of Escrow
Funds to be released on such date as identified by Exodus and CyberGuard to the
Escrow Agent in writing (in the case of Section 2(b)) or as identified in the
applicable Notice of Claim (in the case of Section 4(a)) or in the final
decision of litigation or arbitration, as applicable (in the case of Section
4(b)) received by the Escrow Agent, as the case may be. Such delivery will be in
the form of a check or wire transfer issued in the name of CyberGuard. Exodus
and CyberGuard undertake to deliver a timely written notice to Escrow Agent
identifying the amount of Escrow Funds to be released at such time.
(d) NO ENCUMBRANCE. No Escrow Funds or any beneficial
interest therein may be pledged, sold, assigned or transferred, including by
operation of law, by CyberGuard or be taken or reached by any legal or equitable
process in satisfaction of any debt or other liability of CyberGuard (other than
a security interest in the Escrow Funds that is hereby granted herein by
CyberGuard to Exodus as security for CyberGuard's obligations to Exodus under
Section 9.3 of the Asset Purchase Agreement), prior to the delivery to
CyberGuard of the Escrow Funds by the Escrow Agent. The Escrow Agent agrees that
to the extent CyberGuard has granted Exodus a security interest in the Escrow
Funds, Escrow Agent agrees to hold such Escrow Funds on behalf of Exodus as
Exodus' agent.
(e) POWER TO TRANSFER ESCROW FUNDS. The Escrow Agent
is hereby granted the power to effect any transfer of Escrow Funds contemplated
by this Agreement. Exodus will cooperate with the Escrow Agent in promptly
effecting such transfers.
(f) INVESTMENT OF ESCROW FUNDS. The Escrow Agent
shall invest the funds held in the Escrow Account in the Federated U.S. Treasury
Cash Reserve, which is a money market mutual fund registered under the
Investment Company Act of 1940, the principal of which is invested solely in
obligations issued or guaranteed by the United States government. All interest
or any other income earned with respect to such investment shall be allocated
and paid to CyberGuard and shall not constitute part of the Escrow Funds.
3. NOTICE OF CLAIM. Each Notice of Claim by Exodus must be
delivered before the Final Release Date and will be in writing delivered to
CyberGuard with a copy to the Escrow Agent, will specify whether the Claim
arises as a result of a claim by a person against Exodus (a "THIRD PARTY CLAIM")
or whether the Claim does not so arise (a "DIRECT CLAIM"), and shall also
specify with reasonable particularity (to the extent that the information is
available):
(a) the factual basis for the Claim; and
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(b) the amount of the Claim, if known, or if not
known, Exodus's good faith estimate of the reasonably foreseeable maximum amount
of the alleged damages arising from such Claim (which amount may be the amount
of damages claimed by a third party plaintiff in an action brought against
Exodus based on alleged facts, which if true, would result in liability to
Exodus under Section 9.3 of the Asset Purchase Agreement) (the "ESTIMATED
DAMAGES"), the basis thereof and documentation supporting same.
As among themselves, the Interested Parties agree that if,
through the fault of Exodus, CyberGuard does not receive a notice of any Claim
in time effectively to contest the determination of any liability susceptible of
being contested, then the liability of CyberGuard to Exodus under Section 9.3 of
the Asset Purchase Agreement shall be reduced by the amount of any losses
incurred by CyberGuard resulting from Exodus's failure to give such notice on a
timely basis.
4. RESOLUTION OF NOTICE OF CLAIM AND TRANSFER OF ESCROW FUNDS.
Any Notice of Claim received by CyberGuard and the Escrow Agent, will be
resolved as follows:
(a) UNCONTESTED CLAIMS. In the event that CyberGuard
does not either (i) contest a Notice of Claim in writing to the Escrow Agent and
Exodus or (ii) pay the amount demanded (as certified by CyberGuard to the Escrow
Agent in writing), all within 60 days after Notice of Claim was received by the
Escrow Agent (an "UNCONTESTED CLAIM"), then the Escrow Agent will promptly pay
to Exodus that amount of Escrow Funds equal to the amount of the Claim and/or
Estimated Damages specified in the Notice of Claim and will notify CyberGuard of
such transfer.
(b) CONTESTED CLAIMS. In the event that CyberGuard
delivers written notice contesting all, or a portion of, a Notice of Claim to
Exodus and the Escrow Agent within the 60-day period provided above, matters
that are subject to Third Party Claims brought against Exodus in a litigation or
arbitration will await the final decision, award or settlement of such
litigation or arbitration and shall be subject to the provisions and procedures
set forth in this Agreement. Matters that are subject to Direct Claims and that
are not resolved by CyberGuard and Exodus as provided for in Section 1(e) herein
will be settled by binding arbitration which will be conducted as provided in
Section 5 herein. Any portion of the Notice of Claim that is not contested will
be resolved as set forth above in Section 4(a). The final decision of the
arbitrator will be furnished to the Escrow Agent, CyberGuard and Exodus in
writing and will constitute a conclusive determination of the issue in question,
binding upon CyberGuard and Exodus. After receipt by the Escrow Agent of written
notice that the Notice of Claim is contested by CyberGuard, the Escrow Agent
will continue to hold in the Escrow Account, Escrow Funds sufficient to cover
such Claim (and Estimated Damages, if any) (notwithstanding the expiration of
the Final Release Date) until (i) execution, and delivery to the Escrow Agent,
of a settlement agreement by Exodus and CyberGuard setting forth a resolution of
the Notice of Claim, or (ii) receipt by the Escrow Agent of a copy of the final
award of the arbitrator or court, as the case may be, together with a written
certificate from Exodus or CyberGuard certifying that the same is a true,
accurate and complete copy of a final decision, award or settlement of such
Notice of Claim pursuant to this Section 4(b).
(c) DETERMINATION OF AMOUNT OF CLAIMS. Any amount
owed to Exodus hereunder, as finally determined pursuant to Section 4(a) or (b)
above, will constitute an Uncontested Claim under Section 4(a) hereof.
(d) NO EXHAUSTION OF REMEDIES. Exodus need not
exhaust any other remedies that may be available to it but shall proceed
directly in accordance with the provisions of this Agreement. Exodus may
institute claims against the Escrow Funds and in satisfaction thereof may
recover all or a portion of the Escrow Funds, in accordance with the terms of
this Agreement, without making any other claims directly against CyberGuard and
without rescinding or attempting to rescind the transactions consummated
pursuant to
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the Asset Purchase Agreement. The assertion of any single Claim for
indemnification hereunder will not bar Exodus from asserting other Claims
hereunder.
(e) DELIVERIES TO CYBERGUARD. Deliveries to
CyberGuard shall be made to the applicable address set forth in Section 7
hereof, or such other address or bank account as to which the Escrow Agent shall
have received prior written notice from CyberGuard pursuant to Section 7, on
which the Escrow Agent may rely conclusively. All risks of shipment shall be
borne by the intended recipient.
5. ARBITRATION. Exodus and CyberGuard agree that they shall
use best reasonable efforts to settle amicably disagreements arising from or in
connection with this Agreement. To this effect, following notice of either to
the other (with copy to the Escrow Agent) of a disagreement, which shall include
any failure to agree upon a matter to be agreed upon (a "DISPUTE") the parties
hereto shall consult and negotiate with one another in good faith an
understanding to reach a just and equitable solution. If those attempts fail
after a period of ten (10) Business Days from the time the parties have been
notified of the Dispute, then every such Dispute shall be settled by arbitration
in accordance with the commercial arbitration rules of American Arbitration
Association then in effect. Any judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction over the subject
matter thereof. The arbitrator shall have the authority to grant any equitable
and legal remedies that would be available in a judicial proceeding instituted
to resolve the Dispute.
(a) SELECTION OF ARBITRATOR. The American Arbitration
Association will have the authority to select an arbitrator from a list of
arbitrators who are lawyers familiar with the relevant state contract law;
provided, however, that such lawyers cannot work for a firm then performing
services for either party, that each party will have the opportunity to make
such reasonable objection to any of the arbitrators listed as such party may
wish and that the American Arbitration Association will select the arbitrator
from the list of arbitrators as to whom neither party makes any such objection.
In the event that the foregoing procedure is not followed, each party will
choose one person from the list of arbitrators provided by the American
Arbitration Association (provided that such person does not have a conflict of
interest), and the two persons so selected will select from the list provided by
the American Arbitration Association the person who will act as arbitrator.
(b) PAYMENT OF COSTS. Exodus and CyberGuard will bear
the expense of deposits and advances required by the arbitrator in equal
proportions, but either party may advance such amounts, subject to recovery as
an addition or offset to any award. The arbitrator will award to the prevailing
party, as determined by the arbitrator, all costs, fees and expenses related to
the arbitration, including reasonable fees and expenses of attorneys,
accountants and other professionals incurred by the prevailing party. Exodus and
CyberGuard shall pay in equal proportions all costs and expenses of the Escrow
Agent in connection with any arbitration.
(c) BURDEN OF PROOF. For any Dispute submitted to
arbitration, the burden of proof will be as it would be if the claim were
litigated in a judicial proceeding.
(d) AWARD. Upon the conclusion of the arbitration
proceedings hereunder, the arbitrator will render findings of fact and
conclusions of law and a written opinion setting forth the basis and reasons for
any decision reached and will deliver such documents to each party to this
Agreement along with a signed copy of the award.
(e) TERMS OF ARBITRATION. The arbitrator chosen in
accordance with these provisions will not have the power to alter, amend or
otherwise affect the terms of these arbitration provisions or the provisions of
this Agreement.
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(f) EXCLUSIVE REMEDY. Except as specifically
otherwise provided in this Agreement, arbitration will be the sole and exclusive
remedy to Exodus or CyberGuard for any Dispute arising out of this Agreement.
6. LIMITATION OF ESCROW AGENT'S LIABILITY.
(a) The Escrow Agent shall only have those duties as
are expressly set forth in this Agreement, and no implied duties shall be read
into this Agreement or the rest of the Escrow Agreement. The Escrow Agent will
incur no liability with respect to any action taken or suffered by it in
reliance upon any notice, direction, instruction, consent, statement or other
document believed by it to be genuine and duly authorized, nor for any other
action or inaction, except its own willful misconduct or gross negligence. The
Escrow Agent will not be responsible for the validity or sufficiency of this
Agreement. In all questions arising under this Agreement, the Escrow Agent may
rely on the advice or opinion of counsel, including in-house counsel, and for
anything done, omitted or suffered in good faith by the Escrow Agent based on
such advice or opinion, the Escrow Agent will not be liable to anyone. The
Escrow Agent will not be required to take any action hereunder involving any
expense unless the payment of such expense is made or provided for in a manner
satisfactory to it. The Escrow Agent shall not be obligated to take any legal
action or other action hereunder which might, in its judgment, involve any
expense or liability unless it shall have been furnished with acceptable
indemnification.
(b) In the event conflicting demands are made or
conflicting notices are served upon the Escrow Agent with respect to the Escrow
Account, the Escrow Agent will have the absolute right, at the Escrow Agent's
election, to do either or both of the following: (i) resign so a successor can
be appointed pursuant to Section 10 hereof or (ii) file a suit in interpleader
and obtain an order from a court of competent jurisdiction requiring the parties
to interplead and litigate in such court their several claims and rights among
themselves. In the event such interpleader suit is brought, the Escrow Agent
will thereby be fully released and discharged from all further obligations
imposed upon it under this Agreement, and Exodus will pay the Escrow Agent
(subject to reimbursement from CyberGuard pursuant to Section 9 hereof) all
costs, expenses and reasonable attorney's fees expended or incurred by the
Escrow Agent pursuant to the exercise of Escrow Agent's rights under this
Section 6 (such costs, fees and expenses will be treated as extraordinary fees
and expenses for the purposes of Section 9 hereof).
(c) In no event shall the Escrow Agent be liable for
any indirect, punitive, special or consequential damages, or any amount in
excess of the value of the pledged collateral (as of the date of the action or
omission giving rise to liability).
(d) The Escrow Agent shall in no instance be under
any duty to give any property held by it hereunder any greater degree of care
than it gives its own similar property. In no event shall the Escrow Agent have
any obligation to advance or risk funds.
(e) The Escrow Agent shall not be deemed to have
notice of any fact, claim or demand with respect hereto unless actually known by
an officer charged with responsibility for administering this Agreement or
unless in writing received by the Escrow Agent and making specific reference to
this Agreement.
(f) All indemnifications contained in this Agreement
shall survive the resignation or removal of the Escrow Agent, and shall survive
the termination of this Agreement.
(g) The Escrow Agent is not responsible for the
recitals appearing in this Agreement. The recitals shall be deemed to be
statements of the other parties to this Agreement.
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(h) The Escrow Agent has no responsibility for the
sufficiency of this Agreement for any purpose. Without limiting the foregoing,
if any security interest is referred to herein, the Escrow Agent shall have no
responsibility for, and makes no representation or warranty as to, the creation,
attachment or perfection of any such security interest or the sufficiency of
this Agreement therefor.
(i) Nothing in this Agreement shall obligate the
Escrow Agent to qualify to do business or act in any jurisdiction in which it is
not presently qualified to do business, or be deemed to impose upon the Escrow
Agent the duties of a trustee. The duties of the Escrow Agent under this
Agreement are strictly ministerial in nature.
(j) In no event shall the Escrow Agent have any
liability for any failure or inability of any of the other parties to perform or
observe its duties under the Agreement, or by reason of a breach of this
Agreement by either of the other parties hereto. In no event shall the Escrow
Agent be obligated to take any action against any of the other parties to compel
performance hereunder.
(k) The Escrow Agent shall in no instance be
obligated to commence, prosecute or defend any legal proceedings in connection
herewith. The Escrow Agent shall be authorized and entitled, however, in any
instance to commence, prosecute or defend any legal proceedings in connection
herewith, including without limitation any proceeding it may deem necessary to
resolve any matter or dispute, to obtain a necessary declaration of rights, or
to appoint a successor upon resignation (and after failure by Exodus to appoint
a successor, as provided hereinafter).
(l) In the event of any ambiguity or uncertainty
under this Agreement, or in any notice, instruction, or other communication
received by the Escrow Agent hereunder, the Escrow Agent may, in its discretion,
refrain from taking action, and may retain the pledged collateral until and
unless it receives written instruction signed by Exodus and CyberGuard which
eliminates such uncertainty or ambiguity.
(m) The Escrow Agent shall have no liability for the
actions or omissions of any book-entry depository, transfer agent, nominee,
correspondent, subagent or subcustodian. The Escrow Agent shall be permitted to
use the services of any recognized securities depository or clearing agent, such
as (without limitation) The Depository Trust Company and the Federal Reserve
Bank book-entry securities system, as applicable, in connection with any
securities or investments held hereunder.
(n) The Escrow Agent shall not be responsible or
liable for delays or failures in performance resulting from acts beyond its
control. Such acts shall include but not be limited to acts of God, strikes,
lockouts, riots, acts of war, epidemics, laws or governmental regulations
changes or superimposed after the fact, fire, communication line failures, power
failures, computer viruses, earthquakes or other disasters, or to unavailability
of Federal Reserve Bank wire or telex facilities.
7. NOTICES. Any notice, certificate, consent, determination or
other communication required or permitted to be given or made under this
Agreement shall be in writing and shall be effectively given and made if (i)
delivered personally, (ii) sent by prepaid courier service or mail, or (iii)
sent prepaid by fax and receipt thereof is confirmed, in each case to the
applicable address set out below:
(i) if to CyberGuard, to:
CyberGuard Corporation
2000 West Commercial Blvd., Suite #200
Ft. Lauderdale, FL 33309
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Attention: Brian Foremny, General Counsel
Telephone: (954) 958-3900
Facsimile: (954) 958-3853
with a copy to:
Stearns Weaver Miller Weissler Alahadeff & Sitterson, P.A.
150 West Flagler Street
Miami, FL 33130
Attention: Teddy D. Klinghoffer, Esq.
Telephone: (305) 789-3200
Facsimile: (305) 789-3395
(ii) if to Exodus, to:
Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, CA 95051
Attention: Adam W. Wegner, General Counsel
Telephone: (408) 346-2200
Facsimile: (408) 346-2206
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attention: Eileen Duffy Robinett, Esq.
Telephone: (415) 858-7271
Facsimile: (415) 494-1417
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(iii) If to the Escrow Agent, to:
State Street Bank and Trust Company of California, N.A.
633 W. 5th Street, 12th Floor
Los Angeles, CA 90071
Attention: Corporate Trust Administration (Exodus
Communications, Inc. 1998 escrow)
Telephone: (213) 362-7373
Facsimile: (213) 362-7357
or to such other address as a party may have furnished to the other parties by
written notice given in accordance with this Section 7.
Any such communication so given or made shall be deemed to
have been given or made and to have been received on the day of delivery if
delivered, or on the day of faxing or sending by other means of recorded
electronic communication, provided that such day in either event is a Business
Day and the communication is so delivered, faxed or sent before 4:30 p.m. on
such day. As used herein, a "BUSINESS DAY" shall be any day which is not a
Saturday, Sunday or federal holiday. Otherwise, such communication shall be
deemed to have been given and made and to have been received on the next
following Business Day. Any such communication sent by mail shall be deemed to
have been given and made and to have been received on the fifth Business Day
following the mailing thereof; provided however that no such communication shall
be mailed during any actual or apprehended disruption of postal services. Any
such communication given or made in any other manner shall be deemed to have
been given or made and to have been received only upon actual receipt; provided
that for any notice or other writing required to be delivered to the Escrow
Agent, such notice or other writing shall only be deemed delivered when actually
received.
Any party may from time to time change its address under this
Section 7 by notice to the other party given in the manner provided by this
Section.
8. GENERAL.
(a) GOVERNING LAW, ASSIGNS. This Agreement will be
governed by and construed in accordance with the internal laws of the State of
Delaware without regard to conflict-of-law principles and will be binding upon,
and inure to the benefit of, the parties hereto and their respective successors
and permitted assigns.
(b) COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(c) ENTIRE AGREEMENT. Except as otherwise set forth
in the Asset Purchase Agreement, this Agreement constitutes the entire
understanding and agreement of the Interested Parties with respect to the
subject matter of this Agreement and supersedes all prior agreements or
understandings, written or oral, between the parties with respect to the subject
matter hereof. The Escrow Agent's duties and responsibilities are governed
solely by this Agreement.
(d) WAIVERS. No waiver by any party hereto of any
condition or of any breach of any provision of this Agreement will be effective
unless in writing. No waiver by any party of any such condition or breach, in
any one instance, will be deemed to be a further or continuing waiver of any
such condition or breach or a waiver of any other condition or breach of any
other provision contained herein.
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9. FEES AND EXPENSES AND INDEMNITY.
(a) All fees and expenses of the Escrow Agent
incurred in the acceptance of, and legal fees and expenses incurred in the
preparation of, this Agreement, and in the ordinary course of performing its
responsibilities hereunder will be paid by Exodus upon receipt of a written
invoice by the Escrow Agent. Any extraordinary fees and expenses, including
without limitation any fees or expenses incurred by the Escrow Agent in
connection with a dispute over the distribution of Escrow Funds or the validity
of a Notice of Claim, will be paid 50% by Exodus and 50% by CyberGuard.
CyberGuard's liability for the fees and expenses of the Escrow Agent may be paid
by Exodus and recovered as a Claim hereunder out of the Escrow Funds. To the
extent that insufficient Escrow Funds remain to cover CyberGuard's liability for
the fees and expenses of the Escrow Agent, Exodus shall indemnify the Escrow
Agent for such fees and expenses.
(b) Each of Exodus and CyberGuard, jointly and
severally, hereby covenants and agrees to indemnify the Escrow Agent, its
directors, officers, agents and employees, for, and to defend and hold them
harmless from and against, any and every loss, liability, damage, claim, cost
and expense of any nature incurred or suffered by the Escrow Agent and arising
out of or in connection with this Agreement or the administration of this
Agreement or the performance or observance by the Escrow Agent of its
responsibilities or services under this Agreement (including but not limited to
attorneys fees and other costs and expenses of defending or preparing to defend
against any claim or liability), unless and except to the extent such loss,
liability, damage, cost or expense shall be caused by the Escrow Agent's own
willful misconduct or gross negligence. The Escrow Agent shall be entitled to
reimbursement on demand for all expenses incurred in connection with the
administration of this Agreement or the escrow created hereby which are in
excess of its compensation for normal services hereunder, including, without
limitation, payment of any legal fees and expenses incurred by the Escrow Agent
in connection with the resolution of any claim by any party hereunder.
(c) Each of Exodus and CyberGuard, jointly and
severally, agree to assume any and all obligations imposed now or hereafter by
any applicable tax law with respect to the payment of pledged collateral under
this Agreement, and, without limiting the generality of Section 9(b) above,
hereby agree to indemnify and hold the Escrow Agent harmless from and against
any taxes, additions for late payment, interest, penalties and other expenses,
that may be assessed against the Escrow Agent on any such payment or other
activities under this Agreement. Exodus and CyberGuard undertake to instruct the
Escrow Agent in writing with respect to the Escrow Agent's responsibility for
withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting in connection with its acting as the
Escrow Agent under this Agreement. Exodus and CyberGuard, jointly and severally,
each agrees to indemnify and hold the Escrow Agent harmless from any liability
on account of taxes, assessments or other governmental charges to which the
Escrow Agent may be or become subject in connection with or which arises out of
this Agreement, including costs and expenses (including reasonable legal fees),
interest and penalties.
10. SUCCESSOR ESCROW AGENT. In the event the Escrow Agent
becomes unavailable or unwilling to continue in its capacity herewith, the
Escrow Agent may resign and be discharged from its duties or obligations
hereunder by giving notice of its resignation to the parties to this Agreement,
specifying a date not less than ten days following such notice date of when such
resignation will take effect. Exodus will designate a successor Escrow Agent
prior to the expiration of such ten-day period by giving written notice to the
Escrow Agent and CyberGuard. Exodus may appoint a successor Escrow Agent without
the consent of CyberGuard so long as such successor is a bank (or, in the case
of a subsidiary of a bank holding company, its holding company as an
institution) with assets of at least $50,000,000, and may appoint any other
successor Escrow Agent with the consent of CyberGuard, which will not be
unreasonably withheld. The Escrow Agent will promptly deliver the Escrow Funds
to such designated successor. If no successor Escrow Agent is named by Exodus
and CyberGuard, the Escrow Agent may apply to a court of competent jurisdiction
for appointment of a successor Escrow Agent.
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11. LIMITATION OF RESPONSIBILITY. The Escrow Agent's duties
are limited to those set forth in this Agreement and applicable laws, and Escrow
Agent is not charged with knowledge of or any duties or responsibilities in
connection with any other document or agreement including without limitation the
Asset Purchase Agreement.
12. AMENDMENT. This Agreement may be amended by the written
agreement of Exodus, the Escrow Agent and CyberGuard, provided that, if the
Escrow Agent does not agree to an amendment agreed upon by Exodus and CyberGuard
(except an amendment adversely affecting the rights or protections of the Escrow
Agent), the Escrow Agent will resign and Exodus will appoint a successor Escrow
Agent in accordance with Section 10 above.
13. DISPUTE RESOLUTION RELATING TO DISPUTES INVOLVING THE
ESCROW AGENT. It is understood and agreed that should any dispute arise with
respect to the delivery, ownership, right of possession, and/or disposition of
the Escrow Funds, or should any claim be made upon such Escrow Funds by a third
party, the Escrow Agent upon receipt of written notice of such dispute or claim
by the parties hereto or by a third party, is authorized and directed to retain
in its possession without liability to anyone, all or any of said Escrow Funds
until such dispute shall have been settled either by the mutual written
agreement of the parties involved or by a final order, decree or judgment of
court in the United States of America, the time for perfection of an appeal of
such order, decree or judgment having expired. The Escrow Agent may, but shall
be under no duty whatsoever to, institute or defend any legal proceedings which
relate to the Escrow Funds.
14. CONSENT TO JURISDICTION AND SERVICE RELATING TO DISPUTES
INVOLVING THE ESCROW AGENT. Exodus and CyberGuard hereby absolutely and
irrevocably consent and submit to the jurisdiction of the courts in the State of
California (and of any Federal court located in said state) in connection with
any actions or proceedings brought against Exodus and CyberGuard by the Escrow
Agent arising out of or relating to this Escrow Agreement. In any such action or
proceeding, Exodus and CyberGuard hereby absolutely and irrevocably waive
personal service of any summons, complaint, declaration or other process and
hereby absolutely and irrevocably agree that the service thereof may be made by
certified or registered first-class mail directed to Exodus and CyberGuard, as
the case may be, as their respective addresses in accordance with Section 7
hereof.
15. REPRODUCTION OF DOCUMENTS. This Agreement and all
documents relating hereto, including, without limitation, (a) consents, waivers
and modifications which may hereafter be executed and (b) certificates and other
information previously or hereafter furnished, may be reproduced by any
photographic, photostatic, microfilm, optical disk, micro-card, miniature
photographic or other similar process. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible as evidence.
16. TAX REPORTING MATTERS.
(a) The Interested Parties agree to provide the
Escrow Agent with certified tax identification numbers for each of them by
furnishing appropriate forms W-9 (or Forms W-8, in the case of non-U.S. persons)
and other forms and documents that the Escrow Agent may reasonably request
(collectively, "TAX REPORTING DOCUMENTATION") to the Escrow Agent within 30 days
after the date hereof. The parties hereto understand that, if such Tax Reporting
Documentation is not so certified to the Escrow Agent, the Escrow Agent may be
required by the Internal Revenue Code, as it may be amended from time to time,
to withhold a portion of
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any interest or other income earned on the investment of monies or other
property held by the Escrow Agent pursuant to this Agreement.
(b) The Escrow Agent need not make any distribution
of all or any portion of the Escrow Funds to any person until such person has
furnished to the Escrow Agent such Tax Reporting Documentation as the Escrow
Agent may reasonably require.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
EXODUS COMMUNICATIONS, INC. CYBERGUARD CORPORATION
By: By:
-------------------------- --------------------------
Richard S. Stoltz
Chief Operating Officer and
Chief Financial Officer
EC ACQUISITIONS CORP. STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A., AS ESCROW AGENT
By: By:
-------------------------- --------------------------
Adam W. Wegner Mark D. Henson
President Assistant Vice President
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<PAGE> 42
AGREEMENT
Dated October 2, 1998,
among
CYBERGUARD CORPORATION,
ARCA SYSTEMS, INC.
and
EACH OF THE SHAREHOLDERS OF
CYBERGUARD CORPORATION WHO ARE SIGNATORIES HERETO
TABLE OF CONTENTS
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ARTICLE I DEFINITIONS.......................................................................2
ARTICLE II CLOSING...........................................................................3
ARTICLE III REPRESENTATIONS AND WARRANTIES OF CYBERGUARD......................................3
3.1 Organization, Standing and Power...........................................................3
3.2 Authorization of Agreement.................................................................3
3.3 No Violation or Conflict...................................................................3
3.4 Consent or Approval of Governmental Authorities............................................3
3.5 Broker and Finders.........................................................................3
3.6 Litigation.................................................................................4
</TABLE>
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<PAGE> 44
AGREEMENT
This Agreement is entered into as of October 2, 1998, by and among
CyberGuard Corporation, a Florida corporation ("CYBERGUARD"), ARCA Systems,
Inc., a California corporation ("ARCA"), and each of the individuals who are
signatories hereto (sometimes hereinafter referred to individually as a
"TRANSFEROR" and collectively as the "TRANSFERORS").
PRELIMINARY STATEMENTS
Certain of the Transferors are parties to an Employment Agreement,
dated as of June 1, 1998, with ARCA and CyberGuard (the "EMPLOYMENT
AGREEMENTS"), which, among other things, by their terms provide for restrictions
on such Transferors' rights to compete against ARCA, which Employment Agreements
were entered into in connection with CyberGuard's acquisition of ARCA pursuant
to the Merger Agreement (as defined below).
Each of William F. Wilson, Michael L Weidner and R. Kenneth Bauer is
also a party to a Restrictive Covenant Agreement, dated as of June 1, 1998, with
ARCA and CyberGuard ("RESTRICTIVE COVENANT AGREEMENTS"), which also, among other
things, by their terms provide for restrictions on the right of Messrs. Wilson,
Weidner and Bauer to compete against ARCA, which Restrictive Covenant Agreements
were entered into in connection with CyberGuard's acquisition of ARCA pursuant
to the Merger Agreement.
Each of the Transferors is a party to an Employee Agreement, dated as
of June 1, 1998, with CyberGuard ("CONFIDENTIALITY AND WORKS-MADE-FOR-HIRE
AGREEMENTS") which Agreements were entered into in connection with CyberGuard's
acquisition of ARCA pursuant to the Merger Agreement.
The Transferors desire to terminate the Employment Agreements, the
Restrictive Covenant Agreements and the Confidentiality and Works-Made-For-Hire
Agreements so that they may pursue business and employment opportunities with
Exodus and its Affiliates; and, but for CyberGuard's entering into this
Agreement and consenting to certain other transactions, the terms of the
foregoing documents would by their terms prohibit the Transferors from pursuing
such business and employment opportunities; and theparties further acknowledge
that but for the Transferors entering into this Agreement (and granting the
general release of CyberGuard contained herein), CyberGuard would not enter into
or permit the occurrence of such other transactions and such other transactions
would not occur.
In consideration of CyberGuard entering into this Agreement, the
Transferors are, among other things, agreeing to terminate all of their
CyberGuard Options (as defined below), agreeing to certain restrictive
covenants, agreeing to terminate the Registration Agreement (as defined below)
and agreeing to grant CyberGuard a general release.
In consideration of the Transferors entering into this Agreement,
CyberGuard is hereby terminating the Employments Agreements, the Restrictive
Covenant Agreements, the Confidentiality and Works-Made-For-Hire Agreements and
the Escrow and Pledge Agreement entered into in connection with the Merger
Agreement (the "ESCROW AND PLEDGE AGREEMENT").
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<PAGE> 45
AGREEMENT
In consideration of the Preliminary Statements and the respective
covenants, representations and warranties contained in this Agreement, the
parties agree as set forth below, and agree that the Preliminary Statements are
incorporated herein.
ARTICLE I
DEFINITIONS
In addition to terms defined elsewhere in this Agreement, the following
terms when used in this Agreement shall have the meanings indicated below:
"AFFILIATE" has the meaning specified in Rule 144 promulgated by the
Commission under the Securities Act.
"AGREEMENT" means this Agreement together with all exhibits and
schedules referred to herein.
"CLAIM" has the meaning set forth in SECTION 5.5.
"CLOSING" has the meaning specified in ARTICLE II of this Agreement.
"CLOSING DATE" has the meaning specified in ARTICLE II of this
Agreement.
"CONFIDENTIALITY AND WORKS-MADE-FOR HIRE AGREEMENT" has the meaning set
forth in the Preliminary Statements.
"CYBERGUARD COMMON STOCK" means the common stock of CyberGuard, par
value $.01 per share.
"CYBERGUARD OPTIONS" means the options to acquire CyberGuard Common
Stock referenced in SECTION 4.2 of this Agreement.
"EMPLOYMENT AGREEMENT" has the meaning set forth in the Preliminary
Statements.
"EXODUS" has the meaning set forth in the Preliminary Statements.
"INDEMNIFIED PARTY" has the meaning specified in SECTION 5.8(C) of this
Agreement.
"INDEMNIFYING PARTY" has the meaning specified in SECTION 5.8(C) of
this Agreement.
"LOSSES" has the meaning specified in SECTION 5.8(A) of this Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Merger, dated as of
May 29, 1998, to which ARCA, CyberGuard and certain other Persons are parties.
"PERSON" means any natural person, corporation, unincorporated
organization, partnership, association, joint stock company, joint venture,
trust or government, or any agency or political subdivision of any government,
or any other entity.
"RESTRICTIVE COVENANT AGREEMENT" has the meaning set forth in the
Preliminary Statements.
"SUBSIDIARY" of any Person means any Person, whether or not
capitalized, in which such Person owns, directly or indirectly, an equity
interest of 50% or more, or any Person which may be controlled, directly or
indirectly, by such Person, whether through the ownership of voting securities,
by contract, or otherwise.
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<PAGE> 46
"TRANSACTIONS" has the meaning specified in SECTION 4.8.
ARTICLE II
CLOSING
The consummation of the transactions contemplated by this Agreement
(the "CLOSING") shall take place simultaneously with the execution and delivery
of this Agreement. The date of this Agreement shall be referred to as the
"CLOSING DATE."
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CYBERGUARD
CyberGuard hereby represents and warrants to the Transferors as
follows:
III.1 ORGANIZATION, STANDING AND POWER. Each of CyberGuard and ARCA is
a corporation duly incorporated, validly existing and in good standing under the
laws of its state of incorporation, and has all requisite right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby.
III.2 AUTHORIZATION OF AGREEMENT. The execution, delivery and
performance of this Agreement by CyberGuard and ARCA the consummation by them of
the transactions contemplated hereby have been duly and effectively authorized
by all requisite corporate action. This Agreement constitutes the legal, valid
and binding obligation of CyberGuard and ARCA, enforceable against them in
accordance with its terms, except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights and general principles of equity.
III.3 NO VIOLATION OR CONFLICT. The execution, delivery and performance
of this Agreement by CyberGuard and ARCA, and the consummation by them of the
transactions being effectuated hereby, and compliance by CyberGuard with the
provisions hereof do not and will not violate or conflict with any provision of
law or regulation, or any writ, order or decree of any court, governmental or
regulatory authority or agency, or any term or provision of the Articles of
Incorporation or Bylaws of CyberGuard.
III.4 CONSENT OR APPROVAL OF GOVERNMENTAL AUTHORITIES. No consent,
approval or authorization of, or registration, qualification, designation,
declaration or filing with, any federal, state or local governmental authority
or administrative agency is required in connection with the execution, delivery
or performance by CyberGuard or ARCA of this Agreement or the consummation by
CyberGuard of the transactions being effectuated hereby.
III.5 BROKER AND FINDERS. Neither CyberGuard nor any of its
Subsidiaries has employed any broker or finder and none of them have incurred
nor will incur any broker's, finder's or similar fees, commissions or broker's
or finder's expenses in connection with the transactions contemplated by this
Agreement, except that an investment banking firm has been retained to render a
fairness opinion to CyberGuard at CyberGuard's expense.
III.6 LITIGATION. Except for claims arising directly or indirectly as a
result of any class action lawsuits filed against CyberGuard or from the subject
matter underlying such lawsuits, CyberGuard has not received any written notice
of any actions, suits, proceedings or investigations pending, or directly or
indirectly threatened, in any court or before any governmental agency or
instrumentality which would be reasonably likely to have a material adverse
impact on the transactions contemplated hereby.
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<PAGE> 47
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS
In order to induce CyberGuard and ARCA to enter into this Agreement and
to consummate the transactions contemplated hereby, each of the Transferors
hereby severally but not jointly represents and warrants to CyberGuard as
follows:
IV.1 AUTHORITY; LEGAL, VALID AND BINDING AGREEMENT. Such Transferor has
full and unrestricted right, power and authority to enter into and consummate
the transactions contemplated hereby. This Agreement and all other agreements
executed by such Transferor in connection with the transactions contemplated
hereunder constitute the legal, valid and binding obligations of such
Transferor, enforceable in accordance with their respective terms, except to the
extent that enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights and
general principles of equity.
IV.2 OPTIONS. Such Transferor owns the CyberGuard Options (and no other
options to acquire CyberGuard Common Stock) as described on SCHEDULE 4.2, free
and clear of any and all liens, claims, charges, security interests, voting
agreements or encumbrances of any nature whatsoever, and such Transferor has not
transferred any interest in any such CyberGuard Options of any nature whatsoever
to any third party. No third party has any right, title or interest in any of
such Transferor's CyberGuard Options.
IV.3 LITIGATION. Except as set forth on SCHEDULE 4.3, such Transferor
has not received any notice of any actions, suits, proceedings or investigations
pending, or directly or indirectly threatened, in any court or before any
governmental agency or instrumentality which could have any adverse impact on
the transactions contemplated hereby.
IV.4 NO VIOLATION OR CONFLICT. The execution, delivery and performance
of this Agreement by such Transferor and the consummation by such Transferor of
the transactions contemplated hereby, and compliance by such Transferor with the
provisions hereof, do not and will not violate or conflict with any provision of
law or regulation, or any writ, order or decree of any court, governmental or
regulatory authority or agency, except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights and general principles of equity.
IV.5 CONSENT OR APPROVAL OF GOVERNMENTAL AUTHORITIES. Except as set
forth on SCHEDULE 4.5, no consent, approval or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority or administrative agency is
required in connection with the execution, delivery or performance by such
Transferor of this Agreement or any agreement, instrument or document
contemplated hereby or the consummation by such Transferor of the transactions
contemplated hereby and thereby.
IV.6 BROKERS AND FINDERS. Such Transferor has not employed any broker
or finder and has not incurred nor will incur any broker's, finder's or similar
fees, commissions or broker's or finder's expenses in connection with the
transactions contemplated by this Agreement.
IV.7 NO PRIOR AGREEMENT BY SUCH TRANSFEROR. There is no written or oral
agreement or understanding with respect to the disposition by such Transferor of
any CyberGuard Options, any portion thereof, or any rights attendant or relating
thereto, other than this Agreement. Such Transferor has never conveyed,
hypothecated or otherwise transferred or liened any of his or her right, title
and/or interest in or to (i) any Claims, (ii) his or her Employment Agreement,
Restrictive Covenant Agreement or Confidentiality and
Works-Made-For-Hire-Agreement or (iii) the Escrow and Pledge Agreement. To such
Transferor's knowledge,
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<PAGE> 48
after investigation, all of the representations and warranties of CyberGuard set
forth in that certain Asset Purchase Agreement, of even date herewith, to which
CyberGuard and Exodus are parties are true and correct. Such Transferor has not
incurred any liability or obligation of any nature whatsoever on behalf of ARCA
or CyberGuard or which binds ARCA or CyberGuard and which is not being assumed
by Exodus in connection herewith or set forth on Schedule 4.7 hereto.
IV.8 HIGH DEGREE OF RISK AND NATURE OF TRANSACTIONS; INDEPENDENT LEGAL
COUNSEL AND BUSINESS AND TAX ADVISORS. EACH TRANSFEROR HAS REVIEWED THIS
AGREEMENT AND ALL OF THE AGREEMENTS AND INSTRUMENTS EXECUTED IN CONNECTION
HEREWITH AND ALL OF THE AGREEMENTS AND RELATED ITEMS RELATING TO THE
TRANSACTIONS CONTEMPLATED IN CONNECTION HEREWITH AND THEREWITH BEING EFFECTUATED
ON THE DATE HEREOF (ALL OF THE FOREGOING HEREINAFTER SOMETIMES REFERRED TO AS
THE "TRANSACTIONS"), INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH ON SCHEDULE
4.8 (COLLECTIVELY, THE "TRANSACTION DOCUMENTS"). EACH TRANSFEROR HAS BEEN
STRONGLY URGED AND HAS HAD THE OPPORTUNITY TO SEEK THE ADVICE OF HIS OR HER OWN
INDEPENDENT LEGAL COUNSEL AND BUSINESS AND TAX ADVISORS BEFORE ENTERING INTO ANY
OF THE TRANSACTION DOCUMENTS. EACH TRANSFEROR BELIEVES THAT THE TRANSACTIONS ARE
FAIR AND REASONABLE TO HIM OR HER IN ALL RESPECTS (INCLUDING, BUT NOT LIMITED
TO, THE PAYMENT BY EXODUS TO CYBERGUARD OF MORE THAN $3 MILLION) AND CONSENTS
THERETO AND BELIEVES THAT THE TRANSACTIONS ARE IN HIS OR HER OWN BEST INTEREST.
EACH TRANSFEROR ACKNOWLEDGES THAT NEITHER CYBERGUARD, ARCA NOR ANY OF THEIR
AFFILIATES, OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES NOR ANY OTHER TRANSFEROR
SHALL HAVE ANY LIABILITY OR RESPONSIBILITY OF ANY NATURE WHATSOEVER FOR ANY ACT
OR OMISSION BY EXODUS OR ANY OF ITS AFFILIATES OR THE FAILURE OF EXODUS OR ANY
OF ITS AFFILIATES TO COMPLY WITH ANY OBLIGATIONS UNDER ANY OF THE TRANSACTIONS,
INCLUDING, BUT NOT LIMITED TO, ANY MATERIAL MISSTATEMENT OR OMISSION BY EXODUS
OR ANY AFFILIATE THEREOF. EACH TRANSFEROR ACKNOWLEDGES THAT NONE OF CYBERGUARD,
ARCA, EXODUS NOR ANY OTHER TRANSFEROR NOR ANY OF THEIR RESPECTIVE AFFILIATES OR
AGENTS HAS MADE TO HIM OR HER ANY REPRESENTATION OR WARRANTY AS TO THE TAX OR
OTHER CONSEQUENCES TO SUCH TRANSFEROR OF THE TRANSACTIONS. EACH TRANSFEROR
UNDERSTANDS THE HIGHLY SPECULATIVE NATURE OF AND SUBSTANTIAL RISKS INVOLVED IN
THE TRANSACTIONS, AND HAS BEEN STRONGLY URGED TO DISCUSS THE SAME WITH HIS OR
HER OWN INDEPENDENT LEGAL COUNSEL AND BUSINESS AND TAX ADVISORS. IN ADDITION TO
SUCH TRANSFEROR'S FAMILIARITY WITH ARCA AND CYBERGUARD AND THEIR OPERATIONS,
SUCH TRANSFEROR HAS BEEN OFFERED THE OPPORTUNITY TO ASK QUESTIONS OF AND RECEIVE
ANSWERS FROM ARCA AND CYBERGUARD AND EXODUS AND HAS ACCESS TO INFORMATION SUCH
TRANSFEROR HAS DEEMED MATERIAL IN DECIDING WHETHER TO CONSENT TO THE
TRANSACTIONS. EACH TRANSFEROR ACKNOWLEDGES THAT THE CONSIDERATION TO BE RECEIVED
BY HIM OR HER IN CONNECTION WITH THE TRANSACTIONS WAS DETERMINED IN ARMS LENGTH
NEGOTIATIONS AMONG THE PARTIES. EACH TRANSFEROR IS FULLY SATISFIED AS TO THE
CONSIDERATION BEING RECEIVED BY SUCH TRANSFEROR IN CONNECTION WITH THE
TRANSACTIONS. EACH TRANSFEROR ACKNOWLEDGES THAT HE OR SHE SHALL HAVE NO CLAIMS,
CAUSES OF ACTION OR OTHER RIGHTS OF ANY NATURE WHATSOEVER AGAINST CYBERGUARD OR
ANY OF ITS AFFILIATES IN CONNECTION WITH ANY OF THE TRANSACTIONS AS THEY RELATE
TO ACTS OR OMISSIONS OF ANY PARTY OTHER THAN CYBERGUARD OR ARCA (EXCEPT ACTS OF
ANY EMPLOYEE OF ARCA) OR IN CONNECTION WITH ANY TRANSACTION WHICH IS NOT
EFFECTUATED BY THIS AGREEMENT. EACH TRANSFEROR EXPRESSLY ACKNOWLEDGES THAT HE OR
SHE SHALL HAVE ABSOLUTELY NO CLAIM AGAINST CYBERGUARD OR ANY OF ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS OR AFFILIATES OF ANY NATURE WHATSOEVER FOR ANY ACT
OR FAILURE TO ACT BY EXODUS OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS
OR AFFILIATES IN CONNECTION WITH ANY OF THE TRANSACTIONS AND EXPRESSLY AGREES
NOT TO BRING ANY CLAIM OR ACTION AGAINST CYBERGUARD OR ANY OF ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS OR AFFILIATES IN CONNECTION THEREWITH, WHETHER SUCH
CLAIMS BE FOR BREACH OF REPRESENTATIONS AND WARRANTIES, BREACH OF COVENANT,
SECURITIES LAWS VIOLATIONS, FRAUD, BREACH OF CONTRACT, TORT OR OTHERWISE. EACH
TRANSFEROR FURTHER ACKNOWLEDGES THAT HE OR SHE FULLY UNDERSTANDS THE PROVISIONS
RELATING TO AND THE RAMIFICATIONS OF GRANTING THE RELEASE CONTAINED IN SECTION
5.5 HEREOF AND HAS BEEN STRONGLY URGED TO FULLY DISCUSS SAME WITH HIS OR HER
INDEPENDENT LEGAL COUNSEL AND BUSINESS AND TAX ADVISORS. EACH PERSON THAT
RECEIVED CYBERGUARD COMMON STOCK UNDER THE MERGER AGREEMENT IS A NAMED SIGNATORY
TO THIS AGREEMENT OR A CLAIMS AND STOCK PURCHASE AGREEMENT. EACH TRANSFEROR HAS
MADE HIS OR HER OWN INDEPENDENT EVALUATION OF THE VALUE OF THE CONSIDERATION
PAYABLE TO HIM OR HER AND THE OTHER TERMS AND CONDITIONS OF THE TRANSACTIONS
WITHOUT RELIANCE ON ANY PARTY OTHER THAN TO THE EXTENT HE OR SHE HAS RELIED ON
HIS OR HER OWN INDEPENDENT LEGAL COUNSEL AND BUSINESS AND TAX ADVISORS.
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ARTICLE V
ADDITIONAL AGREEMENTS
V.1 TERMINATION OF CYBERGUARD OPTIONS. Each of the Transferors hereby
agrees that all options to acquire shares of CyberGuard Common Stock owned by
him or her ("CYBERGUARD OPTIONS"), including, but not limited to, those
referenced on SCHEDULE 5.1, are hereby terminated and null and void.
V.2 RESTRICTIVE COVENANTS.
V.2.1 CONFIDENTIAL INFORMATION; COOPERATION. Transferor agrees
not to disclose at any time after the date hereof, directly or indirectly, to
any person or entity, or use or cause or authorize any person or entity to use
any confidential or proprietary information relating to CyberGuard or any of its
respective Subsidiaries or any information concerning financial condition,
income, mergers and acquisitions, results of operations, accounting practices,
customers, suppliers, services, inventions, sources, leads or methods of
obtaining new products, services or business, intangible property or methods of
operating its businesses or any other information relating to CyberGuard or any
of its Subsidiaries which such Transferor knows or should know is regarded as
confidential, sensitive, proprietary or valuable by CyberGuard or any of the
terms or conditions of any of the Transactions (whether or not any of the
foregoing information is actually novel or unique or is actually known by
others, collectively the "Confidential Information"); provided, however, that
this Agreement shall not restrict the disclosure or use of Confidential
Information (i) to the extent required by law, (ii) which is publicly known and
available through no wrongful act of Transferor or any other current or former
shareholder of ARCA or any of their respective Affiliates, (iii) which becomes
available to any Transferor on a non-confidential basis from a source other than
a party to this Agreement, provided such source is not known to be in violation
of a confidentiality agreement, (iv) which relates to the business operations of
ARCA, or (v) to the extent necessary to directly further the enforcement of any
Transaction Documents.
Each Transferor hereby agrees to fully cooperate at all
reasonable times with CyberGuard and its attorneys in connection with any
matters in which such Transferor has knowledge or information concerning any
aspect of CyberGuard's or any of its current or former Subsidiaries businesses
which is relevant to any litigation, controversies or proceedings in which
CyberGuard is or may become involved, including, but not limited to, any matters
concerning financial condition, income, mergers and acquisitions, results of
operations,
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accounting practices, customers, suppliers, services, inventions,
sources, leads or methods of obtaining new products, services or business,
intangible property or methods of operating its businesses (all referred to as
"CyberGuard's Business"). That cooperation will include but not be limited to
meeting with CyberGuard and its attorneys at any reasonable times and upon
reasonable notice to provide a statement or statements concerning any matters
related to CyberGuard's Business. CyberGuard shall reimburse such Transferor for
all reasonable out-of-pocket costs and expenses incurred in connection with this
paragraph. CyberGuard shall endeavor to limit the extent of the Transferor's
time utilized in connection with this paragraph to the extent reasonably
necessary or useful to CyberGuard. No Transferor shall be required to cooperate
under this paragraph for any illegal or improper purpose (E.G., disclosing
historical information about ARCA for competitive or other purposes that would
reasonably be expected to put such Transferor in conflict with duties owed to
Exodus or disclosing information relating to the business acquired which relates
to time periods after the date hereof). In the event such Transferor is
approached in any fashion by any person or persons other than CyberGuard or its
attorneys, seeking information about the CyberGuard's Business, such Transferor
will (i) not, except to the extent required by law, divulge any information
concerning CyberGuard's Business to any person or entity to the extent such
Transferor knows or reasonably should know the same may be used in connection
with any claim against CyberGuard; and (ii) promptly notify CyberGuard of an
attempt to obtain information regarding CyberGuard's Business, identifying to
the best of such Transferor's knowledge, the source of the inquiry. In the event
such Transferor is served with a subpoena in a civil lawsuit to produce
documents or testimony concerning any matters related to CyberGuard's Business,
such Transferor will promptly notify CyberGuard prior to any response.
V.2.2 SOLICITATION OF PERSONNEL. During the two-year period
after the date of this Agreement, each Transferor agrees that he or she will
not, directly or indirectly, at any time solicit or cause or authorize directly
or indirectly to be solicited for employment or employ or cause or authorize,
directly or indirectly, to be employed or engaged as an employee, independent
contractor or sales agent, for or on behalf of himself or herself or any other
Person, any Person who was an employee, independent contractor or sales agent of
CyberGuard or any of its Subsidiaries (other than ARCA) at any time during the
60 days prior to the date hereof.
V.2.3 NON-DISPARAGEMENT. On and after the date hereof, each of
the Transferors agrees not to make or publish any statement or other
communication which could reasonably be interpreted as disparaging,
uncomplimentary, negative, or unfavorable with respect to CyberGuard or any of
its Affiliates, officers, directors, employees or agents, all except as required
by law; provided, however, that the foregoing shall not prohibit otherwise
non-actionable statements made in good faith in furtherance of good faith
business competition; and, provided, further, that the foregoing shall not
restrict in any manner any Transferor in the course of his or her business
activities from providing good faith technical product evaluations that include
products or services of CyberGuard or any of its Affiliates.
V.2.4 INJUNCTIVE RELIEF. Each Transferor acknowledges that it
would be very difficult or impossible to measure the damages resulting from the
breach of any provision of this SECTION 5.2. Each Transferor further
acknowledges that the restrictions in this SECTION 5.2 are reasonable and
reasonably necessary for the protection of the legitimate business interests and
goodwill of CyberGuard, and that a violation by any Transferor of any such
covenant will cause irreparable damage to CyberGuard. Therefore, each Transferor
hereby agrees that any breach or threatened breach by him or her of any
provision of this SECTION 5.2 shall entitle CyberGuard, in addition to any other
legal remedies available to it, to a temporary and permanent injunction or any
other appropriate decree of specific performance in order to enjoin such breach
or threatened breach. It is the desire and intent of the parties that the
provisions of this SECTION 5.2 shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular subparagraph or
portion of this SECTION 5.2 shall be adjudicated to be invalid or unenforceable,
this SECTION 5.2 shall not be deemed null and void and shall be deemed amended
to delete therefrom the portion thus adjudicated to be invalid or unenforceable,
such deletion to apply only with respect to the operation of this SECTION 5.2 in
that particular jurisdiction in which such adjudication is made. In the event
any provisions of this SECTION 5.2 relating to the time period, scope of
activities or areas of restrictions
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shall be declared by a court of competent jurisdiction to exceed the maximum
time period, scope of activities or area such court deems reasonable and
enforceable, the time period, scope of activities or areas of restrictions shall
thereafter be deemed the maximum which such court deems reasonable and
enforceable.
V.2.5 OBLIGATIONS UNCONDITIONAL. Each Transferor acknowledges
that each and every one of his or her obligations under this Section 5 are
unconditional and absolute and shall not be terminable for any reason
whatsoever.
V.3 TERMINATION OF REGISTRATION AGREEMENT, EMPLOYMENT AGREEMENTS,
RESTRICTIVE COVENANT AGREEMENTS, WORKS-MADE-FOR-HIRE AGREEMENTS AND ESCROW AND
PLEDGE AGREEMENT. The Registration Agreement ("REGISTRATION AGREEMENT") entered
into in connection with the Merger Agreement is hereby terminated and null and
void. The Escrow and Pledge Agreement is hereby terminated and null and void,
and the Escrow Agent (as defined in the Escrow and Pledge Agreement) is
irrevocably authorized and directed to deliver to Messrs. Wilson, Weidner and
Bauer all shares of CyberGuard Common Stock covered thereby, free and clear of
all claims of all other Persons. Each of the Employment Agreements is hereby
terminated and null and void. Each of the Restrictive Covenant Agreements is
hereby terminated and null and void. Each of the Confidentiality and
Works-Made-For-Hire Agreements is hereby terminated and null and void.
V.4 PUBLICITY. The Transferors acknowledge and agree that CyberGuard
will prepare and release one or more press releases and/or public announcements
with respect to the transactions contemplated hereby. CyberGuard shall discuss
any such press releases with William F. Wilson and give him reasonable
opportunity to comment thereon prior to public dissemination thereof. The
Transferors shall not, and shall cause their respective officers, directors,
employees, agents and advisors not to, issue or make any press release or other
announcement, disclosure or statement concerning this Agreement or the
transactions contemplated hereby, without the prior written consent of
CyberGuard. Nothing contained herein shall prevent any party from at any time
furnishing any information to any governmental authority which it is by law or
otherwise so obligated to disclose or from making any disclosure which its
counsel deems necessary or advisable in order to fulfill such party's disclosure
obligations under applicable law or the rules of NASDAQ.
V.5 GENERAL RELEASE.
(A) CYBERGUARD. AS A MATERIAL INDUCEMENT FOR CYBERGUARD TO
ENTER INTO THIS AGREEMENT, EFFECTIVE AS THE CLOSING, EACH TRANSFEROR HEREBY
UNCONDITIONALLY AND IRREVOCABLY RELEASES AND FOREVER DISCHARGES, EFFECTIVE AS OF
THE CLOSING, CYBERGUARD AND ALL OF ITS AFFILIATES, OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS AND ASSIGNS FROM ANY AND ALL RIGHTS, CLAIMS, DEMANDS, ACTIONS,
JUDGMENTS, OBLIGATIONS, LIABILITIES, LOSSES, COSTS, EXPENSES AND DAMAGES OF ANY
NATURE WHATSOEVER, WHETHER ACCRUED OR UNACCRUED OR POSSIBLE, ASSERTED OR
UNASSERTED, AND WHETHER KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED ("CLAIMS"),
WHICH EVER EXISTED, NOW EXIST, OR MAY HEREAFTER EXIST, BY REASON OF ANY TORT,
BREACH OF CONTRACT, VIOLATION OF LAW OR OTHER ACT OR FAILURE TO ACT WHICH SHALL
HAVE OCCURRED AT OR PRIOR TO THE CLOSING, INCLUDING, BUT NOT LIMITED TO, MATTERS
IN ANY MANNER RELATING TO OR ARISING IN CONNECTION WITH (I) THE TRANSACTIONS
CONTEMPLATED IN CONNECTION WITH THE MERGER AGREEMENT, INCLUDING, WITHOUT
LIMITATION, THE BREACH OF ANY REPRESENTATIONS AND WARRANTIES OR COVENANTS
CONTAINED IN THE MERGER AGREEMENT, THE VIOLATION OF ANY SECURITIES LAWS BY
CYBERGUARD, THE FAILURE OF CYBERGUARD TO COMPLY WITH ANY PROVISION OF THE MERGER
AGREEMENT OR ANY OTHER DOCUMENT RELATING THERETO (IN ANY SUCH INSTANCE, WHETHER
BY NEGLIGENCE, INTENTIONAL MISCONDUCT, FRAUD OR OTHERWISE), (II) THE OCCURRENCE
OF ANY OF THE TRANSACTIONS WHICH ARE NOT EFFECTUATED BY THIS AGREEMENT, (III)
SUCH TRANSFEROR'S EMPLOYMENT BY ARCA OR CYBERGUARD, INCLUDING BUT NOT LIMITED
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TO, ACCRUED VACATION OR BENEFITS OF ANY NATURE WHATSOEVER, (IV) ANY CLAIMS
RELATING TO WRONGFUL TERMINATION OR AGE, SEX OR OTHER DISCRIMINATION AND\OR (V)
ANY AND ALL RIGHTS TO OPTIONS TO ACQUIRE CYBERGUARD COMMON STOCK WHICH WERE
GRANTED OR PROMISED TO BE GRANTED TO SUCH TRANSFEROR; PROVIDED, HOWEVER, THAT
THE FOREGOING RELEASE SHALL NOT APPLY TO BREACHES OF REPRESENTATIONS, WARRANTIES
OR COVENANTS OF CYBERGUARD OR ARCA IN THIS AGREEMENT. EACH TRANSFEROR EXPRESSLY
INTENDS THAT THE FOREGOING RELEASE SHALL BE EFFECTIVE REGARDLESS OF WHETHER THE
BASIS FOR ANY CLAIM OR RIGHT HEREBY RELEASED SHALL HAVE BEEN KNOWN TO OR
ANTICIPATED BY HIM OR HER. EACH OF THE TRANSFERORS ACKNOWLEDGES THAT HE OR SHE
MAY HEREAFTER DISCOVER FACTS IN ADDITION TO OR DIFFERENT FROM THOSE WHICH THEY
NOW KNOW OR BELIEVE TO BE TRUE WITH RESPECT TO CYBERGUARD OR THE CLAIMS RELEASED
HEREBY OR TO THE SUBJECT MATTER RELATING THERETO, BUT EACH TRANSFEROR FULLY,
FINALLY, UNCONDITIONALLY AND FOREVER RELEASES, SETTLES AND DISCHARGES CYBERGUARD
AND ALL OF ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS AND ASSIGNS AS
DESCRIBED HEREIN WITHOUT REGARD TO THE SUBSEQUENT DISCOVERY OR EXISTENCE OF SUCH
DIFFERENT OR ADDITIONAL FACTS AND HEREBY WAIVES ANY AND ALL RIGHTS HE OR SHE MAY
HAVE UNDER ANY STATUTE, INCLUDING, BUT NOT LIMITED TO, SECTION 1542 OF THE
CALIFORNIA CIVIL CODE, OR COMMON LAW PRINCIPLES WHICH WOULD LIMIT THE EFFECT OF
THE FOREGOING RELEASE TO THOSE ACTIONS, CAUSES OF ACTION, SUITS, DEBTS, DUES,
SUMS OF MONEY, ACCOUNTS, RECKONINGS, BONDS, BILLS, SPECIALITIES, COVENANTS,
CONTRACTS, CONTROVERSIES, AGREEMENTS, JUDGMENTS, EXECUTIONS, CLAIMS, DEMANDS AND
LIABILITIES ACTUALLY KNOW OR SUSPECTED TO EXIST AT THE TIME OF THE EFFECTIVENESS
OF THE FOREGOING RELEASE. CALIFORNIA CIVIL CODE SECTION 1542 PROVIDES:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
EACH TRANSFEROR ALSO IRREVOCABLY AND UNCONDITIONALLY AGREES NOT TO
BRING ANY SUIT, PROCEEDING, ARBITRATION OR OTHER ACTION OF ANY NATURE WHATSOEVER
AGAINST CYBERGUARD OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR
AFFILIATES IN CONNECTION WITH OR RELATING TO ANY CLAIM SO RELEASED.
(B) TRANSFERORS. AS A MATERIAL INDUCEMENT FOR THE TRANSFERORS
TO ENTER INTO THIS AGREEMENT, EFFECTIVE AS THE CLOSING, EACH OF CYBERGUARD AND
ARCA HEREBY UNCONDITIONALLY AND IRREVOCABLY RELEASES AND FOREVER DISCHARGES EACH
TRANSFEROR AND EACH SHAREHOLDER AND OPTION HOLDER OF ARCA AS OF THE DATE OF THE
CONSUMMATION OF THE MERGER AGREEMENT, FROM ANY AND ALL CLAIMS, WHICH EVER
EXISTED, NOW EXIST, OR MAY HEREAFTER EXIST, BY REASON OF ANY TORT, BREACH OF
CONTRACT, VIOLATION OF LAW OR OTHER ACT OR FAILURE TO ACT WHICH SHALL HAVE
OCCURRED AT OR PRIOR TO THE CLOSING, EXCEPT THAT, NOTWITHSTANDING ANYTHING TO
THE CONTRARY SET FORTH HEREIN, THE FOREGOING SHALL NOT RELEASE ANY CLAIM BASED
UPON OR ARISING IN CONNECTION WITH (I) ANY BREACH OF ANY REPRESENTATION OR
WARRANTY OR ANY VIOLATION OF ANY COVENANT OR AGREEMENT OF ANY TRANSFEROR
CONTAINED IN THIS AGREEMENT, IN ANY DOCUMENT OR AGREEMENT EXECUTED IN CONNECTION
WITH ANY OF THE TRANSACTIONS OR IN ANY DOCUMENT OR AGREEMENT ENTERED INTO IN
CONNECTION HEREWITH OR THEREWITH OR (II) ANY RIGHTS WHICH CYBERGUARD OR ARCA
HAVE AS A RESULT OF THE EXERCISE OF ANY
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RIGHTS OF SUBROGATION. EACH OF CYBERGUARD AND ARCA EXPRESSLY INTENDS THAT THE
FOREGOING RELEASE SHALL BE EFFECTIVE REGARDLESS OF WHETHER THE BASIS FOR ANY
CLAIM OR RIGHT HEREBY RELEASED SHALL HAVE BEEN KNOWN TO OR ANTICIPATED BY IT.
EACH OF CYBERGUARD AND ARCA ACKNOWLEDGES THAT IT MAY HEREAFTER DISCOVER FACTS IN
ADDITION TO OR DIFFERENT FROM THOSE WHICH IT NOW KNOWS OR BELIEVES TO BE TRUE
WITH RESPECT TO THE CLAIMS RELEASED HEREBY OR TO THE SUBJECT MATTER RELATING
THERETO, BUT EACH OF CYBERGUARD AND ARCA FULLY, FINALLY, UNCONDITIONALLY AND
FOREVER RELEASES, SETTLES AND DISCHARGES SUCH TRANSFERORS AND SHAREHOLDERS AND
OPTION HOLDERS AS DESCRIBED HEREIN WITHOUT REGARD TO THE SUBSEQUENT DISCOVERY OR
EXISTENCE OF SUCH DIFFERENT OR ADDITIONAL FACTS AND HEREBY WAIVES ANY AND ALL
RIGHTS IT MAY HAVE UNDER ANY STATUTE, INCLUDING, BUT NOT LIMITED TO, SECTION
1542 OF THE CALIFORNIA CIVIL CODE, OR COMMON LAW PRINCIPLES WHICH WOULD LIMIT
THE EFFECT OF THE FOREGOING RELEASE TO THOSE ACTIONS, CAUSES OF ACTION, SUITS,
DEBTS, DUES, SUMS OF MONEY, ACCOUNTS, RECKONINGS, BONDS, BILLS, SPECIALITIES,
COVENANTS, CONTRACTS, CONTROVERSIES, AGREEMENTS, JUDGMENTS, EXECUTIONS, CLAIMS,
DEMANDS AND LIABILITIES ACTUALLY KNOWN OR SUSPECTED TO EXIST AT THE TIME OF THE
EFFECTIVENESS OF THE FOREGOING RELEASE. CALIFORNIA CIVIL CODE SECTION 1542
PROVIDES:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
EACH OF CYBERGUARD AND ARCA ALSO IRREVOCABLY AND UNCONDITIONALLY AGREES
NOT TO BRING ANY SUIT, PROCEEDING, ARBITRATION OR OTHER ACTION OF ANY NATURE
WHATSOEVER AGAINST ANY TRANSFEROR IN CONNECTION WITH OR RELATING TO ANY CLAIM SO
RELEASED.
V.6 NON-DISPARAGEMENT. On and after the date hereof, CyberGuard agrees
not to make or publish any statement or other communication which could
reasonably be interpreted as disparaging, uncomplimentary, negative or
unfavorable with respect to any Transferor, all except as required by law;
provided, however, that the foregoing shall not prohibit otherwise
non-actionable statements made in good faith in furtherance of good faith
business competition; and, provided, further, that the foregoing shall not
restrict in any manner CyberGuard in the course of its business activities from
providing good faith technical product or service evaluations that include
products or services provided by any Transferor.
V.7 INVESTIGATION; NOTICES. The representations, warranties and
covenants set forth in this Agreement shall not be affected or diminished in any
way by the receipt of any notice to any party or by any investigation (or
failure to investigate) at any time by or on behalf of the party for whose
benefit such representations, warranties and covenants were made and shall
survive the closing of the Transactions contemplated hereby.
V.8 INDEMNIFICATION.
(a) BY THE TRANSFERORS. Subject to the limitations set forth
in SECTION 5.8 hereof, each Transferor severally and not jointly agrees to
indemnify and hold harmless CyberGuard and its Affiliates and their respective
successors and assigns from, against and in respect of, the full amount of any
and all liabilities, damages, claims, deficiencies, fines, assessments, losses,
taxes, penalties, interest, costs and expenses, including, without limitation,
reasonable fees and disbursements of counsel (collectively "LOSSES") arising
from, in connection with, or incident to: (i) any breach or violation of any of
the representations, warranties, covenants or agreements of any Transferor
contained in this Agreement or in any document or certificate delivered by any
Transferor at or prior to the Closing to effectuate the transactions
contemplated hereby; and (ii) any and all
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actions, suits, proceedings, demands, assessments, judgments, costs and expenses
incidental to any of the foregoing.
(b) BY CYBERGUARD. Subject to the limitations set forth in
SECTION 5.8 hereof, CyberGuard agrees to indemnify and hold harmless each
Transferor and their respective successors and assigns from, against and in
respect of, the full amount of any and all Losses arising from, in connection
with, or incident to: (i) any breach or violation of any of the representations,
warranties, covenants or agreements of CyberGuard contained in this Agreement or
in any document or certificate delivered by CyberGuard at or prior to the
Closing to effectuate the transactions herein; and (ii) any and all actions,
suits, proceedings, demands, assessments, judgments, costs and expenses
incidental to any of the foregoing.
(c) INDEMNITY PROCEDURE. A party or parties hereto agreeing to
be responsible for or to indemnify against any matter pursuant to this SECTION
5.8 is referred to herein as the "Indemnifying Party" and the other party or
parties claiming indemnity is referred to as the "Indemnified Party." An
Indemnified Party under this Agreement shall, with respect to claims asserted
against such party by any third party, give written notice to each Indemnifying
Party of any liability which might give rise to a claim for indemnity under this
Agreement within ten (10) business days of the receipt of any written claim from
any such third party, and with respect to other matters for which the
Indemnified Party may seek indemnification, give prompt written notice to each
Indemnifying Party; provided, however, that any failure to give such notice will
not waive any rights of the Indemnified Party except to the extent the rights of
the Indemnifying Party are materially prejudiced. The Indemnified Party shall
contest and defend such claims, acting reasonably and in accordance with good
faith business judgment, with counsel reasonably satisfactory to the
Indemnifying Party, and shall not effect any settlement thereof without the
consent of each Indemnifying Party, which consent shall not be unreasonably
withheld. An Indemnifying Party shall have the right to participate in such
proceedings and to be represented by separate attorneys of its choice and at its
own expense. Each Indemnified Party and Indemnifying Party agree to afford one
another the opportunity to be present at, and to participate in, conferences
with all Persons asserting claims for which indemnification is sought hereunder.
Each Indemnified Party and Indemnifying Party shall cooperate with and assist
the other to the extent lawful and reasonably possible. Each Indemnifying Party
shall be kept fully informed of the defense of any such claim at all stages
thereof. In the event that an Indemnified Party fails to timely and in good
faith defend against any such claim, each Indemnifying Party shall, after
providing three days prior written notice to the Indemnified Party, have the
right, but not the obligation, to defend and settle the same. In the event that
the Indemnifying Party is, directly or indirectly, conducting a defense against
any such claim, the Indemnified Party shall cooperate with the Indemnifying
Party in any such defense and make available to it all such witnesses, records,
materials and information in its possession or under its control.
ARTICLE VI
MISCELLANEOUS
VI.1 NOTICES. Any notice or other communication under this Agreement
shall be in writing and shall be delivered personally or sent by registered
mail, return receipt requested, postage prepaid, or sent by prepaid overnight
courier to the parties at the addresses set forth below their names on the
signature pages of this Agreement (or at such other addresses as shall be
specified by the parties by like notice), to the attention of the President of
such party. Such notices, demands, claims and other communications shall be
deemed given when actually received or: (A) in the case of delivery by overnight
service with guaranteed next day delivery, the next day or the day designated
for delivery; or (B) in the case of registered U.S. mail, five days after
deposit in the U.S. mail.
VI.2 ENTIRE AGREEMENT. This Agreement and each document and agreement
executed by the parties in connection herewith contains every obligation and
understanding among the parties relating to the subject matter hereof and merges
all prior discussions, negotiations and agreements, if any, among them, and none
of the parties shall be bound by any representations, warranties, covenants, or
other understandings, other than as expressly provided or referred to herein.
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VI.3 ASSIGNMENT. This Agreement may not be assigned by any party
without the written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, and permitted assigns.
VI.4 WAIVER AND AMENDMENT. Any representation, warranty, covenant, term
or condition of this Agreement which may legally be waived, may be waived, or
the time of performance thereof extended, at any time by the party hereto
entitled to the benefit thereof, and any term, condition or covenant hereof may
be amended by the parties hereto at any time. No waiver by any party hereto,
whether express or implied, of its rights under any provision of this Agreement
shall constitute a waiver of such party's rights under such provisions at any
other time or a waiver of such party's rights under any other provision of this
Agreement or a waiver of the rights of any other party. No failure by any party
hereto to take any action against any breach of this Agreement or default by
another party shall constitute a waiver of the former party's right to enforce
any provision of this Agreement or to take action against such breach or default
or any subsequent breach or default by such other party.
VI.5 NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any Person
other than the parties hereto and their respective successors and permitted
assigns, any rights or remedies under or by reason of this Agreement; PROVIDED,
HOWEVER, that all shareholders and option holders of ARCA as of the consummation
of the Transactions contemplated by the Merger Agreement shall be third party
beneficiaries of SECTIONS 5.5(B) AND 6.13 of this Agreement.
VI.6 SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall be declared invalid, void or unenforceable,
the remainder of the provisions of this Agreement shall remain in full force and
effect, and such invalid, void or unenforceable provision shall be interpreted
as closely as possible to the manner in which it was written.
VI.7 EXPENSES. All expenses (including, without limitation, legal fees
and expenses, investment banking fees, and expenses of accountants) incurred by
a party in connection with the transactions contemplated hereby will be borne by
such party.
VI.8 HEADINGS. The section and other headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of any provisions of this Agreement.
VI.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. Any telecopied
counterpart of a manually executed original shall be deemed a manually executed
original.
VI.10 LITIGATION; PREVAILING PARTY. In the event of any litigation with
regard to this Agreement, the prevailing party shall be entitled to receive from
the non-prevailing party and the non-prevailing party shall pay upon demand all
reasonable fees and expenses of counsel for the prevailing party.
VI.11 INJUNCTIVE RELIEF. It is possible that remedies at law may be
inadequate and, therefore, the parties hereto shall be entitled to equitable
relief including, without limitation, injunctive relief, specific performance or
other equitable remedies in addition to all other remedies provided hereunder or
available to the parties hereto at law or in equity.
VI.12 GOVERNING LAW; EXCLUSIVE VENUE. This Agreement has been entered
into and shall be construed and enforced in accordance with the laws of the
State of Florida without reference to the choice of law principles thereof. This
Agreement shall be subject to the exclusive jurisdiction of the courts located
in Broward County, Florida. The parties to this Agreement agree that any breach
of any term or condition of this Agreement shall be deemed to be a breach
occurring in Broward County, Florida by virtue of a failure to perform an act
required to be performed in Broward County, Florida and irrevocably and
expressly agree to submit to the jurisdiction of the courts located in Broward
County, Florida for the purpose of resolving any
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disputes among the parties relating to this Agreement or the transactions
contemplated hereby. The parties irrevocably waive, to the fullest extent
permitted by law, any objection which they may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to
this Agreement, or any judgment entered by any court in respect hereof brought
in Broward County, Florida, and further irrevocably waive any claim that any
suit, action or proceeding brought in Broward County, Florida has been brought
in an inconvenient forum.
VI.13 TRANSACTIONS. CyberGuard hereby consents to the sale and transfer
of CyberGuard Common Stock to Exodus as contemplated in connection with the
Transactions, notwithstanding the fact that such CyberGuard Common Stock may be
subject to certain Affiliates Letters (as defined in the Merger Agreement) and
may be deemed restricted securities.
VI.14 RESIGNATIONS. Simultaneously with the Closing, each Transferor
hereby resigns from all positions (as officer, director or otherwise) from
CyberGuard and ARCA.
IN WITNESS WHEREOF, the parties hereto have each executed and delivered
this Agreement as of the day and year first above written.
CYBERGUARD CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 2000 West Commercial Boulevard
Suite 200
Ft. Lauderdale, Florida 33309
ARCA SYSTEMS, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 2000 West Commercial Boulevard
Suite 200
Ft. Lauderdale, Florida 33309
-----------------------------------------------
WILLIAM F. WILSON
11149 Sutherland Avenue
Cupertino, CA 95014
-----------------------------------------------
MICHAEL L. WEIDNER
10498 Faulkner Ridge Circle
Columbia, MD 21044
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<PAGE> 57
-----------------------------------------------
R. KENNETH BAUER
40165 Canyon Heights Drive
Freemont, CA 94539-3008
-----------------------------------------------
JACK WOOL
236 Old Littleton Road
Harvard, MA 01451
-----------------------------------------------
MARV SCHAEFER
3657 Sharp Road
Glenwood, MD 21738
-----------------------------------------------
GARY GROSSMAN
2230 Wheelwright Court
Reston, VA 22091
-----------------------------------------------
VICTORIA THOMPSON
9331 Mainsail Drive
Burke, VA 22015
-----------------------------------------------
STEPHEN NARDONE
36 Deacon Lane
Hollis, NH 03049
-----------------------------------------------
CHARLES PFLEEGER
4519 Davenport Street, N.W.
Washington, DC 20016-4415
-----------------------------------------------
Name: Rick Flather
Address:
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-----------------------------------------------
Name: Kelly Stump
Address:
-----------------------------------------------
Name: Nicole Canzanese
Address:
-----------------------------------------------
Name: Lisa Gallagher
Address:
-----------------------------------------------
Name: Claire Barrett
Address:
-----------------------------------------------
Name: Nancy Campesi
Address:
-----------------------------------------------
Name: Lawrence Halme
Address:
-----------------------------------------------
Name: David Wichers
Address:
-----------------------------------------------
Name: Rochelle Randel
Address:
-----------------------------------------------
Name: Karen Ferraiolo
Address:
-----------------------------------------------
Name: Doug Landoll
Address:
-----------------------------------------------
Name: Judy Piatanesi
Address:
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-----------------------------------------------
Name: Jeff Williams
Address:
-----------------------------------------------
Name: Sally Moulton
Address:
-----------------------------------------------
Name: Stan Wisseman
Address:
-----------------------------------------------
Name: Diann Carpenter
Address:
-----------------------------------------------
Name: William Young
Address:
-----------------------------------------------
Name: Sandra Creyssels
Address:
-----------------------------------------------
Name: Herbert Markle
Address:
-----------------------------------------------
Name: Stephen Brackin
Address:
-----------------------------------------------
Name: Frank Wentz
Address:
-----------------------------------------------
Name: Kristina Winkler
Address:
-----------------------------------------------
Name: Joyce Richardson
Address:
-----------------------------------------------
Name: Ken Bailey
Address:
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-----------------------------------------------
Name: Terrie Diaz
Address:
-----------------------------------------------
Name: Klayton Monroe
Address:
-----------------------------------------------
Name: Rich Searles
Address:
-----------------------------------------------
Name: Janine Tipton
Address:
-----------------------------------------------
Name: Carol Wickham
Address:
-----------------------------------------------
Name: Wayne Thibeault
Address:
-----------------------------------------------
Name: Chris Romeo
Address:
-----------------------------------------------
Name: Brian Rickle
Address:
-----------------------------------------------
Name: Daniel DePrez
Address:
-----------------------------------------------
Name: Eric Winterton
Address:
SCHEDULE 4.7
All unassigned Permits and Licenses, all Unassigned Contracts and all Unassigned
Services Contracts (all as defined in the Asset Purchase Agreement).
All liabilities or obligations listed in Section 3.2(ii) of the Asset Purchase
Agreement released by the express terms of this Agreement.
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SCHEDULE 4.8
Claims and Stock Purchase Agreement
Asset Purchase Agreement
Escrow Agreements (2)
Non-Competition Agreements -- Wilson, Weidner and Bauer
Employment Agreements -- Wilson, Weidner and Bauer
Option Agreements
Proprietary Rights Agreements
Executive Employment Policy
<PAGE> 62
CLAIMS AND STOCK PURCHASE AGREEMENT
This CLAIMS AND STOCK PURCHASE AGREEMENT (this "AGREEMENT") is
entered into as of October 2, 1998 (the "CLOSING DATE"), by and between Exodus
Communications, Inc., a Delaware corporation ("EXODUS"), EC Acquisitions Corp.,
a Delaware corporation and wholly-owned subsidiary of Exodus ("SUB" and together
with Exodus, "BUYER") and the persons listed on EXHIBIT A hereto as sellers
(individually, a "SELLER" and together the "Sellers").
W I T N E S S E T H:
WHEREAS, each Seller owns the number of shares of stock of
CyberGuard Corporation, a Florida corporation ("CYBERGUARD"), set forth next to
each Seller's name on EXHIBIT A to this Agreement (the "SHARES") and may have
certain potential claims against CyberGuard in connection with the original
acquisition by Seller of such Shares or otherwise.
WHEREAS, Sellers wish to sell and Buyer wishes to purchase the
Shares and Sellers' interest in such claims pursuant to the terms and subject to
the conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the sums paid to each
Seller set forth next to such Seller's name on EXHIBIT A hereto by Buyer at the
time hereof, and the mutual promises contained in this Agreement, the parties
hereto agree as follows:
SECTION 1. DEFINITIONS. The following terms, as used herein,
have the following respective meanings:
"Claims" means any and all rights, claims, demands, actions,
losses, costs, expenses, judgments, obligations, liabilities and damages of any
nature whatsoever, whether accrued or unaccrued or possible, asserted or
unasserted, and whether known or unknown, suspected or unsuspected, which ever
existed, now exist, or may hereafter exist, by reason of any tort, breach of
contract, violation of law or other act or failure to act, which shall have
occurred at or prior to the date hereof (the "CLOSING DATE") that each
Non-Employee Seller may have against CyberGuard or any of its Subsidiaries,
officers, directors, employees or agents or any of their respective Affiliates.
"Damage" means any damage, loss, liability, expense
(including, without limitation, reasonable expenses of investigation and fees
and disbursements of attorneys and other professional advisors in connection
with any action, suit or proceeding brought against Buyer) and any other
obligation whatsoever.
"Encumbrance" means any lien, mortgage, charge, hypothecation,
pledge, security interest, prior assignment, option, warrant, lease, sublease,
right to possession, encumbrance, claim, right or restriction which affects, by
way of a conflicting ownership interest or otherwise, the right, title or
interest in or to any particular property.
"Founder" means each of William S. Wilson, Ken Bauer and Mike
Weidner.
"Non-Employee Seller" means each of Robert E. Bauer, Arnold M.
Harrison, John P. and Eve W. Melton, Vincent O. Lacariere, Stanley Rybczynski,
E. Lance Doxie, Charles W. Doxie, Richard Perez, Steven Wilson, Francis Wichers,
Frederick P. Henninge, Elizabeth J. Slater, Jeff DeMello, Gordon Buhle and Marla
Collier.
"Person" means an individual, corporation, partnership,
association, trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
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<PAGE> 63
"Transferred Interests and Assets" means the Claims and Shares
transferred pursuant to this Agreement.
SECTION 2. (a) PURCHASE, SALE AND ASSIGNMENT OF CLAIMS;
RELEASE OF CLAIMS; COVENANT NOT TO SUE; COOPERATION. For good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
each Non-Employee Seller hereby irrevocably and unconditionally sells,
transfers, conveys and assigns and Buyer hereby purchases each Non-Employee
Seller's entire undivided interest in the Claims. BY SUCH PURCHASE AND
ASSIGNMENT, BUYER ACQUIRES THE FULL POWER TO PROSECUTE, COMPROMISE, SETTLE AND
REASSIGN SUCH CLAIMS, AND DEMAND, SUE FOR, COLLECT AND RECEIVE ANY AND ALL
AMOUNTS DUE OR TO BECOME DUE UNDER SUCH CLAIMS AND GIVE A RELEASE IN FULL
SETTLEMENT, INCLUDING THE UNCONDITIONAL AND IRREVOCABLE RELEASE OF CYBERGUARD
AND ALL OF ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS AND ASSIGNS
FROM AND AGAINST ANY AND ALL CLAIMS WHICH SHALL HAVE ARISEN OR ACCRUED OR
OCCURRED OR RELATE IN WHOLE OR IN PART TO MATTERS OCCURRING ON OR PRIOR TO THE
DATE OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO, MATTERS IN ANY MANNER
RELATING TO OR ARISING IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED IN
CONNECTION WITH THE AGREEMENT AND PLAN OF MERGER, DATED AS OF MAY 29, 1998, TO
WHICH CERTAIN SELLERS AND CYBERGUARD ARE PARTIES ("MERGER AGREEMENT"),
INCLUDING, WITHOUT LIMITATION, THE BREACH OF ANY REPRESENTATIONS AND WARRANTIES
CONTAINED IN THE MERGER AGREEMENT, THE VIOLATION OF ANY SECURITIES LAWS BY
CYBERGUARD, THE FAILURE OF CYBERGUARD TO COMPLY WITH ANY PROVISION OF THE MERGER
AGREEMENT OR ANY OTHER DOCUMENT RELATING THERETO (IN ANY SUCH INSTANCE, WHETHER
BY NEGLIGENCE, INTENTIONAL MISCONDUCT, FRAUD OR OTHERWISE) OR THE OCCURRENCE OF
ANY OF THE TRANSACTIONS BEING EFFECTUATED ON THE DATE HEREOF WHICH ARE NOT
EFFECTUATED BY AGREEMENTS TO WHICH SUCH NON-EMPLOYEE SELLER AND CYBERGUARD ARE
BOTH PARTIES, INCLUDING AS A THIRD PARTY BENEFICIARY; PROVIDED, HOWEVER, THAT
SUCH A RELEASE MAY NOT INCLUDE A RELEASE WITH RESPECT TO BREACHES OF
REPRESENTATIONS, WARRANTIES OR COVENANTS OF CYBERGUARD OR ARCA IN ANY AGREEMENT
ENTERED INTO ON THE DATE HEREOF TO WHICH SUCH NON-EMPLOYEE SELLER AND CYBERGUARD
ARE BOTH PARTIES, INCLUDING AS A THIRD PARTY BENEFICIARY. EACH NON-EMPLOYEE
SELLER EXPRESSLY INTENDS THAT, BY SELLING AND ASSIGNING TO BUYER ITS INTEREST IN
THE CLAIMS, AND THEREBY ENABLING BUYER TO GIVE A RELEASE IN FULL SETTLEMENT OF
SUCH CLAIMS, THAT ANY SUCH RELEASE SHALL BE EFFECTIVE REGARDLESS OF WHETHER THE
BASIS FOR ANY CLAIM OR RIGHT BEING RELEASED SHALL HAVE BEEN KNOWN TO OR
ANTICIPATED BY HIM OR HER. EACH NON-EMPLOYEE SELLER ACKNOWLEDGES THAT HE OR SHE
MAY HEREAFTER DISCOVER FACTS IN ADDITION TO OR DIFFERENT FROM THOSE WHICH HE OR
SHE NOW KNOWS OR BELIEVES TO BE TRUE WITH RESPECT TO CYBERGUARD OR THE CLAIMS
BEING ASSIGNED TO BUYER HEREBY OR TO THE SUBJECT MATTER RELATING THERETO, BUT
EACH NON-EMPLOYEE SELLER, BY SUCH SALE AND ASSIGNMENT TO BUYER OF ITS CLAIMS,
ENABLES BUYER TO FULLY, FINALLY, UNCONDITIONALLY AND FOREVER RELEASE, SETTLE AND
DISCHARGE CYBERGUARD AND ALL OF ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES,
AGENTS AND ASSIGNS AS DESCRIBED HEREIN WITHOUT REGARD TO THE SUBSEQUENT
DISCOVERY OR EXISTENCE OF SUCH DIFFERENT OR ADDITIONAL FACTS AND TO WAIVE ANY
AND ALL RIGHTS SUCH NON-EMPLOYEE SELLER MAY HAVE HAD UNDER ANY STATUTE,
INCLUDING, BUT NOT LIMITED TO, SECTION 1541 OF THE CALIFORNIA CIVIL CODE, OR
COMMON LAW PRINCIPLES WHICH WOULD LIMIT THE EFFECT OF THE FOREGOING RELEASE TO
THOSE ACTIONS, CAUSES OF ACTION, SUITS, DEBTS, DUES, SUMS OF MONEY, ACCOUNTS,
RECKONINGS, BONDS, BILLS, SPECIALTIES, COVENANTS, CONTRACTS, CONTROVERSIES,
AGREEMENTS, JUDGMENTS, EXECUTIONS, CLAIMS, DEMANDS AND
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LIABILITIES ACTUALLY KNOW OR SUSPECTED TO EXIST AT THE TIME OF THE EFFECTIVENESS
OF THE RELEASE. CALIFORNIA CIVIL CODE SECTION 1542 PROVIDES:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE RELEASE WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Each Non-Employee Seller also irrevocably and
unconditionally agrees not to bring any suit, proceeding, arbitration,
litigation or other action of any nature whatsoever against CyberGuard or any of
its officers, directors, employees, agents or affiliates in connection with or
relating to any Claim referenced above.
(b) PURCHASE AND SALE OF SHARES. Each Seller hereby
sells, transfers, conveys and assigns and Buyer hereby purchases from such
Seller all right, title and interest in and to the number of Shares set forth on
EXHIBIT A hereto next to such Seller's name represented by the stock
certificates identified on such EXHIBIT A, which certificates have been or
promptly will be delivered to Buyer, and each Seller does hereby irrevocably
constitute and appoint CyberGuard's transfer agent as its attorney-in-fact, with
full powers of substitution, to transfer the Shares on the books of CyberGuard
and to issue certificates representing such Shares to Buyer.
Seller understands and acknowledges that Buyer
intends to transfer the Transferred Interests and Assets to CyberGuard and/or
its affiliates.
SECTION 3. CONSIDERATION FOR SALE OF TRANSFERRED INTERESTS AND
ASSETS. As consideration for the sale to Buyer of the Transferred Interests and
Assets, Buyer hereby pays to each Seller the amount listed as total
consideration next to such Seller's name on EXHIBIT A hereto (the
"CONSIDERATION"), in cash, receipt of which is hereby acknowledged, of which the
amount set forth next to such Seller's name on EXHIBIT A as "Amount of
Consideration Held in Escrow" shall be held by the Escrow Agent pursuant to the
Escrow Agreement referenced in Section 6 hereof.
SECTION 4.
(a) REPRESENTATIONS AND WARRANTIES OF SELLERS WITH
RESPECT TO TRANSFERRED INTERESTS AND ASSETS. Each Seller represents and warrants
to and agrees with Buyer that:
(i) This Agreement has been duly authorized,
executed and delivered by or on behalf of such Seller and is enforceable in
accordance with its terms; provided, however, that this Agreement may be subject
as to enforcement to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights, and to general
equitable principles.
(ii) The execution and delivery by such
Seller of, and the performance by such Seller of its obligations under, this
Agreement, will not contravene any provision of applicable law, or the articles
of incorporation or by-laws of such Seller (if such Seller is a corporation), or
any agreement or other instrument binding upon such Seller or any judgment,
order or decree of any governmental body, agency or court having jurisdiction
over such Seller, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by such Seller of its obligations under this Agreement except such
as may be required by the securities or Blue Sky laws of the various states in
connection with the sale of the Shares by such Seller to Buyer; provided,
however, that this Agreement may be subject as to enforcement to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights, and to general equitable principles.
(iii) Such Seller has valid title to the
Shares to be sold by such Seller and the legal right and power, and all
authorizations and approvals required by law, to enter into this Agreement, and
to sell, transfer and deliver the Shares to be sold by such Seller; subject to
the
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enforceability of the release of any restrictions or encumbrances on the Shares
effected by the Agreement dated October 2, 1998 between CyberGuard, Arca and
certain employees of Arca.
(iv) Delivery of the Shares to be sold by
Seller pursuant to this Agreement will pass title to such Shares free and clear
of any security interests, claims, liens, equities and other Encumbrances;
subject to the enforceability of the release of any restrictions or encumbrances
on the Shares effected by the Agreement dated October 2, 1998 between
CyberGuard, Arca and certain employees of Arca.
(v) Such Seller has not sold, assigned or
otherwise transferred to any third party any of his or her right, title or
interest in or to any of the Transferred Interests or Assets; subject to the
enforceability of the release of any restrictions or encumbrances on the Shares
effected by the Agreement dated October 2, 1998 between CyberGuard, Arca and
certain employees of Arca.
(vi) There exists no Encumbrance whatsoever
on or relating to any of the Transferred Interests or Assets, and such Seller
neither holds, nor has any other right, title or interest in or to any
Encumbrance on any of the Transferred Interests or Assets.
(vii) SUCH SELLER HAS REVIEWED THIS
AGREEMENT AND ALL OF THE AGREEMENTS AND INSTRUMENTS EXECUTED IN CONNECTION
HEREWITH AND ALL OF THE AGREEMENTS AND RELATED ITEMS RELATING TO THE
TRANSACTIONS CONTEMPLATED IN CONNECTION HEREWITH AND THEREWITH (ALL OF THE
FOREGOING HEREINAFTER SOMETIMES REFERRED TO AS THE "TRANSACTIONS"), INCLUDING
BUT NOT LIMITED TO THE AGREEMENTS SET FORTH ON SCHEDULE A HERETO, SOME OF WHICH
INVOLVE CYBERGUARD (COLLECTIVELY, THE "TRANSACTION DOCUMENTS"). EACH SELLER
UNDERSTANDS THAT HE OR SHE HAS BEEN STRONGLY URGED AND HAS HAD THE OPPORTUNITY
TO SEEK THE ADVICE OF HIS OR HER OWN INDEPENDENT LEGAL COUNSEL AND BUSINESS AND
TAX ADVISORS BEFORE ENTERING INTO ANY OF THE TRANSACTION DOCUMENTS. SUCH SELLER
BELIEVES THAT THE TRANSACTIONS ARE FAIR AND REASONABLE TO SUCH SELLER IN ALL
RESPECTS (INCLUDING, BUT NOT LIMITED TO, THE PAYMENT BY EXODUS TO CYBERGUARD OF
MORE THAN $3 MILLION) AND CONSENTS THERETO AND BELIEVES THAT THE TRANSACTIONS
ARE IN HIS OR HER OWN BEST INTEREST. SELLER ACKNOWLEDGES THAT NEITHER
CYBERGUARD, ARCA NOR ANY OF THEIR AFFILIATES, OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES, OR ANY OTHER SELLER, SHALL HAVE ANY LIABILITY OR RESPONSIBILITY OF
ANY NATURE WHATSOEVER FOR ANY ACT OR OMISSION BY BUYER OR ANY OF ITS AFFILIATES,
INCLUDING, BUT NOT LIMITED TO, ANY MATERIAL MISSTATEMENT OR OMISSION BY BUYER OR
ANY AFFILIATE OR THE FAILURE OF BUYER OR ANY OF ITS AFFILIATES TO COMPLY WITH
ANY OBLIGATIONS ARISING UNDER ANY OF THE TRANSACTIONS OR OTHERWISE. SUCH SELLER
ACKNOWLEDGES THAT NONE OF BUYER, CYBERGUARD, ARCA OR ANY OTHER SELLER NOR ANY OF
THEIR RESPECTIVE AFFILIATES, SUBSIDIARIES OR AGENTS, HAS MADE TO SUCH SELLER ANY
REPRESENTATION OR WARRANTY AS TO THE TAX OR OTHER CONSEQUENCES TO SUCH SELLER OF
THE TRANSACTIONS. SUCH SELLER UNDERSTANDS THE HIGHLY SPECULATIVE NATURE OF AND
SUBSTANTIAL RISKS INVOLVED IN THE TRANSACTIONS, AND HAS BEEN STRONGLY URGED TO
DISCUSS THE SAME WITH HIS OR HER OWN INDEPENDENT LEGAL COUNSEL AND BUSINESS AND
TAX ADVISORS. IN ADDITION TO SELLER'S FAMILIARITY WITH ARCA AND CYBERGUARD AND
THEIR OPERATIONS, SELLER HAS BEEN OFFERED THE OPPORTUNITY TO ASK QUESTIONS OF
AND RECEIVE ANSWERS FROM ARCA AND CYBERGUARD AND BUYER AND HAS ACCESS TO
INFORMATION SUCH SELLER HAS DEEMED MATERIAL IN DECIDING WHETHER TO CONSENT TO
THE TRANSACTIONS. SUCH SELLER ACKNOWLEDGES THAT THE CONSIDERATION TO BE RECEIVED
BY HIM OR HER IN CONNECTION WITH THE TRANSACTIONS WAS DETERMINED IN ARMS LENGTH
NEGOTIATIONS AMONG THE PARTIES, AND THAT SELLER IS FULLY SATISFIED AS TO THE
CONSIDERATION BEING RECEIVED BY SUCH SELLER IN CONNECTION WITH THE TRANSACTIONS.
SUCH SELLER ACKNOWLEDGES THAT THE CONSIDERATION PAYABLE TO OTHER FORMER
SHAREHOLDERS, OPTION HOLDERS AND EMPLOYEES IN CONNECTION WITH THE
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TRANSACTIONS MAY VARY AND BE DISPARATE, BUT SUCH SELLER HAS REVIEWED AND
UNDERSTANDS THE SAME AND THE CONSIDERATION BEING PAID TO ALL SUCH PARTIES IN
CONNECTION WITH THE TRANSACTIONS AND BELIEVES THE SAME IS FAIR AND EQUITABLE.
SUCH SELLER ACKNOWLEDGES THAT HE OR SHE SHALL HAVE ABSOLUTELY NO CLAIMS, CAUSES
OF ACTION OR OTHER RIGHTS OF ANY NATURE WHATSOEVER AGAINST CYBERGUARD OR ANY OF
ITS AFFILIATES IN CONNECTION WITH ANY OF THE TRANSACTIONS AS THEY RELATE TO ACTS
OR OMISSIONS OF ANY PARTY OTHER THAN CYBERGUARD OR ARCA (EXCEPT ACTS OF ANY
EMPLOYEE OF ARCA) OR IN CONNECTION WITH ANY TRANSACTION WHICH IS NOT EFFECTUATED
BY AN AGREEMENT TO WHICH CYBERGUARD OR ARCA IS A PARTY. EACH NON-EMPLOYEE SELLER
FURTHER ACKNOWLEDGES THAT HE OR SHE FULLY UNDERSTANDS THE PROVISIONS RELATING TO
AND THE RAMIFICATIONS OF SELLING AND ASSIGNING TO BUYER THE ABILITY TO GRANT THE
RELEASE CONTAINED IN SECTION 2(A) HEREOF AND HAS BEEN STRONGLY URGED TO FULLY
DISCUSS SAME WITH HIS OR HER INDEPENDENT LEGAL COUNSEL AND BUSINESS ADVISORS.
SUCH SELLER HAS MADE HIS OR HER OWN INDEPENDENT EVALUATION OF THE VALUE OF THE
CONSIDERATION PAYABLE TO HIM OR HER AND THE OTHER TERMS AND CONDITIONS OF THE
TRANSACTION WITHOUT RELIANCE ON ANY PARTY OTHER THAN TO THE EXTENT HE OR SHE HAS
RELIED ON HIS OR HER INDEPENDENT LEGAL COUNSEL AND BUSINESS AND TAX ADVISORS.
(viii) Such Seller has not employed any
broker, finder or agent, or agreed to pay or incurred any brokerage fee, finders
fee or commission with respect to the transactions contemplated by this
Agreement, or dealt with anyone purporting to act in the capacity of a broker,
finder or agent with respect thereto as a result of which any claim for a fee
can be asserted against Buyer. (b) REPRESENTATIONS AND WARRANTIES OF CERTAIN
SELLERS WITH RESPECT TO EXHIBIT B. Subject to the limitations in Section 6
hereof, each Founder and each Non-Employee Seller (each a "CONTRIBUTING SELLER")
also represents and warrants to Buyer as to the matters set forth on EXHIBIT B
hereto.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to each Seller that:
(a) This Agreement has been duly authorized, executed
and delivered by or on behalf of Buyer. The execution and delivery by Buyer of,
and the performance by Buyer of its obligations under, this Agreement, will not
contravene any provision of applicable law, or the articles of incorporation or
by-laws of Buyer, or any agreement or other instrument binding upon Buyer or any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over Buyer, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by Buyer of its obligations under this Agreement except such as may
be required by the securities or Blue Sky laws of the various states in
connection with the sale of the Shares by Seller to Buyer; provided, however,
that this Agreement may be subject as to enforcement to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors' rights, to general equity principles. Buyer has the legal right and
power, and all authorizations and approvals required by law, to enter into this
Agreement, and to purchase the Shares to be sold by Seller.
(b) Buyer is not purchasing the Shares with a view
to, or for sale in connection with, a distribution of the Shares within the
meaning of the Securities Act of 1933, as amended (the "1933 Act"). However,
Buyer intends to effect a sale of the Transferred Interests and Assets following
execution of this Agreement, including a sale of the Shares to CyberGuard.
(c) Buyer has had access to all information regarding
CyberGuard and its present and prospective business, assets, liabilities and
financial condition that Buyer reasonably considers important in making the
decision to acquire the Shares, and Buyer has had ample opportunity to ask
questions of CyberGuard's representatives concerning such matters and this
investment.
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(d) Buyer is fully aware of: (i) the highly
speculative nature of the Shares; (ii) the financial hazards involved; (iii) the
lack of liquidity of the Shares and the restrictions on transferability of the
Shares (E.G., that Buyer may not be able to sell or dispose of the Shares or use
them as collateral for loans); (iv) the qualifications and backgrounds of the
management of CyberGuard; and (v) the tax consequences of acquiring the Shares.
(e) Buyer has a preexisting personal or business
relationship with the Sellers, CyberGuard and/or certain of its officers and/or
directors of a nature and duration sufficient to make Buyer aware of the
character, business acumen and general business and financial circumstances of
CyberGuard and/or such officers and directors. By reason of Buyer's business or
financial experience, Buyer is capable of evaluating the merits and risks of
this transfer, has the ability to protect Buyer's own interests in this
transaction and is financially capable of bearing a total loss of the Shares.
(f) At no time was Buyer presented with or solicited
by any publicly issued or circulated newspaper, mail, radio, television or other
form of general advertising or solicitation in connection with the Shares.
(g) Buyer understands and acknowledges that, in
reliance upon the representations and warranties made by Buyer herein, the
Shares are not being registered with the Securities and Exchange Commission
("SEC") under the 1933 Act or being qualified under the California Corporate
Securities Law of 1968, as amended (the "LAW"), but instead are being
transferred under an exemption or exemptions from the registration and
qualification requirements of the 1933 Act and the Law which impose certain
restrictions on Buyer's ability to transfer the Shares.
(h) Buyer understands that Buyer may not transfer any
Shares unless such Shares are registered under the 1933 Act or qualified under
the Law or unless exemptions from such registration and qualification
requirements are available. Buyer understands that only CyberGuard may file a
registration statement with the SEC or the California Commissioner of
Corporations and that CyberGuard is under no obligation to do so with respect to
the Shares. Buyer has also been advised that exemptions from registration and
qualification may not be available or may not permit Buyer to transfer all or
any of the Shares in the amounts or at the times proposed by Buyer.
(i) In addition, Buyer has been advised that SEC Rule
144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the Shares
and, in any event, requires that the Shares be held for a minimum of one year,
and in certain cases two years, after they have been purchased AND PAID FOR
(within the meaning of Rule 144), before they may be resold under Rule 144.
SECTION 6. INDEMNITY. (a) Subject to the limitations set forth
in this Section 6, each Seller agrees to indemnify and hold harmless Buyer and
its successors and assigns from, against and in respect of, the full amount of
any and all liabilities, damages, claims, deficiencies, fines, assessments,
losses, taxes, penalties, interest, costs and expenses, including without
limitation, reasonable fees and disbursements of counsel (collectively "LOSSES")
arising from, in connection with, or incident to: (i) any breach or violation of
any of the representations, warranties, covenants or agreements of such Seller
contained in this Agreement or in any document or certificate delivered to Buyer
by Seller in connection herewith; and (ii) any and all actions, suits,
proceedings, demands, assessments, judgments, costs and expenses incidental to
any of the foregoing. Such indemnification shall be joint and several for the
Contributing Sellers with respect to any breach or violation of the
representations and warranties set forth on EXHIBIT B hereto. On the terms and
subject to the conditions set forth in this Agreement, the portion of the
Consideration payable by Buyer set forth next to the name of each Contributing
Seller under the caption "Amount of Consideration held in Escrow" on EXHIBIT A
hereto, shall be delivered to State Street Bank and Trust Company of California,
N.A., as escrow agent (the "ESCROW AGENT"), to be held and delivered in
accordance with an Escrow Agreement (the "ESCROW AGREEMENT") in the form
attached hereto as EXHIBIT C (the "ESCROWED CONSIDERATION"). The Escrowed
Consideration represents security for the performance by
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each Contributing Seller of its indemnity obligations under this Agreement. The
Escrow Agreement will provide for the Escrowed Consideration to be held until
the first anniversary of the Closing Date or such longer period pending
resolution of any outstanding claims thereunder. The fees, costs and expenses of
the Escrow Agent shall be paid by Buyer. Each Contributing Seller hereby
consents to the terms of the Escrow Agreement.
(b) Buyer shall, with respect to claims asserted
against such party by any third party, give written notice to each Seller to
whom the claim relates of any liability which might give rise to a claim for
indemnity under this Agreement within ten business days of the receipt of any
written claim from any such third party, and with respect to other matters for
which the Buyer may seek indemnification, give prompt written notice to each
Seller to whom the claim relates; provided, however, that any failure to give
such notice will not waive any rights of Buyer except to the extent the rights
of a Seller are materially prejudiced. Buyer shall contest and defend such
claims, acting reasonably and in accordance with good faith business judgment,
with counsel reasonably satisfactory to a majority of the Sellers to whom the
claim relates, and shall not effect any settlement thereof without the consent
of such Sellers, which consent shall not be unreasonably withheld. Each Seller
to whom the claim relates shall have the right to participate in such
proceedings and to be represented by separate attorneys of its choice and at its
own expense. Buyer and Sellers agree to afford one another the opportunity to be
present at, and to participate in, conferences with all Persons asserting claims
for which indemnification is sought hereunder. Buyer and Sellers shall cooperate
with and assist the other to the extent lawful and reasonably possible. Sellers
shall be kept fully informed of the defense of any such claim at all stages
thereof. In the event that Buyer fails to timely and in good faith defend
against any such claim, each Seller to whom the claim relates shall, after
providing three days prior written notice to Buyer, have the right, but not the
obligation, to defend and settle the same. In the event that such Seller is,
directly or indirectly, conducting a defense against any such claim, the Buyer
shall cooperate with such Seller in any such defense and make available to it
all such witnesses, records, materials and information in its possession or
under its control.
(c) Except as otherwise set forth herein, no Seller
shall have any obligation under the indemnification provisions set forth in
Section 6 or for any breach of the representations and warranties contained in
EXHIBIT B hereto, unless notice of a claim in respect of any matter has been
given such party on or before the first anniversary of the date hereof. For each
Contributing Seller, except for any claim involving fraud or criminal acts of
such Contributing Seller, the sole and exclusive remedy of Buyer for any breach
of any representation or warranty set forth in EXHIBIT B hereto by such
Contributing Seller in this Agreement shall be the indemnification provisions
contained in this Section 6, and the liability incurred by such Seller (other
than the Founders) for any such breaches shall not exceed the amount of Escrowed
Consideration for such Seller. With respect to the Founders, the liability for
any breach of any representation or warranty set forth in EXHIBIT B hereto
incurred by each such individual will not exceed the amount of Escrowed
Consideration for such individual plus an additional $66,666.67 for each such
individual (the "ADDITIONAL INDEMNITY AMOUNTS"). Any and all amounts determined
to be owed by any Contributing Seller by reason of this Section 6 as a result of
a breach of the representations and warranties contained in EXHIBIT B hereto by
any Contributing Seller shall be satisfied first out of the Escrowed
Consideration (on a pro rata basis among all the Contributing Sellers based on
their respective pro rata percentages of Escrowed Consideration remaining in the
Escrow at the time of satisfaction of such indemnification obligation) by return
to Buyer by the Escrow Agent of the amount of the Consideration paid equal to
the amount of any such indemnity obligation (up to and not to exceed the amount
of Escrowed Consideration), and then out of the Additional Indemnity Amounts (on
an equal basis) if additional amounts are owed. Any amounts determined to be
owed by any Seller by reason of this Section 6 as a result of a breach of the
representations and warranties contained in this Agreement other than in EXHIBIT
B hereto by any Seller shall also be satisfied first out of (i) any Escrowed
Consideration contributed by such Seller by return to Buyer by the Escrow Agent
of the amount of the Consideration paid equal to the amount of any such
indemnity obligation and (ii) the Additional Indemnity Amounts, to the extent
contributed by such Seller.
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(d) Notwithstanding the foregoing, the Contributing
Sellers shall not be liable to Buyer for a breach of the representations or
warranties set forth in EXHIBIT B hereto to the extent that the cause of such
breach (i) is due to an action by CyberGuard or its affiliates (excluding Arca
and any of its employees) following the Prior Acquisition Date (as defined in
EXHIBIT B), (ii) in the case of Section 4.24 of EXHIBIT B, is due to an omission
with respect to any ERISA Plan of CyberGuard or its affiliates not by its terms
designed to cover Arca, (iii) in the case of Section 4.29 of EXHIBIT B, is due
to the failure by CyberGuard to pass along to Arca any notice discussed in such
Section and received by CyberGuard but not Arca, or (iv) in the case of Section
4.25, is due to consents, approvals, authorizations or filings generally
required in connection with the transactions contemplated by the Transaction
Documents, but not specific or related to the nature of Arca's business, all of
the foregoing limitations in (i), (ii), (iii) and (iv) applying only to the
extent that none of such Contributing Sellers had any knowledge of such breach.
SECTION 7. SURVIVAL OF THE REPRESENTATIONS AND WARRANTIES. All
representations and warranties of the parties contained in this Agreement shall
survive the execution and delivery hereof until the expiration of the applicable
statute of limitations, with the exception of the representations and warranties
contained in EXHIBIT B hereto which shall continue only until the first
anniversary of the date hereof. None of the representations and warranties of
the parties contained in this Agreement shall be affected by an examination made
for or on behalf of any party to whom such representation is made or the
knowledge of any of such party's officers, directors, shareholders, employees or
agents.
SECTION 8. FILINGS; FURTHER ASSURANCES. Each Seller will
execute, deliver, file and record any specific assignment or other paper and
take any other action that may be necessary or desirable, or that Buyer may
reasonably request, to enable Buyer to exercise and enforce its rights hereunder
with respect to the Transferred Interests and Assets purchased hereunder. Such
Seller further agrees to take such other actions as may be necessary or
desirable, or that Buyer may reasonably request, to assist Buyer in responding
to any inquiries, or defending any claims, that may be made by third parties
regarding the subject of, or related to, this Agreement or the Transaction
Documents. That assistance will include but not be limited to meeting with Buyer
and its attorneys at any reasonable times and upon reasonable notice to provide
a statement or statements concerning any matters related to this Agreement or
the Transaction Documents. Buyer shall reimburse such Seller for all reasonable
out-of-pocket costs and expenses incurred in connection with the assistance
rendered pursuant to the preceding two sentences. Buyer shall endeavor to limit
the extent of the Seller's time utilized in connection with the assistance to be
rendered pursuant to such sentences to the extent reasonably necessary or useful
to Buyer.
SECTION 9. AGREEMENT TO TAKE NECESSARY AND DESIRABLE ACTIONS.
Sellers and Buyer each agree to execute and deliver such other documents,
certificates and agreements and to take such other actions as may be reasonably
necessary or reasonably appropriate to consummate the transactions contemplated
hereby.
SECTION 10. WAIVERS, NON-EXCLUSIVE REMEDIES. No failure on the
part of Buyer to exercise, and no delay in exercising and no course of dealing
with respect to, any right under this Agreement shall operate as a waiver
thereof; nor shall any single or partial exercise by Buyer of any right under
this Agreement preclude any other or further exercise thereof or the exercise of
any other right. The rights in this Agreement are cumulative and are not
exclusive of any other remedies provided by law or contract.
SECTION 11. NOTICES. All notices, requests and other
communications to any party hereunder shall be in writing (including by
facsimile or similar writing) and shall be given:
(a) if to Buyer, to:
Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, California 95051
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Attention: Adam W. Wegner
Phone: (408) 346-2200
Fax: (408) 346-2206
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with copies to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attn: Eileen Duffy Robinett, Esq.
Phone: (650) 494-0600
Fax: (650) 494-1417
(b) if to Seller, to the address set forth on EXHIBIT
A hereto or such other address or facsimile number as such party may hereafter
specify by notice to the other parties. Each such notice, request or other
communication shall be effective (i) if given by facsimile, when such facsimile
is transmitted to the facsimile number specified in this section and the
appropriate written acknowledgment of receipt is received, or (ii) if given by
any other means, when delivered at the address specified in this section.
SECTION 12. SEVERABILITY. If any provision hereof is invalid
and unenforceable in any jurisdiction, then, to the fullest extent permitted by
law, (i) the other provisions hereof shall remain in full force and effect in
such jurisdiction and shall be liberally construed in favor of Buyer in order to
carry out the intentions of the parties hereto as nearly as may be possible; and
(ii) the invalidity or unenforceability of any provision hereof in any
jurisdiction shall not affect the validity or enforceability of such provision
in any other jurisdiction.
SECTION 13. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
successors and assigns; PROVIDED that this Agreement may not be assigned by
Seller without the written consent of the Buyer. CyberGuard shall be a third
party beneficiary of this Agreement. All representations, warranties, covenants
and agreements in this Agreement, with the exception of those set forth on
EXHIBIT B hereto, shall also be for the benefit of CyberGuard. The Parties
acknowledge that CyberGuard has provided sufficient consideration to receive
such third party beneficiary rights. Notwithstanding the foregoing, CyberGuard
shall have no rights to the Escrowed Consideration.
SECTION 14. COUNTERPARTS. This Agreement may be executed in
one or more counterparts all of which shall together constitute one and the same
instrument.
SECTION 15. GOVERNING LAW. This Agreement shall be construed
in accordance with and governed by the laws of the State of California
applicable to contracts wholly made and performed in the State of California.
SECTION 16. ENTIRE AGREEMENT; AMENDMENT. This Agreement
embodies the entire agreement of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements with respect thereto. This
Agreement may be amended, and any provision hereof waived, but only in writing
signed by the party against whom such amendment or waiver is sought to be
enforced. Each Seller acknowledges and agrees that Buyer will prepare and
release one or more press releases and/or public announcements with respect to
the transactions contemplated hereby. Buyer shall discuss any such press
releases with William F. Wilson and give him a reasonable opportunity to comment
thereon prior to public dissemination thereof. No Seller shall cause to be
issued or made, or permit his agents and advisors to issue or make, any press
release or other announcement, disclosure or statement concerning this Agreement
or the transactions contemplated hereby, without the prior written consent of
Buyer. Nothing contained herein shall prevent any party from at any time
furnishing any information to any governmental authority which it is by law or
otherwise so obligated to disclose or from making any disclosure which its
counsel deems necessary or advisable in order to fulfill such party's disclosure
obligations under applicable
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law, including the Securities Act of 1933 or the Securities Exchange Act of
1934, or the rules of The Nasdaq Stock Market.
SECTION 17. THE REPRESENTATIVE AND RELATIONS AMONG SELLERS.
(a) APPOINTMENT OF ACTIONS. Each Contributing Seller
hereby appoints William F. Wilson (the "REPRESENTATIVE") as his or her agent and
representative under the Escrow Agreement. Representative shall not have any
duties or responsibilities except those expressly set forth in the Escrow
Agreement. Representative shall not be a trustee for any Contributing Seller or
have any fiduciary duty to any Contributing Seller. Neither Representative nor
any of agents shall be responsible to any Contributing Seller for any action
taken or omitted to be taken by him or them hereunder or under the Escrow
Agreement, except for his or their own gross negligence or willful misconduct.
Representative shall take such action with respect to the Escrow Agreement as
shall be directed by a majority in interest of the Contributing Sellers (the
"MAJORITY SELLERS").
(b) INDEMNIFICATION. Each Contributing Seller agrees
to indemnify Representative, ratably in accordance with their proportionate
interest in the Escrowed Consideration, for any and all liabilities,
obligations, losses, damages, costs or disbursements of any kind which may at
any time be imposed on, incurred by or asserted against Representative in any
way relating to or arising out of this Agreement, the Escrow Agreement or the
related transactions, except to the extent they arise from Representative's
gross negligence or willful misconduct.
(c) RESIGNATION OR REMOVAL OF REPRESENTATIVE. Subject
to the appointment and acceptance of a successor Representative as provided
below, Representative may resign at any time by giving notice thereof to the
Contributing Sellers, and Representative may be removed at any time with or
without cause by the Majority Sellers. Upon any such resignation or removal, the
Majority Sellers shall have the right to appoint a successor Representative,
which Representative shall be reasonably acceptable to Buyer. If no successor
Representative shall have been appointed by the Majority Sellers and shall have
accepted such appointment within 30 days after the retiring Representative's
giving of notice of resignation or the Majority Sellers' removal of the retiring
Representative, then the retiring Representative may, on behalf of the Sellers,
appoint a successor Representative which is reasonably acceptable to Buyer. Upon
the acceptance of any appointment as Representative hereunder by a successor
Representative, such successor Representative shall thereupon succeed to and
become vested with all the rights, powers, privileges and duties of the retiring
Representative and the retiring Representative shall be discharged from his
duties and obligations hereunder. After any retiring Representative's
resignation or removal hereunder as Representative, the provisions of this
Section 17 shall continue in effect for his or her benefit in respect of any
actions taken or omitted to be taken by him or her while acting as
Representative.
IN WITNESS WHEREOF, this Agreement has been signed by or on
behalf of each of the parties hereto as of the date first above written.
BUYER:
EXODUS COMMUNICATIONS, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
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SELLER:
---------------------------------
Name:
-----------------------------------
Signature:
------------------------------
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BUYER:
EC ACQUISITIONS CORP.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
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STOCK POWER AND ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Claims and
Stock Purchase Agreement dated as of September ___, 1998, (the "AGREEMENT"), the
undersigned hereby sells, assigns and transfers unto Exodus Communications,
Inc., _____ shares of the Common Stock of CyberGuard Corporation, a Florida
corporation (the "COMPANY"), standing in the undersigned's name on the books of
the Company represented by Certificate No(s). _____ delivered herewith, and does
hereby irrevocably constitute and appoint _________________________ as the
undersigned's attorney-in-fact, with full power of substitution, to transfer
said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS
AUTHORIZED BY THE AGREEMENT AND ANY EXHIBITS THERETO.
Dated: September ___, 1998
SELLER:
-----------------------------------------------------
(Please Print Name)
-----------------------------------------------------
(Signature)
By*:
------------------------------------------------
(Print name of authorized signatory)
---------------------------------------------
(Print title of authorized signatory)
INSTRUCTIONS: Please do not fill in any blanks other than the signature lines.
MEDALLION SIGNATURE GUARANTEE**
- -------------
* Trustees, officers and other fiduciaries or agents should indicate their
title or capacity and print their names under their signatures AND SHOULD
ATTACH EVIDENCE OF THEIR AUTHORITY TO ACT IN THIS CAPACITY ON BEHALF OF THE
REGISTERED HOLDER OF THE STOCK.
** Your signature must be guaranteed and stamped by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations and credit
unions with membership in an APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), pursuant to S.E.C. Rule 17Ad-15.
<PAGE> 76
EXHIBIT B
In order to induce Buyer to enter into this Agreement and to consummate
the transactions contemplated hereby, each Contributing Seller hereby represents
and warrants to Buyer as follows:
4.1 ORGANIZATION, STANDING AND POWER. As of the date of consummation
(the "PRIOR ACQUISITION Date") of the acquisition of Arca by CyberGuard pursuant
to the Merger Agreement (the "ARCA ACQUISITION"), Arca was, and as of the
Closing Date, Arca is, a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation.
4.2 AUTHORITY; LEGAL, VALID AND BINDING AGREEMENT. Arca had full and
unrestricted right, power and authority to enter into and consummate the
transactions contemplated by the Merger Agreement. To Seller's knowledge, at the
time of the Arca Acquisition, each of the shareholders and option holders of
Arca had their residence in the state set forth opposite such Person's name on
Schedule 4.2 to the Merger Agreement. As of the Prior Acquisition Date, the
Merger Agreement and all other agreements executed by Arca in connection with
any of the transactions contemplated thereunder constituted the legal, valid and
binding obligations of Arca, enforceable in accordance with their respective
terms, except to the extent that enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights and general principles of equity. The execution,
delivery and performance of the Merger Agreement by Arca and the consummation by
it of the transactions contemplated thereby were duly and effectively authorized
by all requisite corporate action on the part of Arca, including approval of the
shareholders of Arca.
4.3 AUTHORITY TO DO BUSINESS. Arca has all requisite power and
authority to own and operate its properties and to conduct its business in the
manner and in the jurisdictions where now conducted and where conducted at the
time of the Arca Acquisition. Schedule 4.3 to the Merger Agreement sets forth,
as of the Prior Acquisition Date and as of the Closing Date, (i) those
jurisdictions in which Arca owns or leases properties and (ii) all jurisdictions
in which Arca was or is qualified to do business. As of the Prior Acquisition
Date, Arca was, and as of the Closing Date, Arca is, duly qualified to do
business as a foreign corporation in all jurisdictions where the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified would not have a
Material Adverse Effect (as defined in the Merger Agreement) on Arca.
4.4 ARTICLES OF INCORPORATION, BYLAWS AND MINUTE BOOKS. A true and
complete copy of the Articles or Certificate of Incorporation (as amended and in
effect), Bylaws (as amended and in effect) and minute books of Arca was
delivered by Arca to CyberGuard prior to the Prior Acquisition Date. Such minute
books of Arca in the form of the copies supplied to CyberGuard have embodied
therein copies of all minutes and actions by written consent which had been
prepared since such entity's inception and prior to the Prior Acquisition Date.
The minutes and actions by written consent delivered to Arca reflect all
material actions taken by the Boards of Directors, any committees thereof, the
incorporators or the Shareholders of Arca since their incorporation.
4.5 SUBSIDIARIES. Arca had no, as of the Prior Acquisition Date, and
has no, as of the Closing Date, direct or indirect equity interest by stock
ownership or otherwise in any other
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Person nor was or is Arca engaged in a partnership, joint venture or other
similar arrangement (whether written or oral) with any Person.
4.6 CAPITALIZATION. As of the date of the Arca Acquisition, the
authorized capital stock of Arca consisted of: (i) 20,000,000 shares of Arca
Common Stock, of which 3,726,667 shares were issued and outstanding; and (ii)
10,000,000 shares of Arca Preferred Stock, of which (A) 100,000 shares were
designated Arca Series A Preferred Stock and of which 76,130 shares of Arca
Series A Preferred Stock were issued and outstanding, and (B) 750,000 shares
were designated Arca Series B Preferred Stock and of which 515,000 shares of
Arca Series B Preferred Stock were issued and outstanding. To Seller's
knowledge, as of the date of the Arca Acquisition, all of the issued and
outstanding shares of Arca Common Stock and Arca Preferred Stock were owned
beneficially and of record by Persons and in the amounts set forth on Schedule
4.6 to the Merger Agreement, free and clear of any and all liens, claims,
charges, security interests, voting agreements or encumbrances of any nature
whatsoever created by Arca. As of such date, Arca had no treasury shares. As of
the date of the Arca Acquisition and as of the date hereof, all shares of Arca's
outstanding capital stock had been duly authorized, were validly issued and
outstanding, and were fully paid and nonassessable. No securities issued by Arca
from the date of its incorporation to the date hereof were issued in violation
of any statutory, contractual or common law preemptive rights. There are no
dividends or distributions which have accrued or been declared but are unpaid on
the capital stock of Arca. Except as set forth on Schedule 4.6 to the Merger
Agreement, Arca has not declared or paid any dividends or distributions since
December 31, 1997. All taxes (including documentary stamp taxes) required to be
paid in connection with the issuance by Arca of Arca's capital stock have been
paid. All authorizations required to be obtained from or registrations required
to be effected with any Person in connection with the issuances of securities by
Arca from its date of incorporation to the date hereof have been obtained or
effected and all securities of Arca have been issued in accordance with the
provisions of all applicable securities and other laws. Arca did not have as of
the Prior Acquisition Date and does not have as of the Closing Date any equity
investment in any other corporation, association, partnership, joint venture or
other entity.
4.7 RIGHTS, WARRANTS, OPTIONS. Except as set forth on Schedule 4.7 to
the Merger Agreement, as of the date of the Arca Acquisition and as of the
Closing Date, Arca had no commitment to issue or sell, had not granted, issued
or entered into any rights, subscriptions, warrants, options, conversion rights
or agreements of any kind ("OPTIONS") (other than the Merger Agreement) to
issue, purchase or to otherwise acquire, any shares of stock, or securities or
obligations of any kind convertible or exchangeable into any shares of stock of
any class of capital stock of Arca. As of the date of the Arca Acquisition, all
outstanding Options were held by the Persons and in the amount set forth on
Schedule 4.7 to the Merger Agreement. To Seller's knowledge, as of the date of
the Arca Acquisition, there were no Options (other than the Merger Agreement) to
purchase or to otherwise acquire, any shares of stock or other securities
presently owned by any Shareholder or other equity interest holder of Arca. As
of the date hereof, no Options remain outstanding.
4.8 FINANCIAL STATEMENTS. Arca has delivered to CyberGuard and Buyer,
true and correct copies of the Financial Statements (as defined in the Merger
Agreement). In addition, Arca has delivered to Buyer true and correct copies of
its balance sheet as of August 31, 1998 and its income statement and cash flow
statement for the two-month period then ended (the "AUGUST FINANCIAL
STATEMENTS"). The Financial Statements and the August Financial Statements, as
of the dates thereof and for the periods covered thereby, present fairly, in all
material respects, the financial position, results of operations, and cash flows
of Arca. Except as otherwise noted in Schedule 4.8 to the Merger Agreement, the
Financial Statements and the August Financial
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Statements were prepared in conformity with generally accepted accounting
principles applied on a consistent basis ("GAAP"), except the unaudited December
31, 1996 Financial Statements and the August Financial Statements do not have
notes and are subject to normal year-end adjustments, none of which are
material. The December 31, 1997 Financial Statements and supporting schedules
were audited by independent public accountants within the meaning of the rules
promulgated by the SEC. Arca's accounts receivable, as set forth in the
Financial Statements and the August Financial Statements, arose in the ordinary
course of business, constitute valid and undisputed claims which are not subject
to any counterclaims or offsets and are reasonably believed to be collectible at
their recorded amounts, net of any reserves for doubtful accounts, in accordance
with past practices and GAAP.
4.9 ABSENCE OF UNDISCLOSED LIABILITIES. There was at the Prior
Acquisition Date and is as of the Closing Date no claim, liability, commitment
or obligation of any nature, whether absolute, accrued, contingent or otherwise,
and whether due or to become due, and, to the best of Arca's knowledge, there
was at the Prior Acquisition Date and is as of the Closing Date no basis for
assertion of any such claim, liability, commitment or obligation, which is not
included, disclosed or noted in the December 31, 1997 Financial Statements or
the August Financial Statements (i) except for liabilities incurred since
December 31, 1997 and August 31, 1998, respectively, in the ordinary course of
business consistent with past practice to Persons who are not, to Seller's
knowledge, Affiliates of any Party Shareholder of Arca (as defined in the Merger
Agreement) or any officer or director of Arca, (ii) except for matters that
would not be required to be recorded by GAAP where the claim, liability or
obligation involves an amount less than $10,000, (iii) except as set forth in
Schedule 4.9 to the Merger Agreement and as specifically cross-referenced
therein and (iv) except for the amount owing to CyberGuard as disclosed in
Schedule 1 hereto. Schedule 1 hereto, together with the Other Schedules to the
Merger Agreement, include a listing of all debts, liabilities and obligations of
Arca of any nature, whether due or to become due (including without limitation
absolute liabilities, accrued liabilities and contingent liabilities) as of the
Closing Date.
4.10 TITLE TO PERSONAL PROPERTY AND CONDITION OF ASSETS. As of the
Prior Acquisition Date, Arca had, and as of the Closing Date, Arca has, good and
valid title to all personal property, as reflected on the December 31, 1997
Financial Statements and the August Financial Statements, respectively (other
than non-material property and inventory disposed of in the ordinary course of
business consistent with past practices to Persons who are not Affiliates of
Arca (as defined in the Merger Agreement) and other than changes in Arca's cash
balances) and to each item of personal property acquired since December 31,
1997, including, but not limited to, the Assets (as defined in the Asset
Purchase Agreement dated as of the date hereof among Exodus, Sub, CyberGuard and
Arca (the "ASSET PURCHASE AGREEMENT")), free and clear of any security
interests, liens, claims, charges or encumbrances whatsoever, except for liens
for Taxes not yet due and payable, statutory non-material mechanics and
materialmen's liens and except as set forth in Schedule 4.10 to the Merger
Agreement, with respect to the Prior Acquisition Date, and such Schedule 4.10
together with Schedule 1 hereto with respect to the Closing Date. Schedule 4.10
to the Merger Agreement contains a true and complete list of each item of
tangible personal property owned by Arca as of the Prior Acquisition Date having
a value in excess of $5,000. Schedule 1 hereto contains a true and complete list
of each item of tangible personal property owned by Arca as of the Closing Date
having a value in excess of $5,000. All equipment, machinery, fixtures and other
personal property then owned or utilized by Arca were as of the Prior
Acquisition Date in good operating condition taken as a whole and in a good
state of maintenance and repair, ordinary wear and tear excepted, and were as of
the Prior Acquisition Date adequate for the conduct of its business as then
conducted. All equipment, machinery, fixtures and other personal property owned
or utilized by Arca as of the Closing Date are in good
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operating condition taken as a whole and in good state of maintenance and
repair, ordinary wear and tear excepted, and are as of the Closing Date adequate
for the conduct of its business as now conducted. Except for the leasehold
interests and other leased properties specifically identified in either Schedule
4.10 or 4.11 to the Merger Agreement, with respect to the Prior Acquisition
Date, and such Schedules 4.10 or 4.11 together with Schedule 1 hereto with
respect to the Closing Date, and software or other intellectual property subject
to a license in favor of Arca, there were as of the Prior Acquisition Date and
are as of the Closing Date no assets, including, but not limited to, the Assets,
owned by any third party which were or are used by Arca in the operations of its
business as then conducted or proposed to be conducted.
4.11 REAL PROPERTY.
(a) As of the date of the Arca Acquisition and as of the date
hereof, Arca owned no real property.
(b) Schedule 4.11 to the Merger Agreement sets forth a list of
all of Arca's real property leases, as of the date of the Arca Acquisition, true
and complete copies of which have been provided or made available to CyberGuard
and Buyer. Schedule 1 hereto sets forth a list of all of Arca's real property
leases, as of the date hereof, true and complete copies of which have been
provided or made available to CyberGuard and Buyer. No notice of violation of
any ordinance or administrative regulation (including any zoning or building
law) had been received as of the Prior Acquisition Date or has been received as
of the Closing Date by Arca with respect to any real property leased by Arca.
Arca had not as of the Prior Acquisition Date and has not as of the Closing Date
breached or been in default of any provision of, and was and is currently in
full compliance with and not in breach or default of, Arca's real property
leases. The property leased by Arca was as of the Prior Acquisition Date and is
as of the Closing Date in a state of good maintenance and repair and is adequate
and suitable for the purposes for which it was then and is presently being used.
To Seller's knowledge, neither the whole nor any portion of such real property
was as of the Prior Acquisition Date or is as of the Closing Date being
condemned or otherwise taken by any public authority, nor was or is any such
condemnation or taking to Seller's knowledge threatened or contemplated.
4.12 INSURANCE. Schedule 4.12 to the Merger Agreement sets forth a true
and complete list of all insurance policies providing insurance coverage of any
nature to Arca as of the date of the Arca Acquisition. Schedule 1 hereto sets
forth a true and complete list of all insurance policies providing insurance
coverage of any nature to Arca as of the date hereof. Since January 1, 1996,
timely notice of all material claims has been given under all such policies. All
premiums and other charges under such policies have been timely paid. Arca is
not, and was not at the date of the Arca Acquisition, in default under any such
policy. Arca is, and was at the date of the Arca Acquisition, in material
compliance with all such policies. Except as set forth on Schedule 4.12 to the
Merger Agreement, to Seller's knowledge, Arca has insurance policies of the type
and in amounts customarily carried by Persons conducting similar businesses.
Such insurance policies are sufficient in all material respects for compliance
with all requirements of law and all agreements to which Arca is a party or by
which any of its assets are bound. During the last five years, Arca has not been
refused insurance by any insurance carrier to which it has applied for
insurance. Except as set forth in Schedule 4.12 to the Merger Agreement or
Schedule 1 hereto, no claims involving an amount in excess of $10,000 have been
asserted under any of the foregoing insurance policies in the five years
preceding the date of the Merger Agreement.
4.13 LABOR RELATIONS. Arca is not, and has not been, a party to or
otherwise bound by any labor or collective bargaining agreement and to Seller's
knowledge there have been
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no attempts to organize a labor union with respect to any employees of Arca.
Except as noted on Schedule 4.13 to the Merger Agreement, to Seller's knowledge
no unfair labor practice complaints have been filed against Arca with any
governmental or regulatory agency, and Arca has not received any notice or
communication reflecting an intention or threat to file any such complaint. No
Person has notified Arca of any claim, and to Seller's knowledge, there is, as
of the date hereof, and there was, as of the Prior Acquisition Date, no basis
for any claim, against Arca arising out of any statute, ordinance or regulation
relating to discrimination with respect to employees or employment practices.
There is, as of the date hereof, and there was, as of the Prior Acquisition
Date, no strike, work stoppage or labor disturbance pending or, to Seller's
knowledge, threatened that involves any group of employees of Arca. Except as
set forth on Schedule 4.13 to the Merger Agreement and except for agreements
being terminated on the date hereof and except as otherwise required by law, the
terms of employment or engagement of all employees, agents, consultants and
professional advisors of Arca are such that their employment or engagement may
be terminated by not more than two weeks' notice given at any time without
liability for payment of compensation or damages and Arca has not entered into
any agreement or arrangement for the management of its business or any part
thereof other than with its directors or employees. Except as set forth on
Schedule 4.13 to the Merger Agreement, no consultant, employee or agent of Arca
has terminated his or her employment or business relationship with Arca since
December 31, 1997, except for consultants, employees or agents who have not
received compensation of $25,000 or more from Arca in any calendar year; and
Seller has, as of the date hereof, and had, as of the Prior Acquisition Date, no
knowledge that any such consultant, employee or agent presently intends to so
terminate or materially alter his or her relationship with Arca.
4.14 LICENSES. Arca has, as of the date hereof, and had, as of the
Prior Acquisition Date, all material licenses, franchises, approvals,
certificates, permits, planning permissions and authorizations (a "LICENSE") of
any Person necessary for the conduct of its trade or business and all Licenses
are, as of the date hereof, and were, as of the Prior Acquisition Date,
presently in full force and effect and no action or claim is, as of the date
hereof, or was, as of the Prior Acquisition Date, pending, and no notice of any
such claim or action has, as of the date hereof, or had, as of the Prior
Acquisition Date, been received which threatens to revoke, vary, modify or
terminate any License or declare any License invalid in any respect. Arca is, as
of the date hereof, and was, as of the Prior Acquisition Date, being operated in
material compliance with all Licenses. A true and complete list of all Licenses
is set forth on Schedule 4.14 to the Merger Agreement. The execution, delivery
and performance of the Merger Agreement did not adversely affect the status of
any License nor permit such License to be terminated whether or not following
the giving of notice or making of payment.
4.15 PROPRIETARY RIGHTS. Schedule 4.15 to the Merger Agreement sets
forth a true and complete list of all patents, patent rights, trademarks, trade
names, service marks, brands and registered copyrights (or pending registrations
and applications therefor) owned or used by Arca, as of the date hereof and as
of the Prior Acquisition Date (all such items together with each invention,
protocol, formula, software, trade secret, technology, product composition,
method or process including, but not limited to, the Intellectual Property (as
defined in the Asset Purchase Agreement) and the protocol analyzer, owned or
used by Arca being hereinafter referred to as "INTANGIBLE PROPERTY"), other than
commercially available software programs generally available to the public. Arca
owns, as of the date hereof, and owned, as of the Prior Acquisition Date, the
entire right, title and interest in and to, or is, as of the date hereof, and
was, as of the Prior Acquisition Date, licensed to use, the Intangible Property,
free and clear of any claim or conflict with the rights of others and no
royalties, honorariums or fees are, as of the date hereof, or were, as of the
Prior Acquisition Date, payable by Arca to any Person by reason of the ownership
or use
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of the Intangible Property. Arca has, as of the date hereof, and had, as of the
Prior Acquisition Date, no knowledge of any act or failure to act by Arca or any
of its employees, duly authorized attorneys or agents during the prosecution or
registration of, or any other proceeding relating to any of the Intangible
Property or of any other fact, which could, or could have, as applicable, make
invalid or unenforceable, or negate the right to issuance of any of the
Intangible Property. The consummation of the Arca Acquisition did not alter or
impair any of the Intangible Property or the ability of the Surviving
Corporation (as defined in the Merger Agreement) to use any such Intangible
Property on the same terms and basis as theretofore used by Arca. Except as set
forth in Schedule 4.15 to the Merger Agreement, no interest in any Intangible
Property has been assigned, transferred, licensed or sublicensed by Arca to
third parties and there is not and, to Arca's knowledge, has not been any
infringement or asserted infringement by Arca of any foreign or domestic
patents, patent rights, trademarks, trade names, service marks, copyrights or
applications therefor of another. No claim is, as of the date hereof, or was, as
of the Prior Acquisition Date, pending by Arca against others to the effect that
the present or past operations of such parties infringe upon or conflict with
the rights of Arca and, to Seller's knowledge, no grounds for such action
exists, as of the date hereof, or existed, as of the Prior Acquisition Date. As
of the date hereof, Seller knows, and as of the Prior Acquisition Date, Seller
knew, of no pending or threatened cancellation or revocation of any agreement
granting to Arca rights relating to any Intangible Property. Arca has not
received any notice that any claim is pending that the operation by Arca of its
businesses or the manufacture or sale of any of its products or the provision of
its services, or any formula, method, process, part or material employed by it
in connection therewith, infringes or conflicts in any way upon any rights of
the type enumerated above owned by others. Each confidentiality or secrecy
agreement obtained by Arca with respect to any of the Intangible Property, is,
as of the date hereof, and was, as of the Prior Acquisition Date, in full force
and effect and Arca is not, as of the date hereof, and was not, as of the Prior
Acquisition Date, and to Seller's knowledge, no other party to any such
agreement is, as of the date hereof, or was as of the Prior Acquisition Date, in
default thereunder.
4.16 MAJOR CUSTOMERS AND SUPPLIERS. Schedule 4.16 to the Merger
Agreement sets forth a true and complete list of all of the customers and
suppliers of Arca which, during either of the fiscal years ended December 31,
1996 or December 31, 1997, received from or paid to Arca $50,000 or more (in
cash or in kind); and such schedule sets forth with respect to each, the name
and address and dollar volume involved. Except as otherwise indicated on
Schedule 4.16 to the Merger Agreement with respect to the Prior Acquisition
Date, and such Schedule 4.16 together with Schedule 1 hereto with respect to the
Closing Date, no customer or supplier of Arca listed on Schedule 4.16 to the
Merger Agreement with respect to the Prior Acquisition Date, and such Schedule
4.16 together with Schedule 1 hereto with respect to the Closing Date, had, as
of the Prior Acquisition Date, or has, as of the date hereof, respectively, (i)
canceled, suspended or otherwise terminated its relationship with it (except for
expiration in the ordinary course of business), or (ii) advised Arca, any
executive officer or director of Arca of its intent to cancel, suspend or
otherwise terminate such relationship (except for expiration in the ordinary
course of business), or to materially decrease its services or supplies of
products to Arca or its purchases from Arca (except in the case of relationships
which expire in the ordinary course of business) or to materially increase the
price or change the terms on which it supplies or purchases services or products
to or of Arca, or to materially decrease the price or change the terms on which
it purchases services or products from Arca. Seller has, as of the date hereof,
and had, as of the Prior Acquisition Date, no knowledge that "current customers
or suppliers" (as defined below) could reasonably be expected to terminate or
decrease or adversely modify its business relationship with Arca by reason of
the transactions contemplated hereby. "Current customers or suppliers" means the
customers and suppliers listed on Schedule 4.16 to the Merger Agreement.
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4.17 LITIGATION. Except as set forth in Schedule 4.17 to the Merger
Agreement, there are, as of the date hereof, and there were, as of the Prior
Acquisition Date, no actions, suits, proceedings or investigations pending, or
to Seller's knowledge, directly or indirectly threatened, nor has any notice of
such items been received by Arca, as of the date hereof, or the Prior
Acquisition Date, in any court or before any governmental agency or
instrumentality against or materially affecting Arca or, to its knowledge, any
of its officers or directors nor, to its knowledge, has any such action, suit,
proceeding or investigation been pending during the five-year period preceding
the date hereof, nor have any such actions, suits, proceedings or investigations
been settled by Arca and/or adjudicated for an aggregate amount of $10,000 or
more during the past five years; provided, however, that the foregoing shall not
require disclosure of actions, suits or investigations relating to officers or
directors which are wholly unrelated to Arca. Except as set forth in Schedule
4.17 to the Merger Agreement, Seller has, as of the date hereof, and had, as of
the Prior Acquisition Date, no knowledge of any facts which could result in any
such action, suit, proceeding or investigation. Arca is, as of the date hereof,
and was, as of the Prior Acquisition Date, not in default with respect to any
order, writ, injunction or decree of any court, agency or instrumentality. To
the knowledge of Seller, there were not, as of the Prior Acquisition Date and
there currently are not, any actions, suits, proceedings or investigations
pending or threatened in any court or before any governmental agency or
instrumentality affecting any outstanding securities of Arca which could or
could have, as applicable, prevented, delayed or hindered the consummation of
the transactions contemplated by the Merger Agreement or could prevent, delay or
hinder the consummation of the transactions contemplated hereby. Seller has no
knowledge of any facts which could reasonably result in any such action, suit,
proceeding or investigation.
4.18 NO VIOLATION OR CONFLICT. Except as set forth on Schedule 4.18 to
the Merger Agreement, the execution, delivery and performance of the Merger
Agreement by Arca and the consummation by it of the transactions contemplated
thereby, and compliance by it with the provisions thereof, (i) did not and will
not violate or conflict with any provision of law or regulation, or any writ,
order or decree of any court, governmental or regulatory authority or agency, or
any term or provision of Arca's Articles of Incorporation or Bylaws, (ii) did
not and will not, with or without the passage of time or the giving of notice,
or both, create any right on the part of any party to any material instrument or
Material Agreement (as defined in Section 4.28 below) to which Arca is a party,
to unilaterally modify, amend or terminate any such material instrument or
Material Agreement and (iii) did not and will not, with or without the passage
of time or the giving of notice, result in the breach of, or constitute a
default or require any consent or notice under, or result in the creation of any
lien, charge or encumbrance upon any property or assets (including, without
limitation, Intangible Property) of Arca pursuant to, any material instrument or
Material Agreement to which Arca is a party or by which Arca or any of its
properties are bound or affected.
4.19 TRANSACTIONS WITH AFFILIATES. Except as set forth in Schedule 4.19
to the Merger Agreement, there are no, and since December 31, 1997 there have
been no, contracts, agreements or arrangements of any kind (including, but not
limited to those relating to, the sharing of overhead, intercompany loans, the
furnishing of services and the lease of facilities) between any Affiliate (as
defined in the Merger Agreement) of Arca, on the one hand, and Arca, on the
other hand. Without limiting the generality of the foregoing, except as set
forth on Schedule 4.19 to the Merger Agreement, (i) no Affiliate of Arca has, as
of the date hereof, or had, as of the Prior Acquisition Date, any interest in
any property (real or personal, tangible or intangible, or otherwise) used in
Arca's business, (ii) Arca has, as of the date hereof, or had, as of the Prior
Acquisition Date, no indebtedness to any shareholder, officer or director or any
of their Affiliates and (iii) Arca is, as of the date hereof, or was, as of the
Prior Acquisition Date, not
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owed any indebtedness by any shareholder, officer or director or any of other
Affiliates. For purposes of this Section 4.19, "Affiliate of Arca" shall exclude
any person who became such solely as a result of the Arca Acquisition.
4.20 LIST OF ACCOUNTS. Schedule 4.20 to the Merger Agreement contains a
list (including account numbers, where applicable) of (i) all banks and other
institutions in which Arca has, as of the date hereof, or had, as of the Prior
Acquisition Date, an account or safe deposit box and of all cash management,
money market and similar accounts of Arca and the addresses of all such
institutions and names and telephone numbers of the contact persons at such
institutions and (ii) the names of all persons authorized to draw thereon, make
withdrawals therefrom or have access thereto.
4.21 LIST OF PERSONNEL. Schedule 4.21 to the Merger Agreement contains
as of the date of the ARCA ACQUISITION: the names of all incumbent directors and
officers of Arca; the names, job designations and annual compensation of all
Persons who have been employees or consultants of Arca since December 31, 1996;
a detailed itemization of all accrued but unpaid benefits, emoluments, sums or
amounts of any nature whatsoever (other than salaries accrued since the end of
the last payroll period) which are or may become due to any such employee or
consultant in connection with services rendered prior to such date, including,
but not limited to, accrued vacation and sick leave; and a true and complete
list of all employee policies, employee benefit manuals or other manuals
including employee work rules or policies, vacation policies, sick leave
policies, compensation plans, and any other employee benefit policies or benefit
plans then in effect for Arca. Schedule 1 hereto provides the foregoing
information as of October 2, 1998. Schedule 4.21 to the Merger Agreement, as of
the Prior Acquisition Date, and Schedule 1 hereto as of the Closing Date,
further sets forth any contracts or arrangements with any director, officer,
consultant or employee of Arca which provides for payments to be made to such
party in connection with the termination of any office or employment or
retention of such Person. Except as set forth in Schedule 1 hereto, since
December 31, 1997, Arca has not paid or given any increase in or improvement to
the benefits of any nature of or any bonus or compensation to any of its
directors, officers, consultants or employees, and Arca is not under any
obligation to increase or improve any such benefits or bonuses or compensation
with or without retrospective operation, except for increased sales commissions
paid or payable to any individual resulting solely from, and directly correlated
with, increased sales by such individual. Except as disclosed in Schedule 4.21
to the Merger Agreement, there were, as of the Prior Acquisition Date, no
amounts which were or to become due or owing to any employee or consultant of
Arca for any accrued benefit, emolument, bonus, sum or amount, including without
limitation, amounts due for accrued vacation or sick leave, except for salaries
accrued since the end of the last payroll period prior thereto. Except as
disclosed in Schedule 1 hereto, there are, as of the date hereof, no amounts
which are or may become due or owing to any employee or consultant of Arca for
any accrued benefit, emolument, bonus, sum or amount, including without
limitation, amounts due for accrued vacation or sick leave, except for salaries
accrued since the end of the last payroll period.
4.22 GUARANTIES. Except as disclosed on Schedule 4.22 to the Merger
Agreement, Arca has, as of the date hereof, or had, as of the Prior Acquisition
Date, not guaranteed any obligation or indebtedness of any Person or granted any
power of attorney, and no Person has, as of the date hereof, or had, as of the
Prior Acquisition Date, guaranteed any obligation or indebtedness of Arca or
granted it a power of authority.
4.23 YEAR 2000 COMPLIANCE. Except as set forth on Schedule 4.23 to the
Merger Agreement, Arca has, as of the date hereof, or had, as of the Prior
Acquisition Date, no contractual obligations with any of its customers or any
other Person which requires Arca to be
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Year 2000 compliant. In the event Arca is, as of the date hereof, or was, as of
the Prior Acquisition Date, required to be Year 2000 compliant, Arca has, as of
the date hereof, and had, as of the Prior Acquisition Date, as applicable, taken
all necessary steps to comply with the requirements and terms of its contracts.
4.24 EMPLOYEE BENEFIT PLANS. Schedule 4.24 to the Merger Agreement sets
forth a complete list of all pension, retirement, stock purchase, stock bonus,
stock ownership, stock option, profit sharing, savings, medical, disability,
hospitalization, insurance, deferred compensation, bonus, incentive, welfare or
any other employee benefit plan, policy, agreement, commitment, arrangement or
practice maintained, as of the Prior Acquisition Date, by Arca for any of
directors, officers, consultants, employees or former employees of Arca (the
"ARCA PLANS"). Schedule 1 hereto sets forth a complete list of all Arca Plans
maintained as of the date hereof by Arca for any of directors, officers,
consultants, employees or former employees of Arca. Schedule 4.24 to the Merger
Agreement, with respect to the Prior Acquisition Date, and such Schedule 4.24
together with Schedule 1 hereto with respect to the Closing Date, also identify
each Arca Plan which constitutes an "employee pension benefit plan" ("PENSION
PLAN") or an "employee welfare benefit plan" ("WELFARE PLAN"), as such terms are
defined in the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). None of the Arca Plans is a "multiemployer plan," as such term is
defined in ERISA, or is subject to Title IV of ERISA. Arca has delivered or made
available to CyberGuard and Buyer true and complete copies of the following for
each Arca Plan, if applicable: (i) the Plan document; (ii) summary plan
description of the Arca Plan; (iii) the trust agreement, insurance policy or
other instrument relating to the funding of the Arca Plan; (iv) the most recent
Annual Report (Form 5500 series) and accompanying schedules filed with the IRS
or Department of Labor with respect to the Arca Plan; (v) the most recent
audited financial statement for the Arca Plan; and (vi) the most recent
determination letter issued by the IRS with respect that to the Arca Plan that
is intended to qualify under Section 401(a) of the Code.
Each Pension Plan has, as of the date hereof, and had, as of the Prior
Acquisition Date, been determined by the IRS to be qualified under Section
401(a) of the Code, and each such Plan remains so qualified; and to Seller's
knowledge, no facts or circumstances exist, as of the date hereof, or existed,
as of the Prior Acquisition Date, which could result in the revocation of such
qualification. Each Welfare Plan which is intended to meet the requirements for
tax-favored treatment under the Code to Seller's knowledge meets, as of the date
hereof, and met, as of the Prior Acquisition Date, such requirements. Each Arca
Plan has been administered in all material respects in accordance with its terms
and the Code, and each Pension Plan and Welfare Plan has been administered in
all material respects in accordance with ERISA. No facts or circumstances exist,
as of the date hereof, or existed, as of the Prior Acquisition Date, which might
give rise to any material liability with respect to any Arca Plan, to
CyberGuard, Arca, Acquisition or any of their Subsidiaries (as defined in the
Merger Agreement) or to any other Person. Arca has, as of the date hereof, and
had, as of the Prior Acquisition Date, paid all amounts required under
applicable law, any Pension Plan and any Welfare Plan to be paid as a
contribution to each Pension Plan and Welfare Plan through the date hereof. Arca
has, as of the date hereof, and had, as of the Prior Acquisition Date, set aside
adequate reserves to meet contributions which are or were not yet due under any
Pension Plan or Welfare Plan. Neither Arca, nor any other Person has, as of the
date hereof, or had, as of the Prior Acquisition Date, engaged in any
transaction or taken any other action with respect to any Arca Plan which would
subject Arca, CyberGuard, Acquisition or any of their Subsidiaries (as such
terms are defined in the Merger Agreement) or any other Person to: (A) any tax,
penalty or liability for prohibited transactions under ERISA or the Code; (B)
any tax under Code Sections 4971, 4972, 4976, 4977 or 4979; or (C) a penalty
under ERISA Sections 502(c) or 502(l). Arca, to the extent it is a fiduciary
with respect to any
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Pension Plan or Welfare Plan, has, as of the date hereof, and had, as of the
Prior Acquisition Date, not breached any of its responsibilities or obligations
imposed upon fiduciaries under ERISA or the Code or which could result in any
material claim being made under, by or on behalf of any Pension Plan or Welfare
Plan or any participant or beneficiary thereof other than benefit claims in the
ordinary course of business. Each Welfare Plan which is a group health plan
within the meaning of Code Section 5000(b)(1) complies, as of the date hereof,
and complied, as of the Prior Acquisition Date, with and in each and every case
has complied with the applicable requirements of Code Section 4980B and Part 6
of Title I of ERISA. Except as set forth in Schedule 4.24 to the Merger
Agreement, with respect to the Prior Acquisition Date, and such Schedule 4.24
together with Schedule 1 hereto with respect to the Closing Date, no Arca Plan,
other than an Arca Plan which is an employee pension benefit plan (within the
meaning of Section 3(2)(A) of ERISA) provided, as of the Prior Acquisition Date
or, provides, as of the date hereof, benefits, including without limitation,
death, health or medical benefits (whether or not insured), with respect to
current or former employees of Arca beyond their retirement or other termination
of service with Arca, other than coverage mandated by applicable law.
4.25 CONSENT OR APPROVAL OF GOVERNMENTAL AUTHORITIES. Except as set
forth on Schedule 4.25 to the Merger Agreement, no consent, approval or
authorization of, or filing with, any federal, state or local governmental
authority or administrative agency was required in connection with the
execution, delivery or performance by Arca of the Merger Agreement or any
agreement, instrument or document contemplated thereby or the consummation by
Arca of the transactions contemplated thereby. Except as set forth on Schedule 1
hereto, no consent, approval or authorization of, or filing with, any federal,
state or local governmental authority or administrative agency is required in
connection with the execution, delivery or performance by Arca of the
Transaction Documents or the consummation by Arca of the transactions
contemplated thereby.
4.26 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as set forth in
Schedule 4.26 to the Merger Agreement or Schedule 1 hereto, since December 31,
1997: (A) Arca has conducted its business in the ordinary and usual course; (B)
there has been no Material Adverse Effect (as defined in the Merger Agreement)
with respect to Arca; and (C) Arca has not engaged or agreed to engage in any of
the actions enumerated in the second sentence of SECTION 5.1 of the Merger
Agreement.
4.27 TAXES. Except as set forth in Schedule 4.27 to the Merger
Agreement: (A) there have been timely filed all returns and reports with respect
to Arca required to be filed with any taxing authority with respect to Taxes for
any period ending on or before the date of this Agreement, taking into account
any extension of time to file granted to or obtained on behalf of Arca; (B) all
Taxes shown to be payable on such returns or reports that are due prior to the
date of this Agreement have been paid or shall be paid (prior to the date of
this Agreement) and that were due prior to the Merger Agreement were paid prior
to the Merger Agreement, and all such returns or reports accurately reflect the
proper amount of Taxes payable for the applicable periods; (C) no deficiency for
any Tax has been asserted or assessed by a taxing authority against or with
respect to Arca either as of the date hereof or as of the Prior Acquisition
Date; (D) Arca has, as of the date hereof, and had, as of the Prior Acquisition
Date, provided adequate reserves in its Financial Statements and its August
Financial Statements for any Taxes that were not or have not been paid, whether
or not shown as being due on any returns; (E) the income tax returns of Arca
have never been audited; and (F) Arca has, as of the date hereof, or had, as of
the Prior Acquisition Date, not waived any restrictions on assessment or
collection of Taxes or consented to the extension of any statute of limitations
relating to Taxes. As used in the Merger Agreement, "Taxes" shall mean any and
all taxes, fees, levies, duties, tariffs, imposts and other charges of any
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kind (together with any and all interest, penalties, additions to tax and
additional amounts imposed with respect thereto) imposed by any government or
taxing authority, including, without limitation: taxes or other charges on or
with respect to income, franchises, windfall or other profits, gross receipts,
property, sales, use, capital stock, payroll, employment, social security,
workers' compensation, unemployment compensation or net worth; taxes or other
charges in the nature of excise, withholding, ad valorem, stamp, transfer,
value-added or gains taxes; license, registration and documentation fees; and
customers' duties, tariffs and similar charges.
4.28 MATERIAL AGREEMENTS. Schedule 4.28 to the Merger Agreement sets
forth as of the date of the Arca Acquisition, and Schedule 1 hereto sets forth
as of the date hereof, a list of all written and oral agreements, leases
(whether capitalized or otherwise), arrangements or commitments to which either
Arca was or is, as applicable, a party or by which it or any of the assets it
owns, leases or utilizes is bound which were, or are, expected to result in the
receipt or payment of $10,000 or more (in cash or in kind) by Arca or which
were, or are, as applicable, material to the financial position, results of
operations or prospects of Arca on a consolidated basis or were material to the
ability of Arca to consummate the transactions contemplated by the Merger
Agreement (the "MATERIAL AGREEMENTS"). Arca has furnished CyberGuard and Buyer
with true and complete copies of all Material Agreements. The Material
Agreements set forth in Schedule 4.28 to the Merger Agreement were, as of the
Prior Acquisition Date, each in full force and effect, and were, as of the Prior
Acquisition Date, the valid and legally binding obligations of Arca and to
Seller's knowledge, were, as of the Prior Acquisition Date, valid and binding
obligations of the other parties thereto. Arca was, as of the Prior Acquisition
Date, not in breach of any Material Agreement set forth on Schedule 4.28 to the
Merger Agreement. The Material Agreements set forth in Schedule 1 hereto are, as
of the date hereof, each in full force and effect and are, as of the date
hereof, the valid and legally binding obligations of Arca and to Seller's
knowledge, are as of the date hereof, valid and binding obligations of the other
parties thereto. Arca is, as of the date hereof, not in breach of any Material
Agreement set forth on Schedule 1 hereto. The representations and warranties in
the two immediately preceding sentences are qualified to the extent affected by
the transactions contemplated between CyberGuard and Buyer pursuant to the Asset
Purchase Agreement. Schedule 1 identifies all those Material Agreements
currently in effect requiring third party consents to assign and transfer such
Material Agreements to Buyer in connection with the Transaction Documents.
Except as set forth on Schedule 4.28 to the Merger Agreement, Arca has, as of
the date hereof, and had, as of the Prior Acquisition Date, no: (A) agreement,
contract or commitment which requires the making of any charitable
contributions; (B) material agreement, contract or commitment which is not
terminable without penalty, liability or premium upon notice of 30 days or less;
(C) agreement, contract or commitment containing any severance provisions, or
any employment, consulting or similar agreement, contract or commitment; (D)
outstanding obligation for borrowed money; (E) outstanding loan or advance to
any Person; (F) power of attorney outstanding; (G) agreement, contract or
commitment relating to joint ventures, partnerships, debt or equity investments;
(H) agreements, contracts or commitments relating to non-competition or employee
non-disclosure, or non-solicitation or other similar restrictive covenants; (I)
agreements, contracts or commitments relating to the registration of any of
Arca's securities; and (J) agreement, contract or commitment relating to the
voting or other rights with respect to any securities of Arca. None of Arca's
contracts contains, or as of the Prior Acquisition Date contained, any
restrictions regarding the ability of Arca, CyberGuard or the Buyer to use or
offer any products or services nor do such contracts contain, as of the date
hereof, or contained as of the Prior Acquisition Date, any restrictions on Arca,
CyberGuard or Buyer, to pursue any business or customers.
4.29 COMPLIANCE; GOVERNMENT AUTHORIZATION. Arca (and the properties
used by it) is, as of the date hereof, and was, as of the Prior Acquisition
Date, and has been, in
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material compliance with all federal, state, local and foreign laws, ordinances,
regulations, judgments, rulings, orders and other legal requirements applicable
to it, its properties or its operations. Arca has furnished CyberGuard and Buyer
with true and correct copies of all correspondence from governmental authorities
asserting that Arca is not or was not in material compliance with any laws,
ordinances, regulations, judgments, rulings, orders or other requirements. All
material deficiencies noted in any such report furnished to CyberGuard and Buyer
in accordance with this Section 4.29 have been corrected as of the date hereof
and as of the Prior Acquisition Date, as applicable. There is as of the date
hereof, and was, as of the Prior Acquisition Date, no existing governmental or
judicial order or decree directed expressly at Arca or its assets. Arca is, and
during the past five years has been, in material compliance with all defense
contract accounting standards and all related and similar standards, laws,
rules, regulations, guidelines and the like. A list of all material
investigations, proceedings, actions, notices, reports, assessments and
correspondence or other communications from or to any governmental entity during
the past five years with respect to defense contract accounting standards is set
forth on Schedule 4.29 to the Merger Agreement. Except as set forth on Schedule
4.29 to the Merger Agreement, no material deficiency has been asserted against
Arca with respect to the foregoing matters, and each such deficiency has been
corrected without cost or adverse impact to Arca.
4.30 BROKERS AND FINDERS. Arca did not employ any financial advisor,
broker or finder and it did not incur any broker's, finder's or similar fees,
commissions or broker's or finder's expenses in connection with the transactions
contemplated by the Merger Agreement. Seller has not employed any financial
advisor, broker or finder and it has not incurred nor will incur any broker's,
finder's or similar fees, commissions or broker's or finder's expenses in
connection with the transactions contemplated by this Agreement.
4.31 [RESERVED]
4.32 NO PRIOR AGREEMENT. To Seller's knowledge, there was not, as of
the date of the Arca Acquisition, any written or oral agreement or understanding
with respect to the disposition of any securities of Arca owned by any of the
Party Shareholders (as defined in the Merger Agreement), any portion thereof, or
any rights attendant or relating thereto, other than the Merger Agreement.
4.33 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. For purposes of the Merger Agreement, the
following terms shall have the following meanings: (A) "Hazardous Substances"
means: (i) those substances defined in or regulated under the following federal
statutes and their state counterparts, as each may be amended from time to time,
and all regulations thereunder: the Hazardous Materials Transportation Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Clean Water Act, the Safe Drinking
Water Act, the Atomic Energy Act, the Federal Insecticide, Fungicide, and
Rodenticide Act, the Toxic Substances Control Act and the Clean Air Act; (ii)
petroleum and petroleum products, byproducts and breakdown products including
crude oil and any fractions thereof; (iii) natural gas, synthetic gas, and any
mixtures thereof; (iv) polychlorinated biphenyls; (v) any other chemicals,
materials or substances defined or regulated as toxic or hazardous or as a
pollutant or contaminant or as a waste under any applicable Environmental Law;
and (vi) any substance with respect to which a federal, state or local agency
requires environmental investigation, monitoring, reporting or remediation; and
(B) "Environmental Laws" means any federal, state, foreign, or local law, rule
or regulation, now or hereafter in effect and as amended,
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and any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment, relating to
pollution or protection of the environment, health, safety or natural resources,
including, without limitation, those relating to (i) releases or threatened
releases of Hazardous Substances or materials containing Hazardous Substances or
(ii) the manufacture, handling, transport, use, treatment, storage or disposal
of Hazardous Substances or materials containing Hazardous Substances.
(b) ENVIRONMENTAL STATUS. Except as described in Schedule 4.33
to the Merger Agreement: (A) Arca is, as of the date hereof, and was, as of the
Prior Acquisition Date, and has been in compliance with all applicable
Environmental Laws; (B) Arca has, as of the date hereof, and had, as of the
Prior Acquisition Date, obtained all permits, approvals, identification numbers,
licenses or other authorizations required under any applicable Environmental
Laws ("Environmental Permits") and is, as of the date hereof, and was, as of the
Prior Acquisition Date, and has been in compliance with their requirements; (C)
such Environmental Permits did not, in connection with the Arca Acquisition,
require the consent or approval of, or any filing with or notice to, any
governmental authority; (D) to Seller's knowledge, there are, as of the date
hereof, or were, as of the Prior Acquisition Date, no underground or aboveground
storage tanks or any surface impoundments, septic tanks, pits, sumps or lagoons
in which Hazardous Substances are being or have been treated, stored or disposed
of on any leased real property; (E) to Seller's knowledge, there is, as of the
date hereof, or was, as of the Prior Acquisition Date, no asbestos or
asbestos-containing material on any leased real property in violation of
applicable Environmental Laws; (F) Arca has, as of the date hereof, or had, as
of the Prior Acquisition Date, not released, discharged or disposed of Hazardous
Substances except in compliance with Environmental Laws at any real property
owned by any third party or any real property leased; (G) Arca is, as of the
date hereof, or was, as of the Prior Acquisition Date, not undertaking, and has
not completed, any investigation or assessment or remedial or response action
relating to any such release, discharge or disposal of or contamination with
Hazardous Substances at any site, location or operation, either voluntarily or
pursuant to the order of any governmental authority or the requirements of any
Environmental Law; and (H) there are, as of the date hereof, and were as of the
Prior Acquisition Date, no past or pending or, to the knowledge of Seller,
threatened actions, suits, demands, demand letters, claims, liens, notices of
non-compliance or violation, notices of liability or potential liability,
investigations, proceedings, consent orders or consent agreements relating in
any way to Environmental Laws, any Environmental Permits or any Hazardous
Substances against Arca which is outstanding or has been outstanding during the
past two years, and to Seller's knowledge, there are, as of the date hereof, or
were, as of the Prior Acquisition Date, no circumstances that could be expected
to form the basis for any of the foregoing. Arca has made available to
CyberGuard and Buyer copies of any environmental reports, studies or analyses in
its possession relating to owned or leased real property or the operations of
Arca.
4.34 PROPOSALS. Schedule 4.35 to the Merger Agreement, with respect to
the Prior Acquisition Date, and such Schedule 4.35 together with Schedule 1
hereto with respect to the Closing Date, sets forth a list of all written and
oral proposals and offers pursuant to which since December 31, 1997, Arca has
proposed or offered to provide services and which remain open for possible
acceptance. Arca has furnished CyberGuard and Buyer with true and correct copies
of all of such proposals and offers.
4.35 GOVERNMENT CONTRACTS AND AUDITS. Since December 31, 1997, Arca has
not experienced a decrease in Independent Research And Development (IRAD or
similar items) or IRAD funding (or commitments for the same) from any
governmental entity. To Seller's knowledge, the execution, delivery and
performance of the Merger Agreement and
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the transactions contemplated in connection therewith did not cause or result in
any decrease in the number or dollar volume of government contracts or
subsidies, otherwise adversely affect Arca's business relationship with, and
prospects for continued business with, any governmental entity, or adversely
affect any status, qualification or other standard which Arca then enjoyed.
4.36 LOANS. As of the date of the Arca Acquisition, Arca's existing
bank, shareholder loans or any other loans identified on Schedule 4.38 to the
Merger Agreement (the "Loans") did not exceed $610,000 (the "LOAN AMOUNT").
4.37 WARRANTIES. Arca has not had any warranty claims for its products
or services since January 1, 1998.
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SCHEDULE A
Agreement between CyberGuard, Arca and certain Employee Shareholders of Arca
Asset Purchase Agreement between Exodus and CyberGuard and certain of their
wholly-owned subsidiaries
Escrow Agreements referenced in the Claims and Stock Purchase Agreement and the
Asset Purchase Agreement
Non-Competition Agreements between Exodus and each of Wilson, Weidner and Bauer
Employment Agreements between Exodus and each of Wilson, Weidner and Bauer
Option Agreements between Exodus and Certain Former Arca Employees
Proprietary Rights Agreements between Exodus and Certain Former Arca Employees
Exodus' Executive Employment Policy
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EXHIBIT 10.25
AGREEMENTS RELATING TO THE SALE OF ASSETS OF TRADEWAVE DIVISION
ASSET PURCHASE AGREEMENT AND TRANSITION PLAN
THIS ASSET PURCHASE AGREEMENT AND TRANSITION PLAN (the "Agreement") is
made and entered into as of April , 1999 by and between Digital Signature Trust
Co., a Utah corporation having an office at 1 South Main Street, Salt Lake City,
Utah 84111 (the "Buyer" or "DST") and CyberGuard Corporation, a Florida
Corporation having an office at 2000 West Commercial Blvd., Fort Lauderdale, FL
33309 (the "Seller" or "CyberGuard").
RECITALS:
WHEREAS, Seller's TradeWave division ("TradeWave") that is conducted from
offices located in Austin, Texas, is engaged in electronic commerce (the
"Business"); and
WHEREAS, Seller desires to sell and Buyer desires to purchase certain of
the assets of the Business and the goodwill associated with the Business, as
more fully described below; and
WHEREAS, the parties hereto acknowledge that Seller is engaged in other
businesses, including without limitation a computer network security business
that is headquartered in Fort Lauderdale, Florida, with other locations
throughout the United States of America and in other countries worldwide, and
none of the assets of Seller other than those associated with TradeWave are
intended to be transferred in connection with this Agreement; and
WHEREAS, it will not be possible for DST to begin paying employees,
contractors and certain recurring expenses for between two (2) weeks and two (2)
months after Closing and to provide for a smooth transition of all funding
liabilities and to allow DST adequate time to set up its own bank accounts,
credit card management services account and transfer of employees and
contractors to DST's payroll;
WHEREAS, Seller and Buyer have the requisite power and authority to
consummate the transactions contemplated herein.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants, agreements and recitals contained herein, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. INCORPORATION OF RECITALS. The foregoing recitals are hereby
incorporated by reference and made a part of this Agreement. Furthermore, the
following agreements and documents are being executed and delivered by and
between Seller and Buyer on the date of this Agreement: 1) a Closing
Reconciliation Statement ("Closing Statement"); 2) a General Assignment,
Conveyance and Bill of Sale ("Bill of Sale"); 3) an Assignment and Assumption
Agreement ("Assignment"); 4) a Trademark Assignment ("Trademark Assignment"); 5)
an Escrow Agreement; and other certificates and documents delivered in
connection with the Closing (collectively, the "Closing Agreements, Certificates
and Documents.")
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2. TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES.
2.1 PURCHASED ASSETS.
(a) Pursuant to the provisions set forth in this Agreement, Seller
shall cause to be sold, conveyed, transferred, assigned, and
delivered to Buyer, and Buyer shall purchase and acquire, all
those tangible and intangible assets of Seller that are described
in Schedules 1, 2, 3, 4, 5, and 6 to the Bill of Sale, Schedule 1
to the Assignment, the Trademark Assignment and the goodwill of
the Business (collectively, the "Assets").
(b) At the "Closing" (as defined below in Section 4), all Assets shall
be transferred to Buyer free and clear of any and all liens,
encumbrances, mortgages, security interests, pledges, claims,
equities and restrictions or charges of any kind or nature
whatsoever (collectively, "Liens").
2.2 EXCLUDED ASSETS. It is specifically understood and agreed by
the parties hereto that Buyer is not purchasing (a) any assets of Seller other
than those associated with TradeWave and more fully described in this Agreement
and the documents referenced herein; or (b) with respect to TradeWave's accounts
receivable, the account receivable under the MCC Contract #: F33615-94-C-4400.
2.3 METHOD OF CONVEYANCE. The sale, transfer, conveyance,
assignment and delivery of the Assets to Buyer in accordance with Section 2.1
hereof shall be effected on the "Closing Date" (as defined below in Section 4)
by Seller's execution and delivery to Buyer of the Bill of Sale, the Assignment
and the Trademark Assignment.
2.4 ASSUMED LIABILITIES. Buyer shall not assume any of the
liabilities of Seller or the Business except for (a) obligations arising under
the Assignment; (b) any obligations created by Buyer in hiring the employees of
the Business, as described in section 2.5 below; (c) Buyer's obligations
specifically set forth in this Agreement; and (d) Buyer's obligations
specifically described on Schedule 2 to the Assignment.
2.5 EMPLOYEES AND CONSULTANTS. At the Closing, DST shall offer
employment to Tradewave employees and DST shall offer employment or consulting
contracts (at Buyer's discretion) to Tradewave consultants ("Offers"). In the
event DST does not present the Offers at the Closing, DST will, at the Closing,
provide a letter to CyberGuard describing the terms of the Offers and will
deliver such Offers within one week from Closing. To ensure a smooth transition
and timely completion of Tradewave's obligations herein, the following Tradewave
individuals must remain as DST employees or consultants for six months, in the
ratios provided below:
- --------------------------------------------------------------------------------
At least 5 of the following must At least 3 of the following must remain for
remain for six months for six months
- --------------------------------------------------------------------------------
Ken Fiduk, Employee Russell Martinez, Employee
Chris Britton, Employee Tommy Ates, Consultant
Carmine Mclaughlin, Employee Virginia Hern, Employee
John Arisco, Employee Steven Smith, Consultant
Michael Gray, Employee Evelyn Marr, Consultant
Cynthia Gardner, Employee David Dow, Employee
- --------------------------------------------------------------------------------
If the number of employees and/or consultants falls below the requirements
listed above, DST will be reimbursed by CyberGuard either in cash or by
reduction of the escrow fund at the rate of
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$10,000 per employee/consultant, representing the cost of recruiting and
training replacements. As an incentive to Tradewave employees to remain with
DST, CyberGuard shall allow the remaining unvested CyberGuard stock options of
all employees to fully vest if they remain DST employees for six months.
3. PURCHASE PRICE.
3.1 PAYMENT OF THE PURCHASE PRICE. The Purchase Price (the
"Purchase Price") for the Assets purchased by Buyer hereunder shall be
$810,000.00, of which a portion shall be paid to Seller via cashiers or
certified check and a portion shall be paid by DST into an escrow account, as
such amounts are specifically listed on the Closing Statement.
3.2 TEXAS SALES TAX. Buyer shall be responsible for the payment of
any sales, use or transfer tax applicable to the purchase of the Assets
hereunder and the payment of any applicable sales or use tax to the State of
Texas or any political subdivision thereof. Seller shall not collect any sales
or use taxes at the Closing.
4. CLOSING. Subject to the terms and conditions set forth in this Agreement, the
consummation of the transactions contemplated by this Agreement (the "Closing")
shall take place on April , 1999 or such other date as shall be mutually agreed
upon in writing by the parties hereto. The date on which the Closing shall occur
is referred to herein as the "Closing Date."
5. REPRESENTATIONS AND WARRANTIES OF SELLER. As a material inducement to Buyer
to enter into this Agreement and consummate the transactions contemplated
hereby, Seller hereby represents and warrants to Buyer as of the Date hereof and
as of the Closing Date as follows:
5.1 POWER AND AUTHORITY. Seller is a Florida
corporation in good standing. As evidenced by Schedule 5.1, Seller has the
power, legal capacity and authority to execute and deliver this Agreement and
the other agreements and instruments for which provision is made herein to be
executed and delivered by Seller and to perform its obligations under this
Agreement and such other agreements and instruments to which it is a party, and
no further corporate approval, including shareholder approval, is necessary.
This Agreement and such other agreements and instruments constitute valid and
binding obligations of Seller enforceable against Seller in accordance with
their respective terms. All action on the part of Seller or any other party
necessary for the authorization, execution, delivery and performance by Seller
of this Agreement will be performed on or prior to the Closing Date including,
without limitation, the obtaining of all approvals and consents required for a
valid and effective transfer of the Assets; provided, however, that the parties
acknowledge that it may be impractical to obtain consents to assignments of all
contracts and agreements that are being assigned to Buyer under this Agreement
on or before the Closing Date, and the parties agree that as to any such
required consent, they will work together after the Closing to obtain such
consent.
5.2 ASSET VALUE. The following financial information accurately
reflects the net book value of the Assets listed below as of the dates stated in
such documents, and no material change of any kind has occurred in the financial
condition, assets, or operation of Seller with regard to these Assets, from the
dates stated in such documents to the present time:
(a) Current Outstanding Receivables $ 35,649
(b) Unbilled Receivables OASIS Now Due $ 109,300
(c) Unbilled Receivables NSD (Due August) $ 333,333
(d) Computer Hardware $ 138,638
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(e) Computer Software $ 34,156
(f) Furniture $ 14,706
5.3 LIABILITIES. The following accounting summary accurately reflects
the book value of all Liabilities (not including obligations for future payments
under Contracts) to be assumed by Buyer as of the dates stated in such
documents, and no material change of any kind has occurred in the amounts of
such Liabilities, or the operation of Seller with regard to these Liabilities,
from the dates stated in such documents to the present time:
Schedule 2 to Assignment Agreement $ 76,690.95
5.4 TITLE TO ASSETS; SUITABILITY AND MERCHANTABILITY EXCLUDED. Except as
identified in Schedule 5.4 to this Agreement, Seller has good and marketable
title to all of the Assets and said Assets are not pledged, liened or otherwise
encumbered, nor have they been made the subject of any adverse claim or rights
or the subject of prior agreement. Seller makes no representation or warranty
concerning the merchantability of the assets or suitability of the assets for
any particular purpose.
5.5 CONTRACTS.
(a) Buyer will assume all Seller's obligations arising
under the contracts and agreements described in the
Assignment (the "Contracts"). Each Contract is a
legal, valid and binding obligation of the parties
thereto and is in full force and effect. Seller has
entered into no special contracts with the employees
or contractors described in paragraph 2.5 hereof
which would materially affect Buyer's obligations to,
or relationships with, such employees or contractors.
No notice of default has been received and the
Contracts are otherwise in good standing.
(b) Seller further represents: (i) All material
agreements with TradeWave customers that will
continue to generate revenues for TradeWave after the
Closing, including without limitation an agreement
with Nippon Systems Development and the individual
agreements relating to OASIS ("Customer Contracts")
have been disclosed to DST, and all disclosures that
have been made to DST by CyberGuard regarding the
Customer Contracts are true and accurate; (ii) Each
of the Customer Contracts represent the legal, valid
and binding obligation of the parties thereto and are
in full force and effect; and (iii) the Customer
Contracts are in good standing, there are no
outstanding defaults under the Customer Contracts, no
event has occurred and no condition or state of facts
exists that would cause a material breach, default or
event of default under any Customer Contract, or
would give to any customer the right to cause a
termination or would cause an acceleration of any
obligation under any Customer Contract; provided,
however that DST acknowledges that CyberGuard has
disclosed to DST the status of the completion of the
Y2K testing that is required by OASIS.
5.6 SOFTWARE LICENSES. The Software licenses listed in Schedule 2 to the Bill
of Sale are held in good standing, and Seller is not in breach nor
delinquent in the payment of any fees required to be paid under any of the
software licenses listed in Schedule 2 to the Bill of Sale.
5.7 NO VIOLATION.
(a) The execution and delivery of this Agreement by Seller, the performance by
Seller of its obligations and the consummation of the transactions contemplated
hereunder will not result in
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(I) a violation of any law, statute, rule, regulation, judgment or decree (each,
a "Law") of any domestic or foreign court or governmental, administrative or
regulatory authority, agency or instrumentality, including without limitation
the Securities and Exchange Commission and Florida Division of Securities (each,
a "Governmental Authority") applicable to Seller or the Assets; or (II) the
creation or imposition of any Lien upon the Assets or constitute an event which,
after notice or lapse of time or both, would result in any of the foregoing. (b)
To the knowledge of Seller, no litigation, claim, suit, proceeding or
investigation, related to the Assets or the Business is pending or threatened
(i) against Seller, or any officer or director of Seller; or (ii) against the
Assets.
5.8 NO CONSENTS. Other than as described on Schedule 5.8 hereto, no
consent, approval, authorization or other action by, or filing with, any
Governmental Authority (each, a "Governmental Approval") or other third party is
required to be obtained or made by Seller in connection with the execution,
delivery and performance of this Agreement and the other agreements and
instruments contemplated herein to which Seller is a party and the consummation
by Seller of the transactions contemplated hereby.
5.9 Y2K COMPATIBILITY.
(a) Seller has made necessary modifications to the existing code in its
Trade VPI suite of PKI proxy software and Seller believes the Trade
VPI product line is now Y2K-Compliant,
(b) Seller has purchased upgrades to some third-party software that when
installed will be Y2K-compliant, namely Sybase version 11.0.3 and
Remedy version 4.0; and
(c) In order to test and verify Y2K compliance, Seller has adopted a Y2K
/ T-Cert Release Plan set forth in Schedule 12.
6. REPRESENTATIONS AND WARRANTIES OF BUYER. As a material inducement to Seller
to enter into this Agreement and consummate the transactions contemplated
hereby, Buyer hereby represents and warrants to Seller as of the date hereof and
as of the Closing Date as follows:
6.1 POWER AND AUTHORITY. Buyer has the power, legal capacity and authority
to execute and deliver this Agreement and the other agreements and
instruments for which provision is made herein to be executed and
delivered by Buyer and to perform its obligations under this Agreement
and such other agreements and instruments to which it is a party. This
Agreement and such other agreements and instruments constitute valid and
binding obligations of Buyer enforceable against Buyer in accordance
with their respective terms. All action on the part of Buyer or any
other party necessary for the authorization, execution, delivery and
performance by Buyer of this Agreement will be performed on or prior to
the Closing Date.
6.2 NO VIOLATION OR LITIGATION. The execution and delivery of this Agreement
by Buyer, the performance by Buyer of its obligations and the
consummation of the transactions contemplated hereunder will not result
in a violation of any Law of any Governmental Authority applicable to
Buyer. No litigation related to the Assets is pending against Buyer or
the Assets which: (I) seeks to prevent or delay the consummation of the
transactions contemplated by this Agreement, (II) challenges any of the
terms or conditions of such transactions, or (III) seeks damages in
connection therewith.
6.3 NO CONSENTS. No Governmental Approval or other third party consent,
approval or authorization is required to be obtained or made by Buyer in
connection with the execution, delivery and performance of this
Agreement and the other agreements and instruments contemplated herein
to which Buyer is a party and the consummation by Buyer of the
transactions contemplated hereby and thereby.
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7. CONDITIONS TO CLOSING.
7.1 CONDITIONS TO THE OBLIGATION OF BUYER. The obligation of Buyer to
proceed with the Closing is subject to the satisfaction on or prior to
the Closing Date of all the following conditions, any one or more of
which may be waived in whole or in part by Buyer in its sole discretion:
(a) Seller shall have complied with all of the respective covenants and
agreements contained herein, and all of the representations and
warranties of Seller contained in this Agreement shall be true on
and as of the Closing Date as if made anew on and as of the Closing
Date.
(b) Buyer shall have received the following documents, in each case in
form and substance reasonably satisfactory to Buyer and its
counsel: (I) the Closing Agreements, Certificates and Documents
shall have been executed and delivered by Seller; and (II) Copies
of all contracts and agreements to be assumed by Buyer and all
other contracts that are in force by and between Seller and any
other third party which relates to the Assets being purchased.
(c) No Litigation shall be pending or threatened and no order,
injunction or decree shall have been entered by any Governmental
Authority which in Buyer's sole discretion would prohibit, restrict
or delay consummation of the transactions contemplated by this
Agreement.
(d) All consents and approvals of third parties which are required to
consummate the transactions contemplated herein shall have been
obtained and delivered to Buyer. From the date hereof until the
Closing Date, there shall have occurred no adverse changes or
events which singularly or as whole would have a material adverse
effect on the Business or the Assets.
(e) Buyer shall have received from Coast Business Credit the complete
release of all its liens and security interests on the Assets.
7.2 CONDITIONS TO THE OBLIGATION OF SELLER. The obligation of Seller to
proceed with the Closing is subject to the satisfaction on or prior to
the Closing Date of all the following conditions, any one or more of
which may be waived in whole or in part by Seller in its sole
discretion.
(a) Buyer shall have complied with all of the respective covenants and
agreements contained herein, and all of the representations and
warranties of Buyer contained in this Agreement shall be true on
and as of the Closing Date as if made anew on and as of the Closing
Date.
(b) Seller shall have been paid the Purchase Price as provided in
Section 3 of this Agreement. The Closing Agreements, Certificates
and Documents shall have been executed and delivered by Buyer.
(c) No Litigation shall be pending or threatened and no order,
injunction or decree shall have been entered by any Governmental
Authority which in Seller's sole discretion would prohibit,
restrict or delay consummation of the transactions contemplated by
this Agreement.
(d) Buyer shall have offered employment to Seller's employees, and
employment or consulting contracts at Buyer's discretion to
Seller's consultants, as described in Section 2.5.
(e) All consents and approvals of third parties which are required to
consummate the transactions contemplated herein shall have been
obtained, including, without limitation, the consent to the Closing
and the release of the lien from Coast Business Credit.
8. RISK OF LOSS. Prior to the Closing, the risk of loss of, damage to, or
destruction of the Assets shall remain with Seller. On and after the
Closing Date, the risk of loss of, damage to, or destruction of the
Assets shall be with Buyer.
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9. FURTHER ASSURANCES. Seller shall, from time to time after the Closing,
upon the request of Buyer, execute, acknowledge and deliver all such
further assignments, transfers, conveyances, assurances and other
documents as may be required to transfer to and to vest in Buyer all
right, title and interest of Seller in and to the Assets and the
Business and to protect the right, title and interest of Buyer in and to
the Assets and the Business.
10. NOTICES. Notices required or permitted hereunder will be effective if
delivered by (a) certified mail, return receipt requested, or (b) hand
delivery or overnight courier, to the address given below:
If to Buyer: Digital Signature Trust Co.
1 South Main Street, 11th Floor
Salt Lake City, UT 84111
Fax: 801-594-8258
Attention: Legal Department
If to Seller: CyberGuard Corporation
2000 West Commercial Blvd., Suite 200
Fort Lauderdale, FL 33309
Fax: 954-958-3853
Attention: Legal Department
All notices delivered hereunder shall be marked "PERSONAL AND CONFIDENTIAL."
Any party may change the address or number to which notices are to be
addressed by giving the other party notice in the manner herein set forth.
Any notice given in accordance with the requirements of this Section shall be
deemed to have been received when delivered by overnight courier or by
facsimile transmission, if confirmation of receipt is provided by the party
to be charged with notice, or, if mailed, on the third business day following
the date upon which such notice shall have been deposited in the U.S. mails,
prepaid, return receipt requested.
11. TRANSITION PLAN
11.1 Term. The term of this Transition Plan shall be for two (2) weeks
from the date hereof ("Term"). The Term will be automatically extended
if DST has not been able to set up its own bank accounts, credit card
management services account and transfer of employees and contractors to
DST's payroll before two (2) weeks from the date hereof, but without the
mutual written consent of both parties to this Agreement, it shall not
be extended beyond six (6) weeks from the end of the initial two (2)
week Term. In the event that Buyer fails to completely transfer all
operations related to Buyer's purchase of TradeWave within eight (8)
weeks from the date hereof, Seller shall have no further responsibility
to make any disbursements on behalf of Buyer.
11.2 CyberGuard's Responsibilities. CyberGuard agrees to provide, on
behalf of DST, the following:
(a) payments for all CyberGuard's personnel and contractors who
agree to become DST's employees ("Personnel" and "Contractors",
respectively), including Personnel payroll, 401k contributions,
insurance payments, vacation accruals, as such items and
amounts are more specifically listed on SCHEDULE 11.2, entitled
TradeWave Operating Costs and attached hereto;
(b) payment for travel expenses for Personnel and Contractors;
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(c) payment for recurring operating expenses, as such items and
amounts are more specifically listed on SCHEDULE 11.2 attached
hereto;
(d) credit card processing and management services;
(e) invoices to DST, with supporting documentation, for all
CyberGuard's expenditures on behalf of DST arising from this
Agreement;
(f) payment for software licenses or software upgrades and toolkits
("Upgrades") that are reasonably necessary to complete the
T-Cert/Y2K Release Plan. A list of the current and expected
Upgrades and payments for Upgrades is described on Schedule
11.2 hereto;
(g) payments for such other expenses as are reasonably necessary to
fund the operation of TradeWave.
11.3 DST's Responsibilities. DST hereby agrees to:
(a) reimburse CyberGuard for one hundred percent (100%) of
CyberGuard's payments made and expenses incurred in connection
with Section 11.2 of this Agreement, plus five percent (5%)
processing fee, within seven (7) days from the date of
CyberGuard's invoices to DST;
(b) DST will take no actions that will increase CyberGuard's
obligations set forth in Section 11.2 of this Agreement; and
(c) DST will use its best efforts to take all actions necessary to
complete the transfer of TradeWave to DST, including without
limitation, establishing bank accounts, establishing a credit
card management service account, establishing the employees and
contractors of TradeWave as employees and contractors of DST
(including completion of any payroll and insurance matters) and
the transfer of the payment responsibilities for TradeWave's
recurring operating expenses to DST.
12. Y2K T-CERT RELEASE PLAN. Both parties agree to the terms and deadlines
described in the T-Cert/Y2K Release Plan attached hereto and incorporated by
reference herein as Schedule 12.
13. NON-SOLICITATION. For a period of two (2) years from the date hereof,
CyberGuard shall not (and shall not allow its then current employees to)
(i) encourage, induce, attempt to induce, solicit or attempt to solicit (on
the CyberGuard's behalf or on behalf of any other person or entity) anyone
who is employed at the time, or was employed during the previous three
months, by the DST or any of the DST's subsidiaries, to leave his or her
employment with DST or any of DST's subsidiaries; or (ii) solicit the
business of any customers or prospective customers of TradeWave as of the
date hereof with respect to certificate authority business as it relates to
electronic commerce.
14. NON-COMPETITION. CyberGuard hereby agrees that for a period of two (2)
years following the date hereof neither CyberGuard nor any of its
subsidiaries, whether acting individually or through any joint venture or
one or more third parties, shall own, manage, operate, control or engage in
the ownership, management, operation or control of or have any interest in,
as a majority stockholder, partner or otherwise, any business, entity or
enterprise that engages in or manages a certificate authority business as
it relates to electronic commerce; provided, however, in the event of a
merger, acquisition of substantially all assets of CyberGuard or similar
transaction between CyberGuard and a third party whose majority business is
in the area of public key infrastructure, this Section 14 shall be deemed
void and of no further force or effect.
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15. GOVERNING LAW. The validity, interpretation and performance of this
Agreement will be determined in accordance with the laws of the State of
Texas applicable to contracts made and to be performed wholly within the
state.
16. COUNTERPARTS.This Agreement may be executed in counterparts, each of which
will be deemed an original, but both of which together shall constitute one
and the same instrument. The parties agree that signatures transmitted by
facsimile shall for all purposes be considered as effective as original
executed documents delivered in person.
17. CAPTIONS; GENDER; REFERENCES. The headings, subheadings and captions in
this Agreement and in any appendix, exhibit or schedule hereto are for
reference purposes only and are not intended to affect the meaning or
interpretation of this Agreement. For purposes of this Agreement, the use
of masculine pronouns shall be deemed to include feminine and neuter
pronouns, as appropriate. References in this Agreement to sections,
subsections, schedules or exhibits are to sections, subsections, schedules
or exhibits in or to this Agreement unless otherwise stated. Unless
explicitly stated to the contrary, words such as "hereof", "herein",
"hereunder" and words of similar meaning shall refer to this Agreement as a
whole and not to any particular section or subsection.
18. ENTIRE AGREEMENT; AMENDMENTS, ETC. This Agreement, together with the
Closing Agreements, Certificates and Documents, contain the entire
agreement among the parties hereto with respect to the subject matter
hereof and supersedes all prior negotiations, discussions, agreements,
arrangements and understandings, written or oral, relating to the subject
matter of this Agreement. No amendment or modification of, or any waiver of
any provision of, this Agreement shall be effective against a party unless
set forth in a writing signed by such party.
19. ATTORNEYS' FEES. In the event any suit or other legal proceeding is brought
for the enforcement of any of the provisions of this Agreement, the parties
hereto agree that the prevailing party or parties shall be entitled to
recover from the other party or parties upon final judgment on the merits,
reasonable attorneys' fees including attorneys' fees for any appeal and
costs incurred in bringing such suit or proceeding.
20. SUCCESSORS AND ASSIGNS; NO THIRD PARTY BENEFICIARIES; ASSIGNMENT;
SEVERABILITY. This Agreement shall be binding upon the parties hereto and
their respective successors and permitted assigns. This Agreement is not
intended to, and shall not be construed to, create any rights as a
third-party beneficiary or otherwise in favor of any person or entity who
is not a party to this Agreement or a successor or permitted assign of a
party to this Agreement. No party hereto shall assign this Agreement
without the other party's prior written consent. If any provision of this
Agreement is held to be unenforceable, invalid or void to any extent for
any reason, that provision shall remain in force and effect to the maximum
extent allowable, if any, and the enforceability and validity of the
remaining provisions of this Agreement shall not be affected thereby.
21. INDEMNIFICATION.
a. INDEMNIFICATION OF BUYER BY SELLER. Seller hereby agrees to indemnify
Buyer for any and all losses, claims, damages, taxes (of any nature),
expenses (including costs of investigations and reasonable legal fees
and expenses at trial or an appeal and without initiation of suit) or
other liabilities which arise out of or result from 1) the negligent or
fraudulent conduct or actions of Seller prior to Closing that result in
any claims against
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or damages to Buyer, including but not limited to the issuance of
digital certificates that are found to be issued as the result of either
negligence of fraud, or 2) any misrepresentation or breach of any
warranty, representation or covenant of Seller made in this Agreement.
Additionally, Buyer and Seller agree that errors and omissions insurance
coverage will be carried by Seller sufficient to cover any claim or loss
arising out of conduct engaged or alleged to have been engaged in by
Seller, its shareholders, officers, agents and employees, before the
date of Closing.
b. INDEMNIFICATION PROCEDURE. If any action is commenced against, or claim
is made by Buyer under the indemnification provisions of this
Indemnification Agreement, Buyer shall give notice to Seller thirty (30)
days following Buyer's knowledge thereof. To the extent that failure to
give such notice unduly prejudices Seller and causes additional damages
to be incurred, Seller shall not be liable for such additional damages
or to the extent it is actually prejudiced. Except for the reduction in
liability set forth in the previous sentence, the failure to give such
notice will not relieve Seller from any liability which it may otherwise
have to Buyer whether arising hereunder or otherwise. With respect to
each such notice, Seller shall immediately retain counsel reasonably
satisfactory to Buyer and take such other actions as are necessary to
defend Buyer or to discharge the indemnity obligations hereunder. Buyer
and Seller shall participate in all decisions regarding the defense of
any action to be taken concerning the indemnified obligations or the
discharge thereof. If Seller fails to notify Buyer within thirty (30)
days of receipt of Buyer's notice that Seller must retain counsel and
take such other actions as are necessary, Buyer may, at its option,
conduct such defense at the expense of Seller and Seller shall pay on
demand any amounts owed hereunder to Buyer.
c. INDEMNIFICATION OF SELLER BY BUYER. Buyer hereby agrees to indemnify
Seller for any and all losses, claims, damages, taxes (of any nature),
expenses (including costs of investigations and reasonable legal fees
and expenses at trial or an appeal and without initiation of suit) or
other liabilities which arise out of or result from 1) customer,
employee or vendor claims that arise from Buyer's failure to perform its
obligations after the Closing, or 2) any misrepresentation or breach of
any warranty, representation or covenant of Buyer made in the Agreement.
d. INDEMNIFICATION PROCEDURE. If any action is commenced against or claim
is made by Seller under the indemnification provisions of this
Agreement, Seller shall give notice to Buyer thirty (30) days following
Seller's knowledge thereof. To the extent that failure to give such
notice unduly prejudices Buyer and causes additional damages to be
incurred, Buyer shall not be liable for such additional damages or to
the extent it is actually prejudiced. Except for the reduction in
liability set forth in the previous sentence, the failure to give such
notice will not relieve Buyer from any liability which it may otherwise
have to Seller whether arising hereunder or otherwise. With respect to
each such notice, Buyer shall immediately retain counsel reasonably
satisfactory to Seller and take such other actions as are necessary to
defend Seller or to discharge the indemnity obligations hereunder.
Seller and Buyer shall participate in all decisions regarding the
defense of any action to be taken concerning the indemnified obligations
or the discharge thereof. If Buyer fails to notify Seller within thirty
(30) days of receipt of Seller's notice that Buyer must retain counsel
and take such other actions as are necessary, Seller may, at its option,
conduct such defense at the expense of Buyer and Buyer shall pay on
demand any amounts owed hereunder to Seller.
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<PAGE> 11
e. SETTLEMENT. For the purposes of this Section 21 of this Agreement, the
party (either Buyer or Seller) that provides indemnification shall be
the "Indemnifying Party" and the party receiving indemnification shall
be the "Indemnified Party". An Indemnifying Party may, without the
consent of the Indemnified Party, settle or compromise any action or
consent to the entry of any judgment which includes as an unconditional
term thereof the delivery of the claimant or plaintiff to the
Indemnified Party of a duly executed written release of the Indemnified
Party from all liability in respect of such action, which release shall
be reasonably satisfactory in form and substance to counsel for the
Indemnified Party; provided, however, that the Indemnifying Party shall
not, without the written consent of the Indemnified Party, settle or
compromise any action in any manner that, in the reasonable judgment of
the Indemnified Party or its counsel, would materially and adversely
affect the Indemnified Party.
f. TERMINATION. The right of an Indemnified Party to seek Indemnification
under this Section 21 of this Agreement shall survive until October 22,
2000. If either party intends to make a claim for indemnification
against the other, notice of such claim must be received by the
Indemnifying Party no later than 5:00 PM, Austin, TX time, on October
22, 2000. After October 22, 2000, this Indemnification Agreement shall
continue in effect only with respect to matters for which notice of a
claim for indemnification has been received by the Indemnifying Party on
or prior to October 22, 2000.
22. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The various representations and
warranties of the parties contained in this Agreement shall survive the
Closing until October 22, 2000.
IN WITNESS WHEREOF, each of the parties has caused this Asset Purchase
Agreement and Transition Plan to be duly executed and delivered as of the date
first above written.
CyberGuard Corporation Digital Signature Trust Co.
By: By:
------------------------------ ------------------------------
Name: Name:
---------------------------- ------------------------------
Title: Title:
------------------------------ ------------------------------
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("Assignment") is made,
entered into and effective as of April ___, 1999, by and between CYBERGUARD
CORPORATION, a Florida corporation having an office at 2000 West Commercial
Blvd., Fort Lauderdale, FL 33309 ("Assignor") and DIGITAL SIGNATURE TRUST CO., a
Utah corporation having an office at 1 South Main Street, Salt Lake City, Utah
("Assignee").
WHEREAS, both parties hereto agree that the "Business" shall mean
Assignor's division known as TradeWave that is engaged in electronic commerce
and conducted out of Austin, Texas. Both parties further acknowledge that
Assignor's computer network security business and its assets are located in Fort
Lauderdale, Florida and other locations throughout the United States of America
and in other countries worldwide, and none of those assets are intended to be
transferred in connection with the transaction between Assignor and Assignee;
and
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<PAGE> 12
WHEREAS, as of the date hereof, Assignor has conveyed to Assignee certain
of the assets owned by Assignor and associated with or employed in the Business
(collectively, the "Assets").
WHEREAS, in connection with such conveyance, Assignor has agreed to
assign to Assignee all of its respective right, title and interest in, to and
under certain contracts, agreements and other intangible personal property
relating to or included within the Assets.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. ASSIGNMENT. Assignor hereby assigns, transfers and conveys to
Assignee all of Assignor's interest in, to and under those contracts
and agreements relating to the Business described on SCHEDULE 1
attached hereto (collectively, the "Contracts").
2. ASSUMPTION OF OBLIGATIONS. Assignee hereby accepts the assignment
from Assignor of the Contracts, and assumes and agrees to pay,
perform and/or discharge in accordance with their terms (i) the
Contracts; and (ii) any such other liabilities of Assignor which
Assignee has elected in writing to assume as described on SCHEDULE 2
attached hereto.
3. OTHER LIABILITIES EXCLUDED. The parties acknowledge and agree that
except, as and to the extent provided in Section 2 hereof, Assignee
is not assuming, nor under any circumstances shall Assignee be
obligated to pay, assume or be responsible for (nor shall any of the
Assets be or become liable for or subject to) any other of Assignor's
leases, contracts, agreements, liabilities, indebtedness or
obligations; and any and all other liabilities and obligations of
Assignor (whether by contract, lease or agreement or otherwise) are
specifically excluded and excepted from the liabilities and
obligations to be assumed by Assignee hereunder. Assignor hereby
confirms that Assignee is not assuming any liability arising from a
contract between CyberGuard and IBM.
4. COOPERATION. Each of Assignor and Assignee agree to execute such
other documents and take such other actions as may be reasonably
necessary or desirable to confirm or effectuate the assignments and
assumptions contemplated hereby.
5. BENEFIT; PURPOSE; MODIFICATION; LAW. This Assignment shall inure to
the benefit of and be binding upon Assignee, Assignor, and their
respective legal representatives, successors and assigns. The sole
purposes hereof are to assign certain rights to Assignee and to
relieve Assignor of certain liabilities and obligations and not to
create third-party beneficiary rights. Therefore, this Assignment may
be modified by a writing signed by Assignee and Assignor without the
consent of any third party. This Assignment shall be construed and
governed in accordance with the laws of the State of Texas without
any reference to its conflicts of law provisions.
IN WITNESS WHEREOF, the parties have entered into this Assignment as of
the date first written above.
CYBERGUARD CORPORATION
By
----------------------------
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<PAGE> 13
Title:
-------------------------
("Assignor")
DIGITAL SIGNATURE TRUST CO.
By:
----------------------------
Title:
-------------------------
("Assignee")
STATE OF _______________)
COUNTY OF_____________)
The foregoing instrument was acknowledged before me this ______ day of
___________1999, by ___________________________, as ______________________ of
CyberGuard Corporation, a Florida corporation.
My Commission Expires: ___________________
------------------------------
NOTARY PUBLIC
STATE OF _______________)
COUNTY OF_____________)
The foregoing instrument was acknowledged before me this ________ day of
__________1999, by _______________________, as _______________________ of
Digital Signature Trust Co., a corporation.
My Commission Expires: ______________________
------------------------------
NOTARY PUBLIC
GENERAL ASSIGNMENT, CONVEYANCE AND BILL OF SALE
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<PAGE> 14
THIS GENERAL ASSIGNMENT, CONVEYANCE AND BILL OF SALE ("Bill of Sale"),
is made and entered into as of April ____, 1999, by and between CYBERGUARD
CORPORATION, a Florida corporation having an office at 2000 West Commercial
Blvd., Fort Lauderdale, FL 33309 ("Assignor") and DIGITAL SIGNATURE TRUST CO., a
Utah corporation having an office at 1 South Main Street, Salt Lake City, Utah
("Assignee").
WHEREAS, This Bill of Sale is being delivered to Assignee in connection
with the transaction for the sale of assets of CyberGuard's TradeWave division
("TradeWave") to Assignee; and
WHEREAS, both parties hereto agree that the "Business" shall mean
Assignor's division known as TradeWave that is engaged in electronic commerce
and conducted out of Austin, Texas. Both parties hereto further acknowledge that
Assignor's computer network security business and its assets are located in Fort
Lauderdale, Florida and other locations throughout the United States of America
and in other countries worldwide, and none of those assets are intended to be
transferred in connection with the transaction between Assignor and Assignee;
and
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
Assignor hereby assigns, transfers and conveys unto Assignee, its
successors and assigns forever, the following assets and properties relating to
the Business:
(a) all tangible personal property, including, but not limited to,
all computer hardware, equipment, furniture and supplies, that
are located in Austin, Texas at the Assignor's TradeWave
division facilities and that are used in the operation and
support of the Business as of the date hereof, those items
more specifically described on SCHEDULE 1, attached hereto;
(b) all computer software (including object code and source code,
in machine readable and listing form), operating systems,
application programs and program documentation, routines and
subroutines, directories, databases, hyperlinks, screen
displays, user interfaces and machine interfaces, system
documentation (including internal documentation, documentation
made available to customers and training materials), all
rights to other related technology including, without
limitation, all algorithms, tradenames, trademarks, service
marks, registered or unregistered, including applications and
registrations therefor, and other related intellectual
property rights, utilized by Assignor in connection with the
development, operation and support of TradeWave as of the date
hereof, including, without limitation, those items more
specifically described on SCHEDULE 2 attached hereto;
(c) the names "TradeWave" and any variants thereof and all
tradename applications, trademarks, trademark applications,
service marks, service mark applications and logos (each
whether registered or unregistered, national or
international), domain names, export permits, advertising and
artwork related thereto, relating to those names more
specifically described on SCHEDULE 3 attached hereto;
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<PAGE> 15
(d) all contracts, agreements, lease agreements, service
agreements, customer agreements, consulting agreements, that
are specifically described on SCHEDULE 4 attached hereto; and
(e) all marketing lists, advertising lists and mailing lists
(including, without limitation, electronic or "e-mail" lists)
used in connection with the Business, as described on SCHEDULE
5 attached hereto; and
(f) all accounts receivables that are specifically described on
SCHEDULE 6 attached hereto.
Assignor hereby constitutes and appoints Assignee its true and lawful
attorney, with full power of substitution, in the name of Assignor or otherwise,
and on behalf and for the benefit of Assignee: (a) to demand and receive from
time to time any and all of the transferred assets and properties; (b) to give
receipts and releases for or in respect of the same or any part thereof; (c) to
collect for their account all items transferred hereunder; (d) to endorse checks
and other instruments; (e) to institute and prosecute, from time to time, in the
name of Assignor or otherwise, any and all actions, suits and proceedings which
Assignee deems proper to collect, assert or enforce any claim, title, right,
debt, note or actions, suits or proceedings with respect to the transferred
properties; and (f) to execute such other documents and take such other action
as may be necessary from time to time to carry out this Bill of Sale. Assignor
hereby declares that the foregoing powers are coupled with an interest and shall
be irrevocable.
Assignor covenants and agrees that it will at any time and from time to
time do, execute, acknowledge and deliver any and all other acts, deeds,
assignment, transfers, conveyances, powers of attorney or other instruments that
Assignee reasonably deems necessary or proper to carry out the assignment and
conveyance intended to be made hereunder.
This Bill of Sale shall be binding upon and inure to the benefit of
Assignor and Assignee and their successors and assigns. This Bill of Sale may be
modified only by a writing signed by both parties hereto. This Bill of Sale
shall be construed and governed in accordance with the laws of the State of
Texas without any reference to its conflicts of law provisions.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, Assignor and Assignee have executed this Bill of
Sale effective as of the date first above written.
CYBERGUARD CORPORATION
By:___________________________
Title:_________________________
("Assignor")
DIGITAL SIGNATURE TRUST CO.
By:___________________________
Title:_________________________
("Assignee")
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<PAGE> 16
STATE OF _______________)
COUNTY OF_____________)
The foregoing instrument was acknowledged before me this ________ day
of _______________________1999, by _____________________________________,as
_____________________________________ of CyberGuard Corporation, a Florida
Corporation.
My Commission Expires:
------------------------------
NOTARY PUBLIC
STATE OF _______________)
COUNTY OF_____________)
The foregoing instrument was acknowledged before me this ________ day
of __________1999, by _______________________, as _______________________ of
Digital Signature Trust Co., a corporation.
My Commission Expires: ______________________
-----------------------------
NOTARY PUBLIC
ESCROW AGREEMENT
This Escrow Agreement (this "AGREEMENT") is entered into as of
April ____, 1999 (the "EFFECTIVE DATE"), by and among Digital Signature Trust
Company a Utah corporation ("DST"), and CyberGuard Corporation, a Florida
corporation ("CYBERGUARD"), and Union Bank as escrow agent (the "ESCROW AGENT").
A. DST and CyberGuard have entered into an Asset Purchase
Agreement dated as of the date hereof (the "ASSET PURCHASE AGREEMENT") pursuant
to which DST will acquire certain assets of CyberGuard's TradeWave Division
("TradeWave") from CyberGuard.
B. Pursuant to the Asset Purchase Agreement, a payment of a
certain amount of cash is to be made by DST to CyberGuard (the "CASH PAYMENT").
C. The Asset Purchase Agreement provides for Four Hundred Five
Thousand Dollars ($405,000.00) of the Cash Payment (the "ESCROW FUNDS") to be
withheld by DST and placed in an escrow account (the "ESCROW ACCOUNT").
D. The parties hereto desire to establish the terms and
conditions pursuant to which the Escrow Funds will be deposited, held in, and
disbursed from the Escrow Account.
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<PAGE> 17
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. ESCROW. On the Effective Date, DST will deposit the Escrow
Funds with the Escrow Agent, who will hold them in escrow until required to be
released pursuant to Sections 2 or 4 hereof. The Escrow Agent agrees to accept
delivery of the Escrow Funds and to hold such Escrow Funds in escrow subject to
the terms and conditions of this Agreement.
2. DEPOSIT OF ESCROW FUNDS; RELEASE FROM ESCROW; INVESTMENTS
(a) DELIVERY OF ESCROW FUNDS. On the Effective Date
the Escrow Funds will be delivered by DST to the Escrow Agent in the form of a
check or wire transfer in the amount of Four Hundred Five Thousand Dollars
($405,000.00) and the Escrow Agent shall deposit the Escrow Funds in a separate
escrow account with the Escrow Agent. The Escrow Funds shall be maintained in
such account until the release of the Escrow Funds in accordance with Sections 2
or 4 hereof.
(b) TERMINATION OF ESCROW. On September 30, 1999 (the
"FINAL RELEASE DATE"), the Escrow Agent will deliver the Escrow Funds to
CyberGuard less (A) any Escrow Funds delivered to DST in accordance with Section
4 hereof in satisfaction of Claims and (B) any Escrow Funds subject to possible
delivery to DST in accordance with Section 4 hereof with respect to any then
pending but unresolved Claims of DST, subject to the Escrow Agent's receipt of
written instructions from DST and CyberGuard as provided in Section 2(c) below.
Any Escrow Funds held as a result of clause (B) will be delivered to CyberGuard
or DST (as appropriate) promptly upon resolution of each specific Claim involved
pursuant to Section 4.
(c) RELEASE OF ESCROW FUNDS. The Escrow Funds will be
held by the Escrow Agent until released pursuant to Section 2(b) above or
Section 4, below. On the Final Release Date (in the case of Section 2(b)) or
after the applicable release condition is met (in the case of Section 4), as the
case may be, the Escrow Agent will deliver to CyberGuard the amount of Escrow
Funds to be released on such date as identified by CyberGuard to the Escrow
Agent in writing (in the case of Section 2(b)) or as identified in the Notice of
Completion (in the case of Section 4 (d) ) or as identified in the applicable
Notice of Claim (in the case of Section 4(a)) or in the final decision of
litigation or arbitration, as applicable (in the case of Section 4(b)) received
by the Escrow Agent, as the case may be. Such delivery will be in the form of a
check or wire transfer issued in the name of CyberGuard. DST and CyberGuard
undertake to deliver a timely written notice to Escrow Agent identifying the
amount of Escrow Funds to be released at such time.
(d) POWER TO TRANSFER ESCROW FUNDS. The Escrow Agent
is hereby granted the power to effect any transfer of Escrow Funds contemplated
by this Agreement. DST and CyberGuard will cooperate with the Escrow Agent in
promptly effecting such transfers.
(e) INVESTMENT OF ESCROW FUNDS. The Escrow Agent
shall invest the funds held in the Escrow Account in a money market account
selected by Escrow Agent. All interest or any other income earned with respect
to such investment shall be allocated and paid to CyberGuard and shall not
constitute part of the Escrow Funds.
3. NOTICE OF CLAIM. If DST wishes to assert a claim against
the Escrow Funds, it shall deliver one or more written notices (each, a "Notice
of Claim") before the Final
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<PAGE> 18
Release Date to CyberGuard with a copy to the Escrow Agent, specifying with
reasonable particularity (to the extent that the information is available):
(a) the factual basis for the Claim; and
(b) the amount of the Claim, if known, or if not
known, DST's good faith estimate of the reasonably foreseeable maximum amount of
the alleged damages arising from such Claim (the "ESTIMATED DAMAGES"), the basis
thereof and documentation supporting same.
Notices of Claim may be sent for any of the reasons described in section 4 (c)
of this Agreement.
4. RESOLUTION OF NOTICE OF CLAIM AND TRANSFER OF ESCROW FUNDS.
Any Notice of Claim received by CyberGuard and the Escrow Agent, will be
resolved as follows:
(a) UNCONTESTED CLAIMS. In the event that CyberGuard
does not either (i) contest a Notice of Claim in writing to the Escrow Agent and
DST or (ii) pay the amount demanded (as certified by CyberGuard to the Escrow
Agent in writing), all within 30 days after Notice of Claim was received by the
Escrow Agent and CyberGuard (an "UNCONTESTED CLAIM"), then the Escrow Agent will
promptly pay to DST that amount of Escrow Funds equal to the amount of the Claim
and/or Estimated Damages specified in the Notice of Claim and will notify
CyberGuard of such transfer.
(b) CONTESTED CLAIMS. In the event that CyberGuard
delivers written notice contesting all, or a portion of, a Notice of Claim to
DST and the Escrow Agent within the 30-day period provided above, and if the
matters that are the subject of the Claims are not resolved by CyberGuard and
DST within ten (10) business days thereafter, then such claims will be settled
by binding arbitration which will be conducted as provided in Section 5 herein.
Any portion of the Notice of Claim that is not contested will be resolved as set
forth above in Section 4(a). The final decision of the arbitrator will be
furnished to the Escrow Agent, CyberGuard and DST in writing and will constitute
a conclusive determination of the issue in question, binding upon CyberGuard and
DST. After receipt by the Escrow Agent of written notice that the Notice of
Claim is contested by CyberGuard, the Escrow Agent will continue to hold in the
Escrow Account, Escrow Funds sufficient to cover such Claim (and Estimated
Damages, if any) (notwithstanding the expiration of the Final Release Date)
until (i) execution, and delivery to the Escrow Agent, of a settlement agreement
by DST and CyberGuard setting forth a resolution of the Notice of Claim, or (ii)
receipt by the Escrow Agent of a copy of the final award of the arbitrator or
court, as the case may be, together with a written certificate from DST or
CyberGuard certifying that the same is a true, accurate and complete copy of a
final decision, award or settlement of such Notice of Claim pursuant to this
Section 4(b).
(c) BASIS FOR CLAIMS. DST AND CYBERGUARD AGREE THAT
DST MAY ASSERT A CLAIM AGAINST THE ESCROW FUNDS FOR ANY OF THE FOLLOWING
REASONS:
(i) NSD PAYMENT. If DST has not received payment of
at least $330,000 from NSD, a customer of
CyberGuard's TradeWave Division, on or before the
Final Release Date, then DST shall have a claim
against the Escrow Funds in the amount of the
difference between the amount received from NSD
and $330,000.
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<PAGE> 19
(ii) COMPLETION OF WORK. Section 12 of the Asset
Purchase Agreement requires that certain
licensing, Y2K testing and development, T-CERT
product development and certain localization
work for NSD be completed by the former
TradeWave Division of CyberGuard before the
Escrow Funds be released to CyberGuard (the
"Work"). If Work is completed on or before the
final date required by OASIS for Y2K testing
schedule requirements ("OASIS Required Date"),
then there shall be no reduction in the amount
of the Escrow Funds to be paid to CyberGuard
under this Section 4 (c) (ii). If the Work is
not completed by the OASIS Required Date, then
for each two (2) week delay in the completion of
the Work, DST shall be paid $40,500 of the
Escrow Funds. In addition, if a delay in any of
the Work results in significant impairment of
TradeWave customer relationships, DST will have
the right to assert a Claim for such damage,
with the amount of such Claim either to be
agreed to by CyberGuard or to be subject to
arbitration as required under Section 5 of this
Agreement.
Other than as set forth above in this Section 4 (c) there shall be no other
basis for Claims by DST against the Escrow Funds.
(d) NOTICE OF COMPLETION. Upon completion of the Work and the
receipt by DST of at least $330,000 from NSD as described in Section 4 (c) (ii)
above, CyberGuard shall have the right to send DST and the Escrow Agent a notice
that there are no possible Claims remaining against the Escrow Funds by DST and,
therefore, CyberGuard should be paid the remaining amount of the Escrow Funds
("Notice of Completion"). In the event that DST does not contest the Notice of
Completion in writing to the Escrow Agent and CyberGuard within fifteen (15)
days after a Notice of Completion has been received by the Escrow Agent and DST,
then the Escrow Agent will promptly pay to CyberGuard the full amount of Escrow
Funds remaining in the Escrow Account.
5. ARBITRATION. DST and CyberGuard agree that they shall use
best reasonable efforts to settle amicably disagreements arising from or in
connection with this Agreement. To this effect, following notice of either to
the other (with copy to the Escrow Agent) of a disagreement, which shall include
any failure to agree upon a matter to be agreed upon (a "DISPUTE") the parties
hereto shall consult and negotiate with one another in good faith an
understanding to reach a just and equitable solution. If those attempts fail
after a period of ten (10) Business Days from the time the parties have been
notified of the Dispute, then every such Dispute shall be settled by arbitration
in accordance with the commercial arbitration rules of American Arbitration
Association then in effect. Any judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction over the subject
matter thereof. The arbitrator shall have the authority to grant any equitable
and legal remedies that would be available in a judicial proceeding instituted
to resolve the Dispute.
(a) SELECTION OF ARBITRATOR. The American Arbitration
Association will have the authority to select an arbitrator from a list of
arbitrators who are lawyers familiar with the relevant state contract law;
provided, however, that such lawyers cannot work for a firm then performing
services for either party, that each party will have the opportunity to make
such reasonable objection to any of the arbitrators listed as such party may
wish and that the American
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<PAGE> 20
Arbitration Association will select the arbitrator from the list of arbitrators
as to whom neither party makes any such objection. In the event that the
foregoing procedure is not followed, each party will choose one person from the
list of arbitrators provided by the American Arbitration Association (provided
that such person does not have a conflict of interest), and the two persons so
selected will select from the list provided by the American Arbitration
Association the person who will act as arbitrator.
(b) PAYMENT OF COSTS. DST and CyberGuard will bear
the expense of deposits and advances required by the arbitrator in equal
proportions, but either party may advance such amounts, subject to recovery as
an addition or offset to any award. The arbitrator will award to the prevailing
party, as determined by the arbitrator, all costs, fees and expenses related to
the arbitration, including reasonable fees and expenses of attorneys,
accountants and other professionals incurred by the prevailing party. DST and
CyberGuard shall pay in equal proportions all costs and expenses of the Escrow
Agent in connection with any arbitration.
(c) BURDEN OF PROOF. For any Dispute submitted to
arbitration, the burden of proof will be as it would be if the claim were
litigated in a judicial proceeding.
(d) AWARD. Upon the conclusion of the arbitration
proceedings hereunder, the arbitrator will render findings of fact and
conclusions of law and a written opinion setting forth the basis and reasons for
any decision reached and will deliver such documents to each party to this
Agreement along with a signed copy of the award.
(e) TERMS OF ARBITRATION. The arbitrator chosen in
accordance with these provisions will not have the power to alter, amend or
otherwise affect the terms of these arbitration provisions or the provisions of
this Agreement.
(f) EXCLUSIVE REMEDY. Except as specifically
otherwise provided in this Agreement, arbitration will be the sole and exclusive
remedy to DST or CyberGuard for any Dispute arising out of this Agreement.
6. LIMITATION OF ESCROW AGENT'S LIABILITY.
(a) The Escrow Agent shall only have those duties as
are expressly set forth in this Agreement, and no implied duties shall be read
into this Agreement or the rest of the Escrow Agreement. The Escrow Agent will
incur no liability with respect to any action taken or suffered by it in
reliance upon any notice, direction, instruction, consent, statement or other
document believed by it to be genuine and duly authorized, nor for any other
action or inaction, except its own willful misconduct or gross negligence. The
Escrow Agent will not be responsible for the validity or sufficiency of this
Agreement. In all questions arising under this Agreement, the Escrow Agent may
rely on the advice or opinion of counsel, including in-house counsel, and for
anything done, omitted or suffered in good faith by the Escrow Agent based on
such advice or opinion, the Escrow Agent will not be liable to anyone. The
Escrow Agent will not be required to take any action hereunder involving any
expense unless the payment of such expense is made or provided for in a manner
satisfactory to it. The Escrow Agent shall not be obligated to take any legal
action or other action hereunder which might, in its judgment, involve any
expense or liability unless it shall have been furnished with acceptable
indemnification.
(b) In the event conflicting demands are made or
conflicting notices are served upon the Escrow Agent with respect to the Escrow
Account, the Escrow Agent will have the absolute right, at the Escrow Agent's
election, to do either or both of the following:
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(i) resign so a successor can be appointed pursuant to Section 10 hereof or (ii)
file a suit in interpleader and obtain an order from a court of competent
jurisdiction requiring the parties to interplead and litigate in such court
their several claims and rights among themselves. In the event such interpleader
suit is brought, the Escrow Agent will thereby be fully released and discharged
from all further obligations imposed upon it under this Agreement, and DST and
CyberGuard will each pay the Escrow Agent half its costs, expenses and
reasonable attorney's fees expended or incurred by the Escrow Agent pursuant to
the exercise of Escrow Agent's rights under this Section 6.
(c) In no event shall the Escrow Agent be liable for
any indirect, punitive, special or consequential damages, or any amount in
excess of the value of the pledged collateral (as of the date of the action or
omission giving rise to liability).
(d) The Escrow Agent shall in no instance be under
any duty to give any property held by it hereunder any greater degree of care
than it gives its own similar property. In no event shall the Escrow Agent have
any obligation to advance or risk funds.
(e) The Escrow Agent shall not be deemed to have
notice of any fact, claim or demand with respect hereto unless actually known by
an officer charged with responsibility for administering this Agreement or
unless in writing received by the Escrow Agent and making specific reference to
this Agreement.
(f) All indemnifications in favor of Escrow Agent
contained in this Agreement shall survive the resignation or removal of the
Escrow Agent, and shall survive the termination of this Agreement.
(g) The Escrow Agent is not responsible for the
recitals appearing in this Agreement or Section 4(c). The recitals and Section
4(c) of this Agreement shall be deemed to be statements and agreements of the
other parties to this Agreement.
(h) Nothing in this Agreement shall obligate the
Escrow Agent to qualify to do business or act in any jurisdiction in which it is
not presently qualified to do business, or be deemed to impose upon the Escrow
Agent the duties of a trustee. The duties of the Escrow Agent under this
Agreement are strictly ministerial in nature.
(i) In no event shall the Escrow Agent have any
liability for any failure or inability of any of the other parties to perform or
observe its duties under the Agreement, or by reason of a breach of this
Agreement by either of the other parties hereto. In no event shall the Escrow
Agent be obligated to take any action against any of the other parties to compel
performance hereunder.
(j) In the event of any ambiguity or uncertainty
under this Agreement, or in any notice, instruction, or other communication
received by the Escrow Agent hereunder, the Escrow Agent may, in its discretion,
refrain from taking action, and may retain the pledged collateral until and
unless it receives written instruction signed by DST and CyberGuard which
eliminates such uncertainty or ambiguity.
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<PAGE> 22
7. NOTICES. Any notice, certificate, consent, determination or
other communication required or permitted to be given or made under this
Agreement shall be in writing and shall be effectively given and made if (i)
delivered personally, (ii) sent by prepaid courier service or certified or
registered mail, or (iii) sent prepaid by fax and receipt thereof is confirmed,
in each case to the applicable address set out below:
(i) if to CyberGuard, to:
CyberGuard Corporation
2000 West Commercial Blvd., Suite #200
Ft. Lauderdale, FL 33309
Attention: Terrence A. Zielinski, Chief Financial
Officer
Telephone: (954) 958-3860
Facsimile: (954) 958-3853
with a copy to:
Brian Foremny, Esq.
2425 Hollywood Boulevard
Hollywood, FL 33021
Telephone: (954) 927-6888
Facsimile: (954) 927-1994
(ii) if to DST, to:
Digital Signature Trust Company
One South Main Street, Suite 1452
Salt Lake City, Utah 84111
Attention:Jon Taylor
Telephone: (801) 594-8250
Facsimile: (801) 594-8178
with a copy to:
Digital Signature Trust Company
One South Main Street, Suite 1452
Salt Lake City, Utah 84111
Attention: Benjamin Wilson
Telephone: (801) 594-8025
Facsimile: (801) 594-8258
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<PAGE> 23
(iii) If to the Escrow Agent, to:
Union Bank
3850 Coconut Creek Parkway
Coconut Creek, FL 33066
Attention: Lynn Stone
Telephone: (954) 977-2702
Facsimile: (954) ________
or to such other address as a party may have furnished to the other parties by
written notice given in accordance with this Section 7.
Any such communication so given or made shall be deemed to
have been given or made and to have been received on the day of delivery if
delivered, or on the day of faxing or sending by other means of recorded
electronic communication, provided that such day in either event is a Business
Day and the communication is so delivered, faxed or sent before 4:30 p.m. on
such day. As used herein, a "BUSINESS DAY" shall be any day which is not a
Saturday, Sunday or federal holiday. Otherwise, such communication shall be
deemed to have been given and made and to have been received on the next
following Business Day. Any such communication sent by mail shall be sent via
certified or registered mail, return receipt requested, and shall be deemed to
have been given and made and to have been received on the fifth Business Day
following the mailing thereof; provided however that no such communication shall
be mailed during any actual or apprehended disruption of postal services. Any
such communication given or made in any other manner shall be deemed to have
been given or made and to have been received only upon actual receipt; provided
that for any notice or other writing required to be delivered to the Escrow
Agent, such notice or other writing shall only be deemed delivered when actually
received.
Any party may from time to time change its address under this
Section 7 by notice to the other parties given in the manner provided by this
Section.
8. GENERAL.
(a) GOVERNING LAW, ASSIGNS. This Agreement will be
governed by and construed in accordance with the internal laws of the State of
Florida without regard to conflict-of-law principles and will be binding upon,
and inure to the benefit of, the parties hereto and their respective successors
and permitted assigns.
(b) COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(c) ENTIRE AGREEMENT. This Agreement constitutes the
entire understanding and agreement of the Parties with respect to the subject
matter of this Agreement and supersedes all prior agreements or understandings,
written or oral, between the parties with respect to the subject matter hereof.
(d) WAIVERS. No waiver by any party hereto of any
condition or of any breach of any provision of this Agreement will be effective
unless in writing. No waiver by any party of any such condition or breach, in
any one instance, will be deemed to be a further or continuing waiver of any
such condition or breach or a waiver of any other condition or breach of any
other provision contained herein.
-88-
<PAGE> 24
9. INDEMNITY.
Each of DST and CyberGuard, jointly and severally, hereby
covenants and agrees to indemnify the Escrow Agent, its directors, officers,
agents and employees, for, and to defend and hold them harmless from and
against, any and every loss, liability, damage, claim, cost and expense of any
nature incurred or suffered by the Escrow Agent and arising out of or in
connection with this Agreement or the administration of this Agreement or the
performance or observance by the Escrow Agent of its responsibilities or
services under this Agreement (including but not limited to attorneys fees and
other costs and expenses of defending or preparing to defend against any claim
or liability), unless and except to the extent such loss, liability, damage,
cost or expense shall be caused by the Escrow Agent's own willful misconduct or
gross negligence. The Escrow Agent shall be entitled to reimbursement on demand
for all expenses incurred in connection with the administration of this
Agreement or the escrow created hereby which are in excess of its compensation
for normal services hereunder, including, without limitation, payment of any
legal fees and expenses incurred by the Escrow Agent in connection with the
resolution of any claim by any party hereunder.
10. SUCCESSOR ESCROW AGENT. In the event the Escrow Agent
becomes unavailable or unwilling to continue in its capacity herewith, the
Escrow Agent may resign and be discharged from its duties or obligations
hereunder by giving notice of its resignation to the parties to this Agreement,
specifying a date not less than ten days following such notice date of when such
resignation will take effect. CyberGuard will designate a successor Escrow Agent
prior to the expiration of such ten-day period by giving written notice to the
Escrow Agent and DST. CyberGuard may appoint a successor Escrow Agent without
the consent of DST so long as such successor is a bank (or, in the case of a
subsidiary of a bank holding company, its holding company as an institution)
with assets of at least $50,000,000, and may appoint any other successor Escrow
Agent with the consent of DST, which will not be unreasonably withheld. The
Escrow Agent will promptly deliver the Escrow Funds to such designated
successor. If no successor Escrow Agent is named by DST and CyberGuard, the
Escrow Agent may apply to a court of competent jurisdiction for appointment of a
successor Escrow Agent.
11. AMENDMENT. This Agreement may be amended by the written
agreement of DST, the Escrow Agent and CyberGuard, provided that, if the Escrow
Agent does not agree to an amendment agreed upon by DST and CyberGuard (except
an amendment adversely affecting the rights or protections of the Escrow Agent),
the Escrow Agent will resign and CyberGuard will appoint a successor Escrow
Agent in accordance with Section 10 above.
12. DISPUTE RESOLUTION RELATING TO DISPUTES INVOLVING THE
ESCROW AGENT. It is understood and agreed that should any dispute arise with
respect to the delivery, ownership, right of possession, and/or disposition of
the Escrow Funds, or should any claim be made upon such Escrow Funds by a third
party, the Escrow Agent upon receipt of written notice of such dispute or claim
by the parties hereto or by a third party, is authorized and directed to retain
in its possession without liability to anyone, all or any of said Escrow Funds
until such dispute shall have been settled either by the mutual written
agreement of the parties involved or by a final order, decree or judgment of
court in the United States of America, the time for perfection of an appeal of
such order, decree or judgment having expired. The Escrow Agent may, but shall
be under no duty whatsoever to, institute or defend any legal proceedings which
relate to the Escrow Funds.
-89-
<PAGE> 25
13. CONSENT TO JURISDICTION AND SERVICE RELATING TO DISPUTES
INVOLVING THE ESCROW AGENT. DST and CyberGuard hereby absolutely and irrevocably
consent and submit to the jurisdiction of the courts in the State of Florida
(and of any Federal court located in said state) in connection with any actions
or proceedings brought against DST and CyberGuard by the Escrow Agent arising
out of or relating to this Escrow Agreement. In any such action or proceeding,
DST and CyberGuard hereby absolutely and irrevocably waive personal service of
any summons, complaint, declaration or other process and hereby absolutely and
irrevocably agree that the service thereof may be made by certified or
registered first-class mail directed to DST and CyberGuard, as the case may be,
as their respective addresses in accordance with Section 7 hereof.
-90-
<PAGE> 26
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
DIGITAL SIGNATURE TRUST CYBERGUARD CORPORATION
By: By:
---------------------------------- ---------------------------
Title: Title:
------------------------------- ------------------------
UNION BANK, As Escrow Agent
By:
----------------------------------
Print Name:
--------------------------
SIGNATURE PAGE TO
ESCROW AGREEMENT
-91-
<PAGE> 1
EXHIBIT 16.04
June 11, 1999
Audit Committee
CyberGuard Corporation
2000 W. Commercial Boulevard
Suite 200
Fort Lauderdale, FL 33309
Gentlemen:
We have examined the consolidated balance sheets of CyberGuard Corporation as of
June 30, 1997 and 1996 and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended June 30, 1997, the nine
months ended June 30, 1996, and the year ended September 30, 1995 and issued our
auditors' report thereon dated September 23, 1997 (the "1997 auditors' report").
Further, on September 11, 1996, we issued our auditors' report (the "1996
auditors' report") on the consolidated balance sheets of CyberGuard Corporation
as of June 30, 1996 and September 30, 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for the nine
months ended June 30, 1996 and year ended September 30, 1995.
On May 28,1999 CyberGuard Corporation's Chief Financial Officer informed us that
CyberGuard Corporation "is prepared to issue restated financial statements for
its 1997 fiscal year, including a restated opening balance sheet as of June 30,
1996."
In light of the CyberGuard Corporation's intent to restate its financial
statements, w cannot continue to be associated with such financial statements
and, accordingly, KPMG hereby advises you that our "1997 and 1996 auditors'
reports" should no longer be relied on.
We advise CyberGuard Corporation to promptly consult with legal counsel
regarding any disclosure or reports to regulatory agencies or others which may
be appropriate.
Very truly yours,
Signed: KPMG LLP
-92-
<PAGE> 1
EXHIBIT 21.01
LIST OF SUBSIDIARIES OF THE COMPANY
CyberGuard Europe Limited
Incorporated in the United Kingdom
-93-
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No's. 33-88446, 33-88448, 333-39573 and 333-28813) of
CyberGuard Corporation of our report dated August 27, 1999 relating to the
financial statements, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Atlanta, GA
August 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999, AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,530
<SECURITIES> 0
<RECEIVABLES> 2,428
<ALLOWANCES> 407
<INVENTORY> 210
<CURRENT-ASSETS> 6,428
<PP&E> 2,076
<DEPRECIATION> 922
<TOTAL-ASSETS> 8,277
<CURRENT-LIABILITIES> 10,077
<BONDS> 885
0
0
<COMMON> 91
<OTHER-SE> (2,776)
<TOTAL-LIABILITY-AND-EQUITY> 8,277
<SALES> 11,409
<TOTAL-REVENUES> 13,873
<CGS> 3,618
<TOTAL-COSTS> 5,313
<OTHER-EXPENSES> 18,062
<LOSS-PROVISION> 326
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> (8,115)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,115)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,115)
<EPS-BASIC> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
