-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L5Qe6S9PzynocMw1uJGMhOwEWAr7d7RaoWDGNBOKhIQNNy7ONYUJ8/ZKQKUi7oNI ozdafD4BWmdKQFDgydnOow== 0000898432-96-000281.txt : 19960624 0000898432-96-000281.hdr.sgml : 19960624 ACCESSION NUMBER: 0000898432-96-000281 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 29 FILED AS OF DATE: 19960621 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIRTUAL OPEN NETWORK ENVIRONMENT CORP CENTRAL INDEX KEY: 0001008946 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 521953278 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-06535 FILM NUMBER: 96583896 BUSINESS ADDRESS: STREET 1: 1803 RESARCH BLVD STE 305 CITY: ROCKVILLE STATE: MD ZIP: 20850 MAIL ADDRESS: STREET 1: 1803 RESEARCH BLVD STREET 2: SUITE 305 CITY: ROCKVILLE STATE: MD ZIP: 20850 S-1 1 As filed with the Securities and Exchange Commission on June 21, 1996 File No. 333- ========================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------------- Virtual Open Network Environment Corporation (Exact name of registrant as specified in its charter)
Delaware 5045 52-1953278 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
-------------------------------- 1803 Research Boulevard - Suite 305, Rockville, Maryland 20850 (301) 838-8900 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------------------ James F. Chen, President and Chief Executive Officer Virtual Open Network Environment Corporation 1803 Research Boulevard - Suite 305 Rockville, Maryland 20850 (301) 838-8900 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------------------ Copy to:
Alan J. Berkley, Esq. Cary J. Meer, Esq. Kathy L. Kresch, Esq. Sidney R. Smith, III, Esq. Stuart M. Cable, Esq. Kirkpatrick & Lockhart LLP Goodwin, Proctor & Hoar LLP 1800 Massachusetts Avenue, N.W. Exchange Place Washington, D.C. 20036 Boston, MA 02109
------------------------------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. ------------------------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. /_ / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. /_ / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. /_ /
CALCULATION OF REGISTRATION FEE Proposed Maximum Title of Each Class of Proposed Maximum Aggregate Amount of Securities to be Amount to be Offering Price Offering Registration Registered Registered (1) Per Share (2) Price (2) Fee Common Stock, $.001 par value....... 3,910,000 $6.67 26,079,700 $8,993.00
(1) Includes 510,000 shares of Common Stock that the Underwriters have the option to purchase solely to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee, pursuant to Rule 457(o) under the Securities Act of 1933, as amended. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. =========================================================================== VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION CROSS-REFERENCE SHEET
Item Number of Caption Location in Prospectus ---------------------- ---------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................ Outside Front Page of Registration Statement; Outside Front Cover Page of Prospectus; 2. Inside Front and Outside Back Cover Pages of Prospectus................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors; and Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors; Selected Financial Data 4. Use of Proceeds....................... Use of Proceeds 5. Determination of Offering Price....... Underwriting 6. Dilution.............................. Dilution 7. Selling Security Holders.............. Selling Shareholders 8. Plan of Distribution.................. Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered............................ Outside Front Cover Page of Prospectus; Prospectus Summary; Dividend Policy; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel. Not Applicable 11. Information with Respect to Registrant. Prospectus Summary; Dividend Policy; Selected Financial Data; Management's Discussion of Financial Condition and Results of Operations; Business; Management; Principal Shareholders; Certain Transactions; Description of Capital Stock; Shares Eligible for Future Sales; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.......................... Not Applicable
PROSPECTUS Subject to completion, dated June 21, 1996 dated , 1996 3,400,000 SHARES [LOGO] VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION COMMON STOCK All of the 3,400,000 shares of Common Stock offered hereby (the "Offering") are being sold by Virtual Open Network Environment Corporation (the "Company" or "V-ONE"). Prior to this Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $5.33 and $6.67 per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "VONE." See "Risk Factors" beginning on page 6 for a discussion of certain factors that should be considered by prospective investors. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Proceeds to Price to Public Underwriting Discount(1) Company(2) Per Share . . . . . . . . . . . $ $ $ Total(3) . . . . . . . . . . . $ $ $
(1) The Company and certain shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, estimated at $650,000 payable by the Company. (3) The Company and certain shareholders have granted the Underwriters a 30-day option to purchase up to 510,000 additional shares of Common Stock solely to cover over-allotments, if any, at the per share Price to Public less Underwriting Discount. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discount, and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the Underwriters, subject to prior sale when, as and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that certificates for such shares will be available for delivery at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about , 1996. PIPER JAFFRAY INC. VOLPE, WELTY & COMPANY INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY OR OTHERWISE AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. [Description of graphic: This graphic is a two-page foldout that describes a typical enterprise network secured by V-ONE's technology products. This diagram describes the functional aspects, not the technical components, of a typical enterprise network. Actual physical network hardware components are not described. The network consists of 3 inter- connected "clouds" representing the Internet (left-page/right-half/center); the core/central ring of the corporate business network (right-page/left- half/top); and a representation of a remote location (right-page/left-half/ bottom).] The Company intends to furnish its shareholders with annual reports containing financial statements audited by the Company's independent accountants and quarterly reports for the first three fiscal quarters of each fiscal year containing unaudited interim financial information. The Company has registrations for the trademarks V-ONE(REGISTERED TRADEMARK) and SmartWall(REGISTERED TRADEMARK), and has filed applications for trademark registration of, among others, SmartCAT(TRADEMARK), SmartGATE(TRADEMARK), and SmartREM(TRADEMARK). This Prospectus also contains trademarks, tradenames and servicemarks of other companies. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus (i) reflects the conversion of all outstanding shares of the Company's Series A Convertible Preferred Stock ("Series A Stock") into an aggregate of 1,186,518 shares of Common Stock at the closing of this Offering (see "Description of Capital Stock - Series A Convertible Preferred Stock"), which occurs automatically in the event the initial offering price is at least $5.25 per share of Common Stock (see "Risk Factors - Conversion of Series A Stock," and "Description of Capital Stock - Series A Convertible Preferred Stock"), (ii) has been retroactively adjusted to reflect a 10-for-1 stock split of the Common Stock as of November 11, 1995, (iii) assumes no exercise of the Underwriters' over-allotment option, (iv) assumes the issuance of 280,812 shares of Common Stock to RSA Data Security, Inc. and Massachusetts Institute of Technology (See "Business - Licensing Agreements"), and (v) assumes no exercise of outstanding options and warrants, other than a warrant to purchase 100,000 shares of Common Stock at $0.01 per share (see "Certain Transactions"). The information presented herein has not been adjusted to reflect a 2-for-3 reverse stock split of the Common Stock expected to be approved at the Company's 1996 annual meeting of shareholders. The Company Virtual Open Network Environment Corporation ("V-ONE" or the "Company") develops, markets, and licenses a comprehensive suite of network security products that enable businesses to conduct secured electronic transactions and information exchange using private enterprise networks and public networks such as the Internet. The Company's suite of products address network authentication, access control, and data integrity through the use of smart cards, firewalls, and encryption technology. The Company's products interoperate seamlessly and can be combined to form a complete, integrated network security solution or can be used as independent components in customized security solutions. The Company's products have been designed with an open and flexible architecture to allow for enhanced application functionality and to support future network security standards. In addition, the Company's products enable businesses to deploy and scale their solutions from small, single-site networks to large, multi-site environments. The Company's customers include key participants in the financial and information services markets, as well as U.S. government agencies, including BancOne Corp. ("BancOne"), BayBank Systems, Inc., Fuji Capital Markets Corporation, GE Information Services, Inc. ("GEIS"), VISA International and the National Security Agency ("NSA"). Organizations are increasing their dependence on public networks, such as the Internet, and private enterprise networks using Internet protocols ("intranets") as a cost-effective means to expand enterprise networks, engage in electronic commerce, and increase information 2 exchange. The demand for security in computer networks is expected to grow significantly as a result of the increased use of the Internet and intranets. The Yankee Group, a market research firm, indicated that it expects the market for information security products and services will grow at a 70% compound annual rate from $395 million in 1995 to $5.6 billion in the year 2000. As businesses increase their use of the Internet and deploy intranets, there is a growing need for comprehensive, enterprise-wide network security solutions. To protect an organization's data, network and computer systems, a comprehensive network security solution requires five elements: identification and authentication, integrity, non-repudiation, authorization, and encryption. To date, network security solutions have focused on single function or point products that address one or a limited number of these security elements. These products were designed with a specific function or objective; however, few were designed to meet all of the needs of enterprise-wide network security. The Company offers a suite of products that are designed to address the elements of a comprehensive enterprise-wide network security solution. The Company's three major network security products are: SmartGATE(TRADEMARK), a client/server product that offers identification and authentication, integrity, non-repudiation, authorization, and encryption; SmartWall(REGISTERED TRADEMARK), an application level firewall that incorporates SmartGATE's functionality; and SmartCAT(TRADEMARK), a smart card-based product that offers authentication and encryption. In addition, the Company provides integrated security applications software, including SmartREM(TRADEMARK), which will provide a secure environment for sending and receiving e-mail over the Internet and intranets, and Wallet Technology, a secure electronic payment system. The Company's modular suite of products can be combined and configured to provide perimeter defense, secure remote access, and intra/inter-enterprise security, allowing the Company's customers to securely and easily deploy a broad range of applications and services on the Internet and intranets. The Company's marketing strategy is to achieve broad market penetration through multiple distribution channels, including the Company's direct sales force, Internet service providers, systems integrators, value-added network service providers, and international distributors. In particular, the Company has focused its direct sales efforts on certain vertical markets that require sophisticated network security solutions, including financial institutions, information services companies, and government agencies. The Company has also established strategic relationships with marketing and licensing partners to expand the reach of its marketing efforts. The Company believes that these alliances provide a cost effective means by which the Company can efficiently penetrate new markets. For example, a major telecommunications company is currently deploying a multi-purpose secure campus card program that utilizes the Company's technology at a large university. This smart card-based solution uses the Company's SmartGATE, SmartWall, and SmartCAT products, and when fully deployed, will permit the university's 30,000 students to obtain secure access to their university records, student 3 information, and campus services via the Internet. The smart cards also include stored value, which may be transferred directly from the student's bank account, for use at on- and off-campus vendors. The Company believes that the major telecommunications company intends to promote this smart card-based solution at other colleges and universities. The Company was incorporated in Maryland in February 1993 and reincorporated in Delaware in February 1996. The Company's principal executive offices are located at 1803 Research Boulevard, Suite 305, Rockville, Maryland 20850. The Company's telephone number is (301) 838- 8900, and its World Wide Web ("Web") address is http://www.v-one.com. Information contained on the Company's Web site shall not be deemed part of this Prospectus. 4
The Offering Common Stock offered by the Company . . . . . . . . . . . . . . 3,400,000 shares Common Stock outstanding after this Offering . . . . . . . . . . 17,440,638 shares(1) Use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . For working capital and other general corporate purposes including expansion of marketing, sales, and customer support, research and development, capital expenditures, and repayment of loans. See "Use of Proceeds." Proposed Nasdaq National Market symbol . . . . . . . . . . . . . VONE
Summary Financial Data For the Period February 16, 1993 (date of Year Ended Three Months inception) to December 31, Ended March 31, December 31, ----------------------- ------------------------- 1993 1994 1995 1995 1996 ------------ ---- ---- ---- ---- (unaudited) Statement of Operations Data: Revenues . . . . . . . . . . . . . $ 76,183 $ 59,716 $1,103,501 $ 150,257 $1,021,811 Gross profit . . . . . . . . . . . 38,093 24,602 726,342 97,667 699,813 Net loss . . . . . . . . . . . . . (35,684) (406,288) (1,032,311) (132,291) (994,660) Net loss per common share (2) . . $ (0.00) $ (0.04) $ (0.08) $ (0.01) $ (0.08) Weighted average shares outstanding (2) . . . . . . . . 7,317,100 10,061,825 12,447,600 11,853,392 12,855,714 5 March 31, 1996 -------------------------------- As Actual Adjusted(3) ------ ----------- Balance Sheet Data: Working capital (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,297,123) $17,024,877 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,945,758 21,267,758 Long term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . 143,725 143,725 Shareholders' equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,134,598) 17,187,402
---------------------------------- (1) Based upon shares outstanding as of June 12, 1996. Excludes 526,444 shares of Common Stock that were subject to outstanding options under the Company's 1995 Non-Statutory Stock Option Plan and 1,389,860 shares of Common Stock that were subject to outstanding options under the Company's 1996 Incentive Stock Plan with a weighted average exercise price of $2.12 per share; 110,000 shares of Common Stock reserved for issuance (see "Certain Transactions"), and warrants to purchase 400,000 shares of Common Stock at an exercise price of $3.00 per share (see "Certain Transactions"). Includes warrants issued to JMI Equity Fund II, L.P. ("JMI") to purchase 100,000 shares of Common Stock at an exercise price of $0.01 per share, which must be exercised by June 30, 1996. See "Certain Transactions." (2) For a description of the computation of net loss per share and shares used in computing net loss per share, see Note 2 of Notes to the Financial Statements. (3) Adjusted to reflect the sale of 3,400,000 shares offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds," and "Capitalization." Excludes 280,812 shares of Common Stock reserved for issuance (see "Business - Licensing Agreements"); and warrants issued to JMI to purchase 100,000 shares of Common Stock at an exercise price of $0.01 per share, which must be exercised by June 30, 1996. See "Certain Transactions." 6 RISK FACTORS In addition to the other information included in this Prospectus, the following risk factors should be carefully considered in evaluating an investment in the Common Stock offered by this Prospectus. Limited Operating History; Accumulated Deficit The Company was founded in February 1993 and introduced its first product in December 1994. Accordingly, the Company did not generate any significant revenue until 1995 when it commenced sales of its SmartWall firewall product and introduced its SmartGATE client/server system. Revenues for 1995 and for the three months ended March 31, 1996 were approximately $1,104,000 and $1,022,000, respectively. The Company's growth in recent periods may not be an accurate indication of future results of operations in light of the Company's short operating history, the evolving nature of the network security market and the uncertainty of the demand for Internet and intranet products in general and the Company's products in particular. As of March 31, 1996, the Company had accumulated a deficit of approximately $2.5 million. The Company currently expects to incur net losses over the next several quarters as a result of greater operating expenses incurred to fund research and development and to increase its sales and marketing efforts. Because of the Company's limited operating history, there can be no assurance that the Company will achieve or sustain profitability or significant revenues. To address these risks, the Company must, among other things, continue its emphasis on research and development, successfully execute and implement its marketing strategy, respond to competitive developments, and seek to attract and retain talented personnel. There can be no assurance that the Company will successfully address these risks and the failure to do so could have a material adverse effect on the Company's business, financial condition, and results of operations. Anticipated Fluctuations in Quarterly Results As a result of the Company's limited operating history, the Company does not have historical financial data for a significant number of periods on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenue. The Company's quarterly sales and operating results generally depend on the volume and timing of, and ability to fill, orders received within the quarter, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of demand for the Company's products in relation to the Company's expectations could have an immediate adverse impact on the Company's business, financial condition, and results of operations. In addition, the Company plans to increase its operating expenses to fund the rapid growth of its sales and marketing operations, distribution channels, 7 customer support capabilities, and research and development activities. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, financial condition, and results of operations may be materially adversely affected. The Company expects to experience significant fluctuations in future quarterly operating results, which may be caused by a number of factors, such as the pricing and mix of products sold by the Company, the introduction of new products by the Company and its competitors, the timing of orders and the shipment of products, market acceptance of the Company's products, the ability of the Company's direct sales force and resellers to market the Company's products successfully, the mix of products and services sold, distribution channels used, and other factors that may be beyond the Company's control. Thus, the Company believes that comparisons of quarterly operating results are not meaningful and should not be relied upon, nor will they necessarily reflect the Company's future performance. Because of the foregoing factors, it is likely that in some future quarters the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Conversion of Series A Stock In the event that the initial offering price per share of Common Stock offered hereby is not at least $5.25 per share, the Series A Stock does not automatically convert on a one-for-one basis into shares of Common Stock. In such event, the conversion ratio will be adjusted so that shares of Series A Stock are convertible, at the option of each holder of Series A Stock, into shares of Common Stock on a greater than one-for-one basis, which will increase the dilution suffered by purchasers of the Common Stock offered hereby. Further, if the holders of Series A Stock do not convert their shares into shares of Common Stock, the Series A Stock will remain outstanding following the consummation of the Offering. This will limit the ability of the Company to pay dividends on the Common Stock and will further limit the rights of the holders of Common Stock. See "Dividend Policy," "Dilution," and "Description of Capital Stock - Series A Convertible Preferred Stock." Competition The Company competes in several different network security markets: Internet and intranet perimeter defense and access control (firewalls), token authentication, smart card-based security applications, and electronic commerce applications. The Company's principal competitors for Internet and intranet perimeter defense include Advanced Network and Services (a subsidiary of America Online, Inc.), Bay Networks, Inc., Border Network Technologies, Inc., Check Point Software Technology Ltd., Cisco Systems, Inc., Digital Equipment Corporation, Harris Computer Systems Corporation, International Business Machines Corporation, Milkyway 8 Networks Corporation, Morningstar Technologies, Inc., Network Systems Corporation, Raptor Systems, Inc., Secure Computing Corporation, Sun Microsystems, Inc., and Trusted Information System Inc.'s ("TIS"), which owns the Gauntlet(TRADEMARK) kernel and licenses it to the Company. The Company competes to a lesser degree with token vendors because the Company's SmartGATE product supports many vendor tokens. Token vendors include Security Dynamics, Digital Pathways, Inc., CRYPTOCard Inc., Leemah DataCom Security Corporation, Racal-Guardata, Inc., and National Semiconductor Inc. Security Dynamics has recently agreed to acquire RSA Data Security, Inc. ("RSA"). RSA's technology is licensed to and incorporated within certain products of the Company. As a result, Security Dynamics may become a more substantial competitor of the Company. For smart card-based security applications, the Company principally competes with those token vendors listed above who offer smart card technology. The Company's principal competitors in electronic commerce applications are Netscape Communication's Secure Socket Layer (SSL), Open Market Inc.'s Secure HTTP (S-HTTP), and Cylink Corporation's transaction software. See "Business - Competition." Because of the rapid expansion of the network security market, the Company will face competition from existing and new entrants, possibly including the Company's customers, suppliers, or resellers. There can be no assurance that the Company's competitors will not develop network security products that may be more effective than the Company's current or future products or that the Company's technologies and products would not be rendered obsolete by such developments. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases, and significantly greater financial, technical, and marketing resources than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than the Company. There can be no assurance that the Company's customers will not perceive the products of such other companies as substitutes for the Company's products. The Company believes that the principal competitive factors affecting the market for network security products include effectiveness, scope of product offerings, technical features, ease of use, reliability, customer service and support, name recognition, distribution resources, and cost. Current and potential competitors have established, or may establish in the future, strategic alliances to increase their ability to compete for the Company's prospective customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Such competition could materially adversely affect the Company's business, financial condition, and results of operations. 9 Management of Growth The Company has recently experienced and may continue to experience substantial growth in the number of its employees and the scope of its operations, resulting in increased responsibilities for management and added pressure on the Company's operating and financial systems. As of May 31, 1996, the Company had grown to 52 employees, from 34 employees on January 1, 1996 and 7 employees on January 1, 1995. To manage growth effectively, the Company will need to continue to improve its operational, financial and management information systems and will need to hire, train, motivate, and manage a growing number of employees. Competition is intense for qualified technical, marketing, and management personnel. There can be no assurance that the Company will be able to achieve or manage any future growth, and its failure to do so could delay product development cycles and marketing efforts or otherwise have a material adverse effect on the Company's business, financial condition, and results of operations. Although the Company is not currently involved in negotiations for any acquisitions, the Company may undertake acquisitions in the future. Any such transactions would place additional strains upon the Company's management resources. See "Management" and "Business - Employees." Dependence on the Internet and Intranets The Company's success depends substantially upon the market acceptance of the Internet and intranets as mediums for commerce and communication. Although the Company believes that its software security products will facilitate and fortify commerce and communication over the Internet and intranets, there can be no assurance that commerce and communication over the Internet and intranets will expand or that the Company's products will be adopted for security purposes. In addition, the Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as a reliable network backbone, or timely development of complementary products and services. If the Internet and intranets do not develop as mediums of commerce and communication or the Internet does not develop as a viable commercial marketplace due to inadequate development of infrastructure or complementary products and services, or for other reasons beyond the Company's control, the Company's business, financial condition, and results of operations may be materially adversely affected. See "Business - Industry Background." Risks Associated with the Emerging Network Security Market The market for the Company's products is in an early stage of development. The rapid development of Internet and intranet computing has increased the ability of users to access proprietary information and resources and has recently increased demand for network security products. Because the market for network security products is only beginning to develop, it is difficult to assess the size of the market, the product features desired by the market, the optimal price structure for the 10 Company's products, the optimal distribution strategy, and the competitive environment that will develop in this market. Declines in demand for the Company's products, whether as a result of competition, technological change, the public's perception of the need for security products, developments in the hardware and software environments in which these products operate, general economic conditions, or other factors beyond the Company's control, could have a material adverse effect on the Company's business, financial condition, or results of operations. See "Business - Industry Background." Dependence on Principal Products; Uncertainty of Product Acceptance The Company currently generates most of its revenues from its SmartWall firewall and SmartGATE products. Accordingly, any factor that adversely affects sales of these products could have a material adverse effect on the Company. While the SmartWall firewall has met with a favorable degree of market acceptance since sales commenced in the first quarter of 1995, there can be no assurance that SmartWall will continue to be accepted in the future. In addition, there can be no assurance that there will be market acceptance of the Company's SmartGATE product, which was introduced in the fourth quarter of 1995, or any of the Company's products that may be introduced in the future. The Company's success will, in part, depend upon the Company's ability to design, develop and introduce new products, services, and enhancements on a timely basis to meet changing customer needs, technological developments, and evolving industry standards. See "Business - Products and Services," and "- Product Development." Dependence on Key Licensing Agreements, External Resources and Suppliers The Company relies and intends to continue to rely on external resources for the development of certain of its products and the components thereof. The Company's SmartWall product incorporates the TIS Gauntlet(TRADEMARK) kernel. The Company licenses the TIS Gauntlet(TRADEMARK) kernel under a license agreement with TIS that requires the Company to pay a fee, which varies based on the number of units licensed, for each unit of the Gauntlet(TRADEMARK) kernel licensed for use in SmartWall. The license expires on December 31, 1996; however, the agreement provides for the automatic renewal of the Company's license rights for successive three year terms. Either party may terminate the agreement upon the default of the other party if the defaulting party has failed to cure the default within 30 days of the receipt of written notice of default. In addition, TIS may terminate the agreement upon any second or subsequent breach of the agreement by the Company or upon the Company's insolvency or bankruptcy. See "Business - License Agreements." The Company's SmartCAT and Wallet Technology software incorporate data encryption and authentication technology owned by RSA. The Company has a perpetual license agreement with RSA, which became effective as of December 30, 1994. Either party may 11 December 30, 1994. Either party may terminate the agreement upon the default of the other party if the defaulting party has failed to cure the default within 30 days of the receipt of written notice of default. The agreement also may be terminated by either party upon the insolvency or bankruptcy of the other party. RSA has announced that RSA will be acquired by Security Dynamics Technologies, Inc. ("Security Dynamics"), whose products compete with the Company's products in the token authentication market. There can be no assurance that the change in control of RSA will not adversely affect the Company's business relation- ship with RSA, which could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Business - License Agreements." There can be no assurance that the Company will be able to maintain its license rights for the TIS Gauntlet(TRADEMARK) kernel or the RSA data encryption and authentication technology and the loss of such rights could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company is in the process of developing its own technology to replace the licensed firewall technology. However, the Company's firewall technology is in developmental stages and, until it is tested and integrated, the Company intends to rely on the technology licensed from TIS. The loss of, or inability to maintain, such technology licenses could result in lost sales, delays in delivery of the Company's current products and services, or delays in the introduction of new products and services until the Company's technology is finally developed and tested or equivalent technology, if available, is identified, licensed, and integrated, which could have a material adverse effect on the Company's business, financial condition, or results of operations. See "Business - License Agreements." Intellectual Property Rights; Infringement Claims The Company relies on trademark, copyright, patent and trade secret laws, employee and third-party non-disclosure agreements, and other methods to protect its proprietary rights. The Company has pending three patent applications with the United States Patent and Trademark Office that cover certain aspects of its technology. Prosecution of these patent applications, and any other patent applications that the Company may subsequently determine to file, may require the expenditure of substantial resources. The issuance of a patent from a patent application may require 24 months or longer. There can be no assurance that the Company's technology will not become obsolete while the Company's applications for patents are pending. There also can be no assurance that any pending or future patent application will be granted or that any future patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. Further, the Company has not pursued patent protection outside of the United States for the technology covered by two of the pending patent applications. The Company currently intends to pursue patent protection outside of the United States for the technology covered by the most recently filed patent application although there can be no assurance that any such protection will be granted or, if granted, that it will adequately protect the technology covered thereby. 12 The Company's success is also dependent in part upon its proprietary software technology. There can be no assurance that the Company's trade secrets or non-disclosure agreements will provide meaningful protection for the Company's proprietary technology and other proprietary information. In addition, the Company relies on "shrink wrap" license agreements that are not signed by the end user to license the Company's products and, therefore, may be unenforceable under the laws of certain jurisdictions. Further, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company or that the Company's technology will not infringe upon patents, copyrights, or other intellectual property rights owned by others. Further, the Company may be subject to additional risk as the Company enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in foreign markets, and technology developed abroad may not be protectable in jurisdictions in circumstances where protection is ordinarily available in the United States. The Company believes that, due to the rapid pace of technological innovation for network security products, the Company's ability to establish and, if established, maintain a position of technology leadership in the industry is dependent more upon the skills of its development personnel than upon legal protections afforded its existing or future technology. As the number of security products in the industry increases and the functionality of these products further overlap, software developers may become subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. The Company also may desire or be required to obtain licenses from others in order to develop, produce, and market commercially viable products effectively. Failure to obtain those licenses could have a significant adverse effect on the Company's ability to market its software security products. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, that the patents underlying such licenses will be valid and enforceable, or that the proprietary nature of the unpatented technology underlying such licenses will remain proprietary. The Company is aware of two pending law suits involving RSA and Cylink Corporation ("Cylink") and Cylink's wholly owned subsidiary, Caro- Kann Corporation ("Caro-Kann"). In the first law suit (N.D. Cal. No. C94 02332 CW) filed in 1994, Cylink sued RSA in a declaratory judgment action seeking a declaration from the court that U.S. Patent No. 4,405,829 ("MIT Patent"), under which RSA is licensed, is invalid and unenforceable. RSA counterclaimed that Cylink and Caro-Kann were infringing the MIT Patent. In a related proceeding, Cylink and Caro-Kann initiated arbitration against RSA pursuant to the terms of a partnership agreement among those parties. In the arbitrator's decision, issued in September 1995, the partnership was dissolved. The arbitrators determined that RSA does not 13 have the right to sublicense third parties under U.S. Patents Nos. 4,200,790, 4,218,582, and 4,424,414 ("Stanford Patents"), under which Caro-Kann was licensed. The arbitrators stated further that, if RSA provides code to third parties that causes an infringement of the Stanford Patents, nothing in the arbitrator's decision would prevent Cylink and Caro-Kann from pursuing their rights under the Stanford Patents against such third parties. According to documents filed in the second law suit, discussed below, Cylink sent letters to certain RSA licensees advising them that they need a license from Cylink under the Stanford Patents to use the RSA software. RSA has informed its customers that a sublicense to the Stanford Patents is not necessary to practice the RSA cryptography method. In the second law suit (N.D. Cal. C95-03256 WHO) filed September 15, 1995, RSA sued Cylink and Caro-Kann in a declaratory judgment action seeking a declaration that the Stanford Patents are invalid and unenforceable. Cylink and Caro-Kann have counterclaimed that RSA is liable for direct infringement of the Stanford Patents and also is liable for contributory infringement and inducing infringement of the Stanford Patents by virtue of RSA's license of certain RSA software to third parties. To the best of the Company's knowledge, both law suits are still pending. There can be no assurances that Cylink will not initiate law suits against RSA licensees, including the Company. In the Company's license agreement with RSA, RSA agreed that RSA would, at its own expense: (i) defend, or at its option settle, any claim, suit, or proceeding against the Company, including any claim, suit, or proceeding instituted by Cylink, Caro-Kann, or an entity related to either of them, on the basis of infringement of any United States patent, copyright, or trade secret in the field of cryptography regarding the unmodified software licensed by RSA or any claim that RSA has no right to license the software; and (ii) pay any final judgment or settlement entered against the Company on such issue in any suit or proceeding defended by RSA. RSA's obligation to indemnify the Company survives the termination of the license agreement. There can be no assurance that the outcome of the law suits between RSA and Cylink will support RSA's position. If the outcome of the lawsuit is adverse to RSA, there can be no assurance that Cylink will license its technology to the Company on commercially reasonable terms, or at all. Any royalty obligations to Cylink by the Company would not be covered by RSA's indemnification obligation to the Company. There also can be no assurance that the Company will be able to obtain or develop alternative technology on commercially reasonable terms, if at all. See "Business - License Agreements" and "Business - Patents, Proprietary Technology, Trademarks, and Licenses." Any claims or litigation, with or without merit, could be costly and could result in a diversion of management's attention, which could have a material adverse effect on the Company's business, financial condition, and results of operations. Adverse determinations in such claims or litigation could also have a material adverse effect on the Company's business, financial condition, and results of operations. See "Business - Patents, Proprietary Technology, Trademarks, and Licenses." Changes in Technology and Industry Standards; Risk of New Product Introduction 14 The network security industry is characterized by rapid changes, including evolving industry standards, frequent new product introductions, continuing advances in technology, and changes in customer requirements and preferences. Advances in techniques by individuals and entities seeking to gain unauthorized access to networks could expose the Company's existing products to new and unexpected attacks and require accelerated development of new products or enhancements to existing products. The Company believes that customer support will remain a critical piece of its services offering. The Company intends to enhance its existing customer service system by adding toll-free line support and moving to a three-tier support system. There can be no assurance that the Company will be able to counter challenges to its current products, that the Company's future product offerings will keep pace with technological changes implemented by competitors or persons seeking to breach network security, that its products and expanded customer support services will satisfy evolving consumer preferences, or that the Company will be successful in developing and marketing products for any future technology. Failure to develop and introduce new products and product enhancements in a timely fashion could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Business - Product Development." Risk of Defects and Development Delays The Company may experience schedule overruns in software development triggered by factors such as insufficient staffing or the unavailability of development-related software, hardware, or technologies. Further, when developing new software products, the Company's development schedules may be altered as a result of the discovery of software bugs, performance problems, or changes to the product specification in response to customer requirements, market developments, or Company initiated changes. Changes in product specifications may delay completion of documentation, packaging, or testing, which may, in turn, affect the release schedule of the product. When developing complex software products, the technology market may shift during the development cycle, requiring the Company either to enhance or change a product's specifications to meet a customer's changing needs. These factors may cause a product to enter the market behind schedule, which may adversely affect market acceptance of the product or place it at a disadvantage to a competitor's product that has already gained market share or market acceptance during the delay. Risk of Errors or Failures; Product Liability Risks The complex nature of the Company's products can make the detection of errors or failures in certain of its software products difficult when such products are introduced, which may result in delays and lost revenues during the correction process. In addition, there can be no assurance that any technology licensed by the Company for use in the Company's products does not contain errors that would adversely affect such products. Despite testing by the Company and current and prospective customers, there can be no assurance that errors will not be discovered in 15 new products or releases after commencement of commercial shipments, possibly resulting in delay, adverse publicity, loss of market acceptance, and claims against the Company. A malfunction or the inadequate design of the Company's products could result in tort or warranty claims. While the Company attempts to reduce the risk of such losses through warranty disclaimers and liability limitation clauses in its license agreements, and by maintaining product liability insurance, there can be no assurance that such measures will be effective in limiting the Company's liability for any such damages. The Company also relies on "shrink wrap" license agreements that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. The Company currently intends to purchase product liability insurance and it may seek additional insurance coverage as it commences commercialization of its products. There can be no assurance that adequate additional insurance coverage will be available at an acceptable cost, if at all. Any product liability claim against the Company for damages resulting from security breaches could be substantial and could have a material adverse effect on the Company's business, financial condition, and results of operations. In addition, a well- publicized actual or perceived security breach could adversely affect the market's perception of security products in general, or the Company's products in particular, regardless of whether such breach is attributable to the Company's products. This could result in a decline in demand for the Company's products, which could have a material adverse effect on the Company's business, financial condition, and results of operations. Evolving Distribution Channels Currently, the Company relies primarily on its direct sales force for the sale and marketing of its products. The Company plans to add to its internal sales and marketing staff in order to increase its direct sales effort. There can be no assurance that such internal expansion will be successfully completed, that the cost of such expansion will not exceed the revenues generated, or that the Company's sales and marketing organization will successfully compete against the more extensive and well-funded sales and marketing operations of certain of the Company's current and future competitors. The Company has developed a distribution strategy that involves the development of strategic alliances with resellers and international distributors to enable the Company to achieve broad market penetration. The Company is beginning to establish its reseller distribution channel. There can be no assurance that the Company will be able to attract resellers that will be able to market the Company's products effectively and will be qualified to provide timely and cost-effective customer support and service. The Company anticipates that it will ship products to distributors and resellers on a purchase-order basis, and the Company's distributors and resellers will likely carry competing product lines. Therefore, there can be no assurance that any distributor or reseller will continue to represent the Company's products. The inability to recruit, or the loss of, important sales personnel, distributors, or resellers 16 could materially adversely affect the Company's business, financial condition, and results of operations in the future. See "Business - Sales and Marketing." Long Sales Cycle; Seasonality Sales of the Company's products generally involve a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. Prior to such sales, the Company often permits customers to evaluate products being considered for license, generally for a period of up to 30 days. For these and other reasons, the sales cycle associated with the Company's products is likely to be lengthy and subject to a number of significant risks over which the Company has little or no control and, as a result, the Company believes that its quarterly results are likely to vary significantly in the future. The Company may be required to ship products shortly after it receives orders and, consequently, order backlog, if any, at the beginning of any period may represent only a small portion of that period's expected revenue. As a result, product revenue in any period will be substantially dependent on orders booked and shipped in that period. The Company plans its production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If revenue falls significantly below anticipated levels, the Company's financial condition and results of operations could be materially and adversely affected. In addition, the Company may experience significant seasonality in its business, and the Company's financial condition and results of operations may be affected by such trends in the future. Such trends may include higher revenue in the third and fourth quarters of the year and lower revenue in the first and second quarters. The Company believes that revenue may tend to be higher in the third quarter due to the fiscal year end of the U.S. government and higher in the fourth quarter due to year-end budgetary pressures on the Company's commercial customers and the tendency of certain of the Company's existing and prospective customers to implement changes in computer or network security prior to the end of the calendar year. Liquidity and Capital Requirements; Dependence on the Public Offering The Company anticipates that its existing capital resources, including the net proceeds of the sale of the shares of Common Stock offered hereby, will be adequate to satisfy its capital requirements at least through 1997. The Company's future capital requirements, however, will depend on many factors, including its ability to successfully market and sell its products. To the extent that the funds generated by this Offering and from the Company's on-going operations are insufficient to fund the Company's future operating requirements, it may be necessary to raise additional funds, through public or private financings. Any equity or debt financings, if available at all, may be on terms that are not favorable to the Company and, in the case of equity financings, could result in dilution to the Company's shareholders. If adequate capital is not available, the Company may be required to curtail its operations 17 significantly. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Risk of Sales to U.S. Government In 1995, the Company derived a substantial portion of its revenue from the sale of the SmartWall firewall to departments and agencies of the U.S. government and government contractors. In 1996, the Company's revenues will be attributable, in part, to a contract with NSA. Because no government agency has an obligation to award contracts to, or to purchase products from, the Company in the future, the Company believes that future government contracts and orders for its network security products will in part be dependent upon the continued favorable reaction of government agencies to the development capabilities of the Company and the reliability and perception of the Company's products. There can be no assurance that the Company will be able to sell its products to departments and agencies of the U.S. government and government contractors or that such sales, if any, will result in commercial acceptance of the Company's products. There also is no assurance that the Company will be able to procure an extension of its current NSA contract when it expires in September 1996 or additional contracts of similar magnitude in the future. In addition, reductions or delays in federal funds available for projects the Company is performing or to purchase the Company's products could have an adverse impact on the Company's government contracts business. Contracts involving the U.S. government are also subject to the risks of disallowance of costs upon audit, changes in government procurement policies, the necessity to participate in competitive bidding and, with respect to contracts involving prime contractors or government- designated subcontractors, the inability of such parties to perform under their contracts. The Company is also exposed to the risk of increased or unexpected costs, causing losses or reduced profits, under government and certain third-party contracts. Any of the foregoing events could have an adverse impact on the Company's business, financial condition, and results of operations. See "Business - Regulation and Government Contracts." International Sales The Company plans to increase its presence in overseas markets by expanding international distribution relationships for its suite of network security products, including SmartWall and SmartGATE. There can be no assurance, however, that the Company will be successful in expanding its relationships with international distributors or in gaining commercial acceptance of its products abroad. To the extent the Company expands international sales, currency fluctuations could make the Company's products less competitive in foreign markets and contribute to fluctuations in the Company's operating results. Political instability, difficulties in staffing and managing international operations, potential insolvency of international resellers, longer receivable collection periods and difficulty in collecting accounts receivable also pose risks to the development of international marketing efforts. Moreover, the laws 18 of certain countries, or the enforcement thereof, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. There can be no assurance that these factors will not have a material adverse effect on the Company's business, financial condition, and results of operations. See " Business - Sales and Marketing." Effect of Government Regulation of Technology Exports The Company currently sells its products abroad and intends to continue to expand its relationships with international distributors for the sale of its products overseas. The Company's international sales and operations could be subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the export of critical technology, trade restrictions, and changes in tariffs. In particular, the Company's information security products will be subject to the export restrictions administered by the U.S. Department of State, which permit the export of encryption products only with the required level of export license. These export laws also prohibit the export of encryption products to a number of hostile countries. In certain foreign countries, the Company's distributors will be required to secure licenses or formal permission before encryption products can be imported. There is no assurance that the Company or its distributors will be able to secure required licenses in a timely manner, if at all. As a result, foreign competitors that face less stringent controls on their products may be able to compete more effectively than the Company in the global network security market. There can be no assurance that these factors will not have a material adverse effect on the Company's business, financial condition, and results of operations. See " Business - Technology," and "- Products." Dependence on Key Personnel The Company's success will depend, to a large extent, upon the performance of its senior management team and technical, marketing and sales personnel many of whom have only recently joined the Company. There is keen competition in the software security industry to hire and retain qualified personnel, and the Company is actively searching for additional qualified personnel. The Company's success will depend upon its ability to retain and hire additional key personnel. The loss of the services of key personnel, or the inability to attract additional qualified personnel, could have a material adverse effect upon the Company's results of operations and product development efforts. The Company currently has $1 million "key man" life insurance policies on the lives of each of James F. Chen, its founder and Chief Executive Officer, and Jieh-Shan Wang, its Senior Vice President of Engineering. This coverage, however, may not be sufficient to mitigate the impact that the loss of the services of Mr. Chen or Mr. Wang would have on the Company. See "Management." 19 Certain Anti-takeover Provisions of Certificate of Incorporation, Bylaws, and Delaware Law The Company's Amended and Restated Certificate of Incorporation ("Restated Certificate of Incorporation") and Amended and Restated Bylaws ("Restated Bylaws") provide that any action required or permitted to be taken by shareholders of the Company may be effected at a duly called annual or special meeting. If a shareholder wishes a proposal to be considered at an annual or special meeting under the Restated Bylaws, he or she must give reasonable advance notice to the Company. The Company's Restated Bylaws permit only the Company's Chief Executive Officer or a majority of the members of the Company's Board of Directors to call a special meeting of shareholders. In addition, the Company's Restated Certificate of Incorporation provides that, at the 1996 annual meeting, the Company's Board of Directors will be classified into three classes of directors. Under the Restated Certificate of Incorporation and Restated Bylaws, a Director may be removed only for cause and by the affirmative vote of 67% of the outstanding shares entitled to vote an election of directors at a special meeting called for that purpose. In addition, the Board of Directors has the authority to issue up to 20,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights of those shares, without any further vote or action by the Company's shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the voting stock of the Company. The Company has issued 1,186,518 shares of Series A Stock, which, assuming the initial offering price exceeds $5.25, will convert into 1,186,518 shares of Common Stock upon consummation of the Offering. The Company has no present plans to issue any additional series of Preferred Stock upon the consummation of the Offering. Further, certain provisions of the Company's Restated Certificate of Incorporation, Restated Bylaws, and Delaware law could delay or make difficult a merger, tender offer or proxy contest involving the Company. In addition, the Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203"), which places certain restrictions on the ability of Delaware corporations to engage in business combinations with interested shareholders. See "Description of Capital Stock - Preferred Stock" and " - Anti-takeover Effects of Provisions of the Certificate of Incorporation, Bylaws, and Delaware Law." No Prior Public Market; Market Volatility Prior to this Offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Company's Common Stock will develop or be sustained following the Offering. The initial public offering price of the Common Stock will be determined in negotiations among the Company and the 20 Underwriters based upon several factors and may be greater than the market price for the Common Stock following the Offering. See "Underwriting." The market price of the Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors, such as announcements of new products by the Company or its competitors and changes in financial estimates by securities analysts or other events. Moreover, the stock market has experienced extreme volatility that has particularly affected the market prices of equity securities of many technology companies and that has often been unrelated and disproportionate to the operating performance of such companies. Broad market fluctuations, as well as economic conditions generally and in the software industry specifically, may adversely affect the market price of the Company's Common Stock. There can be no assurance that the market price of the Common Stock offered hereby will not decline below the initial public offering price. Concentration of Share Ownership Upon completion of this Offering, the current directors, executive officers and their respective affiliates will beneficially own approximately 59.5% of the Company's outstanding Common Stock in the aggregate on a fully-diluted basis (57.4% in the event the Underwriters exercise the over-allotment option in full). This does not give effect to the exercise of options to purchase 1,304,708 shares of Common Stock held by these individuals, which, if exercised in whole or in part, will further concentrate ownership of the Company's Common Stock. As a result, these shareholders will retain the voting power required to elect all directors and to approve all other matters requiring approval by a majority of the shareholders of the Company. Such concentration of ownership may also have the effect of delaying or preventing a change in control of the Company. See "Management - Directors and Executive Officers" and "Principal Shareholders." Potential Effect of Shares for Future Sale Sales of substantial amounts of Common Stock in the public market following the Offering could adversely affect the market price of the Common Stock. Upon completion of the Offering, the Company will have outstanding an aggregate of 14,040,638 shares that are "restricted" shares under the Securities Act of 1933, as amended (the "Securities Act"). Only the 3,400,000 shares of Common Stock offered hereby will be eligible for sale in the public market immediately following the effective date of the registration statement on Form S-1 relating to the Common Stock offered hereby ("Registration Statement") filed with the Securities and Exchange Commission ("SEC"), excluding the Common Stock to be offered in the over- allotment option. Certain of the Company's current shareholders, employees, directors, officers, and holders of options and warrants to purchase Common Stock have agreed with Representatives of the Underwriters not to sell or otherwise dispose of any shares of Common Stock not included in the over-allotment option for a period of 180 days after the date of this Prospectus without the consent of the Underwriters. After the expiration of the 180-day period, 1,698,983 shares of Common Stock may 21 be sold in compliance with Rule 144 or Rule 701 under the Securities Act. The number of shares eligible for resale assumes the conversion of 1,186,518 shares of Series A Stock on a one-for-one basis, the issuance of 280,812 shares to RSA and Massachusetts Institute of Technology ("MIT"), and the exercise, by June 30, 1996, of warrants to purchase 100,000 shares of Common Stock at $0.01. The holders of Common Stock issuable upon the conversion of Series A Stock and the holders of warrants exercisable at $0.01 and $3.00 per share will have contractual rights to have those shares registered under the Securities Act for resale to the public. See "Shares Eligible for Future Sale." Absence of Dividends No dividends have been paid on the Common Stock to date and the Company does not anticipate paying dividends in the foreseeable future. See "Dividend Policy." Dilution Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in net tangible book value per share of the Common Stock. To the extent outstanding options and warrants to purchase the Company's Common Stock are exercised, there will be further dilution. See "Dilution." 22 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Common Stock offered hereby are estimated at $18.3 million ($20.0 million if the Underwriters' over-allotment option is exercised in full) assuming an initial public offering price of $6.00 per share, after deducting the underwriting discount and estimated Offering expenses payable by the Company. The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Shareholders upon exercise of the Underwriters' over-allotment option in full or in part. The principal purposes of this Offering are to obtain additional capital, create a public market for the Company's Common Stock and facilitate future access by the Company to public equity markets. The Company expects to use the net proceeds from this Offering for working capital and for other general corporate purposes, including the expansion of marketing, sales, and customer support activities, research and development, and capital expenditures. A portion of the proceeds of this Offering will be used to repay a $1.5 million loan from JMI and loans in an aggregate amount of approximately $143,000 from James F. Chen, the Company's President and Chief Executive Officer. See "Certain Transactions." In addition, a portion of the net proceeds may be used to acquire or invest in related businesses or products or to obtain the right to use technologies that would broaden or enhance the Company's products. The Company has no present plans, agreements or commitments and is not currently engaged in any negotiations with respect to any such transactions. Pending such use of the proceeds, the Company intends to invest the funds in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock or other securities. The Company anticipates that all of its net earnings, if any, will be retained for use in its operations and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Payments of future cash dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, and current and anticipated cash needs. The holders of Common Stock are not entitled to receive dividends as long as any shares of the Company's Series A Stock are issued and outstanding. See "Risk Factors - Conversion of Series A Stock," "Description of Capital Stock - Common Stock," and "Description of Capital Stock -Series A Convertible Preferred Stock." CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996, and as adjusted to give effect to the sale of the 23 shares of Common Stock offered hereby (at an assumed initial public offering price of $6.00 per share and after deducting the estimated underwriting discount and offering expenses), assuming the conversion of all Series A Stock on a one-for-one basis into Common Stock and the application of the net proceeds from this Offering as described under "Use of Proceeds." See "Risk Factors - Conversion of Series A Stock" and "Description of Capital Stock - Series A Convertible Preferred Stock" for a description of the conversion of the Series A Stock on a one-for-one basis, which will occur automatically if the initial offering price exceeds $5.25 per share of Common Stock.
March 31, 1996 -------------------------------------- Actual As Adjusted ------- ----------- Long term debt, less current portion . . . . . . . . . . . $ 143,725 $ 143,725 ---------- ----------- Preferred Stock, $0.001 par value; 20,000,000 shares authorized; none issued and outstanding, actual and as adjusted (1)(2) . . . . . . . . . . . . . . . . ---- ---- Shareholders' equity: Common Stock, $0.001 par value; 50,000,000 shares authorized, 12,456,641 shares issued and outstanding, actual; 15,856,641 shares issued and outstanding, as adjusted (3) . . . . . . . . . . . 12,457 15,857 Additional paid-in capital . . . . . . . . . . . . . . 1,321,888 19,640,488 Accumulated deficit . . . . . . . . . . . . . . . . . (2,468,943) (2,468,943) ---------- ----------- Total shareholders' equity (deficit) . . . . . . . (1,134,598) 17,187,402 ---------- ---------- Total capitalization . . . . . . . . . . . . . . . $ (990,873) $17,331,127 =========== ===========
---------------------------------- (1) The Company's Restated Certificate of Incorporation authorizes the Company to issue up to 20,000,000 shares of Preferred Stock. On April 4, 1996, the Board of Directors authorized the issuance of 1,183,402 shares of Series A Stock and on May 12, 1996, the Board of Directors authorized the issuance of an additional 6,071 shares of Series A Stock. As of June 12, 1996, 1,186,518 shares of Series A 24 Stock have been issued. See "Description of Capital Stock - Series A Convertible Preferred Stock." (2) In December 1995 and January 1996, the Company borrowed $2.5 million through the sale of 7% interest bearing, unsecured Promissory Notes ("Notes") ("Note Offering"). In April and May 1996, the Company exchanged all of the Notes (principal and accrued interest) for shares of the Company's Series A Stock, at a price of $3.00 per share. In addition, the Company permitted the certain investors to purchase an additional 333,333 shares of Series A Stock at a price of $3.00 per share. Assuming the initial offering price exceeds $5.25, shares of Series A Stock will convert to Common Stock on a one-for- one basis on consummation of the Offering. See "Risk Factors - Conversion of Series A Stock," and "Description of Capital Stock - Series A Convertible Preferred Stock." (3) Excludes 280,812 shares of Common Stock reserved for issuance (see "Business - Licensing Agreements") and warrants issued to JMI to purchase 100,000 shares of Common Stock at an exercise price of $0.01 per share, which must be exercised by June 30, 1996. See "Certain Transactions." DILUTION The net tangible book value of the Company as of March 31, 1996 was $(1,135,000) or $(0.09) per share of Common Stock. Net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities divided by the number of shares of Common Stock outstanding. Without taking into account any other changes in the net tangible book value after March 31, 1996, other than to give effect to the receipt by the Company of the net proceeds from the sale of the 3,400,000 shares of Common Stock offered by the Company at an assumed offering price of $6.00 per share and after deducting the estimated underwriting discount and offering expenses, the adjusted net tangible book value of the Company as of March 31, 1996 would have been approximately $17.2 million or $1.08 per share. This represents an immediate increase in net tangible book value of $1.17 per share to existing shareholders and an immediate dilution of $4.92 per share to new investors. The following table illustrates this per share dilution: 25
Assumed initial public offering price per share (1) . . . . . $6.00 Net tangible book value per share before Offering . . . . . $ (0.09) Increase in net tangible book value per share attributable to payments by new investors (2) . . . . . . 1.17 Net tangible book value per share after Offering . . . . . . 1.08 ----- Dilution of net tangible book value per share to new investors . . . . . . . . . . . . . . . . . . . . . $4.92 =====
_____________________________________ (1) Before deducting the estimated underwriting discount and Offering expenses. (2) After deducting the estimated underwriting discount and Offering expenses payable by the Company. The following table summarizes as of March 31, 1996, the difference between existing shareholders and new investors with respect to the number of shares purchased from the Company, the total consideration paid, and the average price paid per share:
Shares Purchased Total Consideration -------------------------- --------------------------- Average Price Number Percent Amount Percent Per Share ------ ------- ------ ------- -------------- Existing shareholders (1) . 12,456,641 78.6% $ 1,334,345 6.1% $ 0.11 New investors (1) . . . . . 3,400,000 21.4 20,400,000 93.9 6.00 ---------- ----- ---------- ---- Total . . . . . . . . . . . 15,856,641 100.0% $21,734,345 100.0% ========== ===== ========== =====
_________________________________ (1) In the event the Underwriters exercise the over-allotment option granted by the Company and the Selling Shareholders, the number of shares held by existing shareholders will be reduced to 12,240,173 or approximately 77.2% of the outstanding shares of the Common Stock and will increase the number of shares held by new investors to 3,616,468 or approximately 22.8% of the total number of shares of Common Stock outstanding after the Offering. The foregoing table assumes no exercise of any outstanding stock options, warrants, or the Underwriters' over-allotment option. As of March 31, 1996, options to purchase 528,444 shares of Common Stock were outstanding under the Company's 1995 Non-Statutory Stock Option Plan at a 26 weighted average per share exercise price of $ 0.83. Additional dilution may result if any of these stock options are exercised. See "Management." 27 SELECTED FINANCIAL DATA The following selected financial data set forth below with respect to the Company's statements of operations from February 16, 1993 (date of inception) to December 31, 1993 and for the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996 and balance sheets as of December 31, 1994 and 1995 and March 31, 1996 are derived from the financial statements of the Company included elsewhere in this Prospectus that have been audited by Coopers & Lybrand L.L.P., independent certified public accountants. The data set forth below should be read in conjunction with the Company's financial statements and the notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
For the Period February 16, 1993 (date of inception) to Year Ended Three Months December 31, December 31, Ended March 31, --------------- ------------------- ------------------ 1993 1994 1995 1995 1996 ------------- ---- ---- ---- ---- (unaudited) Statement of Operations Data: Revenues: Product revenue . . . . . . . . . $ - $ - $ 1,101,418 $ 150,257 $ 981,642 Consulting and services . . . . . 76,183 59,716 2,083 - 40,169 ----------- ----------- ------------ ----------- ----------- Total revenues . . . . . . . . 76,183 59,716 1,103,501 150,257 1,021,811 ----------- ----------- ------------ ----------- ----------- Cost of revenues: Cost of product revenue . . . . . - - 376,359 52,590 310,693 Cost of consulting and services revenue . . . . . . . . . . . . 38,090 35,114 800 - 11,305 ----------- ----------- ------------ ----------- ---------- Gross profit . . . . . . . . . . . 38,093 24,602 726,342 97,667 699,813 Operating expenses: Sales and marketing . . . . . . . 3,652 21,212 103,917 33,980 709,111 General and administrative . . . 68,212 299,392 1,314,661 154,282 592,967 Research and development . . . . - 107,926 277,973 41,696 310,952 ----------- ----------- ----------- ----------- ----------- Total operating expenses . . . 71,864 428,530 1,696,551 229,958 1,613,030 ----------- ----------- ----------- ----------- ----------- 28 SELECTED FINANCIAL DATA (continued) For the Period February 16, 1993 (date of Year Ended Three Months inception) to December 31, Ended March 31, December 31, ------------------------ --------------------- 1993 1994 1995 1995 1996 --------------- ---- ---- (unaudited) ---- Operating loss . . . . . . . . . . (33,771) (403,928) (970,209) (132,291) (913,217) Other (expense) income: Interest expense . . . . . . . . (1,913) (2,360) (66,615) - (104,934) Interest income . . . . . . . . . - - 4,513 - 23,491 ----------- ----------- ----------- ----------- ----------- Total other expenses . . . . . (1,913) (2,360) (62,102) - (81,443) ----------- ----------- ----------- ----------- ----------- Net loss . . . . . . . . . . . . . $ (35,684) $ (406,288) $(1,032,311) $ (132,291) $ (994,660) =========== =========== =========== =========== =========== Net loss per common share . . . . . $ (0.00) $ (0.04) $ (0.08) $ (0.01) $ (0.08) ============ ============ ============ ============ ============ Weighted average shares outstanding (1) . . . . . . . . . 7,317,100 10,061,825 12,447,600 11,853,392 12,855,714 ============ =========== =========== =========== =========== December 31, March 31, ----------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Balance Sheet Data: Working capital (deficit) . . . . . $ (19,436) $ 245,598 $ (168,311) $ 128,690 $(1,297,123) Total assets . . . . . . . . . . . 28,182 394,906 2,050,602 264,580 2,945,758 Long term debt, less current portion - - 126,908 - 143,725 Shareholders' equity (deficit) . . (11,523) 318,028 (139,938) 185,737 (1,134,598)
___________________________________ (1) For a description of the computation of net loss per share and shares used in computing net loss per share, see Note 2 of Notes to the Financial Statements. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainty. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Risk Factors" as well as those discussed elsewhere in this Prospectus. Overview The Company develops, markets, and licenses a comprehensive suite of network security products that enable businesses to conduct secured electronic transactions and information exchange using private enterprise networks and public networks such as the Internet. From inception in February 1993 until December 1994, the Company's operating activities related primarily to recruiting personnel, and conducting research and development. Revenues were minimal during 1993 and 1994. The Company introduced its first product, the SmartCAT smart card reader and application software, in October 1994 and its second product, the SmartWall application-level firewall, in December 1994. In December 1995, the Company introduced SmartGATE, a client/server security enabling product. From inception until December 1994, the Company's revenues were generated primarily from consulting and services. Currently, the Company generates revenues primarily from software licenses and sale of hardware, and to a lesser extent, consulting and related services. The Company anticipates that revenue from products will continue to be the principal source of the Company's revenues. Under the Company's revenue recognition policy, revenue is generally recognized from the license of software upon shipment, net of allowances, provided that no significant vendor obligations remain. In addition, the Company often permits customers to evaluate products being considered for purchase, generally for a period of up to 30 days, in which event the Company does not recognize revenue until the customer has accepted the product. Accordingly, the Company's revenue recognition policy does not necessarily correlate with signing of a contract or shipment of a product. See "Risk Factors - Long Sales Cycle." As of March 31, 1996, the Company had an accumulated deficit of approximately $2,500,000. The Company currently expects to incur net losses over the next several quarters as a result of greater operating expenses incurred to fund research and development and to increase its sales and marketing efforts. To date, the Company has expensed all development costs as incurred in compliance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." The Company believes 30 that it will be able to continue to expense all development costs as incurred. The Company's President, Chief Executive Officer, and founder did not receive salary in 1993, 1994, or 1995, which resulted in reduced general and administrative costs for those years. Mr. Chen has begun receiving a salary in 1996 and the Company recently has hired and intends to continue to hire additional senior level personnel. See "Management - Employment Agreement." In addition, general and administrative costs have increased significantly since the Company's date of inception and the Company expects such costs to continue to increase in the future. In 1993, consulting and services revenue from MacTec Magazine(TRADEMARK) ("MacTec") and IN-SNEC Groupe Technique, an air traffic control equipment manufacturer located in France, accounted for approximately 56% and 13%, respectively, of total revenues. In 1994, consulting and services revenue from the U.S. Department of Energy and MacTec accounted for approximately 37% and 29%, respectively, of total revenues. In 1995, product revenue from GEIS, NCTS Washington, a division of the Department of the Navy, and the U.S. Defense Information Systems Agency accounted for approximately 19%, 10%, and 10%, respectively, of total revenues. For the three months ended March 31, 1996, product revenue from Solomon Technology Corporation, a Taiwanese manufacturer of smart cards, accounted for approximately 20% of total revenues. Results of Operations The following table sets forth certain statement of operations data as a percentage of revenues for the periods indicated:
For the Period February 16, 1993 (date of Year Ended Three Months Ended inception) to December 31, March 31, December 31, ---------------- -------------------- 1993 1994 1995 1995 1996 --------------- ---- ---- ---- ---- (unaudited) Statement of Operations Data: Revenues: Product revenue . . . . . . . . . - % - % 99.8% 100.0% 96.1% Consulting and services . . . . . 100.0 100.0 0.2 - 3.9 ------ ------ ------ ----- ------ Total revenues. . . . . . . . . 100.0 100.0 100.0 100.0 100.0 Cost of revenues: Cost of product revenue . . . . . - - 34.1 35.0 30.4 Cost of consulting and services revenue . . . . . . . . . . . . 50.0 58.8 0.1 - 1.1 ------ ------ ------ ----- ------ 31 For the Period February 16, 1993 (date of Year Ended Three Months Ended inception) to December 31, March 31, December 31, ---------------- -------------------- 1993 1994 1995 1995 1996 --------------- ---- ---- ---- ---- (unaudited) Gross profit . . . . . . . . . . . . 50.0 41.2 65.8 65.0 68.5 Operating expenses: Sales and marketing. . . . . . . . 4.8 35.5 9.4 22.6 69.4 General and administrative . . . . 89.5 501.4 119.1 102.7 58.0 Research and development . . . . . - 180.7 25.2 27.7 30.4 ------ ------ ------ ------ ------ Total operating expenses . . . . 94.3 717.6 153.7 153.0 157.8 ------ ------ ------ ------ ------ Operating loss . . . . . . . . . . . (44.3) 676.4 (87.9) (88.0) (89.3) Other (expense) income: Interest expense . . . . . . . . . (2.5) (4.0) (6.0) - (10.3) Interest income. . . . . . . . . . - - 0.4 - 2.3 ----- ----- ------ ----- ------ Total other expenses . . . . . . (2.5) (4.0) (5.6) - 8.0 Net loss . . . . . . . . . . . . . . (46.8)% (680.4)% (93.5)% (88.0)% (97.3)% ====== ====== ====== ===== =====
_________________________________ (1) For a description of the computation of net loss per share and shares used in computing net loss per share, see Note 2 of Notes to the Financial Statements. 32 Three Months Ended March 31, 1996 Compared with Three Months Ended March 31, 1995 Revenues Total revenues increased significantly from approximately $150,000 for the three months ended March 31, 1995 to approximately $1,022,000 for the three months ended March 31, 1996. This increase was principally attributable to increased sales of the Company's network security products. Product Revenue. Product revenue is derived principally from software licenses and the sale of hardware. Product revenue increased significantly from approximately $150,000 for the three months ended March 31, 1995 to approximately $982,000 for the three months ended March 31, 1996. The increase was due principally to increased sales of the Company's SmartWall product and the introduction of its SmartGATE product in December 1995. Consulting and Services Revenue. Consulting and services revenue is derived principally from fees for services complementary to the Company's products, including consulting, maintenance, and training. Consulting and services revenue was approximately $40,000, or 3.9% of total revenue, for the three months ended March 31, 1996. The Company anticipates that consulting and services revenues will increase as a percentage of total revenue as compared to the three months ended March 31, 1996. Cost of Revenues Cost of Product Revenue. Cost of product revenue consists principally of the costs of computer hardware, licensed technology, manuals, and labor associated with the distribution and support of the Company's products. Cost of product revenue increased from approximately $53,000 for the three months ended March 31, 1995 to approximately $311,000 for the three months ended March 31, 1996. Cost of product revenue as a percentage of product revenue was 35.0% and 31.7% for the three months ended March 31, 1995 and March 31, 1996, respectively. The increase in absolute dollars was principally related to the higher level of product sales compared with the prior year's period. The decrease in cost of product revenue as a percentage of product revenue was primarily due to an increase in sales of the Company's software products as a component of product revenue in the later period. Cost of Consulting and Services Revenue. Cost of consulting and service revenue consists principally of personnel and related costs incurred in providing consulting, support, and training services to customers. There was no cost of consulting and services revenue for the three months ended March 31, 1995 as compared to approximately $11,000, or 28.1% of consulting and services revenue, for the three months ended March 31, 1996. 33 Operating Expenses Sales and Marketing. Sales and marketing expenses consist principally of the costs of sales and marketing personnel, advertising, promotions, and trade shows. Sales and marketing expenses increased significantly from approximately $34,000 for the three months ended March 31, 1995 to approximately $709,000 for the three months ended March 31, 1996. Sales and marketing expenses as a percentage of total revenue were 22.6% and 69.4% for the three months ended March 31, 1995 and March 31, 1996, respectively. The dollar and percentage increase were principally related to expenses associated with increases in the number of sales and marketing personnel, as well as expenses related to advertising and promotional efforts. Sales and marketing expenses can be expected to increase both in the aggregate and as a percentage of total revenues in the near term as a result of the Company's increased sales and marketing efforts. General and Administrative. General and administrative expenses consist principally of the costs of finance, management, and administrative personnel and facilities expenses. General and administrative expenses increased substantially from approximately $154,000 for the three months ended March 31, 1995 to approximately $593,000 for the three months ended March 31, 1996. General and administrative expenses as a percentage of total revenues were 102.7% and 58.0% for the three months ended March 31, 1995 and March 31, 1996, respectively. In addition, during the three months ended March 31, 1996, the Company added approximately $76,000 to its allowance for potentially uncollectible accounts receivable and nonsalable inventory. The remainder of the dollar increase was principally attributable to additional hiring of management and administrative personnel and professional and legal fees. The percentage decrease was primarily due to allocation over a larger revenue base. The Company anticipates that general and administrative expenses will increase in future periods. Research and Development. Research and development expenses consist principally of the cost of research and development personnel and other expenses associated with the development of new products and enhancement of existing products. Research and development expenses increased significantly from approximately $42,000 for the three months ended March 31, 1995 to approximately $311,000 for the three months ended March 31, 1996. Research and development expenses as a percentages of total revenue were 27.7% and 30.4% for the three months ended March 31, 1995 and March 31, 1996, respectively. The dollar and percentage increase were principally attributable to an increase in the number of personnel associated with the Company's technical development efforts. The Company believes that a continuing commitment to research and development is required to remain competitive. Accordingly, the Company intends to allocate substantial resources to research and development, but research and development expenses may vary as a percentage of revenues. Interest Income and Expense. Interest income represents interest earned on cash, cash equivalents and marketable securities. Interest 34 income was approximately $23,000 for the three months ended March 31, 1996. Interest expense was approximately $105,000 for the three months ended March 31, 1996. Interest expense represents interest payable on promissory notes and capitalized lease obligations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Income Taxes. The Company did not incur income tax expense for the three months ended March 31, 1995 and the three months ended March 31, 1996 as a result of the net loss incurred during each period. As of March 31, 1996, the Company had net operating loss carryforwards of approximately $1,785,000 as a result of net losses incurred since inception. Comparison of Years Ended December 31, 1993, 1994, and 1995 Revenues Total revenues decreased 21.6% from approximately $76,000 in 1993 to approximately $60,000 in 1994 and increased substantially to approximately $1,104,000 in 1995. The Company had no revenues from products in 1993 and 1994. The decrease in revenues from 1993 to 1994 was primarily due to the Company's focus on product development. The increase from 1994 to 1995 was primarily due to the introduction of the Company's SmartWall product in December 1994. Cost of Revenues Cost of revenues decreased 7.8% from approximately $38,000 in 1993 to approximately $35,000 in 1994 and increased substantially to approximately $377,000 in 1995. Cost of revenues as a percentage of total revenues were 50.0%, 58.8% and 34.2% in 1993, 1994, and 1995, respectively. The dollar decrease and percentage increase in 1994 was primarily due to a decrease in revenues and higher service costs. The dollar increase and percentage decrease in 1995 is primarily attributable to an increase in revenues from the introduction of SmartWall. Operating Expenses Sales and Marketing. Sales and marketing expenses increased from approximately $4,000 in 1993 to approximately $21,000 in 1994 and increased to approximately $104,000 in 1995. Sales and marketing expenses as a percentage of total revenues were 4.8%, 35.5%, and 9.4% in 1993, 1994, and 1995, respectively. The dollar increase in 1994 was primarily due to the costs associated with expanding operations. The percentage increase in 1994 was primarily attributable to allocation over a smaller revenue base. The dollar increase in 1995 was principally due to increased personnel and marketing efforts and costs associated with the sales of SmartWall. The percentage decrease in 1995 was principally due to allocation over a larger revenue base. 35 General and Administrative. General and administrative expenses increased from approximately $68,000 in 1993 to approximately $299,000 in 1994 and increased to approximately $1,315,000 in 1995. General and administrative expenses as a percentage of total revenues were 89.5%, 501.4% and 119.1% in 1993, 1994, and 1995, respectively. The dollar increase in 1994 was primarily as a result of increased staffing levels. The dollar increase in 1995 was primarily as a result of increased staffing levels, leasing of additional office space, additional travel expense, establishing an allowance for potentially uncollectible and nonsaleable inventory, and increased professional fees. Research Development. Research and development expenses increased from $0 to approximately $108,000 in 1994 and increased to approximately $278,000 in 1995. Research and development expenses as a percentage of total revenues were 0%, 180.7%, and 25.2% in 1993, 1994, and 1995, respectively. The dollar increases in 1994 and 1995 were primarily due to increases in the number of personnel associated with the Company's product development efforts. Interest Income and Expense. There was no interest income in 1993 and 1994. Interest income in 1995 was approximately $5,000 from interest earned on the net proceeds from the Company's private financings. Interest expense was approximately $2,000 in both 1993 and 1994. Interest expense was approximately $67,000 in 1995. The increase was primarily due to the Company's issuance of $1,250,000 in promissory notes in 1995. Income Taxes. The Company did not incur income tax expenses in December 31, 1993, 1994, and 1995 as a result of the net loss incurred during these periods. As of December 31, 1995, the Company had net operating loss carryforwards of approximately $1,172,000 as a result of net losses incurred since inception. 36 Quarterly Results of Operations The following table sets forth selected financial data for the periods indicated. This information (other than the three months ended March 31, 1996) has been derived from the Company's unaudited financial statements, which, in management's opinion, reflect all adjustments necessary to fairly present this information when read in conjunction with the financial statements and notes thereto included elsewhere in this Prospectus.
Three Months Ended _______________________________________________________________ Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1995 1995 1995 1995 1996 ---- ---- ---- ---- ---- (unaudited) (unaudited) (unaudited) (unaudited) Statement of Operations Data: Revenues: Product revenue . . . . . . . . . . . . $ 150,257 $ 218,961 $ 356,021 $ 376,179 $ 981,642 Consulting and services . . . . . . . . - - - 2,083 40,169 ----------- ---------- ---------- ----------- ---------- Total revenues . . . . . . . . . . . 150,257 218,961 356,021 378,262 1,021,811 ----------- ---------- ---------- ----------- ---------- Cost of revenues: Cost of product revenue . . . . . . . . 52,590 78,560 125,482 119,727 310,693 Cost of consulting and services revenue . . . . . . . . . . . . . . . - - - 800 11,305 ----------- ----------- ---------- ----------- ---------- Gross profit . . . . . . . . . . . . . . 97,667 140,401 230,539 257,735 699,813 Operating expenses: Sales and marketing . . . . . . . . . . 33,980 18,562 17,280 34,095 709,111 General and administrative . . . . . . 154,282 289,181 167,903 703,295 592,967 Research and development . . . . . . . 41,696 55,594 83,392 97,291 310,952 ---------- ---------- ---------- ----------- --------- Total operating expenses . . . . . . 229,958 363,337 268,575 834,681 1,613,030 ---------- ---------- ---------- ----------- --------- Operating loss . . . . . . . . . . . . . (132,291) (222,936) (38,036) (576,946) (913,217) Other (expenses) income: 37 Three Months Ended __________________________________________________________________ Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1995 1995 1995 1995 1996 ---- ---- ---- ---- ---- (unaudited) (unaudited) (unaudited) (unaudited) Interest expense . . . . . . . . . . . - - - (66,615) (104,934) Interest income . . . . . . . . . . . . - - - 4,513 23,491 ----------- ----------- ---------- ----------- --------- Total other expenses . . . . . . . - - - (62,102) (81,443) ----------- ----------- ---------- ----------- ---------- Net loss . . . . . . . . . . . . . . . . $ (132,291) $ (222,936) $ (38,036) $ (639,048) $(994,660) =========== =========== ========== =========== ==========
The Company's total revenues and operating results have varied substantially from quarter to quarter and should not be relied upon as an indication of future results. Quarterly operating results can be difficult to forecast because the Company's sales cycle can be relatively long and depend on factors such as the size and timing of individual transactions; changes in customer budget authorizations; the level of sales and marketing, research and development, and general and administrative expenses; and general economic conditions. Operating results for a given period could be disproportionately affected by any shortfall in expected revenues. In addition, fluctuation in revenues from quarter to quarter will likely have an increasingly significant impact on the Company's results of operations. The Company's growth in recent periods may not be an accurate indication of future results of operations in light of the Company's short operating history, the evolving nature of the network security market, and the uncertainty of the demand for Internet and intranet products in general and the Company's products in particular. See "Risk Factors - Anticipated Fluctuations in Quarterly Results." The Company may experience significant seasonality in its business, and the Company's financial condition and results of operations may be affected by such trends in the future. Such trends may include higher revenues in the third and fourth quarters of the year and lower revenues in the first and second quarters. The Company believes that revenues may be higher in the third quarter due to the fiscal year end of the U.S. government and higher in the fourth quarter due to year-end budgetary pressures on the Company's commercial customers and the tendency of certain of the Company's existing or prospective customers to implement changes in computer or network security prior to the end of the calendar year. Because the Company's operating expenses are based on anticipated revenue levels, a small variation in the time of recognition of revenues can cause significant variations in operating results from quarter to quarter. Liquidity and Capital Resources Since its organization, the Company has financed its operations through the private sale of equity securities, notes to shareholders, and short-term borrowings. In 1993, the Company raised approximately $40,000 38 from the issuance of an 8% note. In 1994 and 1995, the Company raised approximately $750,000 and $400,000, respectively, through the sale of Common Stock. In addition, in December 1995 and January 1996, the Company raised $2,500,000 from the sale of the 7% unsecured promissory notes scheduled to mature on June 30, 1996. In April and May of 1996, the Company exchanged all of the 7% unsecured promissory notes for Series A Stock. In June 1996, the Company raised an additional $1,500,000 by issuing to JMI an 8% unsecured senior subordinated note with detachable warrants to purchase 500,000 shares of Common Stock. See "Capitalization," "Description of Capital Stock - Series A Convertible Preferred Stock," and "Certain Transactions." In October 1995, the Company obtained a secured equipment loan from a bank in the amount of $50,000 at the bank's prime rate for the first year, which is scheduled to increase to the bank's prime rate plus 1.5% in October 1996. The Company is required to repay the loan over 36 months commencing in October 1996 and ending in October 1999. The amount outstanding under this loan at March 31, 1996 totalled $50,000. At March 31, 1996, the bank's prime rate was 8.25%. The Company's operating activities used cash of approximately $21,000, $353,000, and $1,121,000 in 1993, 1994, and 1995, respectively. For the three months ended March 31, 1996, the Company's operating activities used cash of $967,000. Cash used in operating activities was principally a result of net losses and increases in accounts receivable and inventory, which were partially offset by increases in accounts payable and the establishment of an allowance for potentially uncollectible accounts receivable and nonsaleable inventory. Capital expenditures for property and equipment were approximately $20,000, $13,000, and $20,000 in 1993, 1994, and 1995, respectively. Capital expenditures for the three months ended March 31, 1996 were $155,000. These expenditures have generally been for computer workstations and personal computers, office furniture and equipment, and leasehold additions and improvements. The Company expects to purchase additional computer equipment and office furniture in 1996. The Company may use a portion of the net proceeds of this Offering for such expenditures. The Company believes that the net proceeds from this Offering, together with existing cash and cash equivalent and funds generated from on-going operations will be sufficient to finance the Company's operations at least through 1997. However, the Company may require additional funds to support its working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financing or from other sources. No assurance can be given that additional financing will be available or, if available, that such additional financing will be on terms favorable to the Company or its shareholders. 39 BUSINESS Overview Virtual Open Network Environment Corporation ("V-ONE" or the "Company") develops, markets, and licenses a comprehensive suite of network security products that enable businesses to conduct secured electronic transactions and information exchange using private enterprise networks and public networks such as the Internet. The Company's suite of products address network authentication, access control, and data integrity through the use of smart cards, firewalls, and encryption technology. The Company's products interoperate seamlessly and can be combined to form a complete, integrated network security solution or can be used as independent components in customized security solutions. The Company's products have been designed with an open and flexible architec- ture to allow for enhanced application functionality and to support future network security standards. In addition, the Company's products enable businesses to deploy and scale their solutions from small, single-site networks to large, multi-site environments. Industry Background Overview. Over the last decade decentralized computing has emerged as a result of the widespread adoption of personal computers, local area networks ("LANs"), and wide area networks ("WANs"). This emergence has enabled users to communicate with each other and share data throughout an entire organization. With the recent popularization of the Internet and increased performance capabilities offered by high-speed modems, ISDN services and Frame Relay technology, the volume of data transferred over networks has increased dramatically. In addition, leading hardware and software vendors have adopted and support TCP/IP, the Internet's non-proprietary communications protocol, for computer communications and information exchange. This open platform, along with the emergence of the Internet, allows increasing numbers of businesses and consumers to engage in electronic commerce, such as home banking, credit verification, securities trading, and home shopping. Organizations are increasingly using public networks, such as the Internet, as an extension of their enterprise networks. Public networks offer a cost-effective means of connecting branch offices and remote and mobile users to mission critical applications and corporate resources such as groupware, customer databases, and inventory control systems. Also, the Internet can be used as a lower cost alternative to value-added networks as a means to link companies with customers, suppliers and trading partners. In addition, businesses are deploying intranets, internal networks using TCP/IP protocols, to facilitate geographically 40 dispersed communications and the transmission of information throughout an enterprise in a cost effective manner. With the increased use of the Internet and intranets, many organizations are discovering that network security is a key element in successfully implementing distributed applications and services, including electronic mail, electronic data interchange, electronic commerce, and information exchange services. Information becomes more vulnerable as organizations rely heavily on computer networks for the electronic transmission of data. In the absence of comprehensive network security, individuals and organizations are able to exploit system weaknesses to gain unauthorized access to networks, network transmissions, and individual network computers. These individuals and organizations use such access to alter or steal data or, in some cases, to launch destructive attacks on data and computers within a network. Demand for computer network security products is expected to grow significantly as a result of the increased use of the Internet and intranets. The Yankee Group, a market research firm, indicated that it expects the market for information security products and services to grow at a 70% compounded annual rate to the end of the decade from $395 million in 1995 to $5.6 billion in the year 2000. Network Security Elements. Each of the following elements is critical in creating a complete network security solution to protect an organization's data, network, and computer systems: . Identification and Authentication - Verifying the user's identity to prevent unauthorized access to computer and network resources. . Integrity - Ensuring that network data, whether in storage or transmission, has not been changed or compromised by any unauthorized manipulation. . Non-repudiation - Verifying that data transmissions have been executed between specific parties so that neither party may legitimately claim that the transaction did not occur. . Authorization - Controlling which systems, data, and applications a user can access. . Encryption - Preventing unauthorized users from viewing private data through the process of "scrambling" data before it is transmitted or placed into electronic storage. To date, network security solutions have focused on single function or point products that address one or a limited number of these specific security elements. 41 Network Security Products. Over the years a number of security products have been developed, including passwords, token-based access devices, firewalls, encryption products, smart cards, and digital certificates. Each of these products was designed with a specific function or objective; however, few were designed to meet all of the needs of enterprise-wide security. Single function or point products that have been developed to address one or a limited number of security requirements include the following: Passwords and Tokens. Until recently, passwords were the most common method of authentication. Static (non-changing) passwords were developed as the first attempt to address the need for authentication. Static passwords, however, are inadequate as they are susceptible to "sniffing" (unauthorized viewing) and to attacks using software designed to randomly generate and enter thousands of passwords. As a result, dynamic passwords, including single-use passwords, were created to provide a greater level of authentication. Dynamic password implementations include the use of time-varying and challenge-response passwords. Generally, dynamic authentication passwords require the use of a hand-held, electronic device called a hardware token. Dynamic passwords were subsequently strengthened by incorporating two- factor identification, which provides a higher level of authentication in that two independent components are combined to identify a user (for example, a bank ATM card and a PIN code). However, dynamic passwords and two-factor identification provide only a limited level of security because the sessions they authenticate are still vulnerable to interception. Firewalls. Firewalls are network access control devices that regulate the passage of information based on a set of user- defined rules. Generally, firewalls are based upon one of two technical architectures: packet filters (customarily used in routers) and proxy-based application-level gateways. Packet filters screen network traffic and allow or prevent network access based upon source and destination Internet protocol addresses. Proxy-based application-level gateways provide access to applications on the network only after the user has identified the desired application and submitted a valid password. Encryption. Encryption products provide privacy for transmitted data. Encryption algorithms scramble data so that only users with the appropriate decoding key are able to view transmitted or stored data. Public-key encryption has recently gained additional credibility for managing the keys (codes) used to encrypt, and subsequently decrypt user designated data. Smart Cards. Smart cards are similar in size to credit cards, but contain a small, tamper-proof microprocessor chip, capable of storing data and processing complex encryption algorithms. Smart cards are an advanced authentication token that are also capable of storing information, such as credit card 42 or bank account numbers, medical records, photographic images, or digital certificates. Digital Certificates. A digital certificate serves as an individual's electronic identification card. The certificates are digitally signed by a trusted third-party, called a certificate authority, who vouches for the identity of the certificate holder. Digital certificates are being standardized as a means of authenticating on-line users, and are perceived to be a key technology for the expansion of secure transactions and electronic commerce. As businesses increase their dependence on the Internet and deploy intranets, the Company believes that there will be an increasing need for a comprehensive enterprise-wide network security solution. Many network security vendors, however, have focused on developing products that address only one or a limited number of specific security requirements. In addition, products developed by different vendors are often difficult to integrate with each other and pose interoperability problems. Consequently, the Company believes that businesses will increasingly demand comprehensive network security solutions that are easy to implement and transparent to the user. These solutions must have the ability to integrate with existing applications, networks, and/or mainframe applications, while being flexible and powerful enough to address the needs of newly developed applications. The V-ONE Solution The Company offers a comprehensive suite of network security products that address the need for identification and authentication, integrity, nonrepudiation, authorization, and encryption. The Company believes that, because of its unique combination of firewalls, smart cards, and encryption technology, it is the first network security vendor to provide two-factor identification, mutual authentication, and fine-grained access control. This combination of network security products enables organizations to identify and authenticate network users while controlling access to network services. The Company's technology is designed to prevent unauthorized access to an organization's mission critical applications and internal data without impeding permitted uses of the organization's resources and information. The Company's products are compatible with many leading hardware platforms and operating systems, as well as many third- party security products, such as firewalls. The Company's customers are able to integrate V-ONE's security products into their networks with minimal impact on existing systems and applications. The Company's suite of products can be combined and configured to provide perimeter defense, secure remote access, and intra/inter- enterprise security to facilitate secured electronic commerce and information exchange. The Company's principal products are SmartGATE, a client/server product that offers identification and authentication, integrity, nonrepudiation, authorization, and encryption; and SmartWall, an application-level firewall that incorporates SmartGATE's functionality. The Company provides customers with two-factor identification, mutual authentication, fine-grained access control, and encryption by combining 43 SmartCAT, V-One's smart card technology, with the SmartGATE server. In addition, SmartGATE users can access enterprise networks from remote locations using SmartCAT. Network security solutions created using the Company's technology enable its customers to securely deploy a broad range of services and applications to engage in secured electronic transactions, information exchange, and remote access to legacy applications. The Company's technology is designed to be (i) modular, allowing businesses to utilize the security product or products best suited to address their immediate needs, with a seamless migration path to additional products as required, (ii) scaleable, ranging from a single system supporting several users to multiple systems potentially supporting hundreds of thousands of users, and (iii) portable, employing smart card technology capable of securing access independent of any particular user's machine or network entry point. Examples of network security solutions created using V-ONE's products include: Multi-purpose Smart Cards. A major telecommunications company, under a reseller agreement, is using V-ONE technology to offer multi- purpose, secure campus card programs to colleges and universities. The telecommunications company is currently deploying that program at a large university. See "- Strategic Alliances - Telecommunications." At the university, the Company's products have been combined to provide secure access to the Internet and the university's internal network. Students can use smart cards to obtain access to their university records, student information, and campus services via secure Internet access. The smart cards also include stored value for use at on- and off-campus vendors and pay telephones. In addition, students can transfer cash value from their bank accounts to the smart cards by using advanced card readers located on campus. The initial campus program began in the spring of 1996, and it is currently expected that the program will be fully implemented to the university's 30,000 students in the fall of 1996. Home Banking. Several commercial banks are deploying applications to their customers that utilize the Company's SmartGATE and SmartWall technology to enable secure, cost-effective, and convenient Internet-based, home banking services. V-ONE's technology is designed to allow a bank's customers to securely transfer funds, review accounts, and communicate with other bank departments using the Internet. To protect the customer's privacy, all data streams between a bank customer and the bank's private network are encrypted. By using V-ONE's technology, a bank is able to cost-effectively provide secured data transmissions while deploying applications to its customers that are intended to result in higher levels of customer service and convenience to the customer. In some cases, the Company's products augment a bank's existing private dial- up network system for home banking. Historically, dial up solutions have afforded banks quick entry into the home banking market, but such solutions have typically had certain administrative and financial limitations. Electronic Data Interchange ("EDI"). GE InterBusiness , the secure Internet offering of GEIS, a worldwide provider of computer 44 communications services, is designed to provide electronic commerce, such as EDI, and secured messaging, as well as access to GEIS's value-added network ("VAN") over the Internet. GEIS has made this integrated product offering available to its installed client base of approximately 40,000 corporations. Using SmartGATE, GEIS has established an environment that provides secure data transfer over the Internet. The use of V-ONE technology permits GEIS' business clients to conduct electronic commerce, to share business information via bulletin boards, and to take advantage of the Internet's open standards while maintaining transparent authentication, authorization, and encryption. Each time a GE InterBusiness member engages in a transaction using the GE InterBusiness service, SmartGATE authenticates the member, checks the member's right to perform the transaction, and encrypts the session. Internet Services. It is expected that Virtual Networks, Inc. ("VNI") will be the first Internet service provider ("ISP") to deploy the Company's secured messaging module SmartREM (Smart Registered Electronic Messaging), which is expected to be introduced in the third quarter of 1996. SmartREM will couple SmartGATE with a SmartGATE-aware TCP/IP mail server to enable secure registered e-mail over the Internet. SmartREM will provide a mail system that authenticates the identity of the sender of each message, guarantees delivery of the message to only the addressee, and will encrypt the message during transit between the sender and the receiver to ensure privacy of the data stream. Strategy The Company's goal is to become the leading provider of comprehensive, open, and interoperable network security products that are convenient to the end user. The Company's strategy to realize its goal contains the following elements: o Provide an Interoperable, Scaleable, and Open Solution. The Company intends to continue to provide network security products that operate on leading platforms and that are interoperable and compatible with other network security products. The flexible and open architecture of the Company's products enable the Company to deliver component technologies for a seamless and interoperable system. In addition, the Company's technology is scaleable, application-independent, and designed both to integrate with existing technology as well as to support emerging standards and applications. o Augment and Integrate with Existing Security Products. The Company will continue to offer products that interoperate with a wide variety of third-party security products, including firewalls and tokens, allowing a customer to augment existing network security systems. The Company believes that its technology protects a customer's existing network security investments because the Company's products are designed to integrate easily with point products currently employed by its customers. 45 o Leverage Key Reference Accounts in Selected Vertical Markets. The Company has identified strategic vertical markets that require sophisticated network security solutions. The Company has targeted its marketing and direct sales efforts on key participants within these selected vertical markets. By successfully installing its products at key accounts, the Company intends to leverage positive references from its installed customer base to expand its market penetration within those information critical industries. In the future, the Company intends to increase its marketing and sales efforts to expand its customer base in additional vertical markets, such as healthcare. o Develop and Leverage Strategic Alliances. The Company has established strategic alliances to increase the distribution and market acceptance of its network security products including alliances with Software.com, Inc. ("Software.com") and a large telecommunication company. The Company intends to continue to strengthen its existing strategic alliances while forging new relationships with key industry participants. In addition, the Company is exploring opportunities to develop new products and expand the functionality of its existing products through alliances with key vendors of complementary technologies. Products and Services The Company's network security products are designed to protect the user's information and networks from unauthorized access while allowing users of the network to conduct business securely over the Internet and intranets. These products have been designed to interoperate seamlessly and enhance application functionality. The Company designs its products so that they can be combined in different configurations to provide customized solutions for its customers.
Date of Product Category Description Introduction ------- -------- ----------- ------------ SmartGATE(TRADEMARK) Client/server End-to-end, application level network Q4 security data security system providing two-factor 1995 identification, mutual authentication, encryption and access control SmartWall(REGISTERED Network perimeter An application level, dual-homed firewall Q4 TRADEMARK) defense (firewall) that protects internal networks while 1994 enabling remote access to internal resources 46 Date of Product Category Description Introduction ------- -------- ----------- ------------ SmartCAT(TRADEMARK) Smart card technology Smart card client software that is Q4 interoperable with third-party smart 1994 cards and smart card readers Online Registration Client/server token A system that allows remote creation and Q2 Service(TRADEMARK) distribution management of secure tokens and 1996 workstation configuration files SmartREM(TRADEMARK) Secured e-mail A system that allows authenticated and Q3 encrypted message transfer between users 1996 of a secure messaging community over (proposed) untrusted networks Wallet Electronic commerce Electronic technology that enables secure Q3 Technology(TRADEMARK) payment transactions containing credit 1995 card information over untrusted networks NetChart(TRADEMARK) On-line financial Stock performance analysis application Q2 analysis 1996
SmartGATE Server and SmartGATE Client. SmartGATE server and SmartGATE client are designed to interoperate easily with most TCP/IP based applications and to allow the end-user to safely use existing and future software applications over the Internet and intranets. SmartGATE employs two-factor identification (two independent components are combined to authenticate a user) and mutual authentication (both the server and client determine that the other party to the transaction is authorized to participate in the transaction) through the use of virtual or physical smart cards. Two-factor identification and mutual authentication are the foundation for V-ONE's bulk encryption technology and non-repudiation of the user's session. Once both parties to a communication involving an untrusted network have been identified and authenticated, SmartGATE establishes a secured, encrypted link over the untrusted network. The authorized user is then granted access to only those services and data for which the user has been approved. SmartGATE supports secure remote administration, which can be accessed using a Web browser or telnet. SmartGATE also supports the data encryption standard ("DES") (which, in most forms, cannot be exported from the United States without the approval of the State Department) and RSA's RC4 (which is exportable). SmartGATE server software versions are available on a variety of leading operating systems, including Berkeley Software Development, Inc.'s BSD/OS, Sun Microsystems' SunOS, and Hewlett-Packard's HP-UX. SmartGATE client supports Microsoft's Windows versions 3.0 and 3.1, Windows 95, and Windows NT. The Company believes that SmartGATE server software versions 47 will also be commercially available for Windows NT and SunSolaris by the end of the third quarter of 1996. In addition, the Company believes that SmartGATE client software versions will also be commercially available for Apple Computer's Macintosh by the end of the third quarter of 1996. A turnkey version of SmartGATE server is available for BSD/OS on an Intel Pentium hardware platform. The Company intends to support additional leading hardware and software platforms based on specific market opportunities. SmartWall. SmartWall, the Company's firewall product, provides a high level of protection against unauthorized access to a trusted network from an untrusted network. SmartWall also allows transparent access from the trusted network to services and applications on the untrusted network. SmartWall includes a secured graphical user interface for firewall administration, strong mutual authentication to identify users, and complete transparency for authorized traffic. In addition, SmartWall allows multiple sites to be administered from any location using a Web browser or telnet. SmartWall supports multiple types of standard encryption, authentication tokens, proxy services, and secure transmission channels. SmartGATE is fully integrated into every SmartWall. The SmartWall firewall incorporates TIS's Gauntlet(REGISTERED TRADEMARK) kernel. SmartWall software-only versions are currently available on a variety of leading operating systems, including BSD/OS, SunOS, and HP-UX. A SmartWall turnkey system is currently available for BSD/OS. The Company intends to support additional leading hardware and software platforms based on specific market opportunities. SmartCAT. The SmartCAT product, when used with the SmartGATE server, provides two-factor identification and mutual authentication using physical smart card technology. There are three parts to the SmartCAT product: (i) a standard smart card (ISO/IEC 7816-3, T=0 compliant), (ii) a smart card reader designed by the Company, and (iii) the Company's proprietary SmartGATE client software. Together these elementsprovide smart card-based encryption and authentication services. Online Registration Service. A user must be registered to access an authentication-based system. The Online Registration Service product is a system for efficient on-line enrollment of large user communities. The Online Registration Service completely automates the creation and exchange of the user's keys and initializes the user's default access privileges. The Online Registration Service either creates a virtual smart card or formats a physical smart card that contains a shared secret key that is PIN code protected. SmartREM. It is currently anticipated that the Company will introduce SmartREM in the third-quarter of 1996. When introduced, SmartREM will provide a private mail box environment for secured e-mail over the Internet or intranets. SmartREM will combine SmartGATE client, SmartGATE server, and a TCP/IP mail server, enabling individuals to initiate non-repudiable sessions for sending and receiving authenticated 48 messages within the same secured community. SmartREM will address the concern of interception or wrongful delivery of private or sensitive e- mail by allowing users to send "registered" e-mail. For example, businesses will be able to use SmartREM to securely send price quotes, volume discounts, and other sensitive information over the Internet from remote locations. Wallet Technology. Wallet Technology enables secured electronic credit card payment transactions over untrusted networks, including the Internet. Wallet Technology encrypts the credit card information supplied by the purchaser and forwards that information to the vendor. The vendor adds the purchase value to the encrypted credit card information, and sends all of this information to the credit card issuer/processor. The issuer/processor decodes this information and either authorizes or rejects the purchaser's request. The Company's design does not allow the vendor to view the unencrypted credit card information supplied by the purchaser. NetChart. NetChart is a stock performance analysis application. This application was originally developed to demonstrate the Company's technology. Recently, prospective and existing customers have expressed interest in using this application. Network Security Consulting. The Company's consulting staff provides pre- and post-sales support, vulnerability analysis, performance analysis, systems integration, and system security architecture support. The Company's consulting staff also provides fee-based engineering services. The Company believes that maintaining a staff of nationally recognized consultants greatly enhances its position as an innovative supplier of network security products. Technology The Company believes that its technology and product architecture provide it with an important competitive advantage. The cornerstone of the Company's network security solution is its proprietary SmartGATE client/server security product. SmartGATE enables two-factor identification, mutual authentication and fine-grained access control for most TCP/IP client/server applications. Using SmartGATE technology, organizations can employ two-factor identification and mutual authentication to identify and authenticate a user's access to the network while fine-grained access control confines each user's access to only those services to which the user is entitled. Two-Factor Identification. Two-factor identification employs two independent components to identify a user using an identity token contained in a physical or virtual smart card. The information in the physical or virtual smart card is secured by a PIN code that is set by the user and is not known by anyone else. SmartCAT provides the means for accessing and using smart cards via smart card readers. SmartGATE client provides the means for using virtual smart cards. Both physical and virtual smart cards store information about the user including the user's 49 keys, which are used for authentication. The keys also contain information that allow the SmartGATE client to authenticate the SmartGATE server with which it communicates. Mutual Authentication. Mutual authentication employs a dual set of challenges and encrypted responses that interact to enable both the client and the server to determine that the other party to the transaction is authorized to participate in the transaction. SmartGATE's mutual authentication employs dual challenges coupled with encrypted responses to ensure non-repudiation between the two parties to an electronic transaction. When a client application attempts to make a connection with an application service protected by a SmartGATE server, the SmartGATE client first performs a mutual authentication process with the SmartGATE server protecting the application service. During the authentication process, the SmartGATE server sends a challenge to the SmartGATE client, and the SmartGATE client uses the secret keys on the physical or virtual smart card to correctly respond to the challenge. The SmartGATE client also sends a challenge to the SmartGATE server, and the SmartGATE server must prove to the client that the server is the issuer of the client's secret key. Fine-Grained Access Control. Fine-grained access control employs access control lists to compare an identified user's request for services against a list of entitlements to determine whether to grant the user access to the requested service. SmartGATE employs an access control list to define the specific Web content page, file, or host application that identified users are permitted to use. If SmartGATE determines that the user is permitted to access the requested service, then the connection is passed through the SmartGATE server to the requested service, otherwise the connection is dropped. In addition to providing identification, authentication, and access control, the SmartGATE client and server independently compute a session key for encrypting the current TCP/IP data stream. The encryption key is computed based on information exchanged during the authentication process and is never transmitted over the network. Strategic Alliances Telecommunications. A major telecommunication company is using the Company's technology to offer multi-purpose secure campus card programs to colleges and universities. The Company has appointed and the telecom- munications company has agreed to act as the Company's exclusive reseller of the Company's SmartGATE, SmartWall, and SmartCAT products for resale and distribution to colleges and universities. The telecommunication company is currently deploying this program at a large university. See "- The V-ONE Solution - Multi-purpose Smart Card." The Company believes that the telecommunication company intends to promote this technology at other campuses at which it has preexisting relationships; however, there can be no assurance that any additional campuses will adopt this technology in whole or in part. 50 Software.com. The Company has entered into a strategic relationship with Software.com for the joint deployment and implementation of a secured electronic messaging system that will employ the Company's SmartGATE product and Software.com's Post.Office product. The Company believes that the integration of SmartGATE and Software.com's Post.Office product will provide Internet users with the ability to communicate efficiently, effectively, and securely. Presently, e-mail communications over the Internet are not secure. The sender cannot ascertain whether the intended receiver, in fact, received the message and the receiver cannot authenticate the actual identity of the sender. The strategic alliance with Software.com combines the Company's SmartGATE server with Software.com's Post.Office product so that the Post.Office server, using SmartREM, authenticates each sender by means of two-factor identification and mutual authentication (similar to the technology used by bank ATM machines to dispense cash) and guarantees delivery only to the specified addressee. In addition, the Post.Office product will notify the sender when the addressee has retrieved the message (return receipt requested). The Software.com agreement expires on July 19, 1996; however, the agreement provides for the automatic renewal for successive three month terms. The agreement may be terminated for cause by either party upon thirty days' prior written notice. Customers The Company has identified strategic vertical markets that require sophisticated network security solutions, including financial institutions, information services companies, and government agencies. The Company targets key participants within these industries that the Company believes can benefit from the functionality, scaleability, and interoperability provided by its products. A representative list of the Company's customers includes: 51
Information Services, Financial Institutions and Other Companies Government Entities ---------------------- ---------------------- -------------------- BancOne Corp. GE Information Services Inc. National Security Agency BayBank Systems, Inc. Virtual Networks, Inc. NCTS Washington, a division of the Department of the Navy Bear, Stearns & Co. Inc. State of Utah Fuji Capital Markets Corporation Svenska Handelsbank Visa International
Sales and Marketing The Company markets its network security products through its direct sales force and, to a lesser extent, through systems integrators, value-added resellers ("VARs") and international distributors. The Company is currently seeking to expand its sales and marketing staff and intends to devote additional resources to marketing and business development activities in order to expand its third-party distribution channels. Direct Marketing Effort. The Company has concentrated its initial marketing and direct sales efforts on key industry participants within certain industry and market segments, including financial institutions, information services companies, and government agencies. The Company employs a direct sales force to market its products to these key industry participants. The Company's direct sales force solicits prospective customers and provides technical advice and support with respect to the Company's products. As of May 31, 1996, the Company employed ten direct sales representatives. In 1996, the Company anticipates hiring additional direct sales representatives and opening regional sales offices in select cities. Indirect Marketing Effort. An important component of the Company's sales strategy is the development of indirect sales channels such as ISPs, systems integrators, and value-added network service providers. The Company utilizes indirect sales channels to leverage the efforts of its direct sales force. For example, in the secured messaging market, the Company has targeted ISPs like VNI. The Company has initiated sales and marketing programs to sign up integrators, VARs, and original equipment manufacturers within the United States. As of June 7, 1996, the Company had established relationships with four integrators within the United States and has signed VAR agreements with GEIS and a major telecommunication company. As of June 7, 1996, the Company has established relationships with international distributors in the United Kingdom, Sweden, Germany, Belgium, South Africa, and Australia, including relationships with Internet Solutions, Ltd. in the United Kingdom and PromaCom A.B. in Sweden. 52 Strategic Alliance Development. The Company plans to increase market penetration by developing and capitalizing upon strategic alliances. These alliances are intended to increase the distribution and market acceptance of V-ONE's network security products in markets where direct sales and traditional indirect sales efforts are not cost effective. For example, the Company has developed a strategic alliance with a large telecommunication company to offer to colleges and universities a multi-purpose, secure campus card program that integrates V-ONE technology with the telecommunication company's products and services. The Company has also entered into a strategic alliance with Software.com that is designed to allow secure messaging over the Internet. The Company intends to continue efforts to strengthen its existing relationships while also forging new relationships with key industry participants. Customer Service and Support The Company believes that customer support and product maintenance is critical to retaining existing customers and attracting prospective customers. The Company provides on-site installation support and basic administrator training with each turnkey hardware product sale. Each such turnkey product comes with 24 hours a day, seven days per week hardware and software support for 90 days. Upon expiration of the 90-day period, customers may purchase an annual maintenance plan. Purchasers of the Company's software products may also purchase annual maintenance plans. The annual maintenance plan provides customers access to the Company's customer service line, technical support personnel, and software upgrades. The Company provides additional user or administrator training, on-site support, vulnerability analysis, performance analysis, systems integration, and system security architecture support as an optional service through its consulting staff. Additionally, the Company provides customer support services for those customers who have entered into an evaluation agreement with the Company. The Company intends to enhance its existing customer service system by adding a toll-free line and developing a three-tier support system. The first tier of the Company's enhanced customer support system will consist of help desk support personnel accessing customer information and a problem database. Second tier support for elevated problems will be provided by the Company's existing systems engineering staff. Lastly, critical third tier problems will be addressed by the Company's in-house consulting staff. The Company believes that moving to a three-tier customer support system will increase its effectiveness and responsiveness to meeting customer's expanding needs. Product Development The Company is expanding and intends to continue to expand its existing product offerings to meet existing and evolving network security needs of businesses and organizations. The Company's products and product enhancements are developed in response to customer needs. Compatibility and interoperability with other applications are strategic focuses of V- ONE's product development efforts. The Company intends to continue to monitor emerging standards for networking and security, and adapt its suite of products to encompass these standards. In keeping with the Company's customer-driven product strategy, the Company will also focus on 53 developing business partnerships with other companies that provide security related services, and exploiting new market opportunities. The market for the Company's products is dynamic and rapidly changing. The Company believes that its future success will depend upon its ability to: (i) enhance its existing products, (ii) identify new opportunities to leverage existing technologies, and (iii) develop new technologies resulting in new products, markets, and services. Accordingly, the Company expects to continue to make a significant investment in research and development, product market analysis, and systems integration. The Company believes that its customer-driven development strategy will enable it to continue to broaden its product offerings. As of May 31, 1996, the Company employed 8 full-time software developers, and 3 software project managers. Competition The market for network security products and services is intensely competitive. The Company expects competition to intensify in the future. Currently, the Company competes in several different markets: Internet and intranet perimeter defense and access control (firewalls), token authentication, smart card-based security applications, and electronic commerce applications. The Company's principal competitors for Internet and intranet perimeter defense include Advanced Network and Services (a subsidiary of America Online, Inc.), Bay Networks, Inc., Border Network Technologies, Inc., Check Point Software Technology Ltd., Cisco Systems, Inc., Digital Equipment Corporation, Harris Computer Systems Corporation, International Business Machines Corporation, Milkyway Networks Corporation, Morningstar Technologies, Inc., Network Systems Corporation, Raptor Systems, Inc., Secure Computing Corporation, Sun Microsystems, Inc., and TIS, which owns the Gauntlet(TRADEMARK) kernel and licenses it to the Company. The Company competes to a lesser degree with token vendors because the Company's SmartGATE product supports many vendor tokens. Token vendors include Security Dynamics, Digital Pathways, Inc., CRYPTOCard Inc., Leemah DataCom Security Corporation, Racal-Guardata, Inc., and National Semiconductor Inc. Security Dynamics has recently agreed to acquire RSA. RSA's technology is licensed to and incorporated within certain products of the Company. As a result, Security Dynamics may become a more substantial competitor of the Company. For smart card-based security applications, the Company principally competes with those token vendors listed above who offer smart card technology. The Company's principal competitors in electronic commerce applications are Netscape Communication's Secure Socket Layer (SSL), Open 54 Market Inc.'s Secure HTTP (S-HTTP), and Cylink Corporation's transaction software. Because of the rapid expansion of the network security market, the Company will face competition from existing and new entrants, possibly including the Company's customers, suppliers, and/or resellers. There can be no assurance that the Company's competitors will not develop network security products that may be more effective than the Company's current or future products or that the Company's technologies and products would not be rendered obsolete by such developments. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases, and significantly greater financial, technical, and marketing resources than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products, than the Company. There can be no assurance that the Company's customers will not perceive the products of such other companies as substitutes for the Company's products. The Company believes that the principal competitive factors affecting the market for network security products include effectiveness, scope of product offerings, technical features, ease of use, reliability, customer service and support, name recognition, distribution resources, and cost. Current and potential competitors have established, or may establish in the future, strategic alliances to increase their ability to compete for the Company's prospective customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins, and loss of market share, which would materially adversely affect the Company's business, financial condition, and results of operations. See "Risk Factors - Competition." Backlog Orders for the Company's products are usually placed by customers on an as-needed basis and the Company has typically been able to ship products within 30 days after the customer submits a firm purchase order. The Company does not generally maintain long-term contracts with its customers that require customers to purchase the Company's products. Accordingly, the Company has not maintained, and does not anticipate maintaining, a backlog. See "Risk Factors - Anticipated Fluctuations in Quarterly Results," "- Long Sales Cycle; Seasonality," and "- Risk of Defect and Development Delays." Supply Sources Components used in the Company's network security products consist primarily of computer diskettes and computer magnetic tapes purchased from commercial vendors. Components used in the Company's 55 turnkey SmartWall and SmartGATE server products consist primarily of off- the-shelf computers, memory, displays, power supplies, and third-party peripherals (such as hard drives and network interface cards). The Company has agreements with at least two vendors for each of its parts and components. However, the Company orders most of each of its parts and components from a single vendor to maintain quality control and enhance working relationships. The Company obtains most of the hardware for its turnkey systems from Beltron Computers, a subsidiary of DBA MAX Technology Corp. The Company uses smart card readers manufactured by two contract manufacturers based on the Company's design specifications. While the Company believes that alternative sources of supply could be obtained, the Company's inability to develop alternative sources if and as required in the future could result in delays or reductions in product shipments that could have a material adverse effect on the Company's business, financial condition, and results of operations. Regulation and Government Contracts The Company's information security products are subject to the export restrictions administered by the U.S. Department of State, which permit the export of encryption products only with the required level of export license. For example, there are two versions of the SmartGATE client; one supports DES for bulk encryption and can only be exported from the United States for financial transactions. The other supports RC4 (an encryption algorithm) for bulk encryption and is exportable. In addition, these U.S. export laws prohibit the export of encryption products to a number of hostile countries. Although to date the Company has been able to secure all required U.S. export licenses, there can be no assurance that the Company will continue to be able to secure such licenses in a timely manner in the future, or at all. See "Risk Factors - Risk of Sales to U.S. Government," "- International Sales," and "- Effect of Government Regulation of Technology Exports." In certain foreign countries, the Company's distributors are required to secure licenses or formal permission before encryption products can be imported. To date, except for certain limited cases, the Company's distributors have not been denied permission to import the Company's products. License Agreements Trusted Information Systems, Inc. ("TIS") Agreement. The Company's license agreement with TIS requires the Company to pay a fee (which varies based on the number of units licensed) for each unit of the Gauntlet(TRADEMARK) product licensed for use in SmartWall. The license expires on December 31, 1996; however, the agreement provides for the automatic renewal of the Company's license rights for successive three year terms. Either party may terminate the agreement upon the default of the other party if the defaulting party has failed to cure the default within 30 days of the receipt of written notice of default. See "Risk 56 Factors - Dependence on Key Licensing Agreements, External Resources and Suppliers." RSA Data Security, Inc. ("RSA") Agreement. The Company's SmartCAT and Wallet Technology software incorporate data encryption and authentication technology owned by RSA. The Company has a perpetual license agreement with RSA, which became effective as of December 30, 1994. On May 23, 1996, RSA exercised an option granted under the agreement to convert its right to receive future royalties into 2% of the Company's outstanding voting securities, after giving effect to the issuance to RSA, until the date of the Company's initial public offering. Pursuant to a separate agreement between RSA and MIT, MIT is entitled to receive a portion of any royalties that RSA receives. As a result, the Company will issue directly to MIT a portion of the shares of Common Stock to which RSA is entitled under the RSA Agreement. The Company has reserved a total of 280,812 shares of Common Stock to be issued to RSA and MIT immediately prior to consummation of the Offering. Either party may terminate the agreement upon the default of the other party if the defaulting party has failed to cure the default within 30 days of the receipt of written notice of default. RSA has announced that RSA will be acquired by Security Dynamics. There is no assurance that the change in control of RSA will not adversely affect the Company's business relationship with RSA. See "Risk Factors - Dependence on Key Licensing Agreements, External Resources and Suppliers" and "- Intellectual Property Rights; Infringement Claims." Patents, Proprietary Technology, Trademarks and Licenses The Company relies on trademark, copyright, patent and trade secret laws, employee and third-party non-disclosure agreements, and other methods to protect its proprietary rights. The Company has pending three patent applications with the United States Patent and Trademark Office that cover certain aspects of its technology. Prosecution of these patent applications, and any other patent applications that the Company may subsequently determine to file, may require the expenditure of substantial resources. The issuance of a patent from a patent application may require 24 months or longer. There can be no assurance that the Company's technology will not become obsolete while the Company's applications for patents are pending. There also can be no assurance that any pending or future patent application will be granted or that any future patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. Further, the Company has not pursued patent protection outside of the United States for the technology covered by two of the pending patent applications. The Company currently intends to pursue patent protection outside of the United States for the technology covered by the most recently filed patent application although there can be no assurance that any such protection will be granted or, if granted, that it will adequately protect the technology covered thereby. The Company's success is also dependent in part upon its proprietary software technology. There can be no assurance that the 57 Company's trade secrets or non-disclosure agreements will provide meaningful protection for the Company's proprietary technology and other proprietary information. In addition, the Company relies on "shrink wrap" license agreements that are not signed by the end user to license the Company's products and, therefore, may be unenforceable under the laws of certain jurisdictions. Further, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company or that the Company's technology will not infringe upon patents, copyrights, or other intellectual property rights owned by others. Further, the Company may be subject to additional risk as the Company enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in foreign markets, and technology manufactured or sold abroad may not be protectable in jurisdictions in circumstances where protection is ordinarily available in the United States. The Company believes that, due to the rapid pace of technological innovation for network security products, the Company's ability to establish and, if established, maintain a position of technology leadership in the industry is dependent more upon the skills of its development personnel than upon legal protections afforded its existing or future technology. As the number of security products in the industry increases and the functionality of these products further overlaps, software developers may become subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. The Company also may desire or be required to obtain licenses from others in order to effectively develop, produce and market commercially viable products. Failure to obtain those licenses could have a material adverse effect on the Company's ability to market its software security products. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, that the patents underlying such licenses will be valid and enforceable, or that the proprietary nature of the unpatented technology underlying such licenses will remain proprietary. There has been, and the Company believes that there may be in the future, significant litigation in the industry regarding patent and other intellectual property rights. Although the Company is not currently the subject of any intellectual property litigation, litigation involving other software developers, including companies from which the Company licenses certain technology, could have a material adverse affect on the Company's business, financial condition, and results of operations. See "Risk Factors - Intellectual Property Rights; Infringement Claims." 58 Employees As of May 31, 1996, the Company had 52 full-time employees. Of these employees 12 were in development, 20 were in sales and marketing, 12 were in customer support, and 8 were in finance and administration. None of the Company's employees is represented by a labor union or is subject to a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are good. Facilities The Company leases approximately 10,700 square feet of office space in Rockville, Maryland under a lease agreement that will expire on April 17, 2001. The Company expects that this space will be sufficient for its needs through August 30, 1996. The Company is currently evaluating and intends to lease additional office space as necessary. Legal Proceedings The Company is not a party to any material legal proceedings. 59 MANAGEMENT Executive Officers and Directors The executive officers and directors of the Company, and their respective ages at March 31, 1996, are as follows:
Name Age Position ---- --- -------- James F. Chen (1)(3) . . . . . . 45 President, Chief Executive Officer, and Director Jieh-Shan Wang . . . . . . . . . 41 Senior Vice President - Engineering Robert W. Rybicki . . . . . . . . 51 Vice President - Indirect Channels Frederick J. Hitt . . . . . . . . 52 Vice President - Technology William C. Wilson . . . . . . . . 41 Vice President - Business Development Barnaby M. Page . . . . . . . . . 32 Vice President - Direct Sales Chansothi Um . . . . . . . . . . 27 Treasurer and Acting Chief Financial Officer Marcus J. Ranum . . . . . . . . . 33 Chief Scientist Charles C. Chen (1)(2)(3) . . . . 41 Secretary and Director Hai Hua Cheng (2) . . . . . . . . 47 Director
__________________________ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. (3) Member of the Executive Committee. James F. Chen founded the Company in February 1993 and has since served as its President and Chief Executive Officer. From December 1980 to January 1993, Mr. Chen served as Director of the Ground Network Engineering Division of INTELSAT, where he was responsible for ground- network design, development and deployment. Mr. Chen earned an M.S. in Computer Science from George Washington University in 1977 and a B.S. in Electrical Engineering from Georgia Institute of Technology in 1973. He is Charles C. Chen's brother. Jieh-Shan Wang, Ph.D. has been with the Company since its inception and has served as the Company's Senior Vice President of Engineering since April 1996. From August 1995 to April 1996, Dr. Wang served as the Company's Vice President of Engineering and, from April 1994 to August 1995 Dr. Wang served as the Company's Chief Engineer. Dr. Wang was with INTELSAT from June 1991 to April 1994, as Senior Systems Engineer, where he led a team of engineers in the development of network applications. From February 1988 to May 1988, Dr. Wang served on the technical staff of AT&T Bell Laboratories. Dr. Wang holds a Ph.D. in Physics from the University of Maryland and holds a B.S. in Physics from National Taiwan University. 60 Robert W. Rybicki has served as the Company's Vice President of Indirect Channels since May 1996. From October 1995 to May 1996, Mr. Rybicki served as the Company's Vice President of Business Development. Prior to joining the Company, Mr. Rybicki was Vice President of Marketing and Customer Support for Spyglass Inc. from July 1994 to September 1995, and Vice President of North American Sales for Kubota Pacific from October 1990 to June 1994. Mr. Rybicki holds an M.B.A. in Finance and a B.S. in Accounting from the University of Detroit. Frederick J. Hitt has served as Vice President of Technology since he joined the Company in January 1996. From August 1981 to January 1996, Mr. Hitt was with GEIS holding a number of technology-related positions including Manager of Software Engineering, Manager of Quality Design, Business Talk Products, Manager of Software Development and, most recently, Principal Consultant. William C. Wilson has served as the Company's Vice President of Business Development since May 1996. Mr. Wilson served as the Company's Vice President of Operations from April 1995 to May 1996 and as Director of Business Development from December 1994 to April 1995. Prior to joining the Company, Mr. Wilson provided consulting services to the Company from August 1994 to December 1994 and served as an independent consultant from August 1985 to November 1994. Mr. Wilson holds a B.S. in Journalism and Economics from Ohio State University, School of Agriculture. Barnaby M. Page has served as the Company's Vice President of Direct Sales since June 1996 and served as its Director of Sales from October 1995 to June 1996. From August 1995 to October 1995, Mr. Page served as the Company's Manager of Commercial Sales. From January 1993 to August 1995, Mr. Page served as Regional Sales Manger for DiBiasio & Edgington, Inc. and from July 1992 to December 1992, as Regional Sales Representative for Thompson Financial Services. From July 1990 to July 1992, Mr. Page was with Bloomberg Financial Markets as a Sales Representative, and from June 1989 to July 1990, Mr. Page was with First Boston Corporation as a swaps negotiator. Mr. Page earned a Certificate from the University of Copenhagen, Denmark in International Relations and Economics and holds a B.A. in Political Science and Journalism from the University of Massachusetts at Amherst. Chansothi Um has served as Treasurer and acting Chief Financial Officer for the Company since January 1996. Prior to joining the Company, Mr. Um was a consultant with the Strategic Services Practice of Andersen Consulting from August 1995 to January 1996. Mr. Um was a Financial Analyst at Philip Morris Companies from May 1994 to August 1994, and a Project Engineer at Kraft General Foods from June 1991 to August 1993. Mr. Um holds an M.B.A. in Finance from the Wharton School of the University of Pennsylvania and a B.S. in Electrical Engineering from the University of Illinois at Urbana-Champaign. Marcus J. Ranum has served as the Company's Chief Scientist since October 1995. From June 1995 to October 1995, Mr. Ranum was an 61 independent consultant, and from January 1993 to June 1995, Mr. Ranum served as Senior Scientist at TIS. From August 1990 to November 1992, Mr. Ranum served as a consultant for Digital Equipment Corporation. In both positions, Mr. Ranum designed, developed and deployed network security products. Mr. Ranum holds a B.A. in Psychology from Johns Hopkins University. Charles C. Chen D.D.S., has served as a Director of the Company since February 1993 and as the Company's Secretary since December 12, 1995. Since July 1982, Dr. Chen has practiced periodontics with Zupnik, Winson & Chen, D.D.S.P.A. Dr. Chen holds a B.S. in Chemistry from the University of Maryland and a D.D.S. from the Baltimore College of Dental Surgery, University of Maryland. He is James F. Chen's brother. Hai Hua Cheng has served as a director of the Company since September 1995. Mr. Cheng is the majority owner of Scientek Corporation in Taiwan and since August 1979 has served as Vice-President and a Director of that company. Mr. Cheng is also the principal owner of Scientek Private Venture Capital and has served as a Director of that company since March 1990. In addition, Mr. Cheng has served on the board of directors of United Test Center Inc. (Taiwan) since March 1995. Mr. Cheng holds a B.S. in Computer and Control Engineering from National Chiao Tung University. The Board of Directors and Board Committees The business of the Company will be managed under the direction of the Company's Board of Directors. The Company's Restated Bylaws authorize a seven-member Board of Directors. Currently the Board of Directors consists of 3 directors. The Company's Restated Certificate of Incorporation provides for a classified Board of Directors effective as of the Company's annual meeting of shareholders in June 1996. In accordance with the Restated Certificate of Incorporation, the terms of the Board of Directors will be divided into three classes: Class I will expire at the annual meeting of shareholders to be held in 1997, Class II will expire at the annual meeting of shareholders to be held in 1998, and Class III will expire at the annual meeting of shareholders to be held in 1999. At each annual meeting of shareholders beginning with the 1997 annual meeting, the successors to directors whose terms will then expire will be elected to serve until the third annual meeting following election and until their successors have been duly elected and qualified. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that as nearly as possible, each class will consist of an equal number of directors. The Restated Certificate of Incorporation and Restated Bylaws provide that a director may be removed at any time, but only for cause and only by the affirmative vote of 67% or more of the outstanding shares of the Company entitled to vote at an election of directors at a special meeting of shareholders called for that purpose. The Company's Board of Directors has established an Audit Committee (the "Audit Committee") to recommend the firm to be appointed as 62 independent accountants to audit financial statements and to perform services related to the audit, review the scope and results of the audit with the independent accountants, review with management and the independent accountants the Company's year-end operating results, and consider the adequacy of the internal accounting procedures. The Audit Committee will consist of at least 2 directors neither of whom are employees of the Company. The Company's Board of Directors has also established a Compensation Committee (the "Compensation Committee") and an Executive Committee (the "Executive Committee"). The Compensation Committee, which consists of 2 directors, reviews and recommends the compensation arrangements for all directors and officers, approves such arrangements for other senior level employees, and administers and takes such other action as may be required in connection with certain compensation and incentive plans of the Company. The Executive Committee, which consists of 2 directors, addresses significant corporate, operating, and management matters between meetings of the full Board of Directors. The Company intends to seek election of at least two additional directors who are neither officers nor employees of the Company prior to consummation of the Offering. Executive Compensation Summary Compensation. The following table sets forth compensation paid to the Chief Executive Officer during the year ended December 31, 1995. The Company had no executive officers whose salary plus bonus exceeded $100,000 during the year ended December 31, 1995.
Summary Compensation Table Annual Compensation -------------------------------------- Name and Principal All Other Position Year Salary Bonus Other Compensation -------- ---- ------ ----- ----- ------------ James F. Chen 1995 ---- $ 18,000 $ 2,213(1) $ 3,060(2) (President, Chief Executive Officer, and Director)
_______________________ (1) Represents payments made by the Company to finance Mr. Chen's automobile. (2) Represents health insurance premiums paid by the Company. 63 Option Grants. James F. Chen, the Company's President and Chief Executive Officer, does not currently hold, nor has he ever been granted, options to purchase the Company's Common Stock. Stock Option Plans 1995 Non-Statutory Stock Option Plan In May 1995, the Company adopted the Virtual Open Network Environment Corporation 1995 Non-Statutory Stock Option Plan ("1995 Plan") under which stock options may be awarded to key employees of the Company. It is expected that the 1995 Plan will be ratified by the Company's shareholders at the 1996 annual meeting to be held on June 28, 1996. As of June 12, 1996, 8 employees and 1 former employee received awards under the 1995 Plan. Stock Option Awards. Stock options ("Non-Qualified Options") that do not meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended ("Code") are available for grant under the 1995 Plan. The term of each Non-Qualified Option is determined by the committee of the Board of Directors that administers the 1995 Plan, but no option is exercisable more than ten years after the date of grant. Unless otherwise provided in an employee's option agreement, Non-Qualified Options granted under the 1995 Plan expire ten years from the date of grant and are exercisable in three equal installments over a twenty-four month period. Non-Qualified Options also may be subject to restrictions on exercise, as determined by the Committee. The exercise price for Non-Qualified Options may be no less than par value per share. The exercise price is payable by either a check in the amount of the purchase price or by previously owned shares of Common Stock with a market value equal to the purchase price. Non-Qualified Options granted under the 1995 Plan are not transferable by the Optionee during an employee's lifetime. Unless otherwise provided in the employee's option agreement, Non-Qualified Options will be exercisable within three months of any termination of employment. Duration of the Plan; Share Authorization. The 1995 Plan will remain in effect until May 15, 2005, unless terminated earlier by the Company's Board of Directors. Awards have been issued with respect to 528,444 shares of Common Stock. Such shares of Common Stock have an aggregate market value of $3,170,664 based on the initial offering price of $6.00. On June 12, 1996, the Board determined that no further options would be granted under the 1995 Plan. 1995 Plan Administration. The 1995 Plan is administered by the Compensation Committee of the Board. The 1995 Plan authorizes the 64 Compensation Committee to grant Non-Qualified Options to key employees to purchase up to 528,444 shares of Common Stock and to determine the employees to whom Non-Qualified Options will be granted, the number of shares subject to each Non-Qualified Option and applicable vesting schedules. The members of the Committee are appointed by the Board. The Committee must be comprised of at least two members. Members of the Committee are eligible to receive options under the 1995 Plan, provided that such members do not participate in the decision to grant themselves options. Transferability; Repurchase Right. Each employee who receives an award under the 1995 Plan is prohibited from transferring or otherwise disposing of the underlying shares of Common Stock until 180 days have elapsed following such time the Company has consummated the Offering. However, shares of Common Stock may be used to pay the exercise price of Non-Qualified Options. Upon an employee's termination of employment with the Company, the Company has the right to repurchase any or all of the shares of Common Stock issued to the employee with respect to Non-Statutory Options granted under the 1995 Plan, whether then held by the employee or a transferee. The Company's right to repurchase shares of Common Stock terminates once the Offering is consummated. Termination and Amendment. The 1995 Plan may be terminated, modified or amended by the Company's shareholders. Although the Board of Directors may terminate, modify or amend the 1995 Plan to conform to any change in law or regulation, the Board of Directors may not, without shareholder approval, (i) increase the maximum number of shares as to which Non-Statutory Options may be granted under the Plan; (ii) change the class of employees eligible to be granted Non-Qualified Options, (iii) increase the periods during which Non-Qualified Options may be granted or exercised, or (iv) provide for the administration of the Plan by other than the Committee. No termination, modification or amendment may be made to the 1995 Plan without the consent of any employee whose rights would be adversely affected thereby. Awards Made. As of June 12, 1996, Non-Qualified Options to purchase 526,444 shares of Common Stock are outstanding under the 1995 Plan. 65 Further information regarding the awards made to date is set forth in the table below:
Number of Shares of Common Stock Name Underlying Option Exercise Price (or Range) ---- ----------------- ------------------------- James F. Chen --- --- (President, Chief Executive Officer, and Director) William C. Wilson 200,000 $0.283 (Vice President-Business Development) Barnaby M. Page 156,003 $1.67 (Vice President - Direct Sales) Ban L. Eap 49,441 $1.67 (Controller) Robert A. Dorsey 40,000 $0.283 (Manager of Government Sales) James V. Reed 30,000 $0.283 (Manager of Communications) John T. Tralka 30,000 $0.283 (Senior Programmer) All executive officers as a group 356,033 $0.283 - $1.67 All employees who are not executive officers as a group 170,441 $0.283 - $3.00 All directors who are not executive officers as a group --- ---
For a description of the principal federal income tax consequences of the 1995 Plan, see "- 1996 Incentive Stock Plan - Certain Federal Income Tax Consequences." 1996 Non-Statutory Stock Option Plan The Company's 1996 Non-Statutory Stock Option Plan ("Non- Statutory Plan") was adopted by the Board of Directors on April 4, 1996. 66 The Non-Statutory Plan provides for the grant of options to purchase Common Stock subject to certain restrictions on transfer ("Restricted Stock"). The Non-Statutory Plan expires on December 31, 1996 and is administered by the Non-Statutory Stock Option Plan Committee of the Board of Directors. The purchase price per share under each option granted is an amount equal to the fair market value of the underlying share on the date the option is granted. Each option granted under the Non-Statutory Plan is exercisable during the period beginning on the date the option is granted and ending on December 31, 1996. As of May 15, 1996 all options granted under the Non-Statutory Plan had been exercised and a total of 575,951 shares of Restricted Stock had been issued. In connection with their exercise of options granted under the Non-Statutory Plan, the optionees, including certain executive officers, paid the par value of the Restricted Stock in cash and executed promissory notes in favor of the Company as consideration for the remaining purchase price of the Restricted Stock. See "Certain Transactions." Five of the six optionees have executed promissory notes with terms of 10 years that are secured by the Restricted Stock purchased therewith, bearing a 6 percent per annum interest rate, with installments of principal and interest due annually. One of the optionees has executed a one-year promissory note, bearing a 6 percent per annum interest rate, with payment of principal and interest due at the expiration of the promissory note's one-year term. Each optionee may make payments to the Company to reduce the principal amount of his or her promissory note with the Restricted Stock serving as collateral therefor; however, if the fair market value of such consideration is less than the then outstanding portion of the indebtedness being satisfied therewith, each promissory note provides that the optionee bears personal liability for the disparity. Each promissory note may be prepaid without penalty. The Restricted Stock may not be sold, assigned, transferred, pledged or otherwise disposed of for six years from the date the option to purchase the shares was granted. As long as this restriction remains in effect, no holder of Restricted Stock has the right to vote the restricted shares for any purpose. All voting rights with respect to the Restricted Stock are to be exercised by a majority vote of the Board of Directors. The restrictions lapse 180 days after the consummation of the Offering or the acquisition of the Company in exchange for publicly traded shares. On June 12, 1996, the Company's Board of Directors determined that no further options will be granted under the Non-Statutory Plan. 1996 Incentive Stock Plan On June 12, 1996, the Board of Directors of the Company adopted the Virtual Open Network Environment Corporation 1996 Incentive Stock Plan ("1996 Plan"), under which both options and restricted share awards may be made to the Company's key employees and consultants. Under the 1996 Plan, automatic stock option awards are made to non-employee directors. It is 67 expected that the 1996 Plan will be ratified by the Company's shareholders at the 1996 annual meeting to be held on June 28, 1996. Awards Available Under the 1996 Plan. Awards to key employees and consultants under the 1996 Plan may take the form of both stock options and restricted share awards; however, no employee may receive awards with respect to more than 750,000 shares of Common Stock under the 1996 Plan. As of May 31, 1996, approximately 52 employees and 1 consultant were eligible to receive awards under the 1996 Plan. Awards under the 1996 Plan may be granted alone or in combination with other awards. Non-employee directors may only receive non-discretionary stock option awards (described in more detail below) under the 1996 Plan. As of May 31, 1996, none of the Company's directors were eligible to participate in the 1996 Plan. Stock Options. Stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code and stock options that do not meet such requirements ("Non-Qualified Options") are both available for grant under the 1996 Plan. The term of each option will be determined by the committee that administers the 1996 Plan ("Committee"), but no option will be exercisable more than ten years after the date of grant. Options will also be subject to restrictions on exercise, such as exercise in periodic installments, as determined by the Committee. The exercise price for an Incentive Stock Option must be at least 100% of the fair market value of a share of Common Stock on the date of grant of such option (110% in the case of Incentive Stock Options granted to a shareholder who owns in excess of 10% of the Company's voting stock). There is no minimum exercise price for Non-Qualified Options. The exercise price is payable in cash, in shares of Common Stock owned by a participant, with respect to Non-Qualified Options, a promissory note payable to the Company, or by cashless exercise with a participant's broker, as determined by the Committee. Stock options granted under the 1996 Plan are not transferable except by will or the laws of descent and distribution. Unless otherwise provided in the relevant option agreement, options will only be exercisable within three months of any termination of employment other than termination for "cause" or termination due to death or disability. Unless otherwise provided in the relevant option agreement, options will be exercisable by a participant or beneficiary, as the case may be, within one year of a termination of employment by reason of death or disability. If a participant's employment is terminated for "cause," his or her options will no longer be exercisable after the date of such termination of employment unless the option agreement provides otherwise. The Committee may provide, at the time of grant of Incentive Stock Options and at or after the time of grant of Non-Qualified Options, that, if a participant surrenders already owned shares of Common Stock in full or partial payment of an option, then, concurrent with such surrender, the participant, subject to the availability of shares of Common Stock under the 1996 Plan, will be granted a new Non-Qualified Option (a "Reload Option") covering a number of shares of Common Stock 68 equal to the number so surrendered. A Reload Option may be granted in connection with the exercise of an option that is itself a Reload Option. Each Reload Option will have the same expiration date as the original option and an exercise price equal to the fair market value of the Company's shares of Common Stock on the date of grant of the Reload Option. A Reload Option is exercisable immediately or at such time or times as the Committee determines and will be subject to such other terms and conditions as the Committee may prescribe. Restricted Shares. The Committee may award restricted shares to a participant. Such a grant gives a participant the right to receive shares of Common Stock subject to a risk of forfeiture based upon certain conditions. The forfeiture restrictions on the shares of Common Stock may be based upon performance standards, length of service, or other criteria as the Committee may determine. Until all restrictions are satisfied, lapsed, or waived, the Company will maintain control over the restricted shares but the participant will be able to vote the shares of Common Stock and generally will be entitled to dividends on the shares of Common Stock. Upon termination of employment, the participant generally forfeits the right to the shares of Common Stock to the extent the applicable performance standards, length of service requirements, or other measurement criteria have not been met. Non-Employee Director Options. The 1996 Plan provides for the automatic grant of a Non-Qualified Option to purchase 10,000 shares of Common Stock to each non-employee director on the first date he or she is elected as such by the Company's shareholders. However, non-employee directors who are first elected as such by the Company's shareholders prior to the 1996 annual meeting are not entitled to receive such an option. The option price is the fair market value of a share of Common Stock on the date of grant of such option. All such options have a five year term and are exercisable in full on the date of grant. If a non-employee director's service with the Company terminates by reason of death, his or her option may be exercised for a period of one year from the date of death or until the expiration of the option, whichever is shorter. If a non-employee director's service with the Company terminates other than by reason of death, his or her option may be exercised for a period of three months from the date of such termination, or until the expiration of the stated term of the option, whichever is shorter. Duration of the 1996 Plan; Share Authorization. The 1996 Plan will remain in effect until June 11, 2006, unless terminated earlier by the Company's Board of Directors. Awards may be issued with respect to up to 3,500,000 shares of Common Stock. Such shares of Common Stock have an aggregate market value of $21 million based on the initial public offering price of $6.00. In the event the purchase price of an option is paid, or tax or withholding payments relating to an award are satisfied, in whole or in part through the delivery of already owned shares of Common Stock, a 69 participant will be deemed to have received an award with respect to those shares of Common Stock. The Common Stock covered by any unexercised portions of terminated options, shares of Common Stock forfeited and shares of Common Stock subject to awards that are otherwise surrendered by a participant without receiving any payment or other benefit with respect thereto may again be subject to new awards under the 1996 Plan. 1996 Plan Administration. The 1996 Plan is administered by the Compensation Committee, a committee of the Company's Board of Directors. Prior to consummation of the Offering, the Committee will be comprised solely of non-employee directors who are not eligible to participate in the 1996 Plan except with respect to certain automatic, non-discretionary stock option awards, as described above. The Committee will determine the key employees and consultants who are eligible for and granted awards, determine the amount and type of awards, determine the duration of the option (which may not exceed ten years), establish rules and guidelines relating to the 1996 Plan, establish, modify, and terminate terms and conditions of awards and take such other action as may be necessary for the proper administration of the 1996 Plan. The members of the Committee are appointed by the Board. As directors, members of the Committee may be removed at any time but only for cause and only by the affirmative vote of the holders of 67% or more of the outstanding shares of the Company's capital stock entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose. Transferability; Repurchase Right. Each participant who receives an award under the 1996 Plan is prohibited from transferring or otherwise disposing of the underlying shares of Common Stock until 180 days have elapsed following such time as the Company has consummated the Offering. However, shares of Common Stock may be used to pay the exercise price of options and to pay withholding and other taxes as otherwise provided in the 1996 Plan. Upon a participant's termination of employment, the Company has the right to repurchase any or all of the shares of Common Stock issued to the participant with respect to awards made under the 1996 Plan, whether then held by the participant or a transferee, at fair market value as determined by the Committee. The Company's right to repurchase shares of Common Stock terminates once the Offering is consummated. Change in Control. Upon the occurrence of a change in control of the Company, all options become immediately exercisable and all restrictions on restricted shares lapse. A change in control includes: (1) approval of the Company's shareholders of a consolidation or merger of the Company with any third party, unless the Company is the entity surviving such merger or consolidation; 70 (2) approval of the Company's shareholders of a transfer of all or substantially all of the assets of the Company to a third party or a complete liquidation or dissolution of the Company; (3) A third party (other than James F. Chen and his affiliates), directly or indirectly, through one or more subsidiaries or transactions or acting in concert with one or more persons or entities: (a) acquires any combination of beneficial ownership of the Company's voting stock and irrevocable proxies representing more than 20% of the Company's voting stock; (b) acquires the ability to control in any manner the election of a majority of the directors of the Company; or (c) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Company; (4) any election has occurred of persons to the Company's Board of Directors that causes a majority of such Board to consist of persons other than (a) persons who were members of the Board on June 12, 1996 ("Effective Date") and/or (b) persons who were nominated for election as members of the Board by the Board (or a committee of the Board) at a time when the majority of the Board (or of such committee) consisted of persons who were members of the Board on the Effective Date; or (5) A determination is made by the SEC or any similar agency having regulatory control over the Company that a change in control, as defined in the securities laws or regulations then applicable to the Company, has occurred. Termination and Amendment. The Board may amend or terminate the 1996 Plan and the Committee may amend or alter the terms of awards under the 1996 Plan but no such action shall affect or in any way impair the rights of a participant under any award previously granted without such participant's consent. No amendment may be made, without shareholder approval, that would require shareholder approval under any applicable law or rule unless the Board determines that compliance with such law or rule is no longer desired. Antidilution Provisions. The number of shares of Common Stock authorized to be issued under the 1996 Plan and subject to outstanding awards (and the purchase or exercise price thereof) will be adjusted to prevent dilution or enlargement of rights in the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the 1996 Plan or the awards. 71 Awards Made. As of June 12, 1996, the Committee has granted Incentive and Non-Qualified Options to purchase 1,389,860 shares of Common Stock under the 1996 Plan. As of such date, no restricted share awards have been granted, and no awards of non-employee director options have been made, under the 1996 Plan. Further information regarding the awards made to date is set forth in the table below:
Number of Shares of Common Stock Exercise Price Name Underlying Option (or Range) ---- ----------------- ------------- James F. Chen --- --- (President, Chief Executive Officer, and Director) Robert W. Rybicki 143,066 $2.50 - $3.00 (Vice President-Indirect Channels) Marcus J. Ranum 486,585 $2.50 - $3.00 (Chief Scientist) Frederick J. Hitt 143,066 $2.50 - $3.00 (Vice President-Technology) Barnaby M. Page 12,709 $3.00 (Vice President-Direct Sales) Chansothi Um 160,488 $2.50 - $3.00 (Treasurer and Acting Chief Financial Officer) Matthew B. Mancuso 85,854 $2.50 - $3.00 (Director of Engineering) All executive officers as a group 948,675 $2.50 - $3.00 All employees who are not executive officers as a group 441,185 $2.50 - $3.00 All directors who are not executive officers as a group --- ---
72 Certain Federal Income Tax Consequences. The following is a brief summary of the principal federal income tax consequences of awards under the 1996 Plan based upon current federal income tax laws. A participant is not generally subject to federal income tax either at the time of grant or at the time of exercise of an Incentive Stock Option. However, upon exercise, the difference between the fair market value of the shares of Common Stock and the exercise price may be includable in the participant's alternative minimum taxable income. If a participant does not dispose of shares of Common Stock acquired through the exercise of an Incentive Stock Option within one year after their receipt and within two years after the date of the option's grant, any gain or loss upon the disposition will be taxed as long-term capital gain or loss. The Company will not receive any tax deduction on the exercise of an Incentive Stock Option or, if the holding requirements are met, on the sale of the underlying shares of Common Stock. If a disqualifying disposition occurs (i.e., one of the holding requirements is not met), the participant will be treated as receiving compensation subject to ordinary income tax in the year of the disqualifying disposition, and the Company will be entitled to a deduction for compensation expense in an amount equal to the amount the participant includes in income. The tax will generally be imposed on the difference between the fair market value of the shares of Common Stock at the time of exercise and the exercise price or, if less, the gain the participant realized on the sale of the shares. Any appreciation in value after the time of exercise will be taxed as long-term or short-term capital gain (depending on how long the shares are held after exercise) and will not result in any deduction by the Company. There are no federal income tax consequences to participant at the time of grant of a Non-Qualified Option. Upon exercise of the option, the participant must pay tax on ordinary income equal to the difference between the exercise price and the fair market value of the underlying shares on the date of exercise. The Company will receive a commensurate tax deduction at the time of exercise. Any appreciation in value after the time of exercise will be taxed upon the disposition of the shares as long-term or short-term capital gain (depending on how long the shares are held after exercise), and will not result in any deduction by the Company. Non-employee director options will receive the same federal income tax treatment as other Non-Qualified Options. Except as described below, a grant of restricted shares does not constitute a taxable event for either a participant or the Company. However, the participant will be subject to tax, at ordinary income rates, when any restrictions on ownership of the shares of Common Stock lapse. The Company will be entitled to take a commensurate deduction at that time. A participant may elect to recognize taxable ordinary income at the time restricted shares are awarded in an amount equal to the fair market value of the shares of Common Stock at the time of grant, 73 determined without regard to any forfeiture restrictions. If such an election is made, the Company will be entitled to a deduction at that time in the same amount. Future appreciation on the shares of Common Stock will be taxed when the shares are sold as capital gain (depending on how long the shares are held after exercise), and will not result in any deduction by the Company. If, after making such an election, the shares of Common Stock are forfeited, the participant will be unable to claim a deduction. Employment Agreement On June 12, 1996, the Company entered into an employment agreement with James F. Chen at an annual base salary of $125,000. The employment agreement has a two year term commencing on June 12, 1996 and is automatically renewed for additional two year terms on each successive June 12, commencing June 12, 1997. However, either party may serve written notice of termination prior to June 12, 1997 or prior to June 12 of each succeeding year, as the case may be, in which case the agreement will terminate at the end of the two year period that begins with the June 12 following the date of such written notice. Under the employment agreement, the Board (or a Board committee) is obligated to review Mr. Chen's base salary promptly following the completion of the Offering and thereafter at least annually. As a result of such review, the Board or committee may, in its discretion, increase, but generally may not decrease, Mr. Chen's base salary. After any adjustment following the Offering, the Board or committee may not increase his base salary for any one year by an amount greater than 50% of his then base salary. It is intended that the Board or committee will consider in any such review factors relating to his performance, duties, and responsibilities and endeavor to maintain his compensation at a level comparable to that of similarly situated executives in the Company's industry. The employment agreement also provides that Mr. Chen may be paid such bonuses, if any, as may be awarded from time to time by the Board or such committee, in its discretion. Such bonuses shall be based on results of operations, special contributions made by him, seniority, competitive conditions in the Company's industry, and such other factors as the Board or such committee considers relevant. In the event that (i) Mr. Chen terminates his employment with the Company (other than because of his death) within two years following a change in control (as defined in the employment agreement), (ii) the Company terminates Mr. Chen's employment for any reason (other than because of death, disability, or just cause) within two years following a change in control, (iii) Mr. Chen terminates his employment with the Company because of the Company's material breach of the employment agreement, (iv) Mr. Chen's base salary is reduced unless such reduction is permitted by the employment agreement, or (v) the Company's principal executive offices are relocated to a location outside Montgomery County, Maryland, or the Company requires Mr. Chen to be based anywhere other than the Company's principal executive offices, then the Company must make a lump sum severance payment to Mr. Chen. The payment is equal to the sum 74 of (a) the aggregate amount of the future base salary payments Mr. Chen would have received if he continued in the employ of the Company until 24 months (36 months if an event described in clauses (i) or (ii) above occurs) following the termination date and (b) Mr. Chen's projected bonus for the year in which the termination date occurs. The payment required by clause (a) is calculated at the highest rate of base salary paid to Mr. Chen at any time under the employment agreement, with such payments discounted to present value at a discount rate equal to 1% above the per annum one-year Treasury Bill rate. The bonus amount is computed assuming that Mr. Chen had remained in the Company's employ until the end of that year and that all performance goals or other performance measures have been met at the then current level for the remainder of that year. The Company may terminate Mr. Chen's employment for "just cause" at any time by giving him written notice, in which case the Company is only obligated to pay him his base salary as then in effect through the termination date. If Mr. Chen fails to perform his duties under the employment agreement on account of a disability, the Company may terminate the agreement on a date not less than 30 days thereafter unless he resumes full performance of his duties within such period. Mr. Chen is entitled to terminate his employment with the Company on, or at any date after, a date on which he is at least 65 years old. The employment agreement also terminates in the event of Mr. Chen's death. In either such event, the Company must pay Mr. Chen or his legal representative Mr. Chen's base salary as then in effect that has accrued to the last day of the month in which the retirement date or the date of death occurs. Director Compensation To date, directors have received no compensation for their services as directors. As of April 26, 1996, the Company began to reimburse directors for travel expenses incurred in connection with their attendance at meetings of the Board of Directors and its committees. The new non-employee directors elected at the June 1996 annual meeting of shareholders will receive an option to purchase 10,000 shares of Common Stock under the 1996 Plan upon such election. See " - 1996 Incentive Stock Plan." Compensation Committee Interlocks and Insider Participation During the year ended December 31, 1995, the Company's Compensation Committee was composed of directors James F. Chen, President and Chief Executive Officer of the Company, and his brother, Charles C. Chen, Secretary of the Company. CERTAIN TRANSACTIONS The Company was initially capitalized by a $10,000 investment by its founder, President and Chief Executive Officer, James F. Chen. Mr. Chen has, on three separate occasions, made loans to the Company. On December 31, 1993, 1994, and 1995, in consideration for loans of $39,705, 75 $32,729, and $143,644, respectively, the Company issued 8% interest bearing notes, due on demand, to Mr. Chen. On May 15, 1995, Scientek Corporation, through Hai Hua Cheng, a director of the Company, and C.C. Tsai, invested $500,000 in V-ONE in consideration for ownership of 15% of the Company's outstanding Common Stock after giving effect to this issuance. As further consideration for this investment, the Company issued 84,000 shares of Common Stock to a voting trust (the "Voting Trust") for the benefit of Mr. Cheng, the majority owner of Scientek Corporation. Mr. Chen serves as voting trustee for this trust under a Voting Trust Agreement dated January 1, 1996. The proceeds of this financing were used to meet general operating expenses. On June 1, 1995, the Company borrowed $330,000 from Scientek Corporation and issued a promissory note, bearing no interest, due June 1, 1996. The note has been assigned to Hai Hua Cheng by Scientek Corporation. The terms of the note provide that, as further consideration for the loan, the Company would issue 230,000 shares of Common Stock to Scientek Corporation immediately after repayment of the loan. As further consideration for the loan, the Company issued 115,000 shares of Common Stock to the voting trust for the benefit of Mr. Cheng described above. On May 17, 1996, Mr. Cheng executed an agreement extending the term of the note to May 31, 1997. On June 12, 1996, in consideration for Mr. Cheng's agreement not to demand payment of the note until May 31, 1997, the Board of Directors authorized the Company to offer Mr. Cheng the option to receive Common Stock based on a $3.00 per share conversion price in lieu of cash in payment of the note. The Board reserved and authorized the issuance of 110,000 shares of Common Stock for this purpose. In connection with this loan, the Company recognized interest expenses of $32,545 and $63,624 during the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. On May 15, 1995, Mr. Chen contributed 199,000 shares of Common Stock to the capital of the Company for the Company's use in transferring the above-described 84,000 and 115,000 shares to the Voting Trust. When the Company issues the above-described 230,000 shares of Common Stock to Mr. Cheng, Mr. Chen will contribute 230,000 shares of Common Stock to the capital of the Company. On May 15, 1995, Mr. Chen also contributed 500,000 shares of Common Stock owned by him to the capital of the Company for the Company to transfer to Jieh-Shan Wang, Senior Vice President of Engineering, for services rendered. In addition, on April 4, 1996 Mr. Chen contributed 575,951 shares of Common Stock owned by him to the capital of the Company for the Company to transfer to participants in the Non-Statutory Plan. Two of the Company's executive officers, Jieh-Shan Wang and William C. Wilson, have paid for options granted under the Non-Statutory Plan with promissory notes. The only one of the two executive officers who borrowed more than $60,000 from the Company is Jieh-Shan Wang, Senior Vice President - Engineering. Mr. Wang borrowed $124,750 from the Company and executed a 6% interest-bearing promissory note, due April 22, 2006, 76 that is secured by the shares of Common Stock issued on exercise of the option by Mr. Wang (the "Pledged Shares"). The terms of the note provide for payments of principal and interest to be made annually, beginning on April 22, 1997. If, at any time, the fair market value of the Pledged Shares securing the note is less than the amount due under the note, Mr. Wang will remain liable for the balance due. If Mr. Wang sells the Pledged Shares at any time prior to April 22, 2006, then the proceeds of the sale will be applied to the balance of the note before payment will be made to Mr. Wang. See "Management - 1996 Non-Statutory Stock Option Plan." In June 1996, the Company borrowed $1.5 million from JMI pursuant to the issuances of unsecured, 8% interest-bearing, senior subordinated notes in the principal amount of $1.5 million with detachable warrants to purchase 500,000 shares of Common Stock. Of the 500,000 detachable warrants, 400,000 are exercisable at $3.00 per share and 100,000 are exercisable at $0.01 per share. The notes must be redeemed upon consummation of the Offering and the warrants with an exercise price of $0.01 per share must be exercised by June 30, 1996. PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock and Series A Stock as of June 12, 1996, and as adjusted to reflect the conversion of all shares of Series A Stock into shares of Common Stock on completion of the Offering (assuming the initial offering price is $5.25 or greater), the exercise of 100,000 detachable warrants issued to JMI, and the sale by the Company of the shares offered hereby, by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding Common Stock or Series A Stock, (ii) each of the Company's directors, and (iii) all current directors and executive officers of the Company as a group.
Percentage of Shares Beneficially Owned (2) Number of Shares ---------------------- of Common Stock Before After Name and Address Beneficially Owned (1) Offering Offering ---------------- ---------------------- -------- -------- James F. Chen 7,264,050(3) 58.2% 41.7% 1803 Research Boulevard Suite 305 Rockville, MD 20850 77 Percentage of Shares Beneficially Owned (2) Number of Shares ---------------------- of Common Stock Before After Name and Address Beneficially Owned (1) Offering Offering ---------------- ---------------------- -------- -------- Hai Hua Cheng 1,964,710(4) 15.8% 11.3% 1803 Research Boulevard Suite 305 Rockville, MD 20850 Charles C. Chen 300,000(5) 2.4% 1.7% 1803 Research Boulevard Suite 305 Rockville, MD 20850 Jieh-Shan Wang 750,000(6) 6.0% 4.3% 1803 Research Boulevard Suite 305 Rockville, MD 20850 Trustee for Shapiro Family 68,175(7) 0.5% 0.4% Trust 2401 Pennsylvania Avenue, N.W. Washington, D.C. 20037 Lewis M. Schott 317,400(8) 2.5% 1.8% 220 Sunrise Avenue Palm Beach, FL 33480 Bryan T. Vanas 106,785(9) 0.8% 0.6% 1600 Smith, Suite 3100 Houston, TX 77002 Joseph and Rosa Lupo 61,068(10) 0.5% 0.4% 758 Oneida Franklin Lakes, NJ 07417 Lee DeVisser and 137,321(11) 1.1% 0.8% Linda DeVisser, Trustees of the Lee DeVisser Trust 2480 N.W. 53rd Street Boca Raton, FL 33496 Steven A. Cohen 227,876(12) 1.8% 1.3% 520 Madison Avenue New York, NY 10022 78 Percentage of Shares Beneficially Owned (2) Number of Shares ---------------------- of Common Stock Before After Name and Address Beneficially Owned (1) Offering Offering ---------------- ---------------------- -------- -------- Kenneth Lissak 68,328(13) 0.5% 0.4% 520 Madison Avenue New York, NY 10022 All directors and executive 11,138,872(14) 84.3% 61.3% officers as a group (10 persons)
---------------------------- (1) Each shareholder possesses sole voting and investment power with respect to the shares listed, except as otherwise indicated. The number of shares beneficially owned by each shareholder is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power, and also any shares which the individual has the right to acquire within 60 days after June 12, 1996. (2) Number of shares deemed outstanding includes any shares subject to stock options held by the person in question that are currently exercisable or exercisable within 60 days following May 15, 1996. Number of shares deemed outstanding after this Offering includes the additional 3,400,000 newly- issued shares of Common Stock that are being offered by the Company hereby. (3) Includes 150,000 shares of Common Stock subject to the over- allotment option granted to the Underwriters by the Company and the Selling Shareholders. See "Selling Shareholders" and "Underwriting." Includes 249,000 shares registered in the name of James F. Chen as Trustee under voting trusts for Hai Hua Cheng, Dennis Winson and Robert Zupnik with respect which Mr. Chen possesses sole voting power. Also includes: (i) 900,000 shares jointly owned with Mary S. Chen; (ii) 106,666 shares registered in the names of Mary S. Chen, Mr. Chen's wife, and Mark R. Feinberg as Co-Trustees under trusts for the benefit of Mr. Chen's children with respect to which Mary S. Chen and Mark R. Feinberg possesses voting and investment power; and (iii) 230,000 shares to be contributed to the Company for issuance to Mr. Cheng upon 79 the repayment by the Company of the $330,000 promissory note due to Mr. Cheng. (4) Includes 200,000 shares transferred to Mr. Cheng by Raymond E. Hanner pursuant to an Assignment of Contract Rights dated January 16, 1996. (5) Owned jointly with Kathleen H. Chen. (6) Includes 50,000 shares of Common Stock subject to the over- allotment option granted to the Underwriters by the Company and the Selling Shareholders. See "Selling Shareholders" and "Underwriting." Includes 250,000 shares of Common Stock subject to restrictions on transferability under the terms of the Company's 1996 Non-Statutory Stock Option Plan. (7) Represents 5.7% of the outstanding Series A Stock and 68,175 shares of Common Stock to be issued on the conversion of Series A Stock, assuming the conversion of shares of Series A Stock into shares of Common Stock on a one-for-one basis as a result of the Offering. See "Description of Capital Stock - Series A Convertible Preferred Stock" and "Risk Factors - Conversion of Series A Stock." (8) Represents 26.8% of the outstanding Series A Stock and 317,400 shares of Common Stock to be issued on the conversion of Series A Stock, assuming the conversion of shares of Series A Stock into shares of Common Stock on a one-for-one basis as a result of the Offering. See "Description of Capital Stock - Series A Convertible Preferred Stock" and "Risk Factors - Conversion of Series A Stock." (9) Represents 9.0% of the outstanding Series A Stock and 106,785 shares of Common Stock to be issued on the conversion of Series A Stock, assuming the conversion of shares of Series A Stock into shares of Common Stock on a one-for-one basis as a result of the Offering. See "Description of Capital Stock - Series A Convertible Preferred Stock" and "Risk Factors - Conversion of Series A Stock." (10) Represents 5.2% of the outstanding Series A Stock and 61,068 shares of Common Stock to be issued on the conversion of Series A Stock, assuming the conversion of shares of Series A Stock into shares of Common Stock on a one-for-one basis as a result of the Offering. See "Description of Capital Stock - Series A Convertible Preferred Stock" and "Risk Factors - Conversion of Series A Stock." 80 (11) Represents 11.6% of the outstanding Series A Stock and 137,321 shares of Common Stock to be issued on the conversion of Series A Stock, assuming the conversion of shares of Series A Stock into shares of Common Stock on a one-for-one basis as a result of the Offering. See "Description of Capital Stock - Series A Convertible Preferred Stock" and "Risk Factors - Conversion of Series A Stock." (12) Represents 19.2% of the outstanding Series A Stock and 227,876 shares of Common Stock to be issued on the conversion of Series A Stock, assuming the conversion of shares of Series A Stock into shares of Common Stock on a one-for-one basis as a result of the Offering. See "Description of Capital Stock - Series A Convertible Preferred Stock" and "Risk Factors - Conversion of Series A Stock." (13) Represents 5.8% of the outstanding Series A Stock and 68,328 shares of Common Stock to be issued on the conversion of Series A Stock, assuming the conversion of shares of Series A Stock into shares of Common Stock on a one-for-one basis as a result of the Offering. See "Description of Capital Stock - Series A Convertible Preferred Stock" and "Risk Factors - Conversion of Series A Stock." (14) Includes 350,000 shares of Common Stock shares subject to restrictions on transferability under the terms of the Company's Non-Statutory Plan and 738,352 shares of Common Stock subject to stock options granted under the Company's 1995 Plan and 1996 Plan currently exercisable or exercisable within 60 days after June 12, 1996. None of the Company's directors or executive officers own shares of the Series A Stock. SELLING SHAREHOLDERS Set forth below are the names of the Selling Shareholders and the number of shares of Common Stock that are subject to the over-allotment option granted to the Underwriters by the Company and the Selling Shareholders, which may be exercised in whole or in part by the Underwriters within 30 days of consummation of the Offering solely to cover over-allotments, if any. Number of Shares Subject to the Over-Allotment Name of Selling Shareholder Option --------------------------- ------------------ James F. Chen (President, 150,000 Chief Executive Officer, and Director) Jieh-Shan Wang (Senior Vice 50,000 President - Engineering) 81 Golden Eagle Partners 16,468 DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue up to 50,000,000 shares of Common Stock, $0.001 par value, and 20,000,000 shares of Preferred Stock, $0.001 par value. The following summary of certain provisions of the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Restated Certificate of Incorporation and Restated Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus is a part, and by the provisions of applicable law. Common Stock As of June 12, 1996, there were 12,473,308 shares of Common Stock outstanding that were held of record by approximately 43 shareholders. There will be 17,440,638 shares of Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options) after giving effect to the sale of newly-issued Common Stock offered to the public hereby. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. The holders of Common Stock are not entitled to receive dividends as long as any shares of the Company's Series A Stock are issued and outstanding. Dividends, if any, may be declared by the Board of Directors out of funds legally available for the payment of dividends. Dividends may be paid in cash, in property or in shares of capital stock. See "Dividend Policy." In the event of any voluntary or involuntary liquidation, sale, or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive rights to subscribe for any of the Company's securities or rights to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and non-assessable, and the shares of Common Stock to be issued upon completion of this Offering will be fully paid and non- assessable. Preferred Stock The Board of Directors has the authority to issue up to 20,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the 82 designation of such series, without any further vote or action by shareholders. The issuance of preferred stock may have the effect of delaying or preventing a change in control of the Company. Series A Convertible Preferred Stock The Company's Board of Directors created a series of Preferred Stock designated as "Series A Convertible Preferred Stock" (herein referred to as "Series A Stock") pursuant to Board Resolution and a Certificate of Designation, both dated April 4, 1994. As of the date of this Prospectus, 1,186,518 shares of Series A Stock are outstanding and are held of record by 12 shareholders. There will be no shares of Series A Stock outstanding after the Offering is consummated. The holders of Series A Stock ("Series A Shareholders") do not have any preemptive rights to subscribe for any securities of the Company. Series A Shareholders are entitled to vote on all matters submitted to a vote of the shareholders of the Company. Series A Shareholders also are entitled to vote as a class on matters affecting the value of the Series A Stock. All actions requiring the approval of Series A Shareholders voting as a class must be authorized by a majority vote of the holders thereof. The Board of Directors may declare dividends on the Series A Stock payable at any time in cash, in property, or in shares of Series A Stock. Series A Shareholders are entitled to share ratably in dividends with the holders of any other series of the Company's preferred stock now existing or hereafter created, but receive no preference in dividends declared. The Company will not pay dividends on Common Stock as long as any shares of Series A Stock are issued and outstanding. In the event of any voluntary or involuntary liquidation, sale, or winding up of the Company, Series A Shareholders are entitled to receive, in preference to holders of Common Stock, an amount equal to the purchase price per share of the Series A Stock plus any accrued but unpaid dividends. Any remaining proceeds shall be allocated between Common and Series A Shareholders on a pro rata basis, treating the shares of Series A Stock on an as-converted basis. Shares of Series A Stock may at any time be converted into shares of Common Stock, on a one-for-one basis, provided that such shares of Series A Stock have not previously been converted by automatic conversion. A mandatory conversion will occur in the event of an initial public offering in which at least $15 million is raised and the offering price per share is at least 1.75 times the initial conversion price of $3.00 per share of Series A Stock ($5.25). The Series A Stock will not, however, convert automatically if the initial offering price is less than $5.25 per share. The conversion ratio will be adjusted so that shares of Series A Stock are convertible into shares of Common Stock on a greater than one-for-one basis as follows. If the Company effects an initial public offering prior to March 31, 1997 at a price less than $5.25 per share, the conversion ratio will be adjusted by multiplying the subscription price of $3.00 per share by 1.75 ("Conversion Factor") and dividing such product by the midpoint of the offering price range contained in the final pre-effective amendment to the registration statement relating to such initial public offering. If the Company's initial public offering occurs (i) during the 83 period from April 1, 1997 to March 31, 1998 at a price less than $6.00 per share or (ii) after March 31, 1998 at a price less than $9.00 per share, the conversion ratio is adjusted as set forth in the preceding sentence except the Conversion Factor becomes 2.00 in the event clause (i) applies or 3.00 in the event clause (ii) applies. The failure to automatically convert (i) may result in shares of Series A Stock remaining outstanding after the Offering, and (ii) will result in further dilution to holders of Common Stock as a result of the adjustment of the conversion ratio. This will limit the ability of the Company to pay dividends on the Common Stock and will further limit the rights of the holders of Common Stock. See "Risk Factors - Conversion of Series A Stock." Anti-takeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law The following provisions of the Restated Certificate of Incorporation and Restated Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions also may have the effect of preventing changes in the management of the Company. See "Risk Factors - Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate of Incorporation, Bylaws and Delaware law." Directors. The Company's Restated Certificate of Incorporation provides that, upon the closing of this Offering, the Company's Board of Directors will be classified into three classes of directors. Under the Restated Certificate of Incorporation and Restated Bylaws, a director may be removed only for cause and by the affirmative vote of 67% of the outstanding shares entitled to vote an election of directors at a special meeting called for that purpose. See "Management - Executive Officers and Directors." Preferred Stock. The Restated Certificate of Incorporation authorizes 20,000,000 shares of Preferred Stock with a par value of $0.001. The Company is authorized to issue preferred stock from time to time in one or more series, and the Board of Directors is authorized to fix the designations, powers preferences and relative participating, optional and other special rights, qualifications, limitations or restrictions with respect to such shares. In the event of a proposed merger, tender offer or other attempt to gain control of the Company of which management does not approve, it might be possible for the Board of Directors to authorize the issuance of a series of preferred stock with rights and preferences that could impede the completion of such a transaction. See "Risk Factors - Anti-takeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." Certain Business Combinations. The Restated Certificate of Incorporation also requires the affirmative vote of not less than 75% of the outstanding shares of capital stock of the Company entitled to vote to effect a merger, consolidation or sale of the Company with any "Interested Person" as defined in the Certificate of Incorporation. The Restated 84 Certificate of Incorporation also provides that the holders of the Company's voting securities must receive consideration no less than the "Fair Price" or fair market value of the share in connection with a merger, consolidation or sale of the Company. Special Meetings of Shareholders. In addition, the Company's Restated Bylaws do not permit shareholders of the Company to call a special meeting of shareholders; only the Company's Chief Executive Officer or a majority of the members of the Company's Board of Directors may call a special meeting of shareholders. Amendment of Bylaws. The Restated Certificate of Incorporation requires the affirmative vote of not less than 75% of the outstanding shares of capital stock of the Company entitled to vote at an election of directors to amend the Company's bylaws. Inspection of Books and Records. The Restated Certificate of Incorporation authorizes the Board of Directors to determine whether, to what extent and under what conditions, the accounts and books of the Corporation (other than the stock ledger) shall be open to inspection by shareholders. Delaware Anti-Takeover Statute. The Company is subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested shareholder for a period of three years following the date that such shareholder became an interested shareholder, unless: (1) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder; (2) upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (i) by persons who are directors and also officers and (ii) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (3) on or subsequent to such date the business combination is approved by the board of directors and authorized at an annual or special meeting of shareholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested shareholder. Section 203 defines business combination when used in reference to a corporation and any interested shareholder to include: (i) any merger or consolidation of the corporation with the interested shareholder or with any other corporation if the merger or consolidation is caused by the interested shareholder and, as a result of the transaction, Section 203(a) does not apply to the surviving corporation; (ii) any sale, lease, exchange, mortgage, transfer, pledge or other disposition involving the interested shareholder of 10% or more of the assets of the corporation; 85 (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested shareholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation owned by the interested shareholder; or (v) any receipt by the interested shareholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested shareholder as any entity or person beneficially owns, or within three years did own, 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding 17,440,638 shares of Common Stock (assuming the Underwriters' over- allotment option is not exercised). The 3,400,000 shares sold in this Offering will be freely tradeable without restriction or registration by persons other than "affiliates" of the Company, as defined in the Securities Act, who would be required to sell under Rule 144 under the Securities Act. The 14,040,638 shares of Common Stock held by existing shareholders upon completion of this Offering, without giving effect to shares of Common Stock that are subject to the Underwriters' over- allotment option, will be "restricted securities" as that term is defined in Rule 144, and may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701, which rules are summarized below. The foregoing numbers assume the issuance of 280,812 shares to RSA and MIT, the conversion of the Series A Stock on a one-for-one basis (assuming an initial offering price of at least $5.25 per share), and the exercise of 100,000 warrants at $0.01 upon consummation of the Offering. See "Risk Factors - Conversion of Series A Stock." "Business - License Agreements," "Description of Capital Stock - Series A Convertible Preferred Stock," and "Certain Transactions." As a result of the contractual provisions described below and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market as follows: (i) except for the shares of Common Stock offered hereby and the shares of Common Stock subject to the over- allotment option, if exercised, no additional shares will be eligible for immediate sale on the date of this Prospectus, and (ii) 1,698,983 shares will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus in compliance with Rules 144, 144(k) or 701. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least two years (including the holding period of any prior owner except an "affiliate" of the Company as that term is defined under Rule 144), is entitled to sell in "brokers' transactions" or to market makers, within any three-month period commencing 90 days after the completion of this Offering, a number of shares that does not exceed the greater of: (i) 1% of the number of 86 shares of the Company's Common Stock then outstanding (approximately 174,406 shares immediately after the Offering); or (ii) the average weekly trading volume of the Company's Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are also generally subject to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Unless otherwise restricted, "144(k) shares" may therefore be sold immediately upon the completion of this Offering. The SEC is currently considering a revision to Rule 144 that would reduce the two year holding period in Rule 144(d) to one year and the three year holding period in Rule 144(k) to two years. If enacted, such modification will have a material effect on the timing of when certain shares of Common Stock become eligible for resale. Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701 promulgated under the Securities Act. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non- affiliates may sell such shares in reliance on Rule 144 without having to comply with the public information, volume limitation, or notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is required to wait until 90 days after the date of this Prospectus before selling such shares. Upon completion of this Offering, 501,358 of the 575,951 shares of Common Stock issued upon the exercise of options granted under the Non-Statutory Plan may be sold under Rule 701. The Company has agreed not to offer, issue, sell, agree to sell, grant any option for the sale of or otherwise dispose of directly or indirectly any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (except for options to be granted pursuant to the Company's 1996 Plan) for a period of 180 days after the date of this Prospectus without the prior written consent of the Representatives. This agreement may be released without notice to persons purchasing shares in the Offering and without notice to any market on which the Common Stock is traded. The Company's current shareholders, employees, officers, directors, and holders of options and warrants to purchase shares of Common Stock have also agreed with the Underwriters not to offer, sell agree to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of the Representatives, except for sales to the Underwriters pursuant to the Purchase Agreement. This agreement may be released without notice to persons purchasing shares in the 87 Offering and without notice to any market on which the Common Stock is traded. Individuals who participated in the Note Offering and subsequently exchanged their Notes for shares of Series A Stock ("Investors") were granted two demand registration rights for underwritten and shelf offerings of Common Stock by the Company. Investors, as a group, may exercise the demand registration rights at any time for a period of two years from the closing date of this Offering, unless the holding period under Rule 144 is shortened to a period of less than two years. Investors also were granted unlimited piggyback registration rights with respect to any offering of Common Stock or Series A Stock by the Company. Except for one Selling Shareholder, all holders of Series A Stock have waived their piggyback registration rights with respect to the Offering. In connection with the Company's issuances of senior subordinated notes to JMI, with detachable warrants to purchase 500,000 shares of Common Stock, the Company has granted certain registration rights to the holders of such warrants. See "Certain Transactions." At any time after six months following the consummation of the Offering, holders of such warrants may exercise one demand registration right to require the Company to register shares of the Company's Common Stock issuable upon exercise of the warrants in whole or in part. In addition, the Company has granted such warrant holders unlimited piggyback registration rights with respect to any offering of securities of the Company and unlimited registrations on Form S-3 with respect to at least 20% of the warrant shares then outstanding. The exercise of registration rights and the sale of the shares so registered could have an adverse effect on the trading price of the Common Stock. The Company intends to file a registration statement or registration statements on Form S-8 under the Securities Act to register all shares of Common Stock issuable under the 1995 Plan and the 1996 Plan. The registration statement or statements are expected to be filed shortly after the effective date of the Registration Statement of which this Prospectus is a part and will be effective upon filing. Shares issued upon the exercise of stock options after the effective date of the Form S- 8 registration statement or statements will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to affiliates and the lock-up agreements described above. Prior to this Offering, there has been no trading market for shares of Common Stock, and no prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of a substantial number of shares of Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. 88 UNDERWRITING The Company has entered into a Purchase Agreement (the "Purchase Agreement") with the underwriters listed in the table below (the "Underwriters"), for whom Piper Jaffray Inc. and Volpe, Welty & Company are acting as representatives (the "Representatives"). Subject to the terms and conditions set forth in the Purchase Agreement, the Company has agreed to sell to the Underwriters, and each of the Underwriters has severally agreed to purchase, the following number of shares of Common Stock set forth opposite each Underwriter's name in the table below: Name Number of Shares ---- ---------------- Piper Jaffray Inc. . . . . . . . . . Volpe, Welty & Company . . . . . . . ________ Total . . . . . . . . . . . 3,400,000 Subject to the terms and conditions of the Purchase Agreement, the Underwriters have agreed to purchase all of the Common Stock being sold pursuant to the Purchase Agreement, if any is purchased (excluding shares covered by the over-allotment option granted therein). In the event of a default by any Underwriter, the Purchase Agreement provides that in certain circumstances purchase commitments of the nondefaulting Underwriters may be increased or the Purchase Agreement may be terminated. The Representatives have advised the Company that the Underwriters propose to offer Common Stock directly to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not more than $ per share. Additionally, the Underwriters may allow, and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the public offering, the public offering price and other selling terms may be changed by the Underwriters. The Company and the Selling Shareholders have granted to the Underwriters an option, exercisable by the Representatives within 30 days after the date of the Purchase Agreement, to purchase up to an additional 510,000 shares of Common Stock at the same price per share to be paid by the Underwriters for the other shares offered hereby. If the Underwriters purchase any of such additional shares pursuant to this option, each Underwriter will be committed to purchase such additional shares in approximately the same proportion as set forth in the table above. The Underwriters may exercise the option only for the purpose of covering over-allotments, if any, made in connection with the distribution of the Common Stock offered hereby. The Representatives have informed the Company that neither they, nor any other member of the National Association of Securities Dealers, Inc. (the "NASD") participating in the distribution of this offering, will make sales of the Common Stock offered hereby to accounts over which they exercise discretionary authority without the prior specific written approval of the customer. 89 The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company's current shareholders, employees, officers, directors, and holders of options and warrants, who will beneficially own in the aggregate 14,040,638 shares of Common Stock after the Offering, have agreed that they will not sell, offer to sell, issue, distribute or otherwise dispose of any shares of Common Stock owned by them prior to the date of this Prospectus for a period of 180 days after the date of this Prospectus, without the prior written consent of the Representatives. See "Shares Eligible For Future Sale." The Company has agreed that it will not, without the Representatives' prior written consent, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180-day period following the date of this Prospectus, except that the Company may issue shares upon the exercise of options granted prior to the date hereof, and may grant additional options under the 1996 Plan. Prior to this Offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors to be considered in determining the initial public offering price will be prevailing market and economic conditions, the Company's revenue and earnings, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, an assessment of the Company's management and the consideration of the above factors in relation to the market valuations of companies in related businesses. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. See "Risk Factors-No Prior Public Market; Market Volatility." The Company and the Selling Shareholders have agreed to indemnify the Underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Kirkpatrick & Lockhart LLP. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Goodwin, Procter & Hoar LLP. EXPERTS The balance sheets as of December 31, 1994 and 1995 and March 31, 1996 and the statements of operations, shareholders' equity (deficit) and cash flows for the period from February 16, 1993 (date of inception) to December 31, 1993 and for each of the two years in the period ended December 31, 1995 and the three months ended March 31, 1996 included in 90 this Prospectus have been included herein in reliance upon the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. ADDITIONAL INFORMATION This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Further information with respect to the Company and the Common Stock offered hereby is included or incorporated by reference in the Registration Statement and exhibits. A copy of the Registration Statement may be inspected without charge and may be obtained at rates prescribed by the SEC at the Public Reference Section of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, the New York Regional Office located at 7 World Trade Center, New York, New York 10048, and the Chicago Regional Office located at 500 West Madison Street, Chicago, Illinois 60661-2511. Upon completion of the Offering, the Company will be subject to the information reporting requirements of the Exchange Act and, in accordance therewith, will file reports, proxy statements and other information with the SEC. 91 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants F-2 Balance sheets as of December 31, 1994, December 31, 1995 and March 31, 1996 F-3 Statements of Operations for the period from February 16, 1993 (date of inception) to December 31, 1993, the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996 F-5 Statements of Shareholders' Equity for the period from February 16, 1993 (date of inception) to December 31, 1993, the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996 F-6 Statements of Cash Flows for the period from February 16, 1993 (date of inception) to December 31, 1993, the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996 F-7 Notes to Financial Statements F-10 F-1 REPORT OF INDEPENDENT ACCOUNTANTS _________ To the Board of Directors of Virtual Open Network Environment Corporation We have audited the accompanying balance sheets of Virtual Open Network Environment Corporation (the Company) as of December 31, 1994 and 1995, and March 31, 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the period from February 16, 1993 (date of inception) to December 31, 1993, and for each of the two years in the period ended December 31, 1995, and the three month period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1994 and 1995, and March 31, 1996, and the results of its operations and its cash flows for the period from February 16, 1993 (date of inception) to December 31, 1993, and for each of the two years in the period ended December 31, 1995, and the three month period ended March 31, 1996, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Washington, D.C. June 7, 1996 F-2
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION BALANCE SHEETS December 31, ----------------------------- March 31, 1994 1995 1996 ---- ---- ---- ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 321,636 $1,328,385 $1,446,143 Accounts receivable, less allowances of $-0- and $23,620 as of December 31, 1994 and 1995, and $100,000 as of March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 840 242,392 857,849 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . - 257,630 191,629 Prepaid expenses and other current assets . . . . . . . . . . . - 13,955 65,003 -------------- ------------ ------------ Total current assets . . . . . . . . . . . . . . . . . 322,476 1,842,362 2,560,624 -------------- ------------ ------------ Property and equipment: Office and computer equipment . . . . . . . . . . . . . . . . . 83,760 219,044 330,734 Furniture and fixtures . . . . . . . . . . . . . . . . . . . . - 14,958 88,123 -------------- ------------ ------------ 83,760 234,002 418,857 Less accumulated depreciation . . . . . . . . . . . . . . . . . (11,330) (35,952) (47,953) -------------- ------------ ------------ 72,430 198,050 370,904 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,190 14,230 -------------- ------------ ------------ Total assets . . . . . . . . . . . . . . . . . . . . . $ 394,906 $ 2,050,602 $ 2,945,758 ============== ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses . . . . . . . . . . . . . $ 52,812 $ 189,384 $ 741,656 Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 4,273 38,161 78,398 Deferred income . . . . . . . . . . . . . . . . . . . . . . . . - 12,500 16,667 Capital lease obligations - current . . . . . . . . . . . . . . - 40,928 40,524 Notes payable - current . . . . . . . . . . . . . . . . . . . . - 1,255,556 2,508,333 Notes payable to related parties . . . . . . . . . . . . . . . 19,793 474,144 472,169 ------------- ------------ ------------- Total current liabilities . . . . . . . . . . . . . . . 76,878 2,010,673 3,857,747 ------------- ------------ ------------- Notes payable - noncurrent . . . . . . . . . . . . . . . . . . . - 44,444 41,667 Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . - 52,959 78,884 Capital lease obligations - noncurrent . . . . . . . . . . . . . - 82,464 102,058 ------------- ------------ ------------- Total liabilities . . . . . . . . . . . . . . . . . . . 76,878 2,190,540 4,080,356 ------------- ------------ ------------- Commitments and contingencies F-3 Series A Convertible preferred stock, $0.001 par value; 20,000,000 shares authorized, none issued and outstanding . . . - - - Stockholders' equity (deficit) Common stock, $0.001 par value; 50,000,000 shares authorized, 11,764,710 and 12,456,641 and 12,456,641 shares issued and outstanding, as of December 31, 1994 and 1995 and March 31, 1996, respectively . . . . . . . . . . . . . . . . . . . . . 11,765 12,457 12,457 Additional paid-in capital . . . . . . . . . . . . . . . . . . 748,235 1,321,888 1,321,888 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (441,972) (1,474,283) (2,468,943) ------------ ------------ ------------ Total stockholders' equity (deficit) . . . . . . . . . 318,028 (139,938) (1,134,598) ------------ ------------ ------------ Total liabilities and stockholders' equity (deficit) . $ 394,906 $ 2,050,602 $ 2,945,758 ============ ============ ============ The accompanying notes are an integral part of these financial statements.
F-4
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION STATEMENTS OF OPERATIONS For the Period February 16, 1993 (date of Year Ended Three Months Ended inception) to December 31, March 31, December 31, --------------------- ------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- (Unaudited) Revenues: Product revenue . . . . . . . . . $ - $ - $1,101,418 $ 150,257 $ 981,642 Consulting and services . . . . . 76,183 59,716 2,083 - 40,169 ------------- ------------ --------- ---------- ---------- Total revenues. . . . . . 76,183 59,716 1,103,501 150,257 1,021,811 ------------- ------------ --------- ---------- ---------- Cost of revenues: Cost of product revenue . . . . . - - 376,359 52,590 310,693 Cost of consulting and services revenue. . . . . . . . 38,090 35,114 800 - 11,305 ------------- ---------- ---------- --------- ---------- Gross profit. . . . . . . . . . . . 38,093 24,602 726,342 97,667 699,813 Operating expenses: Sales and marketing . . . . . . . 3,652 21,212 103,917 33,980 709,111 General and administrative. . . . 68,212 299,392 1,314,661 154,282 592,967 Research and development. . . . . - 107,926 277,973 41,696 310,952 ------------- ----------- ----------- ---------- ---------- Total operating expenses. . . 71,864 428,530 1,696,551 229,958 1,613,030 ------------- ----------- ----------- ---------- ---------- Operating loss. . . . . . . . . . . (33,771) (403,928) (970,209) (132,291) (913,217) Other (expense) income: Interest expense. . . . . . . . . (1,913) (2,360) (66,615) - (104,934) Interest income . . . . . . . . . - - 4,513 - 23,491 ------------- ----------- ----------- ---------- ---------- Total other expenses. . . (1,913) (2,360) (62,102) - (81,443) ------------- ----------- ----------- ---------- ---------- Net loss. . . . . . . . . . . . . . $ (35,684) $ (406,288) $(1,032,311) $ (132,291) $ (994,660) ============= =========== =========== ========== ========== Net loss per common share . . . . . $ (.00) $ (.04) $ (.08) $ (.01) $ (.08) ============= =========== =========== ========== ========== Weighted average shares outstanding. . . . . . . . . . . . 7,317,100 10,061,825 12,447,600 11,853,392 12,855,714 ============= ========== ========== ========== ========== The accompanying notes are an integral part of these financial statements.
F-5
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Common Stock Additional ------------------------ Paid-In Accumulated Shares Amount Capital Deficit Total ------ ------ ---------- ------------ ----- Initial issuance of common stock. . . . . . . . . . . . . 8,500,000 $ 8,500 $ 1,500 $ - $ 10,000 Net loss . . . . . . . . . . . . - - - (35,684) (35,684) -------------- ----------- -------------- -------------- ------------ Balance, December 31, 1993 . . . 8,500,000 8,500 1,500 (35,684) (25,684) Sale of common stock . . . . . . 3,264,710 3,265 746,735 - 750,000 Contribution of common stock from related party . . . . . . (500,000) (500) 500 - - Issuance of common stock as payment for services . . . . . 500,000 500 (500) - - Net loss . . . . . . . . . . . . - - - (406,288) (406,288) -------------- ----------- -------------- ------------- ----------- Balance, December 31, 1994 . . . 11,764,710 11,765 748,235 (441,972) 318,028 Sale of common stock . . . . . . 161,931 162 399,838 - 400,000 Contribution of common stock from related party . . . . . . (199,000) (199) 199 - - Issuance of common stock in accordance with anti-dilution agreement. . . . . . . . . . . 84,000 84 (84) - - Issuance of common stock as payment on accrued interest. . 115,000 115 32,430 - 32,545 Issuance of common stock . . . . 530,000 530 141,270 - 141,800 Net loss . . . . . . . . . . . . - - - (1,032,311) (1,032,311) --------------- ----------- -------------- ------------ ------------ Balance, December 31, 1995 . . . 12,456,641 12,457 1,321,888 (1,474,283) (139,938) Net loss . . . . . . . . . . . . - - - (994,660) (994,660) --------------- ----------- -------------- ------------ ------------ Balance, March 31, 1996. . . . . 12,456,641 $ 12,457 $1,321,888 $(2,468,943) $(1,134,598) =========== =========== ========== =========== =========== The accompanying notes are an integral part of these financial statements.
F-6
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION STATEMENTS OF CASH FLOWS For the Period February 16, 1993 (date of Year Ended Three Months Ended inception) to December 31, March 31, December 31, --------------------- ----------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Cash flows from operating activities: (Unaudited) Net loss . . . . . . . . . . . . . . . . . $(35,684) $(406,288) $(1,032,311) $(132,291) $(994,660) Adjustments to reconcile net loss to net cash from operating activities: Provision for doubtful accounts. . . . . . - - 23,620 - 76,380 Provision for obsolete inventory . . . . . - - 50,000 - - Depreciation and amortization. . . . . . . 1,023 10,307 24,623 18,340 12,001 Consulting expense satisfied by issuance of common stock . . . . . . . . . . . . . . - 500 - - - Compensation expense satisfied by issuance of common stock. . . . . . . . . . . . . - - 141,800 - - Accrued interest to be satisfied with common stock. . . . . . . . . . . . - - 32,545 - 63,624 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . - (840) (265,172) (90,202) (691,837) Loan receivable. . . . . . . . . . . . . . - - - (2,200) - Inventory. . . . . . . . . . . . . . . . . - - (307,630) (25,596) 66,001 Prepaid expenses and other . . . . . . . . - - (24,145) (2,958) (55,088) Accounts payable and accrued expenses. . . 14,161 42,924 235,919 (24,569) 557,002 ------- -------- ---------- -------- --------- Net cash used in operating activities . (20,500) (353,397) (1,120,751) (259,476) (966,577) ------- -------- ---------- -------- --------- Cash flows from investing activities: Purchase of property and equipment . . . . (20,460) (13,300) (19,840) - (155,437) ------- -------- ---------- --------- ---------- Net cash used in investing activities. . . (20,460) (13,300) (19,840) - (155,437) ------- -------- ---------- --------- ---------- Cash flows from financing activities: Issuance of common stock . . . . . . . . . 10,000 700,000 400,000 - - Issuance of notes payable. . . . . . . . . 39,705 - 1,300,000 - 1,250,000 Issuance of notes payable to related parties . . . . . . . . . . . . . . . . - - 454,351 26,534 - Principal payments on capitalized lease obligations . . . . . . . . . . . - - (7,011) - (10,228) Repayment of notes payable to related parties . . . . . . . . . . . . - (20,412) - - - --------- ---------- ----------- ---------- ------------- Net cash provided by financing activities. . . . . . . . . 49,705 679,588 2,147,340 26,534 1,239,772 ------- ---------- ---------- --------- --------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . 8,745 312,891 1,006,749 (232,942) 117,758 F-7 Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . - 8,745 321,636 321,636 1,328,385 ---------- ----------- ----------- --------- ---------- Cash and cash equivalents at end of the period . . . . . . . . . . . . . $ 8,745 $ 321,636 $1,328,385 $ 88,694 $1,446,143 ======== ========== ========== ========= ========== F-8 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION STATEMENTS OF CASH FLOWS (continued) For the Period February 16, 1993 (date of Year Ended Three Months Ended inception) to December 31, March 31, December 31, ------------------- ------------------ 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Noncash investing and financing activities: Property and equipment acquired through capital leases. . . . . . . . . . . . . . . $ - $ - $ 130,403 $ - $ 29,418 ========== ========== ========== =========== =========== Property and equipment acquired through the issuance of common stock. . . . . . . . $ - $ 50,000 $ - $ - $ - ========== ========== ========== =========== =========== Issuance of common stock as compensation . . . . . . . . . . . . . . $ - $ - $ 141,800 $ - $ - ========== ========== ========== =========== =========== Accrued interest to be satisfied with common stock . . . . . . . . . . . . . $ - $ - $ 32,545 $ - $ 63,624 ========== ========== ========== =========== =========== Supplemental cash flow disclosure: Cash paid for interest $ - $ - $ 182 $ - $ 1,074 ========== ========== ========== =========== ===========
F-9 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 1. Nature of Business: ------------------ V-ONE develops, markets, and licenses a comprehensive suite of network security products that enable businesses to conduct secured electronic transactions and information exchange using private enterprise networks and public networks such as the Internet. The Company was originally incorporated in the State of Maryland on February 16, 1993. The Board of Directors authorized and the stockholders approved a ten-for-one stock split of the Company's common stock as of November 11, 1995. Effective February 7, 1996, the Company merged with a pre-existing corporation formed in Delaware. The Delaware corporation is the surviving corporation. In connection with the reincorporation, the Company increased the number of authorized shares of common stock from 20 million to 50 million and authorized 20 million shares of preferred stock. All references to common and preferred stock have been restated to give effect to this transaction. 2. Significant Accounting Policies: ------------------------------- Interim Financial Statements and Reporting Period: ------------------------------------------------- The financial statements for the three months ended March 31, 1995 and related footnote information are unaudited and have been prepared on a basis substantially consistent with the audited financial statements, and in the opinion of management, include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the results of the interim period. The results of the three months ended March 31, 1996, are not necessarily indicative of the results for the entire year. Revenue Recognition: ------------------- The Company's revenue recognition policy is in conformance with the American Institute of Certified Public Accountants' Statement of Position, 91-1 "Software Revenue Recognition." Revenue is generally recognized from the license of software upon shipment, net of allowances, provided that no significant vendor obligations remain. Allowances for estimated future returns, credits, and doubtful accounts are netted against accounts receivable. Service and training revenue is recognized as the services are performed. F-10 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 2. Significant Accounting Policies: ------------------------------- Revenue Recognition, continued: ------------------- Maintenance and support revenue is recognized ratably over the contract term, typically one year. Payments received in advance of revenue recognition are included in deferred income. In some instances, the Company recognizes revenues from the sale of systems using the percentage of completion method as the work is performed, measured primarily by the ratio of labor hours incurred to total estimated labor hours for each specific contract. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information becomes known. Research and Development and Software Development Costs: ------------------------------------------------------- Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed" requires the capitalization of certain software development costs once technological feasibility is established, which the Company generally defines as completion of a working model. Capitalization ceases when the products are available for general release to customers, at which time amortization of the capitalized costs begins on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Cash and Cash Equivalents: ------------------------- The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include time deposits with commercial banks used for temporary cash management purposes. Inventories: ----------- Inventories are valued at the lower of cost or market and consist primarily of computer equipment for sale on orders received from customers, items held for stock, and training kits. Cost is determined based on specific identification. F-11 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 2. Significant Accounting Policies: -------------------------------- Property and Equipment: ---------------------- Computer and office equipment, furniture and fixtures are recorded at cost. Depreciation and amortization of furniture and equipment is calculated using the straight-line method over a useful life of three to seven years. Repairs and maintenance costs are charged to expense as incurred. Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss on such disposition is included in the determination of net income. Income Taxes: ------------ Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured by applying presently enacted statutory tax rates, that are applicable to the future years in which deferred income tax assets or liabilities are expected to be settled or realized, to the differences between the financial statement carrying amount and the tax bases of existing assets and liabilities. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in net income in the period which the tax rate is enacted. The Company provides a valuation allowance against net deferred income tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred income tax assets may not be realized. Computation of Net Loss Per Common Share: ---------------------------------------- Common equivalent shares are included in the per share calculations where the effect of their inclusion would be dilutive. Common equivalent shares consist of Series A Convertible Preferred Stock and the assumed exercise of outstanding stock options. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 83, the common equivalent shares issued by the Company during the twelve-months preceding the initial filing date of the registration statement relating to the Company's initial public F-12 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 2. Significant Accounting Policies: ------------------------------- Computation of Net Loss Per Common Share, continued: ---------------------------------------- offering (July 15, 1996), using the treasury stock method and the assumed public offering price (of $6.00 per share), have been included in the calculation of net loss per common share for all periods presented. Fully diluted net loss per common share is the same as primary net loss per common share. Risks, Uncertainties and Concentrations: --------------------------------------- The Company invests its cash primarily in money market funds with an international commercial bank. The Company had a balance in these funds of $0, $1,175,279 and $1,390,341 as of December 31, 1994 and 1995 and March 31, 1996, respectively. The Company has not experienced any losses to date on its invested cash. The Company's cash balances exceed Federal insured amounts. 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could impact future results of operations and cash flows. The Company sells its product to a wide variety of customers in a variety of industries. The Company performs ongoing credit evaluations of its customers but does not require collateral or other security to support customer accounts receivable. In management's opinion, the Company has provided sufficient provisions to prevent a significant impact of credit losses to the financial statements. In 1993 and 1994, two customers accounted for over 70% and 65% of total revenue respectively. In 1995, three customers accounted for over 39% of total revenue. Twenty percent of revenues generated in the three month period ended March 31, 1996 related to one customer. F-13 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 2. Significant Accounting Policies: ------------------------------- Risks, Uncertainties and Concentrations, continued: --------------------------------------- One customer accounted for 36% of total accounts receivable as of December 31, 1995. Two customers accounted for 32% of total accounts receivable as of March 31, 1996. Fair value of financial instruments: ----------------------------------- The carrying amounts of the Company's assets and liabilities approximate fair value due to either the short-term maturity of those financial instruments or their negotiated market terms. Stock-based Compensation: ------------------------ In October 1995, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 123 ("SFAS 123") Accounting for Stock-Based Compensation, which is effective for the Company's financial statements for fiscal years beginning after December 15, 1995. SFAS 123 allows companies to either account for stock-based compensation under the new provisions of SFAS 123 or under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS 123 had been adopted. The Company has continued to account for its stock based compensation in accordance with the provisions of APB 25. Reclassifications: ----------------- Certain reclassifications have been made to the prior years' financial statements to conform to the classifications used in the current period. 3. Inventory: --------- The Company has provided an allowance for potentially non-salable inventory in the amounts of $0, $50,000 and $50,000 as of December 31, 1994 and 1995, and March 31, 1996, respectively. F-14 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 4. Notes Payable: ------------- In both December 1995 and January 1996, the Company issued $1.25 million in promissory notes to individual investors bearing interest at 7%. As of March 31, 1996, $2.5 million was outstanding related to the promissory notes. The principal and interest are due and payable on June 30, 1996. In the event the Company enters into a private or public offering, or the notes become due and payable, the note holders may convert the principal and interest into the shares of the Company's capital stock. In the event the Company conducts a private placement, the conversion price is equal to the price per share being offered in the placement. In the event of an initial public offering, or on the maturity date of the notes, the price per common share is based on current fair value. In October 1995, the Company entered into a $50,000 loan agreement with an international financial institution. The loan requires monthly payments of interest at a rate equal to the institutions prime lending rate for the first twelve months, thereafter the interest rate increases to 1.5% over prime (9.75% as of March 31, 1996). The Company is required to repay the loan through 36 monthly payments commencing October 1996. The loan is collateralized by the assets of the Company and is subordinate to notes payable to a shareholder (See Note 5). Maturities of notes payable as of March 31, 1996 are as follows: 1996 $2,508,333 1997 16,666 1998 16,667 1999 8,334 ---------- $2,550,000 ========== F-15 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 5. Notes Payable to Related Parties: -------------------------------- On June 1, 1995, the Company issued a promissory note for $330,000 to a foreign shareholder. In lieu of cash payments for interest the Company agreed to issue 345,000 shares of the Company's common stock to the note holder. As of March 31, 1996, the Company had issued 115,000 shares under this agreement, recognizing interest expense of $63,624 and $32,545 during 1996 and 1995, respectively. The Company's president, who is the majority shareholder, has advanced the Company operating funds three separate promissory notes which are updated on an annual basis. The notes bear interest at 8% and are due on demand. Total amounts outstanding under the notes were $19,293, $143,644 and $142,169 as of December 31, 1994 and 1995, and March 31, 1996, respectively. 6. Income taxes: ------------ The tax effect of temporary differences that give rise to significant portions of deferred income taxes are as follows as of:
December 31, December 31, March 31, 1994 1995 1996 ---- ---- ---- Deferred income tax assets: Deferred income. . . . . . . . . . . . . . . . $ - $ 4,828 $ 6,437 Inventory allowance. . . . . . . . . . . . . . - 19,310 19,310 Allowance for bad debts. . . . . . . . . . . . - 9,122 38,620 Nondeductible accruals . . . . . . . . . . . . - - 65,654 Deferred rent. . . . . . . . . . . . . . . . . - 20,453 30,465 Net operating loss carryforward. . . . . . . . 165,804 452,580 689,525 ----------- ----------- ----------- Total deferred income tax asset. . . . . . . . 165,804 506,293 850,011 Less valuation allowance . . . . . . . . . . . (165,804) (506,293) (850,011) ----------- ----------- ----------- Deferred income taxes, net . . . . . . . . . . $ - $ - $ - =========== =========== ===========
F-16 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 6. Income taxes, continued: ------------ In 1995 and 1996, respectively, the net change in the valuation allowance for deferred income tax assets was an increase of approximately $344,000 and $300,000 due principally to increases in the net operating loss. A valuation allowance has been recognized due to the uncertainty of realizing the benefit of net operating carryforwards. As of March 31, 1996, the Company had net operating loss carryforwards of approximately $1,785,000, for Federal and state income tax purposes available to offset future taxable income. The net operating loss carryforwards begin expiring in 2008. 7. Stockholders' Equity: -------------------- Stock Split: ----------- On November 11, 1995, the Board of Directors authorized and the stockholders approved a ten-for-one stock split of the outstanding shares of the Company's common stock. All references to common stock, options, and per share data have been restated to give effect to the stock split. 1995 Non-Statutory Stock Option Plan: ------------------------------------ During 1995, the Company adopted the 1995 Non-Statutory Stock Option Plan (SOP) to attract and retain key employees. The SOP is administered by a committee, appointed by the Board of Directors, which determines the number of options granted to a qualified employee, the vesting period, and the exercise price provided it is not below market value on the date of the grant. In most cases the options vest over a three year period and terminate in ten years from the date of grant. The SOP will terminate during May 2005 unless terminated earlier in accordance with the provisions of the SOP. F-17 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 7. Stockholders' Equity: -------------------- 1995 Non-Statutory Stock Option Plan, continued: ------------------------------------ Option activity for the period from the plan's inception to March 31, 1996 was as follows: Shares Price ------ ----- Balance as of December 31, 1994. . - - Granted. . . . . . . . . . . . . 525,444 $.283 - 1.67 Exercised. . . . . . . . . . . . - - Canceled . . . . . . . . . . . . - - Balance as of December 31, 1995. . 525,444 $.283 - 1.67 Granted. . . . . . . . . . . . . 3,000 $3.00 Exercised. . . . . . . . . . . . - - Canceled . . . . . . . . . . . . - - ----------- ----------------- Balance as of March 31, 1996 . . . 528,444 $.283 - 3.00 =========== ================= F-18 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 7. Stockholders' Equity: -------------------- 1995 Non-Statutory Stock Option Plan, continued: ------------------------------------ As of March 31, 1996, the Compensation committee was authorized by the Board of Directors to grant options for a total of 528,444 shares of common stock under the SOP. As of December 31, 1995 and March 31, 1996, respectively, 66,667 and 209,484 of the options were vested and exercisable. As of March 31, 1996, the Company had no shares of common stock available for grant under the plan. The Company accounts for the fair value of its grants under this plan in accordance with APB Opinion 25. Accordingly, no compensation cost has been recognized for its incentive stock option plan. Had compensation cost been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1995 ---- ---- Net loss As reported $ 994,660 $1,032,311 Pro forma $ 995,950 $1,100,618 Loss per common share As reported $ 0.08 $ 0.08 Pro forma $ 0.08 $ 0.08 The fair value of each option is estimated on the date of grant using a type of Black-Scholes option-pricing model with the following weighted-average assumptions used for grants for the three month period ended March 31, 1996: dividend yield of 0%, expected volatility of 0%, risk-free interest rate of 5.35% and expected lives of 3 years. F-19 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 7. Stockholders' Equity: -------------------- 1995 Non-Statutory Stock Option Plan, continued: ------------------------------------ A summary of the status of the Company's stock option plan is presented below:
Three Months Ended Year Ended March 31, 1996 December 31, 1995 -------------- ----------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price ------ --------- ------ --------- Options outstanding beginning of period. . . . . . . . . 525,444 $0.82 - - Options exercised . . . . . . . . . . . - - - - Options granted . . . . . . . . . . . . 3,000 $3.00 525,444 $0.82 Options outstanding end of period. . . . . . . . . . . . 528,444 $0.83 525,444 $0.82 Options exercisable at end of period . . . . . . . . . . 206,151 $0.75 66,667 $0.28 Weighted-average fair value of options granted during the period. . . . . . - $0.43 - $0.13
As of March 31, 1996, the weighted average remaining contractual life of the options that range from $ .283 to $3.00 is 9.3 years. F-20 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 7. Stockholders' Equity: -------------------- 1995 Non-Statutory Stock Option Plan, continued: ------------------------------------ As of March 31, 1996 and December 31, 1995, the proforma tax effects under SFAS 109 of this standard would include an increase to both the deferred tax asset and the valuation allowance of $500 and $26,400, respectively, and no impact to the statement of operations. Reserved for Issuance: --------------------- The Board of Directors has authorized 280,812 shares of the Company's common stock to be reserved for issuance in accordance with a license agreement whereby the licensor may waive its future rights to any license fees in exchange for 2% of the Company's outstanding common stock until the date of an initial public offering (See Note 8). Series A Convertible Preferred Stock: ------------------------------------ The holders of Series A Convertible Preferred Stock ("Preferred Stock") do not have any preemptive rights to subscribe for any securities of the Company. Preferred Stockholders are entitled to vote on all matters submitted to a vote of the stockholders of the Company. The holders of Preferred Stock also are entitled to vote, as a class, on matters affecting the value of the Preferred Stock. All action requiring the approval of holders of shares of Preferred Stock voting as a class must be authorized by a majority vote of the holders thereof. The Board of Directors may declare dividends on the Preferred Stock payable at any time in cash, in property, or in shares of Preferred Stock. Preferred Stock holders are entitled to share ratably in dividends with the holders of any other series of the Company's preferred stock now existing or hereafter created, but receive no preference in dividends declared. The Company will not pay dividends on Common Stock as long as any shares of Preferred Stock are issued and outstanding. In the event of any voluntary or involuntary liquidation, sale, or winding up of the Company, the holders of Preferred Stock are entitled to receive, in preference to holders of Common Stock, an amount equal to the purchase price per share of the Preferred Stock plus any accrued but unpaid dividends. Any remaining proceeds shall be allocated between Common and Preferred Shareholders on a pro rata basis, treating the shares of Preferred Stock on an as if converted basis. Shares of Preferred Stock may at any time be converted into shares of Common Stock, provided that such shares of Preferred Stock have not previously been converted by a mandatory conversion which shall take place in the event of an initial public offering in which at least $15 million is raised and the offering price per share is at least 1.75 times the initial conversion price per share of the Preferred Stock of $3.00 per share. F-21 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 7. Stockholders' Equity: -------------------- Series A Convertible Preferred Stock, continued: ------------------------------------ As of December 31, 1994 and 1995, and March 31, 1996, there were no shares of the Preferred Stock outstanding. 8. Commitments: ----------- Leases ------ The Company is obligated under various operating and capital lease agreements, primarily for office space and equipment through 2001. Future minimum lease payments under these non-cancelable operating and capital leases as of March 31, 1996 are as follows: Operating Capital --------- ------- 1996. . . . . . . . . . . . $116,794 $ 51,551 1997. . . . . . . . . . . . 187,224 56,092 1998. . . . . . . . . . . . 191,238 28,415 1999. . . . . . . . . . . . 197,928 20,679 2000. . . . . . . . . . . . 197,928 17,773 Thereafter. . . . . . . . . 61,991 1,915 -------- -------- Less: Portion representing interest . . - (33,843) -------- -------- $953,103 $142,582 ======== ======== F-22 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 8. Commitments: ----------- Leases: ------ Rental expense was $0, $12,366, $92,785 and $42,864, for the period February 16, 1993 to December 31, 1993 and for the years ended December 31, 1994 and 1995, and for the three month period ended March 31, 1996, respectively. The cost and accumulated amortization of assets under capital leases were as follows as of: December 31, March 31, 1995 1996 ---- ---- Furniture. . . . . . . . . . . . . $ 8,752 $ 8,752 Computers and equipment. . . . . . 114,640 144,058 -------- -------- 123,392 152,810 Less: Accumulated amortization. . (3,192) (10,228) --------- -------- $120,200 $142,582 ======== ======== License Agreements: ------------------ In 1994 the Company entered into two licensing agreements whereby the Company obtained the right to modify and sell certain technology used in the Company's product line. One of the agreements requires the Company to pay fees based on product and subscription sales for any product using the licensed technology. The other agreement provides for payment of fees based upon gross revenues of the Company. This latter agreement also gives the licensor the right to forfeit future licensing fees in exchange for 2% of the Company's outstanding voting stock (See Note 7). The Company incurred expenses totaling $0, $110,860 and $67,690 relating to these agreements in 1994, 1995 and 1996, respectively. Licensing rights: ---------------- The Company has incorporated in its services, the data encryption and authentication technology developed by another company (the Licensor) under the licensing agreement previously described. The Company has become aware of a third party dispute over the rights to the Licensor's technology. The Company has received no notification F-23 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 8. Commitments: ----------- Licensing rights, continued: ---------------- with respect to this matter and management believes that the Company will not experience detrimental effects from the outcome of this dispute. The financial statements do not contain any adjustments that may result from the resolution of this matter. 9. Financing: --------- The Company has incurred net losses of $35,684, $406,288, $1,032,311 and $994,660, for the period February 16, 1993 to December 31, 1993, for the years ended December 31, 1994 and 1995, and for the three month period ended March 31, 1996. Management has historically been successful in obtaining outside financing to meet obligations and funding working capital requirements as they come due. Most recently, the Company closed on several transactions that provided additional cash flow. These are summarized below. During April 1996, the Company converted $2,500,000 in promissory notes to Preferred Stock. The Company also raised an additional $1,000,000 by issuing 333,333 shares of Preferred Stock at $3.00 per share (See Note 10). During June 1996, the Company borrowed $1.5 million and issued unsecured, 8% interest-bearing, senior subordinated notes due June 18, 2000, with 500,000 detachable warrants to purchase Common Stock. During June 1996, the Company signed a software license contract with a customer for $2 million, with payment terms of $500,000 to be received by June 30, 1996 and the remaining $1.5 million to be paid over the remaining two year contract period. During April 1996, the Board of Directors authorized the President to proceed with plans for the initial public offering of the Company's common stock. In the event the Company does not successfully complete its initial public offering, the Company intends to pursue other financing alternatives that may be available to the Company and, if required, reduce its operating expenses. F-24 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (Continued) (Information for the three months ended March 31, 1995 is unaudited) 10. Subsequent Events: --------------- On April 15, 1996, the Company repaid the full amount of the promissory notes outstanding, including accrued interest, to seven of the investors who participated in the December 1995 and January 1996 note offering, by issuing to those investors shares of the Company's Preferred Stock, at a price of $3.00 per share. The Company paid cash to each of these investors in an amount equal to the value of any fractional shares of Preferred Stock that would otherwise have been transferred to such investors. In addition, the Company permitted the seven investors to purchase an additional 333,333 shares of Preferred Stock at a price of $3.00 per share. Of the remaining seven investors, two transferred their notes to one of the other remaining investors. The remaining five investors exchanged their notes, including the transferred notes, for shares of the Company's Preferred Stock on May 24, 1996, also at a price of $3.00 per share. A total of 1,186,518 shares of Preferred Stock were issued as of May 24, 1996. Shares of Preferred Stock may at any time be converted into shares of Common Stock, on a one-for-one basis, provided that such shares of Preferred Stock have not previously been converted by automatic conversion. A mandatory conversion will occur in the event of an initial public offering in which at least $15 million is raised and the offering price per share is at least 1.75 times the initial conversion price of $3.00 per share of Preferred Stock ($5.25). The Preferred Stock will not, however, convert automatically if the initial offering price is less than $5.25 per share. The conversion ratio will be adjusted so that shares of Preferred Stock are convertible into shares of Common Stock on greater than one-for-one basis as follows. If the Company effects an initial public offering prior to March 31, 1997 at a price less than $5.25 per share, the conversion ratio will be adjusted by multiplying the subscription price of $3.00 per share by 1.75 ("Conversion Factor") and dividing such product by the midpoint of the offering price range contained in the final pre-effective amendment to the registration statement relating to such initial public offering. If the Company's initial public offering occurs (i) during the period from April 1, 1997 to March 31, 1998 at a price less than $6.00 per share or (ii) after March 31, 1998 at a price less than $9.00 per share, the conversion ratio is adjusted as set forth in the preceding sentence except the Conversion Factor becomes 2.00 in the event clause (i) applies or 3.00 in the event clause (ii) applies. F-25 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION NOTES TO FINANCIAL STATEMENTS (Information for the three months ended March 31, 1995 is unaudited) 10. Subsequent Events, continued: ----------------- On June 12, 1996, in consideration for the foreign shareholder's agreement not to demand payment of the $330,000 note until May 31, 1997, the Board of Directors authorized the Company to offer the foreign shareholder the option to receive common stock at $3.00 per share, in lieu of cash in payment of the note. The Board reserved and authorized the issuance of 110,000 shares of common stock for this purpose. On May 17, 1996, the foreign shareholder executed an agreement extending the term of the note to May 31, 1997. During April 1996, the Company adopted the 1996 Non-Statutory Stock Option Plan to attract and retain executive employees. The plan is administered by a committee, appointed by the Board of Directors. The option price will be the fair market value of the stock on the date of grant. The options are not transferable, subject to various restrictions outlined in the agreement and must be exercised by December 31, 1996. As of April 2, 1996, 575,951 options were granted under the plan. No additional options are available for grant under the plan. The options were exercised on April 22, 1996 at $.50 a share. During June 1996, the Company adopted the 1996 Incentive Stock Option Plan (the 1996 Plan), under which both options and restricted share awards may be made to the Company's key employees. Both incentive stock options and options that are not qualified under Section 422 of the Internal Revenue Code of 1986, as amended ("Non- Qualified Options") are available under this plan. The options are not transferable and are subject to various restrictions outlined in the agreement. The 1996 Plan is administered by the Compensation Committee of the Board of Directors, which determines the number of options granted to a qualified employee, the vesting period, and the exercise price provided that it is not below market value. The 1996 Plan will terminate during June 2006 unless terminated earlier by the Board of Directors. During June 1996, the Compensation Committee was authorized by the Board of Directors to grant options for a total of 3,500,000 shares of common stock under the 1996 Plan. To date, the committee has granted a total of 1,103,868 Non-Qualified Options and 285,992 incentive stock options, of which 466,674 and 85,792, respectively, were vested and exercisable. Subsequent to the initial grants, the Company had 2,110,140 shares of common stock available for grant under the 1996 Plan. The 1996 Plan also provides for the automatic grant of a non- qualified option to purchase 10,000 shares of common stock to each non-employee director. All options have a five year term and are exercisable on the date of grant. As of June 1996, none of the Company's directors were eligible to participate in the 1996 Plan. F-26
No dealer, salesperson or any other person has been authorized to give any information or to make any representations in connection with the Offering other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, any Selling Shareholder or the Underwriters. This Prospectus does not 3,400,000 SHARES constitute an offer to sell, or a solicitation of an offer to purchase, any securities other than the securities to which it relates or an offer to sell or the solicitation of Virtual Open Network Environment Corporation an offer to buy the Common Stock in any circumstances in which such offer or solicitation is unlawful. Neither the COMMON STOCK delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the facts set forth in the Prospectus or in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof. ---------------------------------- _____________________ TABLE OF CONTENTS PROSPECTUS Page _____________________ ---- Prospectus Summary . . . . . . . . . . . . . . . . . . . 2 Risk Factors . . . . . . . . . . . . . . . . . . . . . . 6 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . 18 Dividend Policy . . . . . . . . . . . . . . . . . . . . . 18 Capitalization . . . . . . . . . . . . . . . . . . . . . 18 Dilution . . . . . . . . . . . . . . . . . . . . . . . . 19 Selected Financial Data . . . . . . . . . . . . . . . . . 21 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 22 Business . . . . . . . . . . . . . . . . . . . . . . . . 30 Piper Jaffray Inc. Management . . . . . . . . . . . . . . . . . . . . . . . 46 Certain Transactions. . . . . . . . . . . . . . . . . . . 58 Volpe, Welty & Company Principal Shareholders . . . . . . . . . . . . . . . . . 59 Selling Shareholders . . . . . . . . . . . . . . . . . . 62 Description of Capital Stock . . . . . . . . . . . . . . 63 Shares Eligible for Future Sale . . . . . . . . . . . . . 66 Underwriting . . . . . . . . . . . . . . . . . . . . . . 68 Legal Matters . . . . . . . . . . . . . . . . . . . . . . 69 Experts . . . . . . . . . . . . . . . . . . . . . . . . . 70 Additional Information . . . . . . . . . . . . . . . . . 70 Index to Financial Statements . . . . . . . . . . . . . .F-1 Until , 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligations of the dealers to deliver a Prospectus when acting as Underwriters and with respect to , 1996 their unsold allotments or subscriptions. ======================================================================================================================== /TABLE PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth estimated expenses expected to be incurred by the Company in connection with the issuance and distribution of the securities being registered. Securities and Exchange Commission Registration Fee........ $8,993.00 NASD Filing Fee.................... $3,108.00 NASDAQ Listing Fee................. * Blue Sky Fees and Expenses......... * Printing and Engraving Expenses.... * Accounting Fees and Expenses....... * Legal Fees and Expenses............ * Transfer Agent Fees and Expenses... * Miscellaneous...................... ------- Total..................... $ * ____________________ * To be provided by amendment. Item 14. Indemnification of Directors and Officers Article Ninth of the Company's Amended and Restated Certificate of Incorporation provides that the Company shall indemnify, to the fullest extent now or hereafter permitted by law, each director, officer employee or agent (including each former director, officer, employee agent) of the Company who was or is made party to or a witness in or is threatened to be made a party to or a witness in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was an authorized representative of the Company, against all expenses (including attorneys' fees and disbursements), judgments, fines (including excise taxes and penalties) and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. Article VI, Section 6.1 of the Company's Amended Bylaws provides that each person who was or is made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a Director, officer, agent or employee of the Company, shall be indemnified and held harmless by the Company to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended, against any expenses (including attorneys fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection therewith. Notwithstanding the foregoing, no Director shall be indemnified nor held harmless in violation II-1 of the provisions of the Company's Amended and Restated Certificate of Incorporation; and no Director, officer, agent or employee shall be indemnified nor held harmless by the Company unless: (i) In the case of conduct in his/her official capacity with the Company, he/she acted in good faith and in a manner he/she reasonably believed to be in the best interests of the Company; (ii) In all other cases, his/her conduct was at least not opposed to the best interests of the Company nor in violation of the Amended and Restated Certificate of Incorporation, Bylaws or any agreement entered into by the Company; and (iii) In the case of any criminal proceeding, he/she had no reasonable cause to believe that his/her conduct was unlawful. Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expenses incurred in connection with an action or proceeding to which he is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances. Pursuant to the provisions of the Common Stock Purchase Agreement (the "Underwriting Agreement"), the underwriters are obligated, under certain circumstances to indemnify directors and officers for the Company against certain liability, including liabilities under the Securities Act. Reference is made to the form of Underwriting Agreement filed as Exhibit 1 hereto. Item 15. Recent Sales of Unregistered Securities. During the past three years, the Company has issued unregistered securities to persons as described below. No underwriters or underwriting discounts or commissions were paid in connection with such issuances. There were no public offerings in such transactions, and the Company believes that each transaction, unless otherwise noted, was exempt from registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), by reason of Section 4(2) thereof, based on the private nature of the transactions and the financial sophistication of the purchasers, all of whom had access to complete information concerning the II-2 Company and acquired the securities for investment and not with a view to the distribution thereof. All share numbers indicated below have been retroactively adjusted to reflect the 10-for-1 stock split effective November 13, 1995. On February 21, 1994, the Company issued 8,500,000 shares to James F. Chen in consideration for a payment of $10,000. On February 21, 1994, the Company also issued: (i) 150,000 shares of Common Stock to Maxine Loh in consideration for a payment of $25,000; (ii) 450,000 shares of Common Stock to Ed Lee, Teresa Lee, David Luk and Lousia Lee in consideration for a payment of $75,000; (iii) 300,000 shares of Common Stock to Charles C. Chen in consideration for a payment of $49,500; (iv) 300,000 shares of Common Stock to How Lin in consideration for equipment valued at $50,000; (v) 150,000 shares of Common Stock to Dr. Mark Rosenthal in consideration for a payment of $25,000; and (vi) 150,000 shares of Common Stock to Ngan Ying Chen in consideration for a payment of $25,000. On May 15, 1995, James F. Chen contributed 500,000 shares of Common Stock to the capital of the Company and the Company issued 500,000 shares of Common Stock to Jieh-Shan Wang in consideration for services rendered. On June 1, 1995, James F. Chen contributed 199,000 shares of Common Stock to the capital of the Company. On that date, the Company issued 1,764,710 shares of Common Stock to Mr. H.H. Cheng in consideration for a payment of $500,000 which was made to the Company in December 1994. To provide protection against dilution to Mr. Cheng's $500,000 investment, the Company issued 84,000 shares of Common Stock to Mr. James F. Chen as trustee of a voting trust for Mr. Cheng on June 1, 1995. Also on June 1, 1996, the Company issued an additional 115,000 shares of Common Stock to the voting trust established for Mr. Chen in consideration for providing a loan of $300,000. On December 12, 1995, the Company issued: (i) 61,930 shares of Common Stock to Ban Leong Eap and Pisei Phlong Eap in consideration for a payment of $100,000; (ii) 8,333 shares of Common Stock to Joseph D. Gallagher in consideration for a payment of $25,000; (iii) 8,334 shares of Common Stock to Gill & Sippel Profit Sharing Plan, FBO Joseph D. Gallagher in consideration for a payment of $25,000; (iv) 16,667 shares of Common Stock to Chansothi Um and Viseth Um in consideration for a payment of $50,000; (v) 41,667 shares of Common Stock to Stanley Shapiro in consideration for a payment of $125,000; (vi) 16,667 shares of Common Stock to Burnett Moody in consideration for a payment of $50,000; and (vi) 8,333 shares of Common Stock to Norman Fine in consideration for a payment of $25,000. On December 12, 1995, the Company also issued 500,000 shares of Common Stock to Ray Hanner for services rendered and 30,000 shares of Common Stock to Scott Hu consisting of 16,667 shares in accordance with the terms of Mr. Hu's Employment Agreement and 13,333 shares issued as a severance payment. II-3 Between May, 1995 and June 12, 1996, the Company granted options to purchase 320,000 shares of Common Stock at $0.283 and 206,444 shares of Common Stock at $1.67 per share under the Company's 1995 Non-Statutory Stock Option Plan. On June 12, 1996, the Company granted options to purchase 885,604 shares of Common Stock $2.50 per share and options to purchase 504,256 shares of Common Stock at $3.00 per share under the Company's 1996 Incentive Stock Plan. The Company believes that the option grants described in this paragraph are exempt from the registration requirements of the Securities Act by reason of Rule 701 promulgated thereunder because the options were granted pursuant to written compensatory benefit plans of the Company, copies of which were provided to each participant, and the aggregate offering price did not exceed the limit prescribed by Rule 701 in connection with any such grant. In April, 1996, the Company issued options to purchase 575,951 shares of Common Stock subject to restrictions on transferability ("Restricted Stock"), at $0.50 per share, under the Company's 1996 Non- Statutory Stock Option Plan. As of June 12, 1996, all options granted under the Plan had been exercised and a total of 575,951 shares of Restricted Stock had been issued. The Company also believes that the transactions described in this paragraph are exempt from registration under the Securities Act by reason of Rule 701 as the options were granted pursuant to a written compensatory benefit plan of the Company, a copy of the plan was provided to each participant, and the aggregate offering price did not exceed the limit prescribed by Rule 701. In December, 1995 and January, 1996, the Company borrowed $2.5 million through the sale of 7% interest bearing, unsecured promissory notes due June 30, 1996 to fourteen investors ("Note Offering"). The Company issued: (i) a note dated December 19, 1995 in the amount of $200,000 to the Trustee under the Shapiro Family Trust; (ii) a note dated December 18, 1995 in the amount of $25,000 to Burnett H. Moody; (iii) a note dated December 15, 1995 in the amount of $25,000 to Norman D. Fine; (iv) a note dated December 15, 1995 in the amount of $500,000 to Lewis M. Schott; (v) a note dated December 22, 1995 in the amount of $175,000 to Bryan T. Vanas; (vi) a note dated December 22, 1995 in the amount of $100,000 to Joseph Lupo and Rosa Lupo; (vii) a note dated December 22, 1995 in the amount of $225,000 to Lee DeVisser and Linda DeVisser, Trustees of the DeVisser Trust dated January 4, 1993; (viii) a note dated January 15, 1996 in the amount of $166,500 to Edgehill Capital Management LP; (ix) a note dated January 15, 1996 in the amount of $60,000 to J. Francis Lavelle; (x) a note dated January 15, 1996 in the amount of $547,000 to Steven A. Cohen; (xi) a note dated January 15, 1996 in the amount of $60,000 to John P. Holmes III; (xii) a note dated January 15, 1996 in the amount of $166,500 to Golden Eagle Partners; (xiii) a note dated January 15, 1996 in the amount of $50,000 to John J. Egan IV; and (xiv) a note dated January 15, 1996, in the amount of $200,000 to Kenneth Lissak. On April 15, 1996, the Company exchanged the full amount of notes (including accrued interest) issued to seven investors for shares of the Company's Series A Convertible Preferred Stock ("Series A Stock") II-4 at $3.00 per share and paid cash to each of the seven investors in an amount equal to any fractional shares of Series A Stock. The Company issued: (i) 68,175 shares of Series A Stock to the Trustee of the Shapiro Family Trust; (ii) 8,523 shares of Series A Stock to Burnett H. Moody; (iii) 8,528 shares of Series A Stock to Norman D. Fine; (iv) 170,566 shares of Series A Stock to Lewis M. Schott; (v) 59,619 shares of Series A Stock to Bryan T. Vanas, (vi) 34,068 shares of Series A Stock to Joseph Lupo and Rosa Lupo and (vii) 76,654 shares of Series A Stock to Lee DeVisser and Linda DeVisser Trustees of the Lee DeVisser Trust dated January 4, 1993. On April 15, 1996 the Company offered certain of the investors who agreed to exchange their notes for Series A Stock, the opportunity to subscribe for an additional 333,333 shares of Series A Stock at a price of $3.00 per share in proportion to each investor's pro-rata interest in the Note Offering. The Company issued (i) 41,667 shares of Series A Stock to Stanley Shapiro in consideration for a payment of $125,001; (ii) 6,666 shares of Series A Stock to Burnett H. Moody in consideration for a payment of $19,998; (iii) 3,333 shares of Series A Stock to Norman D. Fine in consideration for a payment of $9,999; (iv) 146,834 shares of Series A Stock to Lewis M. Schott in consideration for a payment of $440,502; (v) 47,166 shares of Series A Stock to Bryan T. Vanas in consideration for a payment of $141,498; (vi) 27,000 shares of Series A Stock to Joseph Lupo and Rosa Lupo in consideration for a payment of $81,000; and (vii) 60,667 shares of Series A Stock to Lee DeVisser and Linda DeVisser Trustees of the Lee DeVisser Trust dated January 4, 1993 in consideration for a payment of $182,001. Two of the remaining seven noteholders transferred their notes to another noteholder. On May 24, 1996, the Company exchanged the full amount of the remaining notes (including accrued interest) for Shares of Series A Stock at $3.00 per share and paid cash in an amount equal to any fractional shares. The Company issued: (i) 17,082 shares of Series A Stock to John J. Egan, IV; (ii) 56,883 shares of Series A Stock to Golden Eagle Partners; (iii) 56,883 shares of Series A Stock to Edgehill Capital Management; (iv) 227,876 shares of Series A Stock to Steven A. Cohen; and (v) 68,328 shares of Series A Stock to Kenneth Lissak. On May 23, 1996 RSA Data Security, Inc. ("RSA") exercised an option granted under the Company's license agreement with RSA, to convert its right to receive future royalties into 2% of the Company's issued and outstanding voting securities, after giving effect to the issuance to RSA, through the date of the public offering. Pursuant to a separate agreement between RSA and Massachusetts Institute of Technology ("MIT"), MIT is entitled to receive 7.2% of any royalties that RSA receives. As a result, the Company will issue to MIT, 7.2% of the 2% of shares to which RSA was entitled under the license agreement. At the time of the Offering, RSA and MIT will be entitled to receive 260,594 and 20,218 shares of Common Stock, respectively, In June, 1996, the Company issued 16,667 shares of Common Stock to John J. Egan IV in consideration for consulting services rendered to the Company. II-5 In June, 1996, the Company borrowed $1.5 million from JMI Equity Fund II, L.P. by issuing unsecured, 8% interest-bearing, senior subordinated notes in the principal amount of $1.5 million with detachable warrants to purchase 500,000 shares of Common Stock. Of the 500,000 detachable warrants, 400,000 are exercisable at $3.00 per shares and 100,000 are exercisable at $0.01 per share. Item 16. Exhibits and Financial Statement Schedules. (a) The following Financial Statement Schedules are filed as part of this registration statement: Number Description ------ ----------- Schedule II Valuation and Qualifying Accounts (b) The following exhibits are filed as part of this registration statement: Number Description ------- ----------- 1 Form of Underwriting Agreement 3.1 Amended and Restated Certificate of Incorporation dated January 10, 1996 3.2 Amended Bylaws dated June 12, 1996 3.3 Certificate of Designation, Preferences, and Rights of Series A Convertible Preferred Stock dated April 4, 1996 3.4 Certificate of Increase in the Number of Shares of Series A Convertible Preferred Stock dated May 21, 1996 5 Opinion on Legality* 9.1 Voting Trust Agreement between H. H. Cheng and James F. Chen, Trustee 9.2 Voting Trust Agreement between Robert Zupnick and James F. Chen, Trustee 9.3 Voting Trust Agreement between Dennis Winson and James F. Chen, Trustee II-6 10.1 Employment Agreement between Virtual Open Network Environment Corporation and James F. Chen dated as of June 12, 1996 10.2 Virtual Open Network Environment Corporation 1995 Non-Statutory Stock Option Plan 10.3 Virtual Open Network Environment Corporation 1996 Non-Statutory Stock Option Plan 10.4 Virtual Open Network Environment Corporation 1996 Incentive Stock Plan 10.5 Software License Agreement between Trusted Information Systems, Inc. ("TIS") and V-ONE executed October 6, 1994 10.6 First Amendment to the Software License Agreement between TIS and V-ONE 10.7 Second Amendment to the Software License Agreement between TIS and V-ONE 10.8 Third Amendment to the Software License Agreement between TIS and V-ONE 10.9 Fourth Amendment to the Software License Agreement between TIS and V-ONE 10.10 OEM Master License Agreement between RSA Data Security, Inc. ("RSA") and V-ONE dated December 30, 1994 and Amendment Number One to the OEM Master License Agreement between RSA and V-ONE 10.11 Amendment Number Two to the OEM Master License Agreement between RSA and V-ONE and Conversion Agreement dated May 23, 1996 10.12 Promissory Note for H.H. Cheng with Allonge and Amendment dated June 12, 1996 10.13 Form of Exchange and Purchase Agreement dated April 1996 10.14 Registration Rights Agreement between V-ONE and JMI Equity Fund II, L.P. ("JMI") 10.15 8% Senior Subordinated Note due June 18, 2000 issued by V-ONE to JMI 10.16 Warrant to Purchase 100,000 shares of Common Stock Issued by V-ONE to JMI II-7 10.17 Warrant to Purchase 400,000 shares of Common Stock Issued by V-ONE to JMI 11 Computation of Primary and Fully Diluted Loss Per Share 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Kirkpatrick & Lockhart, LLP* 24 Power of Attorney: see signature page of this registration statement 27 Financial Data Schedule for the year ended December 31, 1995 and the three months ended March 31, 1996 __________________________ *To be filed by amendment Item 17. Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b), if, in the aggregate the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment II-8 shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post- effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rockville, State of Maryland, on June 21, 1996. VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION (Registrant) By: /s/ James F. Chen ------------------------------------ Name: James F. Chen Title: President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James F. Chen, Charles C. Chen, Chansothi Um and Ban L. Eap, and each of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, to all intents and purposes and as fully as they might or could do in person, thereby ratifying and confirming all that such attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ James F. Chen President, Chief Executive June 21, 1996 ------------------- Office and Director James F. Chen /s/ Chansothi Um Treasurer and Acting Chief June 21, 1996 ------------------- Financial Officer Chansothi Um /s/ Ban L. Eap Controller June 21, 1996 ------------------- Ban L. Eap /s/ Hai Hua Cheng Director June 21, 1996 ------------------- Hai Hua Cheng /s/ Charles C. Chen Director June 21, 1996 ------------------- Charles C. Chen
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION (For the period from February 16, 1993 (date of inception) to December 31, 1993 and for the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996)
Additions Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions Period ----------- ------------ ------------ ---------- ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS February 16, 1993 to December 31, 1993 $ - $ - $ - $ - December 31, 1994 . . . . . . . . . . . - - - - December 31, 1995 . . . . . . . . . . . - 23,620 - 23,620 January 1, 1996 to March 31, 1996 . . . 23,620 76,380 - 100,000 DEFERRED TAX ASSET VALUATION ALLOWANCE February 16, 1993 to December 31, 1993 $ - $ - $ - $ - December 31, 1994 . . . . . . . . . . . - 165,804 - 165,804 December 31, 1995 . . . . . . . . . . . 165,804 340,489 - 506,293 January 1, 1996 to March 31, 1996 . . . 506,293 343,718 - 850,011 ALLOWANCE FOR NON-SALABLE INVENTORY February 16, 1993 to December 31, 1993 $ - $ - $ - $ - December 31, 1994 . . . . . . . . . . . - - - - December 31, 1995 . . . . . . . . . . . - 50,000 - 50,000 January 1, 1996 to March 31, 1996 . . . 50,000 - - 50,000
EXHIBIT INDEX ------------- Number Description ------ ----------- 1 Form of Underwriting Agreement 3.1 Amended and Restated Certificate of Incorporation dated January 10, 1996 3.2 Amended Bylaws dated June 12, 1996 3.3 Certificate of Designation, Preferences, and Rights of Series A Convertible Preferred Stock dated April 4, 1996 3.4 Certificate of Increase in the Number of Shares of Series A Convertible Preferred Stock dated May 21, 1996 5 Opinion on Legality* 9.1 Voting Trust Agreement between H. H. Cheng and James F. Chen, Trustee 9.2 Voting Trust Agreement between Robert Zupnick and James F. Chen, Trustee 9.3 Voting Trust Agreement between Dennis Winson and James F. Chen, Trustee 10.1 Employment Agreement between Virtual Open Network Environment Corporation and James F. Chen dated as of June 12, 1996 10.2 Virtual Open Network Environment Corporation 1995 Non- Statutory Stock Option Plan 10.3 Virtual Open Network Environment Corporation 1996 Non- Statutory Stock Option Plan 10.4 Virtual Open Network Environment Corporation 1996 Incentive Stock Plan 10.5 Software License Agreement between Trusted Information Systems, Inc. ("TIS") and V-ONE executed October 6, 1994 10.6 First Amendment to the Software License Agreement between TIS and V-ONE 10.7 Second Amendment to the Software License Agreement between TIS and V-ONE 10.8 Third Amendment to the Software License Agreement between TIS and V-ONE 10.9 Fourth Amendment to the Software License Agreement between TIS and V-ONE 10.10 OEM Master License Agreement between RSA Data Security, Inc. ("RSA") and V-ONE dated December 30, 1994 and Amendment Number One to the OEM Master License Agreement between RSA and V-ONE 10.11 Amendment Number Two to the OEM Master License Agreement between RSA and V-ONE and Conversion Agreement dated May 23, 1996 10.12 Promissory Note for H.H. Cheng with Allonge and Amendment dated June 12, 1996 10.13 Form of Exchange and Purchase Agreement dated April 1996 10.14 Registration Rights Agreement between V-ONE and JMI Equity Fund II, L.P. ("JMI") 10.15 8% Senior Subordinated Note due June 18, 2000 issued by V-ONE to JMI 10.16 Warrant to Purchase 100,000 shares of Common Stock Issued by V-ONE to JMI 10.17 Warrant to Purchase 400,000 shares of Common Stock Issued by V-ONE to JMI 11 Computation of Primary and Fully Diluted Loss Per Share 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Kirkpatrick & Lockhart, LLP* 24 Power of Attorney: see signature page of this registration statement 27 Financial Data Schedule for the year ended December 31, 1995 and the three months ended March 31, 1996 __________________________ *To be filed by amendment EX-1 2 FORM OF ------- ________ Shares1 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION Common Stock PURCHASE AGREEMENT ------------------ __________, 1996 PIPER JAFFRAY INC. VOLPE, WELTY & COMPANY As Representatives of the several Underwriters named in Schedule I hereto c/o Piper Jaffray Inc. Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402 Gentlemen: Virtual Open Network Environment Corporation, a Delaware corporation (the "Company") proposes to sell to the several Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of _________ shares (the "Firm Shares") of Common Stock, $.001 par value per share (the "Common Stock"), of the Company. The Company and the stockholders of the Company listed in Schedule II hereto (the "Selling Stockholders") severally have also granted to the several Underwriters an option to purchase an aggregate of up to ______ additional shares of Common Stock, on the terms and for the purposes set forth in Section 3 hereof (the "Option Shares"). The Option Shares consist of _____ authorized but unissued shares of Common Stock to be issued and sold by the Company and __________ outstanding shares of Common Stock to be sold by the Selling Stockholders. The Firm Shares and any Option Shares purchased pursuant to this Purchase Agreement are herein collectively called the "Securities." The Company and the Selling Stockholders hereby confirm their agreement with respect to the sale of the Securities to the several Underwriters, for whom you are acting as Representatives (the "Representatives"). 1 Plus an option to purchase up to _______ additional shares to cover over-allotments. 1. Registration Statement. A registration statement on Form S-1 (File No. 33-____) with respect to the Securities, including a preliminary form of prospectus, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations ("Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission; one or more amendments to such registration statement have also been so prepared and have been, or will be, so filed. Copies of such registration statement and amendments and each related preliminary prospectus have been delivered to you. If the Company has elected not to rely upon Rule 430A of the Rules and Regulations, the Company has prepared and will promptly file an amendment to the registration statement and an amended prospectus. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and file a prospectus pursuant to Rule 424(b) that discloses the information previously omitted from the prospectus in reliance upon Rule 430A. Such registration statement as amended at the time it is or was declared effective by the Commission, and, in the event of any amendment thereto after the effective date and prior to the First Closing Date (as hereinafter defined), such registration statement as so amended (but only from and after the effectiveness of such amendment), including the information deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A(b), if applicable, is hereinafter called the "Registration Statement." The prospectus included in the Registration Statement at the time it is or was declared effective by the Commission is hereinafter called the "Prospectus," except that if any prospectus filed by the Company with the Commission pursuant to Rule 424(b) of the Rules and Regulations or any other prospectus provided to the Underwriters by the Company for use in connection with the offering of the Securities (whether or not required to be filed by the Company with the Commission pursuant to Rule 424(b) of the Rules and Regulations) differs from the prospectus on file at the time the Registration Statement is or was declared effective by the Commission, the term "Prospectus" shall refer to such differing prospectus from and after the time such prospectus is filed with the Commission or transmitted to the Commission for filing pursuant to such Rule 424(b) or from and after the time it is first provided to the Underwriters by the Company for such use. The term "Preliminary Prospectus" as used herein means any preliminary prospectus included in the Registration Statement prior to the time it becomes or became effective under the Act and any prospectus subject to completion as described in Rule 430A of the Rules and Regulations. 2. Representations and Warranties of the Company and the Selling Stockholders. --------------------------------------------------------------------- (a) The Company represents and warrants to, and agrees with, the several Underwriters as follows: (i) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission and each Preliminary Prospectus, at the time - 2 - of filing thereof, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; except that the foregoing shall not apply to statements in or omissions from any Preliminary Prospectus in reliance upon, and in conformity with, written information furnished to the Company by you, or by any Underwriter through you, specifically for use in the preparation thereof. (ii) As of the time the Registration Statement (or any post-effective amendment thereto) is or was declared effective by the Commission, upon the filing or first delivery to the Underwriters of the Prospectus (or any supplement to the Prospectus) and at the First Closing Date and Second Closing Date (as hereinafter defined), (A) the Registration Statement and Prospectus (in each case, as so amended and/or supplemented) will conform or conformed in all material respects to the requirements of the Act and the Rules and Regulations, (B) the Registration Statement (as so amended) will not or did not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) the Prospectus (as so supplemented) will not or did not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are or were made, not misleading; except that the foregoing shall not apply to statements in or omissions from any such document in reliance upon, and in conformity with, written information furnished to the Company by you, or by any Underwriter through you, specifically for use in the preparation thereof. If the Registration Statement has been declared effective by the Commission, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceeding for that purpose has been initiated or, to the Company's knowledge, threatened by the Commission. (iii) The financial statements of the Company, together with the notes thereto, set forth in the Registration Statement and Prospectus comply in all material respects with the requirements of the Act and fairly present the financial condition of the Company as of the dates indicated and the results of operations and changes in stockholders equity and cash flows for the periods therein specified in conformity with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise - 3 - stated therein); and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. No other financial statements or schedules are required to be included in the Registration Statement or Prospectus. Coopers & Lybrand, L.L.P., who have expressed their opinion with respect to the financial statements and schedules filed as a part of the Registration Statement and included in the Registration Statement and Prospectus, are independent public accountants as required by the Act and the Rules and Regulations. The summary financial and statistical data included in the Registration Statement fairly present the information shown therein and have been compiled on a basis consistent with the financial statements presented in the Registration Statement. (iv) Each of the Company and its subsidiaries (if any) has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries has full corporate power and authority to own, lease and operate its properties and conduct its business as currently being carried on and as described in the Registration Statement and Prospectus, and is duly qualified to do business as a foreign corporation in good standing in each domestic and foreign jurisdiction in which it owns or leases real property or in which the conduct of its business makes such qualification necessary and in which the failure to so qualify would have a material adverse effect upon the business, condition (financial or otherwise) or properties of the Company and its subsidiaries, taken as a whole. (v) Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, or declared or paid any dividends or made any distribution of any kind with respect to its capital stock; and there has not been any change in the capital stock, or any material change in the short-term or long-term debt, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock, of the Company or any of its subsidiaries, or any material adverse change, or any development involving a prospective material adverse change, in the general affairs, condition (financial or otherwise), business, key personnel, property, prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole. - 4 - (vi) Except as set forth in the Prospectus under the caption "Business Legal Proceedings," there is not pending or, to the knowledge of the Company, threatened or contemplated, any action, suit or proceeding to which the Company or any of its subsidiaries or, to the best knowledge of the Company after due inquiry, any of its officers, is a party before or by any domestic or foreign court or governmental agency, authority or body, or any arbitrator, which might result in any material adverse change in the condition (financial or otherwise), business, prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, or prevent the consummation of the transactions contemplated hereby. (vii) There are no contracts or documents of the Company or any of its subsidiaries that are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations that have not been accurately described in all material respects or so filed. (viii) This Agreement has been duly authorized, executed and delivered by the Company, and constitutes a valid, legal and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and except as such enforceability against the Company may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity. The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any agreement or instrument to which the Company is a party or by which it is bound or to which any of its property is subject, the Company's charter or by-laws, or any order, rule, regulation or decree of any court or governmental agency or body having jurisdiction over the Company or any of its properties. No consent, approval, authorization or order of, or filing with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement or for the consummation of the transactions contemplated hereby, including the issuance or sale of the Securities by the Company, except such as may be required under the Act or state securities or blue sky laws; or the by-laws or rules of the National Association of Securities Dealers ("NASD") relating to the corporate financing arrangements, and the Company has - 5 - full power and authority to enter into this Agreement and to authorize, issue and sell the Securities as contemplated by this Agreement. (ix) All of the issued and outstanding shares of capital stock of the Company, including the outstanding shares of Common Stock, are duly authorized and validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the holders thereof are not subject to personal liability by reason of being such holders; the Securities which may be sold hereunder by the Company have been duly authorized and, when issued, delivered and paid for in accordance with the terms hereof, will have been duly and validly issued and will be fully paid and nonassessable, and the holders thereof will not be subject to personal liability by reason of being such holders; and the capital stock of the Company, including the Common Stock, conforms to the description thereof in the Registration Statement and Prospectus. There are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's charter, by-laws or any agreement or other instrument to which the Company is a party or by which the Company is bound. Neither the filing of the Registration Statement nor the offering or sale of the Securities as contemplated by this Agreement gives rise to any rights for or relating to the registration of any shares of Common Stock or other securities of the Company. All of the issued and outstanding shares of capital stock of each of the Company's subsidiaries (if any) have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise described in the Registration Statement and Prospectus and except for any directors' qualifying shares, the Company owns of record and beneficially, free and clear of any security interests, claims, liens, proxies, equities or other encumbrances, all of the issued and outstanding shares of such stock. Except as described in the Registration Statement and the Prospectus, there are no options, warrants, agreements, contracts or other rights in existence to purchase or acquire from the Company or any subsidiary of the Company any shares of the capital stock of the Company or any subsidiary of the Company. The Company has an authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. - 6 - (x) The Company and each of its subsidiaries holds, and is operating in compliance with, all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders of any governmental or self-regulatory body required for the conduct of its business and all such franchises, grants, authorizations, licenses, permits, easements, consents, certifications and orders are valid and in full force and effect; and the Company and each of its subsidiaries is in compliance with all applicable federal, state, local and foreign laws, regulations, orders and decrees, including without limitation all export and re-export laws, regulations, orders, decrees, permits and licenses. (xi) The Company and its subsidiaries have good and marketable title to all property and assets described in the Registration Statement and Prospectus as being owned by them, in each case free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus; the property held under lease by the Company and its subsidiaries is held by them under valid, subsisting and enforceable leases with only such exceptions with respect to any particular lease as do not interfere in any material respect with the conduct of the business of the Company or its subsidiaries. (xii) The Company and each of its subsidiaries owns or possesses adequate rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, know-how, trade secrets and rights ("Intellectual Property") necessary for the conduct of the business of the Company and its subsidiaries as currently carried on and as described in the Registration Statement and Prospectus, including without limitation the Intellectual Property described or referred to in the Prospectus as being owned or used by the Company or any subsidiary. Except as stated in the Registration Statement and Prospectus, no activity engaged in by or aspect of the business of the Company or any of its subsidiaries uses and no other aspect of the business of the Company or any of its subsidiaries will involve or give rise to any infringement of or conflict with, or license or similar fees for, any Intellectual Property or other similar rights of others, and neither the Company nor any of its subsidiaries has received any notice alleging, or is aware of, any such infringement or conflict or that any such fee is due. No officer or employee of the Company or any of its subsidiaries is obligated under any contract or subject to any judgment, decree or order of - 7 - any court or administrative agency that would interfere with the use of such person's best efforts to promote the interests of the Company and its subsidiaries or which would conflict in any material respect with the business of the Company and its subsidiaries as described in the Registration Statement. No prior employer of any employee of the Company or any of its subsidiaries has any right to or interest in any inventions, improvements, discoveries or other information assigned to the Company or any of its subsidiaries. The Company and each of the subsidiaries have taken reasonable security measures to protect and enforce the secrecy, confidentiality and value of its Intellectual Property. (xiii) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in breach of or otherwise in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note, indenture, loan agreement or any other material contract, lease or other instrument to which it is subject or by which any of them may be bound, or to which any of the material property or assets of the Company or any of its subsidiaries is subject. (xiv) The Company and its subsidiaries have filed on a timely basis all federal, state, local and foreign income, franchise and other tax returns required to be filed (or timely filed for extensions thereof) and are not in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto, other than any which the Company or any of its subsidiaries is contesting in good faith. (xv) The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Securities other than any Preliminary Prospectus or the Prospectus or other materials permitted by the Act. (xvi) The Securities have been conditionally approved for listing on the Nasdaq National Market and, on the date the Registration Statement became or becomes effective, the Company's Registration Statement on Form 8-A or other applicable form under the Securities Exchange Act of 1934, as amended, became or will become effective. (xvii) Other than the subsidiaries (if any) of the Company listed in Exhibit 21.1 to the Registration Statement, the Company owns no capital stock or other equity or ownership or proprietary interest in any - 8 - corporation, partnership, association, trust or other entity. (xviii) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xix) To the best of the Company's knowledge, each of the Company and its subsidiaries (A) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (B) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (C) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (xx) The Company is not, and upon receipt and pending application of the net proceeds from the sale of the Common Stock to be sold by the Company in the manner described in the Prospectus will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. (xxi) Each of the Company and its subsidiaries maintains insurance of the types and in the amounts that the Company believes are reasonably adequate for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, - 9 - destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. The Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance overage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations or business of the Company and its subsidiaries taken as a whole. (xxii) Neither the Company nor any of its subsidiaries has at any time during the last five (5) years in any jurisdiction (i) made any unlawful contribution to any candidate for office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any governmental officer or official or other person charged with similar public or quasi-public duties other than payments required or permitted by the laws of the United States. (xxiii) Other than as contemplated by this Agreement, the Company has not incurred any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (xxiv) Neither the Company nor any of its affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. (xxv) The Company and its subsidiaries are not involved in any labor dispute or disturbance nor, to the knowledge of the Company, is any such dispute or disturbance threatened. (b) Each Selling Stockholder severally and not jointly represents and warrants to, and agrees with, the Underwriters as follows: (i) Such Selling Stockholder is the record and beneficial owner of, and has, and on the First Closing Date and/or the Second Closing Date, as the case may be (each as defined herein), will have, good, valid and marketable title to the Securities to be sold by such Selling Stockholder, free and clear of all security interests, claims, liens, restrictions on transferability, legends, proxies, equities or other - 10 - encumbrances; and upon delivery of and payment for such Securities hereunder, the Underwriters will acquire valid and marketable title thereto, free and clear of any security interests, claims, liens, restrictions on transferability, legends, proxies, equities or other encumbrances. Such Selling Stockholder is selling the Securities to be sold by such Selling Stockholder for such Selling Stockholder's own account, and no part of the proceeds of such sale received by such Selling Stockholder will inure, either directly or indirectly, to the benefit of the Company other than as described in the Registration Statement and Prospectus. (ii) Such Selling Stockholder has duly authorized, executed and delivered a Power of Attorney and Custody Agreement ("Custody Agreement"), which Custody Agreement is a valid and binding obligation of such Selling Stockholder, to ________________________, as Custodian (the "Custodian"); pursuant to the Custody Agreement the Selling Stockholder has placed in custody with the Custodian, for delivery under this Agreement, the certificates representing the Securities to be sold by such Selling Stockholder; and such certificates were duly and properly endorsed in blank for transfer, or were accompanied by all documents duly and properly executed that are necessary to effect the transfer to the Underwriters of title thereto, free of any legend, restriction on transferability, proxy, lien or claim, whatsoever. (iii) Such Selling Stockholder has the power and authority to enter into this Agreement and to sell, transfer and deliver the Securities to be sold by such Selling Stockholder; and such Selling Stockholder has duly authorized, executed and delivered to _______________ as attorney-in-fact (the "Attorney-in-Fact"), an irrevocable power of attorney (a "Power of Attorney") authorizing and directing the Attorney-in-Fact, or any of them, to effect the sale and delivery of the Securities being sold by such Selling Stockholder, to enter into this Agreement and to take all such other action as may be necessary hereunder. (iv) This Agreement, the Custody Agreement and the Power of Attorney have each been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and each constitutes a valid and binding agreement of such Selling Stockholder, enforceable against such Selling Stockholder in accordance with its terms, except as rights to indemnity or contribution hereunder or thereunder may be limited by federal or state securities laws and except as such enforceability - 11 - may be limited by bankruptcy, insolvency, reorganization or laws affecting the rights of creditors generally and subject to general principles of equity. (v) Such Selling Stockholder owns the Securities such Selling Stockholder is selling as an individual or as a custodian for a minor, and not as a trustee or in any other similar capacity. (vi) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Securities other than any Preliminary Prospectus or the Prospectus or other materials permitted by the Act to be distributed by such Selling Stockholder. (vii) Such Selling Stockholder has not taken and will not take, directly or indirectly any action designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Company's Common Stock, to facilitate the sale or resale of the Securities. (c) Any certificate signed by any officer of the Company and delivered to you or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby; any certificate signed by or on behalf of any Selling Stockholder as such and delivered to you or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by such Selling Stockholder to the Underwriters as to the matters covered thereby. 3. Purchase, Sale and Delivery of Securities. ----------------------------------------- (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell ____ Firm Shares, to the Underwriters, and the Underwriters severally agree to purchase from the Company the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereto. The purchase price for each Firm Share shall be $___ per share. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of Firm Shares (to be adjusted by the Representatives to avoid fractional shares) which represents the same proportion of the number of Firm Shares to be sold by the Company pursuant to this Agreement as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto represents to the total number of Firm Shares to be purchased by all Underwriters pursuant to this Agreement. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (d) of this Section 3 and in Section 8 hereof, the - 12 - agreement of each Underwriter is to purchase only the respective number of Firm Shares specified in Schedule I. The Firm Shares will be delivered by the Company to you for the accounts of the several Underwriters against payment of the purchase price therefor by certified or official bank check or other next day funds payable to the order of the Company at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, MN, 55402 or such other location as may be mutually acceptable, at 9:00 a.m. Minneapolis time on the third full business day (or, if the Firm Shares are priced as contemplated by Rule 15c6-1(c) of the Exchange Act, after 4:30 p.m., Washington, D.C. time, the fourth full business day) following the date hereof, or at such other time as you and the Company determine, such time and date of delivery being herein referred to as the "First Closing Date." The Firm Shares, in definitive form and in such denominations and registered in such names as you may request upon at least two business days' prior notice to the Company, will be made available for checking and packaging at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, MN, 55402 or such other location as may be mutually acceptable, at least one business day prior to the First Closing Date. The Company shall instruct the bank at which the check is deposited that the funds are not to be made available to the Company (nor transferred from the account of the Underwriters) prior to the first business day following the First Closing Date. In this regard, the Company agrees not to deposit any such check in the bank on which it is drawn earlier than the first business day following the First Closing Date (if such deposit would have the purpose or effect of receiving immediately available funds or earning interest on such funds) and further agrees not to take any other action with the purpose or effect of receiving immediately available funds or earning interest on such funds until the first business day following the First Closing Date. In the event of any breach of the foregoing, the Company shall reimburse the Underwriters for the interest lost and any other expenses borne by the Underwriters by reason of such breach. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 9 or 10 hereof) to purchase and pay for the number of Firm Shares agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to each other Underwriter, and the non- defaulting Underwriters shall have the right within 24 hours after the receipt of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between the non-defaulting Underwriters and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the Firm Shares which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of Firm Shares which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting - 13 - Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares exceeds 10% of the total number of Firm Shares, which all Underwriters agreed to purchase hereunder. If the total number of Firm Shares which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two proceeding sentences, the Company shall have the right to postpone the First Closing Date determined as provided in Section 3(a) hereof for not more than seven business days after the date originally fixed as the First Closing Date pursuant to said Section 3(a) in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour period stated above for the purchase of all of the Firm Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholders hereby grant to the several Underwriters an option to purchase all or any portion of the Option Shares at the same purchase price as the Firm Shares, for use solely in covering any over-allotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the effective date of this Agreement upon notice (confirmed in writing) by the Representatives to the Company and the Custodian setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the certificates for the Option Shares are to be registered and the date and time, as determined by you, when the Option Shares are to be delivered, such time and date being herein referred to as the "Second Closing" and "Second Closing Date", respectively; provided, however, that the Second Closing Date shall not be earlier than the First Closing Date nor earlier than the second business day after the date on which the option shall have been exercised. If the option granted hereunder is exercised, the number of Option Shares to be purchased by each Underwriter shall be the same percentage of the total number of Option Shares to be purchased by the several Underwriters as the number of Firm Shares to be purchased by such Underwriter is of the total number of Firm Shares to be purchased by the several Underwriters, as adjusted by the Representatives in such manner as the Representatives deem advisable to avoid fractional shares. If the option is exercised in part, the respective number of Option Shares to be sold by the Company and the Selling Stockholders shall be in the same proportion to the aggregate number of Option Shares to be sold as the - 14 - maximum number of Option Shares to be sold by each of the Company and the Selling Stockholders bears to the total number of Option Shares, as adjusted by the Representatives in such a manner as they deem advisable to avoid fractional shares. No Option Shares shall be sold and delivered unless the Firm Shares previously have been, or simultaneously are, sold and delivered. The Option Shares will be delivered by the Company and the Custodian to you for the accounts of the several Underwriters against payment of the purchase price therefor by certified or official bank check or other next day funds payable to the order of the Company or the Custodian, as appropriate, at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, MN, 55402 or such other location as may be mutually acceptable at 9:00 a.m. Minneapolis time on the Second Closing Date. The Option Shares in definitive form and in such denominations and registered in such names as you have set forth in your notice of option exercise, will be made available for checking and packaging at the office of Piper Jaffray, Inc., Piper Jaffray Tower, 222 South 9th Street, Minneapolis, MN, 55402 or such other location as may be mutually acceptable, at least one business day prior to the Second Closing Date. The Company and the Custodian shall instruct the respective banks at which the checks are deposited that the funds are not to be made available to the Company or the Custodian, as the case may be, (nor transferred from the account of the Underwriters) prior to the first business day following the Second Closing Date. In this regard, each of the Company and the Custodian agree not to deposit any such check in the bank on which it is drawn earlier than the first business day following the Second Closing Date (if such deposit would have the purpose or effect of receiving immediately available funds or earning interest on such funds) and further agrees not to take any other action with the purpose or effect of receiving immediately available funds or earning interest on such funds until the first business day following the Second Closing Date. In the event of any breach of the foregoing, the Company shall reimburse the Underwriters for the interest lost and any other expenses borne by the Underwriters by reason of such breach. (d) It is understood that you, individually and not as Representatives of the several Underwriters, may (but shall not be obligated to) make payment to the Company on behalf of any Underwriter for the Securities to be purchased by such Underwriter. Any such payment by you shall not relieve any such Underwriter of any of its obligations hereunder. Nothing herein contained shall constitute any of the Underwriters an unincorporated association or partner with the Company. 4. Covenants. --------- (a) The Company covenants and agrees with the several Underwriters as follows: (i) If the Registration Statement has not already been declared effective by the Commission, the - 15 - Company will use its best efforts to cause the Registration Statement and any post-effective amendments thereto to become effective as promptly as possible; the Company will notify you promptly of the time when the Registration Statement or any post-effective amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed and of any request by the Commission for any amendment or supplement to the Registration Statement or Prospectus or additional information; if the Company has elected to rely on Rule 430A of the Rules and Regulations or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, the Company will file a Prospectus containing the information omitted therefrom pursuant to such Rule 430A or otherwise with the Commission within the time period required by, and otherwise in accordance with the provisions of, Rule 424(b) and, if applicable, Rule 430A of the Rules and Regulations; the Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or Prospectus that, in your opinion, may be necessary or advisable in connection with the distribution of the Securities by the Underwriters; and the Company will not file any amendment or supplement to the Registration Statement or Prospectus to which you or your counsel shall reasonably object by notice to the Company after having been furnished a copy a reasonable time prior to the filing. (ii) The Company will advise you, promptly after it shall receive notice or obtain knowledge thereof, of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or suspending the use of the Prospectus, of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any such purpose; and the Company will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such a stop order should be issued. (iii) Within the time during which a prospectus relating to the Securities is required to be delivered under the Act, the Company will comply with all requirements imposed upon it by the Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities as contemplated by the provisions hereof and the Prospectus. If during such period any event occurs as a result of which the Prospectus or any other prospectus - 16 - relating to the Securities as then in effect would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act, the Company will promptly notify you and will promptly amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance. (iv) The Company will use its best efforts to qualify the Securities for offering and sale under the securities laws of such jurisdictions as you reasonably designate and to continue such qualifications in effect so long as required for the distribution of the Securities, except that the Company shall not be required in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process in any state. (v) The Company will furnish to the Underwriters copies of the Registration Statement (four of which will be signed and will include all exhibits), and each Preliminary Prospectus, and all amendments and supplements to such documents, in each case as soon as available and in such quantities as you may from time to time reasonably request. The Company will furnish the Underwriters with copies of the Prospectus in Minneapolis prior to 10:00 a.m., Minneapolis time, on the business day next succeeding the date of this Agreement. (vi) During a period of five years commencing with the date hereof, the Company will furnish to the Representatives, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to the stockholders of the Company and all information, documents and reports filed with the Commission, the National Association of Securities Dealers, Inc., the Nasdaq National Market or any securities exchange. (vii) The Company will make generally available to its security holders as soon as practicable, but in any event not later than 15 months after the end of the Company's current fiscal quarter, an earnings statement (which need not be audited) covering a 12-month period beginning after the effective date of the Registration Statement that shall satisfy the provisions of Section 11(a) of the Act and Rule 158 of the Rules and - 17 - Regulations and will advise you in writing when such statement has been made available. (viii) The Company, whether or not the transactions contemplated hereunder are consummated or this Agreement is prevented from becoming effective under the provisions of Section 9(a) hereof or is terminated, will pay or cause to be paid (A) all expenses (including transfer taxes allocated to the respective transferees) incurred in connection with the delivery to the Underwriters of the Securities, (B) all expenses and fees (including, without limitation, fees and expenses of the Company's accountants and counsel but, except as otherwise provided below, not including fees of the Underwriters' counsel) in connection with the preparation, printing, filing, delivery, and shipping of the Registration Statement (including the financial statements therein and all amendments, schedules, and exhibits thereto), the Securities, each Preliminary Prospectus, the Prospectus, and any amendment thereof or supplement thereto, and the printing, delivery, and shipping of this Agreement and other underwriting documents, including Blue Sky Memoranda, (C) all filing fees and fees and disbursements of the Underwriters' counsel incurred in connection with the qualification of the Securities for offering and sale by the Underwriters or by dealers under the securities or blue sky laws of the states and other jurisdictions which you shall designate in accordance with Section 4(d) hereof, (D) the fees and expenses of any transfer agent or registrar, (E) the filing fees incident to any required review by the NASD of the terms of the sale of the Securities, (F) listing fees, if any, and (G) all other costs and expenses incident to the performance of its obligations hereunder that are not otherwise specifically provided for herein. If the sale of the Securities provided for herein is not consummated by reason of action by the Company pursuant to Section 9(a) hereof which prevents this Agreement from becoming effective, or by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled, the Company will reimburse the several Underwriters for all out-of-pocket disbursements (including fees and disbursements of counsel) incurred by the Underwriters in connection with their investigation, preparing to market and marketing the Securities or in contemplation of performing their obligations hereunder. The Company shall not in any event be liable to any of the - 18 - Underwriters for loss of anticipated profits from the transactions covered by this Agreement. (ix) The Company will apply the net proceeds from the sale of the Securities to be sold by it hereunder for the purposes set forth in the Prospectus under "Use of Proceeds" and will file such reports with the Commission with respect to the sale of the Securities and the application of the proceeds therefrom as may be required in accordance with Rule 463 of the Rules and Regulations. (x) The Company will not, without the prior written consent of the Representatives, offer for sale, sell, contract to sell, grant any option for the sale of or otherwise issue or dispose of any Common Stock or any securities convertible into or exchangeable for, or any options or rights to purchase or acquire, Common Stock, for a period of 180 days after the commencement of the public offering of the Securities by the Underwriters, except (i) to the Underwriters pursuant to this Agreement, or (ii) upon the exercise of outstanding stock options under the Company's 1996 Stock Incentive Plan (the "1996 Stock Incentive Plan") described in the Registration Statement and Prospectus. The Company will not, without the prior consent of the Representatives or unless subject to the Lock-Up Agreements (as more fully described in Section 4(a)(xi) below), grant any new option under the 1996 Stock Incentive Plan which becomes exercisable during such 180 day period. The foregoing restriction is expressly agreed to preclude the Company from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in such disposition during such 180 day period even if such shares of Common Stock or such options or rights to purchase or acquire Common Stock would be disposed of by someone other than the Company. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any such shares of Common Stock or such options or rights or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from such shares of Common Stock or such options or rights. (xi) The Company either has caused to be delivered to you or will cause to be delivered to you prior to the effective date of the Registration Statement true, accurate and complete copies of agreements - 19 - (collectively, the "Lock-Up Agreements"), in the form set forth on Exhibit A hereto, from each of the Company's directors, officers, stockholders and holders of outstanding options and warrants to purchase Common Stock on the date of this Agreement stating that such person agrees that he or she will not, without your prior written consent, directly or indirectly offer, sell, contract to sell, make subject to any purchase option, grant a security interest in or otherwise dispose of any shares of Common Stock or rights to purchase Common Stock, for a period of 180 days after commencement of the public offering of the Securities by the Underwriters. (xii) The Company has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, or which has constituted, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, and has not effected any sales of Common Stock which are required to be disclosed in response to Item 701 of Regulation S-K under the Act which have not been so disclosed in the Registration Statement. (xiii) The Company will not incur any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (xiv) The Company will inform the Florida Department of Banking and Finance at any time prior to the consummation of the distribution of the Securities by the Underwriters if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba. Such information will be provided within 90 days after the commencement thereof or after a change occurs with respect to previously reported information. (xv) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (xvi) The Company is familiar with the Investment Company Act of 1940, as amended, and the rules and regulations thereunder, and has in the past conducted its affairs and will in the future conduct its affairs, in such a manner so as to insure that the Company was not and will not be an "Investment Company" within the - 20 - meaning of the Investment Company Act of 1940 and the rules and regulations promulgated thereunder. (b) Each Selling Stockholder covenants and agrees with the Underwriters as follows: (i) Such Selling Stockholder will pay all taxes, if any, on the transfer and sale, respectively, of the Securities being sold by such Selling Stockholder and except as otherwise agreed to by the Company and the Selling Stockholder, the fees of such Selling Stockholder's counsel if such Selling Stockholder elects to be represented by counsel other than Company counsel; provided, however, that each Selling Stockholder severally agrees to reimburse the Company for any reimbursement made by the Company to the Underwriters pursuant to Section 4(a)(viii) hereof to the extent such reimbursement resulted from the failure or refusal on the part of such Selling Stockholder to comply under the terms or fulfill any of the conditions of this Agreement, which failure or refusal arises out of or results from (A) the breach by such Selling Stockholder of any representation or warranty herein or in such Selling Stockholder's Power of Attorney, or (B) any act taken or attempted to be taken by such Selling Stockholder in its own right and in derogation of the authority granted by such Selling Stockholder in such Power of Attorney. (ii) The Securities to be sold by such Selling Stockholder, represented by the certificates on deposit with the Custodian pursuant to the Custody Agreement of such Selling Stockholder, are subject to the interest of the Underwriters and the other Selling Stockholders; the arrangements made for such custody are, except as specifically provided in the Custody Agreement, irrevocable; and the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Custody Agreement, by any act of such Selling Stockholder, by operation of law, whether by the liquidation, dissolution or merger of such Selling Stockholder, by the death of such Selling Stockholder, or by the occurrence of any other event. If any Selling Stockholder should liquidate, dissolve or be a party to a merger or if any other such event should occur before the delivery of the Securities hereunder, certificates for the Securities deposited with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such liquidation, dissolution, merger or other event had not occurred, whether or not the Custodian shall have received notice thereof. - 21 - (iii) Such Selling Stockholder will not, without your prior written consent, offer for sale, sell, contract to sell, grant any option for the sale of or otherwise dispose of any Common Stock or any securities convertible into or exchangeable for, or any options or rights to purchase or acquire, Common Stock, except (i) to the Underwriters pursuant to this Agreement and (ii) exercises of options, for the period of 180 days after the commencement of the public offering of the Securities by the Underwriters as set forth in such Selling Stockholder's respective Lock-Up Agreement, which Agreement has been delivered to you prior to the effective date of the Registration Statement. Each Selling Stockholder agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of shares of Common Stock held by such Selling Stockholder, except in accordance with the terms hereof. (iv) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (v) Such Selling Stockholder shall immediately notify you if any event occurs, or of any change in information relating to such Selling Stockholder or the Company or any new information relating to the Company or relating to any matter stated in the Prospectus or any supplement thereto, which results in the Prospectus (as supplemented) including an untrue statement of a material fact or omitting to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading to the extent such event or change relates to written information specifically provided to the Company by such Selling Stockholders for use in the Prospectus. 5. Conditions of Underwriters' Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy, as of the date hereof and at each of the First Closing Date and the Second Closing Date (as if made at such Closing Date), of and compliance with all representations, warranties and agreements of the Company and the Selling Stockholders contained herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., Minneapolis time, on the date of this - 22 - Agreement, or such later time and date as you, as Representatives of the several Underwriters, shall approve and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been timely made; no stop order suspending the effectiveness of the Registration Statement or any amendment thereof shall have been issued; no proceedings for the issuance of such an order shall have been initiated or threatened; and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to your satisfaction. (b) No Underwriter shall have advised the Company that the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, contains an untrue statement of fact which, in your opinion, is material, or omits to state a fact which, in your opinion, is material and is required to be stated therein or necessary to make the statements therein not misleading. (c) Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries shall have incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, or declared or paid any dividends or made any distribution of any kind with respect to its capital stock; and there shall not have been any change in the capital stock (other than a change in the number of outstanding shares of Common Stock due to the issuance of shares upon the exercise of outstanding options under the 1996 Stock Incentive Plan), or any material change in the short-term or long-term debt of the Company, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company or any of its subsidiaries, or any material adverse change or any development likely to involve a prospective material adverse change (whether or not arising in the ordinary course of business), in the general affairs, condition (financial or otherwise), business, key personnel, property, prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, that, in your judgment, makes it impractical or inadvisable to offer or deliver the Securities on the terms and in the manner contemplated in the Prospectus. (d) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, the opinion of Kirkpatrick & Lockhart L.L.P., counsel for the Company, dated such Closing Date and addressed to you, in form and substance satisfactory to you, to the effect that: (i) Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries has full corporate power and authority to own its properties and conduct its business as currently being carried on and as described in the - 23 - Registration Statement and Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which it owns or leases real property or in which the conduct of its business makes such qualification necessary and in which the failure to so qualify would have a material adverse effect upon the business, condition (financial or otherwise) or properties of the Company and its subsidiaries, taken as a whole. (ii) The capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock." All of the issued and outstanding shares of the capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and the holders thereof are not subject to personal liability by reason of being such holders. All outstanding shares of the Company's capital stock and all outstanding options to purchase the Company's capital stock were issued in compliance in all material respects with the registration and qualification requirements of all applicable federal and state securities laws. The Securities to be issued and sold by the Company hereunder have been duly authorized and, when issued, delivered and paid for in accordance with the terms of this Agreement, will have been validly issued and will be fully paid and nonassessable, and the holders thereof will not be subject to personal liability by reason of being such holders. Except as otherwise stated in the Registration Statement and Prospectus, there are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's charter, by-laws or any agreement or other instrument known to such counsel to which the Company is a party or by which the Company is bound. To the best of such counsel's knowledge, neither the filing of the Registration Statement nor the offering or sale of the Securities as contemplated by this Agreement gives rise to any rights for or relating to the registration of any shares of Common Stock or other securities of the Company. (iii) All of the issued and outstanding shares of capital stock of each of the Company's subsidiaries have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise described in the Registration Statement and Prospectus and except for directors' qualifying shares, the Company owns of record and beneficially, free and clear of any security interests, claims, liens, proxies, equities or - 24 - other encumbrances, all of the issued and outstanding shares of such stock. To the best of such counsel's knowledge, except as described in the Registration Statement and Prospectus, there are no options, warrants, agreements, contracts or other rights in existence to purchase or acquire from the Company or any subsidiary any shares of the capital stock of the Company or any subsidiary of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the knowledge of such counsel, threatened by the Commission; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by Rule 424(b). (v) The descriptions in the Registration Statement and Prospectus of statutes, legal and governmental proceedings, contracts and other documents are accurate and fairly present the information required to be disclosed with respect thereto; and such counsel does not know of any statutes or legal or governmental proceedings required to be described in the Prospectus that are not described as required, or of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or included as exhibits to the Registration Statement that are not described or included as required. (vi) The Company has full corporate power and authority to enter into this Agreement and to issue, sell and deliver to the several Underwriters the Securities to be issued and sold by it hereunder. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid, legal and binding obligation of the Company enforceable against the Company in accordance with its terms (except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity); the execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, rule, regulation, license, - 25 - authorization, approval or permit issued or promulgated by any governmental agency or body having jurisdiction over the Company or any agreement or instrument known to such counsel to which the Company is a party or by which it is bound or to which any of its property is subject, the Company's charter or by-laws, or any order, judgment, writ or decree known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of its or their respective properties; and no consent, approval, authorization or order of, or filing with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement or for the consummation of the transactions contemplated hereby, including the issuance or sale of the Securities by the Company, except such as may be required under the Act or state securities laws. (vii) To the best of such counsel's knowledge, the Company and each of its subsidiaries holds, and is operating in compliance in all material respects with, all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders of any governmental or self-regulatory body required for the conduct of its business and all such franchises, grants, authorizations, licenses, permits, easements, consents, certifications and orders are valid and in full force and effect. (viii) To the best of such counsel's knowledge, neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws. To the best of such counsel's knowledge, neither the Company nor any of its subsidiaries is in breach of or otherwise in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note, contract, indenture, loan agreement, permit, approval, registration, judgment, decree, order, statute, rule or regulation or any other contract, lease or other instrument to which it is subject or by which any of them may be bound, or to which any of the material property or assets of the Company or any of its subsidiaries is subject. (ix) The Registration Statement and the Prospectus, and any amendment thereof or supplement thereto, comply as to form in all material respects with the requirements of the Act and the Rules and Regulations, and on the basis of conferences with officers of the Company, examination of documents referred to in the Registration Statement and Prospectus and such other procedures as such counsel deemed - 26 - appropriate, nothing has come to the attention of such counsel which causes such counsel to believe that the Registration Statement or any amendment thereof, at the time the Registration Statement became effective and as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (as of its date and as of such Closing Date), as amended or supplemented, includes any untrue statement of material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no opinion as to the financial statements and notes thereto, financial statement schedules and other financial and statistical data included in any of the documents mentioned in this clause. (x) Except as set forth in the Registration Statement and Prospectus, such counsel knows of no pending or threatened action, suit, claim, proceeding or investigation before any court or governmental agency or body that, if determined adversely to the Company, would have a material adverse effect on the Company and its subsidiaries, taken as a whole, or which would limit, revoke, cancel, suspend, or cause not be renewed any existing license, certificate, registration, approval or permit from any state, federal or regulatory authority that is material to the conduct of the business or the Company and its subsidiaries, taken as a whole, as presently conducted. (xi) To the best of such counsel's knowledge, no holders of shares of Common Stock or other securities of the Company have registration rights with respect to securities of the Company, other than as described in the Prospectus. (xii) The Company is not an "Investment Company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. (xiii) The statements under the captions "Certain Transactions", "Description of Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus and in Items 14 and 15 of the Registration Statement, insofar as such statements constitute a summary of documents referred to therein or of matters of law, are accurate summaries and fairly and correctly present the - 27 - information called for with respect to such documents and matters. (xiv) The statements in the Prospectus under the captions "Risk Factors Pending Litigation" and "Business Legal Proceedings" fairly summarize the legal matters, documents and proceedings referred to therein. (xv) Such other matters as you may reasonably request. In rendering such opinion such counsel may rely (i) as to matters of law other than the law of the District of Columbia and federal law, upon the opinion or opinions of local counsel provided that the extent of such reliance is specified in such opinion and that such counsel shall state that such opinion or opinions of local counsel are satisfactory to them and that they believe they and you are justified in relying thereon and (ii) as to matters of fact, to the extent such counsel deems reasonable upon certificates of officers of the Company and its subsidiaries provided that the extent of such reliance is specified in such opinion. Copies of any opinion or certificate relied upon shall be delivered to you, as Representatives of the Underwriters. (e) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, the opinion of ____________________, [intellectual property] counsel for the Company, dated such Closing Date and addressed to you, in form and substance satisfactory to you, to the effect that: (i) To the best of such counsel's knowledge, neither the Registration Statement nor the Prospectus contains any untrue statement of a material fact with respect to the Intellectual Property owned or used by the Company or omits to state any material fact relating to Intellectual Property owned or used by the Company that is required to be stated in the Registration Statement or the Prospectus or that is necessary to make the statements therein not misleading; (ii) To the best of such counsel's knowledge, there are no legal or governmental proceedings pending relating to Intellectual Property other than prosecution by the Company of its patent applications before the United States Patent and Trademark Office and appropriate foreign government agencies, and to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or others; (iii) The Company has duly and properly filed patent applications and patent cooperation treaty applications, listed or otherwise referred to in the - 28 - Prospectus under the caption "BUSINESS - Patents, Proprietary Technology, Trademarks and Licenses"; (iv) Such counsel do not know of any contracts or other documents relating to the Company's Intellectual Property of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus that are not filed or described as required. (v) To the best of such counsel's knowledge, the Company is not infringing or otherwise violating any trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights of others and, to the best of such counsel's knowledge, there are no infringements by others of any of the Company's Intellectual Property which in the judgment of such counsel would have a material adverse effect upon the business condition (financial or otherwise) or properties of the Company and its subsidiaries, taken as a whole; and (vi) To the best of such counsel's knowledge, the Company owns or possesses sufficient licenses or other rights to use all Intellectual Property necessary to conduct the business now being or proposed to be conducted by the Company as described in the Prospectus. In rendering such opinion, such counsel may, to the extent stated therein, rely as to matters of fact on certificates of officers of the Company, copies of which shall be attached to the opinion. In rendering such opinion, such counsel need not have conducted any independent investigation or conducted searches to locate any third party patents, mask works, copyrights or other intellectual property rights that might impact the Company's activities, unless such counsel has knowledge of any actual, potential or alleged infringement. (f) On each Closing Date, there shall have been furnished to you the opinion of ____________________, dated such Closing Date and addressed to you, to the effect that: (i) Immediately prior to the Closing Date, each of the Selling Stockholders was the sole registered owner of the Securities to be sold by such Selling Stockholder; upon registration of the Securities in the names of the Underwriters in the stock records of the Company, the Underwriters will acquire all the rights of such Selling Stockholder in the Securities (assuming the Underwriters purchased the Securities in good faith and without notice of an adverse claim), free and clear of any adverse claim, lien in favor of the Company and restrictions on transfer imposed by the Company. - 29 - (ii) The Attorney-in-Fact has the power and authority to enter into the Custody Agreement, the Power of Attorney and this Agreement and to perform and discharge such Selling Stockholder's obligations thereunder and hereunder; and this Agreement, the Custody Agreements and the Powers of Attorney have been duly and validly authorized, executed and delivered by (or by any Attorney-in-Fact, or any of them, on behalf of) the Selling Stockholders. In rendering such opinion such counsel may rely as to matters of fact, to the extent such counsel deems reasonable upon certificates of the Attorney-in-Fact or Selling Stockholders. Copies of any opinion or certificate relied upon shall be delivered to you. (g) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, such opinion or opinions from Goodwin, Procter & Hoar LLP, counsel for the several Underwriters, dated such Closing Date and addressed to you, with respect to the formation of the Company, the validity of the Securities, the Registration Statement, the Prospectus and other related matters as you reasonably may request, and such counsel shall have received such papers and information as they request to enable them to pass upon such matters. (h) On each Closing Date you, as Representatives of the several Underwriters, shall have received a letter of Coopers & Lybrand, L.L.P., dated such Closing Date and addressed to you, confirming that they are independent public accountants within the meaning of the Act and are in compliance with the applicable requirements relating to the qualifications of accountants under Rule 2-01 of Regulation S-X of the Commission, and stating, as of the date of such letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of such letter), the conclusions and findings of said firm with respect to the financial information and other matters covered by its letter delivered to you concurrently with the execution of this Agreement, and the effect of the letter so to be delivered on such Closing Date shall be to confirm the conclusions and findings set forth in such prior letter. All such letters shall be in a form reasonably satisfactory to the Representatives and counsel thereto. (i) On each Closing Date, there shall have been furnished to you, as Representatives of the Underwriters, a certificate, dated such Closing Date and addressed to you, signed by the chief executive officer and by the chief financial officer of the Company, to the effect that (and you shall be satisfied that as of such date): (i) The representations and warranties of the Company in this Agreement are true and correct as if made at and as of such Closing Date, and the Company has - 30 - complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date; (ii) The Registration Statement has become effective and no stop order or other order suspending the effectiveness of the Registration Statement or any amendment thereof or the qualification of the Securities for offering or sale has been issued, and no proceeding for that purpose has been instituted or, to the best of their knowledge, is contemplated by the Commission or any state or regulatory body; and (iii) The signers of said certificate have carefully examined the Registration Statement and the Prospectus, and any amendments thereof or supplements thereto, and (A) such documents contain all statements and information required to be included therein, the Registration Statement, or any amendment thereof, does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented, does not include any untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (B) since the effective date of the Registration Statement there has occurred no event required to be set forth in an amended or supplemented prospectus which has not been so set forth, (C) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, not in the ordinary course of business, or declared or paid any dividends or made any distribution of any kind with respect to its capital stock, and except as disclosed in the Prospectus, there has not been any change in the capital stock (other than a change in the number of outstanding shares of Common Stock due to the issuance of shares upon the exercise of outstanding options under the 1996 Stock Incentive Plan), or any material change in the short-term or long-term debt, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock, of the Company, or any of its subsidiaries, or any material adverse change or any development involving a prospective material adverse change (whether or not arising in the ordinary course of business), in the general affairs, condition (financial or otherwise), business, key - 31 - personnel, property, prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, and (D) except as stated in the Registration Statement and the Prospectus, there is not pending, or, to the knowledge of the Company, threatened or contemplated, any action, suit or proceeding to which the Company or any of its subsidiaries is a party before or by any court or governmental agency, authority or body, or any arbitrator, which might result in any material adverse change in the condition (financial or otherwise), business, prospects or results of operations of the Company and its subsidiaries, taken as a whole. (j) On each Closing Date, there shall have been furnished to you a certificate or certificates, dated such Closing Date and addressed to you, signed by each of the Selling Stockholders or any of such Selling Stockholder's Attorney-in-Fact to the effect that the representations and warranties of such Selling Stockholder contained in this Agreement are true and correct as if made at and as of such Closing Date, and that such Selling Stockholder has complied with all the agreements and satisfied all the conditions on such Selling Stockholder's part to be performed or satisfied at or prior to such Closing Date. (k) The Company shall have furnished to you and counsel for the Underwriters such additional documents, certificates and evidence as you or they may have reasonably requested. (l) The Common Stock shall be approved for quotation, subject to issuance of the Firm Shares, on the Nasdaq National Market. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and counsel for the Underwriters. The Company will furnish you with such conformed copies of such opinions, certificates, letters and other documents as you shall reasonably request. 6. Indemnification and Contribution. -------------------------------- (a) The Company and each Selling Stockholder, severally and not jointly, agree to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise (including in settlement of any litigation if such settlement is effected with the written consent of the Company and/or such Selling Stockholder, as the case may be), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any breach of any representation, warranty or covenant of the Company and/or such Selling Stockholder, as the case may be, herein contained or any untrue statement or alleged untrue statement of a material fact - 32 - contained in the Registration Statement, including the information deemed to be a part of the Registration Statement at the time of effectiveness pursuant to Rule 430A, if applicable, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending against such loss, claim, damage, liability or action; provided, however, that neither the Company nor any Selling Stockholder shall be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you, or by any Underwriter through you, specifically for use in the preparation thereof. Notwithstanding anything in this Agreement, (i) each Selling Stockholder shall only be liable to the extent such untrue statement or omission was made in reliance on and in conformity with written information furnished by the Selling Stockholder in such capacity to the Company or the Underwriters specifically for use in the preparation of the Registration Statement and Prospectus; and (ii) the aggregate liability of any Selling Stockholder for indemnification and contribution pursuant to this Agreement shall not exceed an amount equal to the proceeds of the sale of the Securities by the Selling Stockholder after deducting all underwriting discounts and commissions and other costs and expenses paid or to be paid by such Selling Stockholder in connection with or relating to the transactions contemplated by this Agreement. In addition to their other obligations under this Section 6(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 6(a), it will reimburse each Underwriter on a monthly basis for all reasonable legal fees or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriter that received such payment shall promptly return it to the party or parties that made such payment, together with interest, compounded daily, at the Prime Rate, as defined below. Any such interim reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement shall bear interest determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by _______________ - 33 - (the "Prime Rate") from the date of such request. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company and such Selling Stockholder may become subject, under the Act or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you, or by such Underwriter through you, specifically for use in the preparation thereof, and will reimburse the Company and such Selling Stockholder for any legal or other expenses reasonably incurred by the Company or any such Selling Stockholder in connection with investigating or defending against any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability that it may have to any indemnified party. In case any such action shall be brought against any indemnified party, and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the sole judgment of the Representatives, it is advisable for the Underwriters to be represented as a group by separate counsel, the Representatives shall have the right to employ a single counsel to represent the Representatives and all Underwriters who may be subject to liability arising from any claim in respect of which indemnity may be sought by the Underwriters under - 34 - subsection (a) of this Section 6, in which event the reasonable fees and expenses of such separate counsel shall be borne by the indemnifying party or parties and reimbursed to the Underwriters as incurred (in accordance with the provisions of the third paragraph in subsection (a) above). An indemnifying party shall not be obligated under any settlement agreement relating to any action under this Section 6 to which it has not agreed in writing. (d) If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relevant intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this subsection (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or - 35 - alleged untrue statement or omission or alleged omission. The aggregate liability of any Selling Stockholder for indemnification and contribution pursuant to this Agreement shall not exceed an amount equal to the proceeds of the sale of the Securities by the Selling Stockholder after deducting all underwriting discounts and commissions and other costs and expenses paid or to be paid by such Selling Stockholder in connection with or relating to the transactions contemplated by this Agreement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company and the Selling Stockholders under this Section 6 shall be in addition to any liability which the Company and the Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 6 shall be in addition to any liability that the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company (including any person who, with his consent, is named in the Registration Statement as about to become a director of the Company), to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act. 7. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties, and agreements of the Company and the Selling Stockholders herein or in certificates delivered pursuant hereto, and the agreements of the several Underwriters and the Company and the Selling Stockholders contained in Section 6 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof, or the Company or any of its officers, directors, or controlling persons, or any Selling Stockholder or any controlling person thereof, and shall survive delivery of, and payment for, the Securities to and by the Underwriters hereunder. 8. Substitution of Underwriters. ---------------------------- (a) If any Underwriter or Underwriters shall fail to take up and pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder, upon tender of such Firm Shares in accordance with the terms hereof, and the amount of Firm Shares not purchased does not aggregate more than 10% of the total amount of Firm Shares set forth in Schedule I hereto, the remaining Underwriters shall be obligated to take up and pay for (in proportion to their respective underwriting obligations hereunder as set forth in Schedule I hereto except as may otherwise be determined by you) the Firm Shares that the withdrawing or defaulting Underwriters agreed but failed to purchase. - 36 - (b) If any Underwriter or Underwriters shall fail to take up and pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder, upon tender of such Firm Shares in accordance with the terms hereof, and the amount of Firm Shares not purchased aggregates more than 10% of the total amount of Firm Shares set forth in Schedule I hereto, and arrangements satisfactory to you for the purchase of such Firm Shares by other persons are not made within 36 hours thereafter, this Agreement shall terminate. In the event of any such termination the Company shall not be under any liability to any Underwriter (except to the extent provided in 4(a)(vii) and Section 6 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the amount of Firm Shares agreed by such Underwriter to be purchased hereunder) be under any liability to the Company (except to the extent provided in Section 6 hereof). If Firm Shares to which a default relates are to be purchased by the non-defaulting Underwriters or by any other party or parties, the Representatives or the Company shall have the right to postpone the First Closing Date for not more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 8. 9. Effective Date of this Agreement and Termination. ------------------------------------------------ (a) This Agreement shall become effective at 10:00 a.m., Minneapolis time, on the first full business day following the effective date of the Registration Statement, or at such earlier time after the effective time of the Registration Statement as you in your discretion shall first release the Securities for sale to the public; provided, that if the Registration Statement is effective at the time this Agreement is executed, this Agreement shall become effective at such time as you in your discretion shall first release the Securities for sale to the public. For the purpose of this Section, the Securities shall be deemed to have been released for sale to the public upon release by you of the publication of a newspaper advertisement relating thereto or upon release by you of telexes offering the Securities for sale to securities dealers, whichever shall first occur. By giving notice as hereinafter specified before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company may prevent this Agreement from becoming effective without liability of any party to any other party, except that the provisions of Section 4(a)(vii),m Section 4(b)(i) and Section 6 hereof shall at all times be effective. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time at or prior to the First Closing Date, and the option referred to in Section 3(b), if exercised, may be cancelled at any time prior to the Second Closing Date, if (i) the - 37 - Company or the Selling Stockholders shall have failed, refused or been unable, at or prior to such Closing Date, to perform any agreement on its part to be performed hereunder, (ii) any other condition of the Underwriters' obligations hereunder is not fulfilled, (iii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have occurred any material adverse change or any development involving prospective material adverse change in or affecting the condition, financial or otherwise, of the Company's subsidiaries taken as a whole or the earnings, business affairs, management, or business prospects of the Company and its subsidiaries, taken as a whole whether or not arising in the ordinary course of business, (iv) any federal or state statute, regulation, rule or order of any court or other governmental authority shall have been enacted, published, decreed or otherwise promulgated which in your reasonable opinion materially and adversely affects or will materially and adversely affect the business or operations of the Company or any of its subsidiaries, (v) trading on the New York Stock Exchange or the American Stock Exchange shall have been wholly suspended, (vi) minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York Stock Exchange or the American Stock Exchange, by such Exchange or by order of the Commission or any other governmental authority having jurisdiction, (vii) a banking moratorium shall have been declared by Federal, New York, Minnesota or Maryland authorities, or (viii) there has occurred any material adverse change in the financial markets in the United States or an outbreak of major hostilities (or an escalation thereof) in which the United States is involved, a declaration of war by Congress, any other substantial national or international calamity or any other event or occurrence of a similar character shall have occurred since the execution of this Agreement that, in your judgment, makes it impractical or inadvisable to proceed with the completion of the sale of and payment for the Securities. Any such termination shall be without liability of any party to any other party except that the provisions of Section 4(a)(viii), Section 4(b)(i) and Section 6 hereof shall at all times be effective. (c) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section, the Company and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified promptly by you by telephone or telegram, confirmed by letter. If the Company elects to prevent this Agreement from becoming effective, you and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified by the Company by telephone or telegram, confirmed by letter. 10. Default by the Company. If the Company shall fail at the First Closing Date to sell and deliver the number of Securities which it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non-defaulting party. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. - 38 - 11. Information Furnished by Underwriters. The statements set forth in the last paragraph of the cover page (to the extent related to the Underwriters) and under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitute the written information furnished by or on behalf of the Underwriters referred to in Section 2 and Section 6 hereof. 12. Notices. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to the Representatives c/o Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, except that notices given to an Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at the address stated in the Underwriters' Questionnaire furnished by such Underwriter in connection with this offering; if to the Company, shall be mailed, telegraphed or delivered to it at 1803 Research Blvd., Suite 305, Rockville, Maryland 20850 Attention: James F. Chen, President and Chief Executive Officer, if to any of the Selling Stockholders, at the address of the Attorneys-in-Fact as set forth in the Powers of Attorney, or in each case to such other address as the person to be notified may have requested in writing. All notices given by telegram shall be promptly confirmed by letter. Any party to this Agreement may change such address for notices by sending to the parties to this Agreement written notice of a new address for such purpose. 13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns and the controlling persons, officers and directors referred to in Section 6. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Securities from any of the several Underwriters. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Minnesota. [Remainder of this page is left intentionally blank] - 39 - Please sign and return to the Company the enclosed duplicates of this letter whereupon this letter will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION By:_______________________________ Name: Title: SELLING STOCKHOLDERS By:______________________________ Attorney-in-Fact Confirmed as of the date first above mentioned, on behalf of themselves and the other several Underwriters named in Schedule I hereto. PIPER JAFFRAY INC. By:_______________________________ Name: Title: VOLPE, WELTY & COMPANY By:_______________________________ Name: Title: - 40 - SCHEDULE I Number of Underwriter Firm Shares (1) ----------- --------------- Piper Jaffray Inc. Volpe, Welty & Company Total ..................._________ ========= _________________ (1) The Underwriters may purchase up to an additional _______ Option Shares, to the extent the option described in Section 3 of the Agreement is exercised, in the proportions and in the manner described in the Agreement. - 41 - SCHEDULE II Number of Name of Selling Stockholder Option Shares --------------------------- ------------- ------------- Total ============= - 42 - EX-3.1 3 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF VIRTUAL OPEN NETWORK ENVIRONMENT CORP. Virtual Open Network Environment Corp., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is Virtual Open Network Environment Corporation, originally incorporated on October 24, 1994. 2. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation restates and integrates and further amends the provision of the Certificate of Incorporation of this Corporation. 3. The text of the Amended and Restated Certificate of Incorporation is hereby restated and amended to read in its entirety as follows: FIRST. The name of the Corporation is Virtual Open Network Environment Corporation. SECOND. The registered agent of the Corporation is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of Delaware. FOURTH. The Corporation is authorized to issue two classes of shares to be designated Common Stock and Preferred Stock, respectively. The total number of shares of stock the Corporation shall have authority to issue is seventy million (70,000,000) shares: fifty million (50,000,000) shares of Common Stock with par value of $0.001 per share, and twenty million (20,000,000) shares of Preferred Stock with par value of $0.001 per share. The Corporation shall from time to time in accordance with the laws of the State of Delaware increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of the Preferred Stock. FIFTH. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of Article Fourth, to provide, by resolution or resolutions and by filing a certificate pursuant to the applicable law of the State of Delaware, for the issuance of additional classes of stock and one or more series of stock within any such class, and the number of shares to be included in such classes and series, which classes and series may have such voting powers, full or limited, or no voting powers, and such powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof as shall be stated in such resolution or resolutions and certificate. SIXTH. The names of the directors of the Corporation are James F. Chen, Charles Chen, Maxine Loh and H.H. Cheng. The mailing address for each is 1803 Research Boulevard, Suite 305, Rockville, MD 20850. SEVENTH. The Corporation is to have perpetual existence. EIGHTH. Elections of directors need not be by written ballot except and to the extent provided in the bylaws of the Corporation. (a) The number of directors constituting the entire Board shall be not less than three nor more than seven as fixed from time to time by vote of a majority of the entire Board, provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office. (b) The Board of Directors shall be divided into three classes, as nearly equal in numbers as the then total number of directors constituting the entire Board permits with the term of office of one class expiring each year. At the annual meeting of stockholders in 1996, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors for any reason, and any directorships resulting from any increase in the number of directors, shall be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders. Subject to the foregoing, at each annual meeting of stockholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting. (c) Notwithstanding any other provisions of this Certificate of Incorporation or the bylaws of the Corporation (and notwithstanding the - 2 - fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the bylaws of the Corporation), any director or the entire Board of Directors of the Corporation may be removed at any time, but only for cause and only by the affirmative vote of the holders of 75% or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose. NINTH. The Corporation shall indemnify, to the fullest extent now or hereafter permitted by law, each director, officer employee or agent (including each former director, officer, employee or agent) of the Corporation who was or is made a party to or a witness in or is threatened to be made a party to or a witness in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was an authorized representative of the Corporation, against all expenses (including attorneys' fees and disbursements), judgments, fines (including excise taxes and penalties) and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this provision shall not eliminate or limit the liability of a director to the extent that such elimination or limitation of liability is expressly prohibited by the General Corporation Law of the State of Delaware as in effect at the time of the alleged breach of fiduciary duty by such director. Any repeal or modification of this Article Ninth by the stockholders of the Corporation shall not adversely affect any right or protection existing at the time of such repeal or modification to which any person may be entitled under this Article Ninth. The rights conferred by this Article Ninth shall not be exclusive of any other right which the Corporation may now or hereafter grant, or any person may have or hereafter acquire, under any statute, provision of this Certificate of Incorporation, Bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The rights conferred by this Article Ninth shall continue as to any person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such person. For the purposes of this Article Ninth, the term "authorized representative" shall mean a director, officer, employee or agent of the Corporation or of any subsidiary of the Corporation, or a trustee, custodian, administrator, committeeman or fiduciary of any employee benefit plan established and maintained by the Corporation or by any subsidiary of the Corporation; or a person who is or was serving another corporation, partnership, joint venture, trust or other enterprise in any of the foregoing capacities at the specific written request of the Corporation. - 3 - The affirmative vote of the holders of at least 75% of the outstanding shares of the capital stock of the Corporation, given in person or by proxy, at a meeting called for the purpose of voting thereon shall be required to amend or repeal this Article Ninth. TENTH. All corporate powers and authority of the Corporation shall be vested in and exercised by the Board of Directors except as otherwise provided by statute, this Certificate of Incorporation or the bylaws of the Corporation. In furtherance and not in limitation of that power, the Board of Directors shall have the power to make, adopt, alter, amend and repeal from time to time the bylaws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to adopt, alter, amend and repeal bylaws made by the Board of Directors; provided, however, that the bylaws shall not be adopted, altered, amended or repealed by the stockholders of the Corporation except by the vote of the holders of not less than 75% of the outstanding shares of stock entitled to vote upon the election of directors. The Board of Directors also shall have the authority to determine whether and to what extent, and at what times and places, and under what conditions and regulations the accounts and books of the Corporation (other than the stock ledger) shall be open to inspection by stockholders. No stockholder shall have any right to inspect any account, book, or document of the Corporation except to the extent permitted by statute or the bylaws. ELEVENTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statue, and all rights conferred upon the officers, directors and stockholders are granted subject to this reservation. TWELFTH: (a) Vote Required for Certain Business Combinations. The affirmative vote of not less than 75% of the outstanding shares of "Voting Stock" (as hereinafter defined) held by stockholders other than an "Interested Person" (as hereinafter defined) shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) of the Corporation with any Interested Person; provided, however, that the 75% voting requirement shall not be applicable if: (1) the "Disinterested Directors" (as hereinafter defined) of the Corporation have expressly approved such Business Combination either in advance of or subsequent to such Interested Person's having become an Interested Person; or (2) the following requirements are satisfied: (i) the cash or Fair Market Value (as hereinafter defined) of the property, securities or "Other Consideration" (as hereinafter defined) per share to be received by holders of the Voting Stock of the - 4 - Corporation in the Business Combination is not less than the "Fair Price" (as hereinafter defined) of such share of Voting Stock of the Corporation; and (ii) the Interested Person shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and (iii) a proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 ("Exchange Act") and the General Rules and Regulations thereunder shall be mailed to the stockholders of the Corporation at least 30 days prior to the consummation of a Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Exchange Act). (b) Tender for Remaining Shares. Every Interested Person, within 60 days of the date they became an Interested Person, must offer to purchase all of the outstanding shares of capital stock of the Corporation at the Fair Price of such stock unless a majority of the Disinterested Directors have expressly approved in advance the transaction through which the Interested Person became an Interested Person. The tender offer must comply with the Exchange Act and applicable General Rules and Regulations thereunder, notwithstanding that such Act or such Rules and Regulations may not require such compliance. The expenses of making the tender offer shall be borne in whole by the Interested Person. Consideration due a shareholder who tenders a share of the Corporation's capital stock in response to such tender offer shall be paid within 60 days of the date on which such stock is tendered. (c) Definitions. The following definitions shall apply to certain words and terms used in this Article TWELFTH: (1) Business Combination. The term "Business Combination" means (i) any merger or consolidation of the Corporation or an "Affiliate" (as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect at the date of the adoption of this Article TWELFTH by the stockholders of the Corporation) of the Corporation with or into an Interested Person, (ii) any sale, lease, exchange, transfer or other disposition, including without imitation, a mortgage or any other security device, of all or any "Substantial Part" (as hereinafter defined) of the assets either of the Corporation (including without limitation, any voting securities of an Affiliate) or of an Affiliate of the Corporation to an Interested Person, (iii) any merger or - 5 - consolidation of an Interested Person with or into the Corporation or an Affiliate of the Corporation, (iv) any sale, lease, exchange, transfer or other disposition, including without limitation, a mortgage or other security device, of all or any Substantial Part of the assets of an Interested Person to the Corporation or an Affiliate of the Corporation, (v) the issuance or transfer by the Corporation or any Affiliate of the Corporation of any securities of the Corporation or of an Affiliate of the Corporation to an Interested Person, (vi) any reclassification of securities, recapitalization, merger or consolidation of the Corporation with any of its Affiliates, or other comparable transaction involving the Corporation that would have the effect of increasing the voting power to any Interested Person with respect to Voting Stock of the Corporation, (vii) any plan or proposal for the liquidation or dissolution of the Corporation or of an Affiliate of the Corporation proposed by or on behalf of an Interested Person, and (viii) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination. (2) Interested Person. The term "Interested Person" means and includes any individual, Corporation, partnership or other person or entity which, together with its Affiliates and "Associates" (as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect at the date of the adoption of this Article TWELFTH by the stockholders of the Corporation), is the "Beneficial Owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act as in effect at the date of the adoption of this Article TWELFTH by the stockholders of the Corporation) of in the aggregate 25 percent or more of the outstanding shares of Voting Stock of the Corporation, and any Affiliate or Associate of any such individual, Corporation, partnership or other person or entity. Notwithstanding paragraph three (3) of this section (c), any share of Voting Stock of the Corporation that any Interested Person has the right to acquire at any time (notwithstanding that Rule 13d-3 of the General Rules and Regulations under the Exchange Act deems such shares to be beneficially owned only if such right may be exercised within 60 days) pursuant to any agreement, or upon exercise of conversion rights, warrants or options or otherwise, shall be deemed to be beneficially owned by the Interested Person and to be outstanding for purposes of this definition. An Interested Person shall be deemed to have acquired a share of the Voting Stock of the - 6 - Corporation at the time when such Interested Person became the Beneficial Owner thereof. (3) Voting Stock. The term "Voting Stock" means all of the outstanding shares of common stock of the Corporation and any outstanding shares of preferred stock of the Corporation entitled to vote on each matter on which the holders of record of common stock of the Corporation shall be entitled to vote, and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares voting together as a single class. (4) Disinterested Director. The term "Disinterested Director" means a director who is unaffiliated with an Interested Person and who (i) was a member of the Board of Directors of the Corporation immediately prior to the time that the Interested Person involved in a Business Combination became an Interested Person, or (ii) was elected or appointed to fill a vacancy after the date the Interested Person became an Interested Person by a majority of the Disinterested Directors then on the Board of Directors, or (iii) was recommended to succeed a Disinterested Director by a majority of the Disinterested Directors then on the Board of Directors. (5) Fair Price. The term "Fair Price" means with respect to each class and series of capital stock of the Corporation, the highest of (i) the amount determined by a majority of the Continuing Directors to be the highest per share price or price equivalent paid at any time by the Interested Person for any share or shares of that class and series of capital stock of the Corporation, or (ii) the Fair Market Value of the stock, or, (iii) if applicable, the highest preferential amount per share to which holders of shares of such class or series of capital stock are entitled in the event of any liquidation, dissolution or winding up of the Corporation. In determining the Fair Price, all purchases by the Interested Person shall be taken into account regardless of whether the shares were purchased before or after the Interested Person became an Interested Person. Also, the Fair Price includes any brokerage commissions, transfer taxes and soliciting dealers' fees paid by the Interested Person with respect to the shares of capital stock of the Corporation acquired by the Interested Person. The Fair Price of capital stock of the Corporation purchased by an Interested Person also includes interest compounded annually from the date an Interested Person became an Interested Person through the date the Business - 7 - Combination is consummated at the publicly announced prime rate of interest of Citibank, N.A. less the aggregate amount of any cash dividends paid and the Fair Market Value of any dividends paid in other than cash on each share of capital stock in the same time period, in an amount up to but not exceeding the amount of interest so payable per share of capital stock. The consideration to be received by holders of a particular class and series of outstanding capital stock shall be, at the option of each stockholder of the Corporation, in cash or in the form of consideration the Interested Person used to acquire the largest number of shares of such class and series of capital stock previously acquired by it. The price determined in accordance with this paragraph shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (6) Fair Market Value. The term "Fair Market Value" means in the case of securities, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such security on the Composite Tape for New York Stock Exchange Listed Securities, or, if such security is not listed on such exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such security is listed, or, if such security is not listed on any such exchange, the highest closing bid quotation with respect to such security during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the value on the date in question of the security as determined by the Board of Directors in good faith. The Fair Market Value of property other than cash or stock shall be as determined by the Board of Directors in good faith. In the case of Business Combinations, the Fair Market Value, as determined above, shall be determined with reference to higher of the fair market value on the date the Interested Person became an Interested Person or on the date of the first public announcement of the Business combination. In the case of Tenders for Remaining Shares, the Fair Market Value, as determined above, shall be determined with reference to the higher of the fair market value on the date the Interested Person became an Interested Person or on the last business day before the date upon which the Interested Person makes the tender offer. (7) Substantial Part. The term "Substantial Part" means more than 20 percent of the Fair Market Value - 8 - of the total consolidated assets of the Corporation and its Affiliates taken as a whole as of the end of its most recent fiscal year ended prior to the date the termination is being made. (8) Other Consideration. The term "Other Consideration" includes, without limitation, common stock or other capital stock of the Corporation retained by its existing stockholders other than Interested Persons or other parties to such Business Combination in the event of a Business Combination in which the Corporation is the surviving Corporation. (d) Fiduciary Obligations of Interested Persons. Nothing contained in this Article TWELFTH shall be construed to relieve any Interested Person from any fiduciary obligation imposed by law. (e) Determinations by the Disinterested Directors. In making any determinations, the Disinterested Directors may, at the expense of the Corporation, engage such persons, including investment banking firms and the independent accountants who have reported on the most recent financial statements of the Corporation, and utilize employees and agents of the Corporation, who will, in the judgment of the Disinterested Directors, be of assistance to the Disinterested Directors. Any determinations made by the Disinterested Directors, acting in good faith on the basis of such information and assistance as was then reasonably available for such purposes, shall be conclusive and binding upon the Corporation and its stockholders, including any Interested Person. (f) Amendments to the Article. Notwithstanding any other provision of this Certificate of Incorporation or the bylaws of the Corporation and notwithstanding that absent this provision, a lesser percentage may be sufficient under applicable law, the affirmative vote of not less than 75% of the Voting Stock held by stockholders other than an Interested Person shall be required to amend, repeal or adopt any provisions inconsistent with this Article TWELFTH. - 9 - IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation has been signed under the seal of the Corporation this 10 day of January, 1996. VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION /s/ James F. Chen --------------------------------------- James F. Chen, President [Seal] Attest: /s/ Charles Chen -------------------------------- Charles Chen, Secretary - 10 - EX-3.2 4 AMENDED BYLAWS OF VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION ARTICLE I. ---------- MEETINGS OF SHAREHOLDERS ------------------------ Section 1.1 Places of Meetings. All meetings of the share- holders shall be held at such place, either within or without the State of Delaware, as from time to time may be fixed by the Board of Directors. Section 1.2 Annual Meeting. The annual meeting of the shareholders for the election of Directors and transaction of such other business as may come before the meeting shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Unless otherwise designated by the Board of Directors, the annual meeting shall be held on the first Friday of the month of June. Section 1.3 Special Meetings. A special meeting of the shareholders for any purpose or purposes may be called at any time by the President or the Chairman of the Board or a majority of the Board of Directors as prescribed by statute. Section 1.4 Notice of Meetings. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the Corporation may be examined. The notice of a meeting shall in all instances state the purpose or purposes for which the meeting is called. If any action is proposed to be taken which would, if taken, entitle stockholders to receive payment for their shares of stock, the notice shall include a statement of that purpose and to that effect. Except as otherwise provided by the General Corporation Law of the State of Delaware, a copy of the notice of any meeting shall be given, personally or by telex, telefax, telephone, telegraph or postal mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he/she may have furnished by request in writing to the Secretary of the Corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the U.S. mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice by him/her before or after the time stated therein. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders need be specified in any written waiver of notice. Section 1.5 Quorum. Any number of shareholders together holding at least a majority of the outstanding shares of stock entitled to vote with respect to the business to be transacted, who shall be present in person or represented by proxy at any meeting duly called, shall constitute a quorum for the transaction of business. If less than quorum shall be in attendance at the time for which a meeting shall have been called, the meeting may be adjourned from time to time by a majority of the shareholders present or represented by proxy without notice other than by announcement at the meeting. Section 1.6 Proxies and Voting. Each shareholder shall, at every meeting of the shareholders, be entitled to one vote in person or by proxy for each share of capital stock having voting power held by such shareholder as of the record date set for the meeting. All action requiring the approval of the shareholders shall be authorized by a majority of the votes cast except where the General Corporation Laws of the State of Delaware prescribes a different percentage of votes and/or a different exercise of voting power. A proxy shall be authorized by an instrument in writing, dated and signed by the shareholder entitled to vote or his duly authorized attorney-in-fact. The original or a facsimile of the proxy shall be filed with the Secretary. All voting may be taken either by voice vote or by written ballots, except where otherwise required by law. No proxy shall be voted after three years from its date, unless the proxy provides for a longer period. Section 1.7 Inspectors and Judges. The person presiding at any meeting of shareholders may, but need not, appoint one or more inspectors or judges. Each inspector or judge, if any, before entering upon the discharge of his/her duties, shall take and sign an oath faithfully to execute the duties of inspector or judge at such meeting with strict impartiality and according to the best of his/her ability. The inspectors or judges, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing of any challenge, question or matter determined by him/her or them and execute a certificate of any fact found by him/her or them. - 2 - Section 1.8 Written Consent. Any action required or permitted by law to be taken at a shareholders' meeting may be taken without a meeting, without action by the Board of Directors, without prior notice, and without a vote, if consents in writing setting forth the action are signed by all shareholders entitled to vote upon the action. Written consents, in order to be valid, must be delivered by postal mail or telefax to the Secretary of the Corporation for inclusion in the minutes or filing in the corporate minutes. Every written consent shall bear the signature of each shareholder who makes the consent and the date upon which the consent was signed. ARTICLE II. ----------- DIRECTORS --------- Section 2.1 Powers of Directors. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which shall exercise all powers of the Corporation, except as otherwise expressly provided by law, the Certificate of Incorporation, or these Bylaws. Section 2.2 Number of Directors. The number of Directors which shall constitute the Board of Directors shall be not more than seven. The first Board of Directors shall consist of the following four Directors: James F. Chen, Charles Chen, Maxine Loh and H.H. Cheng. Thereafter, within the limits specified above, the number of Directors shall be determined by resolution of the Board of Directors at the annual meeting. Section 2.3 Election of Directors. Directors shall be elected at each annual meeting of shareholders to succeed those Directors whose terms have expired and to fill any vacancies then existing. Directors shall hold their offices for terms of one year and until their successors are elected on a staggered basis as provided for in the Amended and Restated Certificate of Incorporation. Section 2.4 Advance Notice of Nomination of Directors. Unless a Director is nominated by a member of the Board of Directors, no person shall be nominated or elected as a Director unless the Board receives written notice of his nomination not less than 120 calendar days in advance of the anniversary date of the Corporation's previous year's annual meeting of stockholders. Section 2.5 Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the authorized number of Directors shall be filled by vote of a majority of the Directors then in office and shall be distributed among the three classes of Directors so that, as nearly as possible, each class will consist of an equal number of Directors. Vacancies in the Board of Directors however occurring shall be - 3 - filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director. A Director chosen to fill a vacancy shall have the same term as that Director's predecessor. Section 2.6 Removal and Resignation of Directors. Directors may be removed from office only for cause at a meeting called expressly for that purpose by the vote of shareholders holding not less than 75% of the shares entitled to vote at an election of Directors or by a vote of a majority of the Directors. Directors may resign at any time upon written notice to the Corporation. Such resignation shall become effective upon receipt and need not be accepted by the Board to become effective. ARTICLE III. ----------- BOARD OF DIRECTORS' MEETINGS --------------------------- Section 3.1 Regular Meetings. The first meeting of the Board of Directors shall be held at such time and place as shall be fixed by the vote of the shareholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present, or it may convene at such place and time as shall be fixed by the consent in writing of all the Directors. Thereafter regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors shall from time to time determine. No notice shall be required for any such regular meetings. Section 3.2 Special Meetings. Special meetings of the Board of Directors, or the reconvening of any regular meeting, may be called by one-third of the Directors then in office, or by the President or Chairman of the Board, by giving: (1) no less than one day's actual notice to each Director by oral communication, computer e-mail, telegram, telefax or telex; or (2) no less than 10 days' notice to each Director by registered letter. Section 3.3 Participation in Meetings by Telephone. Members of the Board of Directors, or any Committee thereof, may participate in meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and be heard. Section 3.4 Unanimous Written Consent. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any Committee thereof, may be taken without a meeting if all the members of the Board of Directors or Committee consent thereto in writing and the writing is filed in the minute book of the Corporation. Section 3.5 Quorum. Except as otherwise provided in these Bylaws, a majority of the Directors in office shall constitute a quorum - 4 - for the transaction of business, and the vote of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. If a quorum shall fail to attend any meeting, a majority of those Directors present may adjourn and reconvene the meeting at another place, date, or time, without further notice other than an announcement at the originally scheduled meeting. Section 3.6 Conduct of Business. The Board of Directors shall have the authority to make, and from time to time to alter, amend and supplement, rules of conduct for its own meetings. Any Director shall have the right to put any item on the agenda of any meeting of the Board of Directors. ARTICLE IV. ----------- COMMITTEES ---------- Section 4.1 Establishment. The Board of Directors, by resolution adopted by a majority of the number of Directors fixed by these Bylaws, may establish such Committees of the Board as it may deem advisable, consisting of not less than two Directors; and the members, terms and authority of such Committees shall be as set forth in the resolutions establishing the same; provided, however, no Committee of the Board of Directors shall have the power to (1) amend the Certificate of Incorporation; (2) adopt an agreement of merger or consolidation; (3) recommend to the shareholders the sale, lease or exchange of all or substantially all of the Corporation's assets; (4) recommend to the shareholders a dissolution of the Corporation or a revocation of a dissolution; (5) amend the Bylaws of the Corporation; (6) declare a dividend; (7) authorize the issuance of stock; (8) change the number of Directors or fill a vacancy in the Board of Directors or in any Committee; or (9) perform any other function prohibited by law. Persons who are not directors may attend and participate in Committee meetings in an advisory capacity at the invitation of the Committee, but they may not vote. The Board of Directors may establish rules and regulations for the conduct of the proceedings of any Committee and may appoint the chairman of the Committee and a secretary of the Committee. To the extent that the Board of Directors does not exercise these powers of appointment, they may be exercised by the Committee, subject to the power of the Board of Directors to change the Committee's action. Each Committee may be terminated at the will of the Board of Directors. Section 4.2 Meetings. Regular and special meetings of any Committee established pursuant to this Article may be called and held subject to the same requirements with respect to time, place and notice as are specified in these Bylaws for regular and special meetings of the Board of Directors. - 5 - Section 4.3 Quorum and Manner of Acting. A majority of the members of any Committee serving at the time of any meeting thereof shall constitute a quorum for the transaction of business at such meeting. The action of a majority of those members present at a Committee meeting at which a quorum is present shall constitute the act of the Committee. Section 4.4 Term of Office. Members of any Committee shall be elected as above provided and shall hold office so long as they serve as Directors or until their successors are elected by the Board of Directors or until such Committee is dissolved by the Board of Directors. Section 4.5 Resignation and Removal. Any member of a Committee may resign at any time by giving written notice of the member's intention to do so to the President, the Chairman of the Board or the Secretary of the Corporation, or may be removed, with or without cause, at any time by such vote of the Board of Directors as would suffice for the member's election. Section 4.6 Vacancies. Any vacancy occurring in a Committee resulting from any cause whatever may be filled by a majority of the number of Directors fixed by these Bylaws or by a majority of the remaining Committee members. ARTICLE V. ---------- OFFICERS -------- Section 5.1 General. The executive officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board and Chief Executive Officer, a President, a Treasurer, a Secretary, and such Vice-Presidents as the Board of Directors may from time to time determine. Other offices may be established by the Board of Directors from time to time. Any number of offices may be held by the same person. Any number of offices may be left temporarily vacant at the option of the Board of Directors. The initial officers shall be as follows: President, James F. Chen; and Secretary and Treasurer, Charles Chen. Thereafter, the officers shall be reaffirmed or replaced at the first meeting of the Board of Directors subsequent to each annual meeting of shareholders, unless the Board of Directors determines, upon appointing an officer, that he/she shall serve for a different term. All executive officers have a right to act as a second signatory on contracts when such a second signature is required by law. Section 5.2 Chairman of the Board and Chief Executive Officer. The Chairman of the Board and Chief Executive Officer shall preside at all meetings of the shareholders and the Board of Directors, shall see that all orders and resolutions of the Board of Directors are carried into effect, and shall have general active management of the business of the Corporation. Except where, by law, the signature of the - 6 - President is required, the Chairman of the Board and Chief Executive Officer shall possess the same power as the President to sign all certificates, contracts, and other instruments of the Corporation which may be authorized by the Board of Directors. Section 5.3 President. The President, in the absence of the Chairman of the Board and Chief Executive Officer, shall be preside at all meetings of the shareholders and of the Board of Directors, shall have general and active management of the business of the Corporation, and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall have authority to sign all stock certificates, contracts and other instruments of the Corporation, and to affix the seal of the Corporation to such documents. The President has the authority to delegate portions of his power to one or more Vice Presidents. The President shall perform such other functions as the Board of Directors may from time to time require. Section 5.4 Chief Operating Officer. The Chief Operating Officer shall perform such functions as the Board of Directors may from time to time require. Section 5.5 Executive Vice President and Vice President. In the absence of the President, an Executive Vice President or a Vice President (as one or more may be appointed by the Board of Directors; or in the absence of such delegation appointed by the President) shall perform the duties of the President. The Vice Presidents shall not have the power to sign stock certificates, contracts or other instruments of the Corporation, nor to affix the seal of the Corporation to such documents, unless authorized to do so by the President. The Vice Presidents shall perform such other functions as the Board of Directors may from time to time require. Section 5.6 Treasurer. The Treasurer shall have responsibility for the Corporation's funds and for keeping full and accurate accounts of receipts and disbursements in books belonging to the Corporation. The Treasurer shall deposit, or authorize deposit of, all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse, or authorize disbursements of, the funds of the Corporation as necessary and proper for the operation of the Corporation, taking proper receipts for such disbursements; provided, however, that the Board of Directors shall, from time to time, set a maximum expenditure amount, and disbursement of sums over and above such amount shall require a resolution of the Board of Directors. The Treasurer may authorize another officer of the Corporation or an accountant retained by the Corporation to disburse sums of the Corporation necessary and proper for the daily operating expenses of the Corporation, up to a maximum amount which the Treasurer shall set from time to time, which will not exceed any maximum expenditure amount set by the Board of Directors. The Treasurer shall not be required to be bonded. - 7 - The Treasurer shall, when required, render to the President or the Board of Directors an account of the transactions and of the financial condition of the Corporation. The accounting of the Corporation shall be maintained according to generally accepted accounting principles. The Treasurer shall have the authority to retain, from time to time, an attorney or accountant to review the accounts, prepare the tax returns of the Corporation, and perform such other services as may be necessary and proper to maintain the financial records of the Corporation. The Treasurer shall perform such other functions as the Board of Directors may from time to time require. Section 5.6 Secretary. The Secretary shall issue all authorized notices for, and shall prepare and maintain custody of the minutes of, all meetings of the shareholders and the Board of Directors. The Secretary shall have charge of the corporate books. The Secretary shall have custody of the seal of the Corporation and shall have authority to affix the seal to any instrument requiring it and to attest to the authenticity of that seal by the Secretary's signature. The Secretary shall authenticate records of the Corporation. The Secretary shall sign all stock certificates. The Secretary shall perform such other functions as the Board of Directors may from time to time require. Section 5.7 Delegation of Authority. The Board of Directors may, from time to time, delegate the powers and duties of any executive officer to any other executive officer, and may designate the powers of non-executive officers to any other officers or agents, notwithstanding the provisions hereof. Section 5.8 Compensation. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors or set forth in employment agreements or other compensation arrangements approved by the Board. Section 5.9 Removal. Any officer may be removed at any time, with or without cause, by the Board of Directors. ARTICLE VI. ----------- INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS, AND EMPLOYEES ------------------------------------------------------------- Section 6.1 Right to Indemnification. Each person who was or is made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he/she is or was a Director, officer, agent, or employee of the Corporation shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the - 8 - same exists or may hereafter be amended, against any expenses, (including attorneys fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection therewith. Notwithstanding the above, no Director shall be indemnified nor held harmless in violation of the provisions set forth in the Certificate of Incorporation; and no Director, officer, agent, or employee shall be indemnified nor held harmless by the Corporation unless: (1) In the case of conduct in his/her official capacity with the Corporation, he/she acted in good faith and in a manner he/she reasonably believed to be in the best interests of the Corporation; (2) In all other cases, his/her conduct was at least not opposed to the best interests of the Corporation nor in violation of the Certificate, Bylaws or any agreement entered into by the Corporation; and (3) In the case of any criminal proceeding, he/she had no reasonable cause to believe that his/her conduct was unlawful. Section 6.2 Right to Advancement of Expenses. The right to indemnification conferred in Section 6.1 of this Article shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that such an advancement of expenses shall be made only upon delivery to the Corporation of (1) a statement of his/her good faith belief that he/she has met the standard of conduct described in Section 6.1; and (2) an undertaking by or on behalf of the indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision that he/she is not entitled to be indemnified for such expenses. Section 6.3 Determination and Authorization to Indemnify. The Corporation may not indemnify a Director under Section 6.1 unless authorized after a determination has been made that indemnification of the Director is permissible in the circumstances because he/she has met the standard of conduct in Section 6.1. This determination shall be made by the Board of Directors by a majority vote of a quorum consisting of Directors not at the time parties to the proceeding. Section 6.4 Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, agreement, vote of shareholders or disinterested Directors, or otherwise. Section 6.5 Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any Director, officer, employee or agent of the Corporation against any expense, liability or loss. - 9 - ARTICLE VII. ------------ STOCK ----- Section 7.1 Issuance. The Corporation may issue shares of capital stock of any class or series now or hereafter authorized in the Certificate of Incorporation, in accordance with the authority granted by a Board of Directors resolution. Section 7.2. Stock Certificates. Each shareholder shall be entitled to a certificate signed in the name of the Corporation by the President and by the Secretary, and affixed with the seal of the Corporation. The Treasurer may sign in lieu of the Secretary. Signatures on the certificate may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he/she were such officer at the date of its issue. Section 7.3 Transfer of Stock. Transfer of stock may be made only on the transfer ledger of the Corporation kept at an office of the Corporation or in the possession of the Secretary or the corporate transfer agent. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7.4 Record Date. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock, the Board of Directors may fix a record date. Such record date shall not precede the date on which the Board of Directors' resolution fixing the record date is adopted, and shall not be more than 70 days prior to the meeting or such other action as above described. If no record date is fixed by the Board of Directors for determination of who is entitled to vote or receive notice of a shareholders' meeting, the record date shall be at the close of business on the day preceding the day on which notice is given; or if notice is waived, at the close of business on the day preceding the day on which the meeting is held. If no record date is set for determining shareholders entitled to receive a dividend or other distribution or allotment of rights or to exercise any rights in respect to any change, conversion or exchange of stock, the record date shall be at the close of business on - 10 - the day on which the Board of Directors adopts a resolution relating thereto. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. In order that the Corporation may determine the shareholders entitled to consent in writing to corporate action taken without a meeting, the Board of Directors may fix a record date, which shall not precede and shall not be more than ten days after the date on which the resolution fixing the record date is adopted. If no record date has been fixed by the Board of Directors, and the Board of Directors is not required by law to take some action prior to the action for which written consent is sought, the record date shall be the first date on which a signed written consent is properly delivered to the Corporation. If no record date had been fixed by the Board of Directors and the Board of Directors is required by law to take some action prior to the action for which written consent is sought, the record date shall be the close of business on the day on which the Board of Directors adopts a resolution taking such prior action. Section 7.5 Replacement Certificates. New stock certificates may be issued to replace certificates lost, stolen, destroyed, or mutilated, upon such terms and conditions, including proof of loss or destruction and the giving of a satisfactory bond of indemnity, as the Board of Directors may from time to time determine. Section 7.6 Holders of Record. The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock as the holder and owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim of right, title, or interest in such share or shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law. Section 7.7 Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VIII. ------------- LIST OF SHAREHOLDERS -------------------- The officer or agent having charge of the transfer books for shares shall make, at least ten days before each meeting of shareholders, - 11 - a complete list of the shareholders entitled to vote at such meeting, arranged by voting group and within each voting group by class or series of shares, with the address of each and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the principal business office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share transfer book, or a duplicate thereof, shall be prima facie evidence as to who are the shareholders entitled to examine such list or share transfer book or to vote at any meeting of the shareholders. ARTICLE IX. ----------- MISCELLANEOUS ------------- Section 9.1 Dividends. Dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors in its absolute discretion, from time to time, believes is proper as a reserve fund to meet contingencies, or equalize dividends, or for such other purposes as the Board of Directors determines is conducive to the interests of the Corporation. The Board of Directors may at any time modify or abolish any such reserve fund. Section 9.2 Annual Statement. The Board of Directors shall present at each annual meeting, and at any special meeting of the shareholders when called for by vote of the shareholders, a full and clear statement of the business and condition of the Corporation. Section 9.3 Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors from time to time. Section 9.4 Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 9.5 Seal. The Corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Section 9.6 Amendments. These Bylaws may be altered, amended, repealed, or replaced by new Bylaws by the affirmative vote of a - 12 - majority of the Board of Directors at any regular or special meeting of the Board of Directors unless the Certificate of Incorporation or law reserve this power to the shareholders. I HEREBY CERTIFY that the foregoing is a full, true and correct copy of the Bylaws of Virtual Open Network Environment Corporation, a Delaware corporation, as in effect on the date hereof. WITNESS my hand and the seal of the Corporation. Dated: January 10, 1996 /s/ Charles Chen By: ------------------------- Charles Chen, Secretary (SEAL) - 13 - EX-3.3 5 CERTIFICATE OF DESIGNATION, PREFERENCES, AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK of VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, James F. Chen, President and Chief Executive Officer, and Charles Chen, Secretary, of Virtual Open Network Environment Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware ("Corporation"), in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation on April 4, 1996, adopted the following resolution creating a series of 1,183,402 shares of convertible preferred stock designated as Series A Convertible Preferred Stock; That, pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a series of preferred stock of the Corporation be, and it hereby is, created, and that the designation and amount thereof and the powers, preferences, and relative, optional, and other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof are as follows: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Convertible Preferred Stock" and the number of shares constituting such series shall be 1,183,402. Section 2. DIVIDENDS AND DISTRIBUTIONS. Dividends upon the shares of Series A Convertible Preferred Stock may be declared by the Board of Directors at any time and may be paid in cash, in property, or in shares of Series A Convertible Preferred Stock. The holders of shares of Series A Convertible Preferred Stock are entitled to share ratably in dividends with holders of any other series of preferred stock of the Corporation now existing or hereafter created, but shall receive no preference in dividends declared. The Corporation will not pay dividends on Common Stock as long as Series A Convertible Preferred Stock is outstanding. Section 3. VOTING RIGHTS. In addition to any other voting rights required by law, the holders of shares of Series A Convertible Preferred Stock shall have the following voting rights: (a) Each share of Series A Convertible Preferred Stock shall entitle the holder thereof to vote on all matters submitted to a vote of the stockholders of the Corporation, and the holders of Series A Convertible Preferred Stock shall vote as a class on matters affecting their value including a) issuance of any new series of Preferred Stock of the Corporation with superior rights, and b) any merger, dissolution, or sale of the Corporation. All action requiring the approval of holders of shares of Series A Convertible Preferred Stock voting as a class shall be authorized by a majority vote of such holders. (b) Except as set forth herein, holders of Series A Convertible Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. REACQUIRED SHARES. Any shares of Series A Convertible Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall, upon their cancellation, become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. The Corporation will not repurchase Common Stock as long as Series A Convertible Preferred Stock is outstanding without the approval of the holders of the Series A Convertible Preferred Stock voting as a class. Section 5. LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary liquidation, sale, or winding up of the Corporation, the holders of Series A Convertible Preferred Stock shall be entitled to receive in preference to holders of Common Stock an amount equal to the purchase price per share of the Series A Convertible Preferred Stock plus any accrued but unpaid dividends. Any remaining proceeds shall be allocated between Common and Preferred Shareholders on a pro-rata basis, treating the shares of Series A Convertible Preferred Stock on an as-if converted basis. Section 6. CONVERSION. Shares of Series A Convertible Preferred Stock may at any time be converted into shares of Common Stock, on a one for one basis, provided that such shares of Series A Convertible Stock have not been previously converted pursuant to Section 7 below. Section 7. MANDATORY CONVERSION. Shares of Series A Convertible Preferred Stock will be subject to a mandatory conversion by the Corporation on ten (10) days written notice in the event of an initial public offering of shares of the Corporation's Common Stock in which over $15 million is raised and the offering price per share is at least 1.75 times the initial conversion price per share of the Series A Convertible Preferred Stock. Section 8. CONVERSION RATIO ADJUSTMENT. The conversion ratio provided in Section 6 shall be subject to adjustment under the circumstances and in the manner as described below: (a) In the event that the Corporation effects an initial public offering prior to March 31, 1997 at a price less than $5.25 per share, the conversion ratio shall be adjusted by multiplying the subscription price of the Series A Convertible Preferred Stock times a factor of 1.75, and dividing the product by the midpoint of the filing range contained in the final pre-effective amendment to the registration statement for the initial public offering, so that if the subscription price is $3.00 per share and the midpoint of the filing range is $4.50 per share, the conversion ratio would be determined by multiplying $3.00 x 1.75, and dividing the product by $4.50 to reach a conversion ratio of 1.1667 shares of Common Stock for each converted share of Series A Convertible Preferred Stock; (b) In the event that the Corporation effects an initial public offering during the period from April 1, 1997 until March 31, 1998 at a price less than $6.00 per share, the conversion ratio shall be adjusted by multiplying the subscription price of the Series A Convertible Preferred Stock times a factor of 2.00, and dividing the product by the midpoint of the filing range contained in the final pre-effective amendment to the registration statement for the initial public offering, so that if the subscription price is $3.00 per share and the midpoint of the filing range is $4.50 per share, the conversion ratio would be determined by multiplying $3.00 x 2.00, and dividing the product by $4.50 to reach a conversion ratio of 1.333 shares of Common Stock for each converted share of Series A Convertible Preferred Stock; (c) In the event that the Corporation effects an initial public offering after March 31, 1998 at a price less than $9.00 per share, the conversion ratio shall be adjusted by multiplying the subscription price of the Series A Convertible Preferred Stock times a factor of 3.00, and dividing the product by the midpoint of the filing range contained in the final pre-effective amendment to the registration statement for the initial public offering, so that if the subscription price is $3.00 per share and the midpoint of the filing range is $4.50 per share, the conversion ratio would be determined by multiplying $3.00 x 3.00, and dividing the product by $4.50 to reach a conversion ratio of 2.00 shares of Common Stock for each converted share of Series A Convertible Preferred Stock. Section 9. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination, or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash, and/or any other property, then in any such case the shares of Series A Convertible Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to the amount of stock, securities, cash, and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the date hereof (a) declare any dividend on Common Stock payable in shares of Common Stock, (b) subdivide the outstanding shares of Common Stock, or (c) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Convertible Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 10. REDEMPTION. The shares of Series A Convertible Preferred Stock, on or before December 31, 2001, will be subject to redemption at the option of the holder, if not previously converted, at the earlier of a dissolution, winding up, or sale or merger wherein a "change of control" occurs ("Liquidity Events"). A change of control will occur: a) upon the sale or transfer of substantially all the assets of the Corporation by sale, merger or otherwise, or b) if any "person" (as such term is used in Sections 13(d) or 14(d) of the 1934 Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the then-existing outstanding securities of the Corporation. If no Liquidity Event occurs on or before December 31, 2001, shares of Series A Convertible Preferred Stock will be subject to redemption, at the option of the holder, in equal amounts effective as of December 31, 2001, December 31, 2002, and December 31, 2003. The redemption price will equal the initial purchase price and there shall be no interest or premium paid. Section 11. AMENDMENT. The Certificate of Incorporation of the Corporation shall not be further amended in any manner that would materially alter or change the powers, preferences, or special rights of the Series A Convertible Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding shares of Series A Convertible Preferred Stock, voting separately as a class. IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury this 4th day of April, 1996. /s/ James F. Chen ---------------------------------- James F. Chen, President and Chief Executive Officer Attest: /s/ Charles Chen ------------------------- Charles Chen Secretary PAGE 1 State of Delaware OFFICE OF THE SECRETARY OF STATE --------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION", FILED IN THIS OFFICE ON THE NINETEENTH DAY OF APRIL, A.D. 1996, AT 12 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. SEAL /s/ Edward J. Freel ----------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 2447723 8100 7915153 960113363 DATE: 04-22-96 EX-3.4 6 CERTIFICATE OF INCREASE IN THE NUMBER OF SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK of VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, James F. Chen, President and Chief Executive Officer, and Charles Chen, Secretary of Virtual Open Network Environment Corporation, a corporation organized and existing under the general Corporation Law of the State of Delaware ("Corporation"), in accordance with the provisions of sections 151 and 103 thereof, do hereby certify that 1. Pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation on April 4, 1996, adopted a resolution creating a series of preferred stock designated as "Series" A Convertible Preferred Stock." The number of shares constituting the Series A Convertible Preferred Stock was established by such resolution at 1,183,402. A Certificate of Designation, Preferences, and Rights of Series A Convertible Preferred Stock was duly executed, acknowledged, filed and recorded pursuant to Section 103 of the General Corporation Law of the State of Delaware. 2. Pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation on May 13, 1996, adopted a further resolution increasing the number of shares constituting the Series A Convertible Preferred Stock by 6,071 shares to a total of 1,189,473 shares. IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury this 21st day of May, 1996. /s/ James F. Chen ------------------------------- JAMES F. CHEN, President and Chief Executive Officer Attest: /s/ Charles Chen -------------------------- CHARLES CHEN, Secretary EX-9.1 7 VOTING TRUST AGREEMENT THIS AGREEMENT, is intended to memorialize and consolidate the terms of prior understandings of the parties and is therefore made effective as of the 1st day of January, 1996, by and between H.H. Cheng (hereinafter referred to as "Stockholder"), and James F. Chen, Trustee, and his successor and successors in the Trust, (hereinafter collectively referred to as "Voting Trustee"): 1. Stockholder has assigned and transferred to Voting Trustee the number of shares of Virtual Open Network Environment Corporation (the Corporation) set opposite his or her signature hereto, for the purpose of vesting in Voting Trustee, as Trustee of an active trust, the right to vote thereon and act in respect thereof, for a period of 1 year from the date hereof, or initial public offering whichever is first, subject to earlier termination by the Trustee as hereinafter provided. 2. Voting Trustee shall cause to be issued, in respect of the stock of the Corporation held by him, pursuant to the terms hereof, a voting trust certificate in a form acceptable to the parties and the Corporation (hereinafter referred to as the "voting trust certificate"): 3. In the event that Voting Trustee shall receive any additional stock certificates of Corporation by way of dividend upon stock held by it under this Agreement, Voting Trustee shall hold such stock certificates likewise subject to the terms of this Agreement, and shall issue voting trust certificates representing such stock certificates to the respective registered holder of the then outstanding voting trust certificate entitled to such dividend. 4. Voting Trustee shall execute any and all of the said voting trust certificates, and no voting trust certificate shall be valid unless duly signed by Voting Trustee. Each voting trust certificate shall be transferable on the voting trust certificate books of Voting Trustee (which shall be kept for that purpose at the office of the said Trustee) by the registered holder thereof, either in person or by duly authorized attorney, upon the surrender of such voting trust certificate properly endorsed for transfer. Until so transferred, the Voting Trustee may treat the registered holder of voting trust certificates as owner thereof for all purposes, except that the delivery of stock certificates hereunder and certain payments hereunder, as hereinafter provided, shall not be made without surrender of such voting trust certificates. 5. Until the termination of this Agreement each registered holder of a voting trust certificate shall be entitled to receive promptly from Voting Trustee payments equal to the amount of dividends (other than dividends represented by capital stock of the Corporation) or other distributions if any, collected by Voting Trustees upon the number of shares of stock of the Corporation standing in the name of such registered holder, and any payment representing the amount received upon redemption or sale of any common stock, represented by the voting trust certificate or certificates held by him, subject, however, to the terms and conditions of this Agreement. Those registered as holders of voting trust certificates on the dates fixed as record dates by the Corporation for dividends and for the allotment of rights shall be entitled to such payments and to any rights to the benefit of which holders of voting trust certificates may be entitled under this Agreement. Voting Trustee may, in his discretion, from time to time, close the voting trust certificate books against transfers of voting trust certificates for the purpose of determining the voting trust certificate holder entitled to such payments or to such rights, or for the purpose of determining the voting trust certificate holder entitled to vote at any meeting thereof or to do any thing or act to be done or performed by said holders. 6. This Agreement shall terminate one year from its effective date or upon initial public offering if earlier without notice by or action of the Voting Trustee; but, at any earlier time, it may be terminated by the written action of the Voting Trustee, in his uncontrolled discretion, by signing a declaration to that effect and sending a copy of the same to each registered holder of voting trust certificates issued hereunder. Upon termination of this Agreement as above specified, Voting Trustee, in exchange for, or upon surrender of, any voting trust certificate then outstanding, shall, in accordance with the terms hereof, and out of the stock held by him hereunder, deliver proper certificates of stock of the Corporation to the holders of voting trust certificates and thereupon all liability of Voting Trustee, or his successors, or successor, or of any of them, for the delivery of said stock certificates shall cease and terminate. Voting Trustee may call upon and require the holders of voting trust certificates to surrender them in exchange for certificates of stock of the number of shares to which they are entitled hereunder. 7. Until the actual transfer of stock certificates to the holders of voting trust certificates hereunder, Voting Trustee shall, in his uncontrolled discretion, in respect of any and all of the stock held by him hereunder, except as in this Agreement expressly limited, possess and be entitled to exercise the right to vote thereon for every purpose, in person or by proxy, to waive any stockholder's privilege in respect thereof, excluding any right or privilege to subscribe for any increased stock, and to consent to any lawful corporate act of the Corporation, as though absolute owner of said stock, it being expressly agreed that no voting right shall pass to others by or under said voting trust certificates, or by or under this Agreement, or by or under any other agreement, express or implied. Voting Trustee is specifically authorized by way of example, without limiting his rights hereunder, to vote the stock held by him for, or to consent in respect thereof to, any increase or reduction of the stock of the Corporation, any agreement of consolidation, merger, share exchange or the sale or other disposition of all, substantially all, or any part of the property, assets and franchises of the Corporation and the granting, ratification or confirmation of any option or options therefor (whether executed before or after the execution of this Agreement, and whether or not such option or options extend(s) beyond the term of this Agreement), or the dissolution of the Corporation, - 2 - and the judgment of Voting Trustee as to the adequacy of the consideration thereby to be received by the Corporation and Stockholder (provided Stockholder and each holder of a voting trust certificate of each class is treated uniformly, share for share) shall be conclusive and binding upon Stockholder and the holders of voting trust certificates and all persons claiming through or under them. Any person acting as a Voting Trustee under this Agreement may, directly or indirectly, transact any lawful business with the Corporation, notwithstanding is position as Voting Trustee. Voting Trustee may also serve as director and compensated officer of the Corporation and may vote for himself, as such. 8. In the event of the death, resignation or other permanent inability to serve of the Voting Trustee, James F. Chen, then Not Applicable shall serve as successor Voting Trustee, and in the event of the death, resignation, inability or refusal to serve of such successor, then anything contained herein to the contrary notwithstanding, this Agreement shall cease and terminate without notice by or action of such successor Voting Trustee. Such successor shall serve for the unexpired term in the place and stead of the original Voting Trustee, as above provided, and the authority, powers, duties, obligations, and limitations of the said original Voting Trustee shall devolve upon such successor with the same effect as if such successor had been the person named as original Voting Trustee. The successor of any person acting as Voting Trustee shall, by written agreement, undertake the performance of this voting trust in accordance with its terms. 9. At any meeting of the stockholders of the Corporation, any person then acting as a Voting Trustee may vote or act in person or by proxy to any other person whether or not such other person is a Voting Trustee, and any person acting as a Voting Trustee may give a power or attorney to any other person, whether or not such other person is acting as a Voting Trustee, to sign for him in case of action taken in writing without a meeting. Voting Trustee may adopt his own rules of procedure and may vote as stockholder of the Corporation in person or by proxy. 10. In voting the stock represented by the stock certificates issued to Voting Trustee as hereinbefore provided, the person acting as Voting Trustee shall exercise his best judgment to the end that the business and affairs of the Corporation shall be properly managed; but no person acting as Voting Trustee assumes any responsibility in respect of such management, or in respect of any action taken by Voting Trustee, or of his successor, or of any person acting as such, or taken in pursuance of his consent thereto, or in pursuance of his vote so cast, and no person acting as a Voting Trustee shall incur any responsibility, as stockholder, trustee or otherwise, by reason of any error of law, or of any matter or thing done, except for his own wilful misconduct. 11. The term "Corporation", for the purposes of this agreement and of all rights hereunder, including the issue and delivery of stock certificates, shall be taken to mean Virtual Open Network Environment Corporation, a Maryland corporation, or any corporation successor to it. - 3 - 12. Each and all of the terms and provisions of this agreement shall be and are hereby made binding upon the parties, their heirs, personal representatives, guardians and assigns. 13. Voting Trustee shall have no duty to hold meetings of holders of voting trust certificates, but he shall be entitled to do so if he wishes. Ten days' written notice of every meeting of holders of voting trust certificates shall be given and such notice shall state the place, day and hour and the purpose, if any, of such meeting, but any holder of a voting trust certificate may waive such notice in writing, either before or after the holding of the meeting. No notice of any adjourned meeting need be given. Every such meeting shall be held in the State of Maryland at a place designated by Voting Trustee, unless the holders of voting trust certificates representing two-thirds of the stock held by the Voting Trustee consent in writing to the holding thereof at another place. The failure to hold meetings shall not in any manner or degree impair or reduce the authority of Voting Trustee hereunder. 14. All notices to be given to the holders of voting trust certificates may be given by mailing the same to the registered holders thereof at their addresses as the same last appear on the voting trust certificate books of Voting Trustee, and any notice, mailed as herein provided, shall be taken as though personally served on all the holders of voting trust certificates, and such mailing shall be the only notice required to be given under any provisions of this agreement. 15. This agreement shall be filed with Voting Trustee, and a duplicate hereof shall be filed in the principal office of Corporation. 16. The Voting Trustee, hereby accepts the above trust, subject to all of the terms, conditions and reservations herein contained, and agrees that he will exercise the powers and perform the duties of Voting Trustee as herein set forth, according to his best judgment. IN WITNESS WHEREOF, this agreement is executed at Rockville, Maryland. Witness: --------------------------- ------------------------------------ James F. Chen, Voting Trustee /s/ H.H. Cheng 199,000 shares --------------------------- ------------------------------------ H.H. Cheng, Stockholder - 4 - EX-9.2 8 VOTING TRUST AGREEMENT THIS AGREEMENT, is intended to memorialize and consolidate the terms of prior understandings of the parties and is therefore made effective as of the 15th day of October, 1994, by and between Robert M. Zupnik (hereinafter referred to as "Stockholder"), and James F. Chen, Trustee, and his successor and successors in the Trust, (hereinafter collectively referred to as "Voting Trustee"): 1. Stockholder has assigned and transferred to Voting Trustee the number of Shares of Virtual Open Network Environment Corporation (the Corporation) set opposite his or her signature hereto, for the purpose of vesting in Voting Trustee, as Trustee of an active trust, the right to vote thereon and act in respect thereof, for a period of two (2) years from the date hereof, subject to earlier termination by the Trustee as hereinafter provided. 2. Voting Trustee shall cause to be issued, in respect of the stock of the Corporation held by him, pursuant to the terms hereof, a voting trust certificate in a form acceptable to the parties and the Corporation (hereinafter referred to as the "voting trust certificate"): 3. In the event that Voting Trustee shall receive any additional stock certificates of Corporation by way of dividend upon stock held by it under this Agreement, Voting Trustee shall hold such stock certificates likewise subject to the terms of this Agreement, and shall issue voting trust certificates representing such stock certificates to the respective registered holder of the then outstanding voting trust certificate entitled to such dividend. 4. Voting Trustee shall execute any and all of the said voting trust certificates, and no voting trust certificate shall be valid unless duly signed by Voting Trustee. Each voting trust certificate shall be transferable on the voting trust certificate books of Voting Trustee (which shall be kept for that purpose at the office of the said Trustee) by the registered holder thereof, either in person of by duly authorized attorney, upon the surrender of such voting trust certificate properly endorsed for transfer. Until so transferred, the Voting Trustee may treat the registered holder of voting trust certificates as owner thereof for all purposes, except that the delivery of stock certificates hereunder and certain payments hereunder, as hereinafter provided, shall not be made without surrender of such voting trust certificates. 5. Until the termination of this Agreement each registered holder of a voting trust certificate shall be entitled to receive promptly from Voting Trustee payments equal to the amount of dividends (other than dividends represented by capital stock of the Corporation) or other distributions if any, collected by Voting Trustees upon the number of shares of stock of the Corporation standing in the name of such registered holder, and any payment representing the amount received upon redemption or sale of any common stock, represented by the voting trust certificate or certificates held by him, subject, however, to the terms and conditions of this Agreement. Those registered as holders of voting trust certificates on the dates fixed as record dates by the Corporation for dividends and for the allotment of rights shall be entitled to such payments and to any rights to the benefit of which holders of voting trust certificates may be entitled under this Agreement. Voting Trustee may, in his discretion, from time to time, close the voting trust certificate books against transfers of voting trust certificates for the purpose of determining the voting trust certificate holder entitled to such payments or to such rights, or for the purpose of determining the voting trust certificate holder entitled to vote at any meeting thereof or to do any thing or act to be done or performed by said holders. 6. This Agreement shall terminate two (2) years from its effective date without notice by or action of the Voting Trustee; but, at any earlier time, it may be terminated by the written action of the Voting Trustee, in his uncontrolled discretion, by signing a declaration to that effect and sending a copy of the same to each registered holder of voting trust certificates issued hereunder. Upon termination of this Agreement as above specified, Voting Trustee, in exchange for, or upon surrender of, any voting trust certificate then outstanding, shall, in accordance with the terms hereof, and out of the stock held by him hereunder, deliver proper certificates of stock of the Corporation to the holders of voting trust certificates and thereupon all liability of Voting Trustee, or his successors, or successor, or of any of them, for the delivery of said stock certificates shall cease and terminate. Voting Trustee may call upon and require the holders of voting trust certificates to surrender them in exchange for certificates of stock of the number of shares to which they are entitled hereunder. 7. Until the actual transfer of stock certificates to the holders of voting trust certificates hereunder, Voting Trustee shall, in his uncontrolled discretion, in respect of any and all of the stock held by him hereunder, except as in this Agreement expressly limited, possess and be entitled to exercise the right to vote thereon for every purpose, in person or by proxy, to waive any stockholder's privilege in respect thereof, excluding any right or privilege to subscribe for any increased stock, and to consent to any lawful corporate act of the Corporation, as though absolute owner of said stock, it being expressly agreed that no voting right shall pass to others by or under said voting trust certificates, or by or under this Agreement, or by or under any other agreement, express or implied. Voting Trustee is specifically authorized by way of example, without limiting his rights hereunder, to vote the stock held by him for, or to consent in respect thereof to, any increase or reduction of the stock of the Corporation, any agreement of consolidation, merger, share exchange or the sale or other disposition of all, substantially all, or any part of the property, assets and franchises of the Corporation and the granting, ratification or confirmation of any option or options therefor (whether executed before or after the execution of this Agreement, and whether or not such option or options extend(s) beyond the term of this Agreement), or the dissolution of the Corporation, and the judgment of Voting Trustee as to the adequacy of the consideration thereby to be received by the Corporation and Stockholder (provided 2 Stockholder and each holder of a voting trust certificate of each class is treated uniformly, share for share) shall be conclusive and binding upon Stockholder and the holders of voting trust certificates and all persons claiming through or under them. Any person acting as a Voting Trustee under this Agreement may, directly or indirectly, transact any lawful business with the Corporation, notwithstanding is position as Voting Trustee. Voting Trustee may also serve as director and compensated officer of the Corporation and may vote for himself, as such. 8. In the event of the death, resignation or other permanent inability to serve of the Voting Trustee, James F. Chen, then /s/ Charles C. Chen shall serve as successor Voting Trustee, and in the event of the death, resignation, inability or refusal to serve of such successor, then anything contained herein to the contrary notwithstanding, this Agreement shall cease and terminate without notice by or action of such successor Voting Trustee. Such successor shall serve for the unexpired term in the place and stead of the original Voting Trustee, as above provided, and the authority, powers, duties, obligations, and limitations of the said original Voting Trustee shall devolve upon such successor with the same effect as if such successor had been the person named as original Voting Trustee. The successor of any person acting as Voting Trustee shall, by written agreement, undertake the performance of this voting trust in accordance with its terms. 9. At any meeting of the stockholders of the Corporation, any person then acting as a Voting Trustee may vote or act in person or by proxy to any other person whether or not such other person is a Voting Trustee, and any person acting as a Voting Trustee may give a power or attorney to any other person, whether or not such other person is acting as a Voting Trustee, to sign for him in case of action taken in writing without a meeting. Voting Trustee may adopt his own rules of procedure and may vote as stockholder of the Corporation in person or by proxy. 10. In voting the stock represented by the stock certificates issued to Voting Trustee as hereinbefore provided, the person acting as Voting Trustee shall exercise his best judgment to the end that the business and affairs of the Corporation shall be properly managed; but no person acting as Voting Trustee assumes any responsibility in respect of such management, or in respect of any action taken by Voting Trustee, or of his successor, or of any person acting as such, or taken in pursuance of his consent thereto, or in pursuance of his vote so cast, and no person acting as a Voting Trustee shall incur any responsibility, as stockholder, trustee or otherwise, by reason of any error of law, or of any matter or thing done, except for his own wilful misconduct. 11. The term "Corporation", for the purposes of this agreement and of all rights hereunder, including the issue and delivery of stock certificates, shall be taken to mean Virtual Open Network Environment Corporation, a Maryland corporation, or any corporation successor to it. 3 12. Each and all of the terms and provisions of this agreement shall be and are hereby made binding upon the parties, their heirs, personal representatives, guardians and assigns. 13. Voting Trustee shall have no duty to hold meetings of holders of voting trust certificates, but he shall be entitled to do so if he wishes. Ten days' written notice of every meeting of holders of voting trust certificates shall be given and such notice shall state the place, day and hour and the purpose, if any, of such meeting, but any holder of a voting trust certificate may waive such notice in writing, either before or after the holding of the meeting. No notice of any adjourned meeting need be given. Every such meeting shall be held in the State of Maryland at a place designated by Voting Trustee, unless the holders of voting trust certificates representing two-thirds of the stock held by the Voting Trustee consent in writing to the holding thereof at another place. The failure to hold meetings shall not in any manner or degree impair or reduce the authority of Voting Trustee hereunder. 14. All notices to be given to the holders of voting trust certificates may be given by mailing the same to the registered holders thereof at their addresses as the same last appear on the voting trust certificate books of Voting Trustee, and any notice, mailed as herein provided, shall be taken as though personally served on all the holders of voting trust certificates, and such mailing shall be the only notice required to be given under any provisions of this agreement. 15. This agreement shall be filed with Voting Trustee, and a duplicate hereof shall be filed in the principal office of Corporation. 16. The Voting Trustee, hereby accepts the above trust, subject to all of the terms, conditions and reservations herein contained, and agrees that he will exercise the powers and perform the duties of Voting Trustee as herein set forth, according to his best judgment. IN WITNESS WHEREOF, this agreement is executed at Rockville, Maryland. Witness: --------------------------- ----------------------------------- James F. Chen, Voting Trustee /s/ Robert M. Zupnik 25,000 shares ----------------------- ------------------------------------ , Stockholder 4 EX-9.3 9 VOTING TRUST AGREEMENT THIS AGREEMENT, is intended to memorialize and consolidate the terms of prior understandings of the parties and is therefore made effective as of the 15th day of October, 1994, by and between Dennis E. Winson (hereinafter referred to as "Stockholder"), and James F. Chen, Trustee, and his successor and successors in the Trust, (hereinafter collectively referred to as "Voting Trustee"): 1. Stockholder has assigned and transferred to Voting Trustee the number of Shares of Virtual Open Network Environment Corporation (the Corporation) set opposite his or her signature hereto, for the purpose of vesting in Voting Trustee, as Trustee of an active trust, the right to vote thereon and act in respect thereof, for a period of two (2) years from the date hereof, subject to earlier termination by the Trustee as hereinafter provided. 2. Voting Trustee shall cause to be issued, in respect of the stock of the Corporation held by him, pursuant to the terms hereof, a voting trust certificate in a form acceptable to the parties and the Corporation (hereinafter referred to as the "voting trust certificate"): 3. In the event that Voting Trustee shall receive any additional stock certificates of Corporation by way of dividend upon stock held by it under this Agreement, Voting Trustee shall hold such stock certificates likewise subject to the terms of this Agreement, and shall issue voting trust certificates representing such stock certificates to the respective registered holder of the then outstanding voting trust certificate entitled to such dividend. 4. Voting Trustee shall execute any and all of the said voting trust certificates, and no voting trust certificate shall be valid unless duly signed by Voting Trustee. Each voting trust certificate shall be transferable on the voting trust certificate books of Voting Trustee (which shall be kept for that purpose at the office of the said Trustee) by the registered holder thereof, either in person or by duly authorized attorney, upon the surrender of such voting trust certificate properly endorsed for transfer. Until so transferred, the Voting Trustee may treat the registered holder of voting trust certificates as owner thereof for all purposes, except that the delivery of stock certificates hereunder and certain payments hereunder, as hereinafter provided, shall not be made without surrender of such voting trust certificates. 5. Until the termination of this Agreement each registered holder of a voting trust certificate shall be entitled to receive promptly from Voting Trustee payments equal to the amount of dividends (other than dividends represented by capital stock of the Corporation) or other distributions if any, collected by Voting Trustees upon the number of shares of stock of the Corporation standing in the name of such registered holder, and any payment representing the amount received upon redemption or sale of any common stock, represented by the voting trust certificate or certificates held by him, subject, however, to the terms and conditions of this Agreement. Those registered as holders of voting trust certificates on the dates fixed as record dates by the Corporation for dividends and for the allotment of rights shall be entitled to such payments and to any rights to the benefit of which holders of voting trust certificates may be entitled under this Agreement. Voting Trustee may, in his discretion, from time to time, close the voting trust certificate books against transfers of voting trust certificates for the purpose of determining the voting trust certificate holder entitled to such payments or to such rights, or for the purpose of determining the voting trust certificate holder entitled to vote at any meeting thereof or to do any thing or act to be done or performed by said holders. 6. This Agreement shall terminate two (2) years from its effective date without notice by or action of the Voting Trustee; but, at any earlier time, it may be terminated by the written action of the Voting Trustee, in his uncontrolled discretion, by signing a declaration to that effect and sending a copy of the same to each registered holder of voting trust certificates issued hereunder. Upon termination of this Agreement as above specified, Voting Trustee, in exchange for, or upon surrender of, any voting trust certificate then outstanding, shall, in accordance with the terms hereof, and out of the stock held by him hereunder, deliver proper certificates of stock of the Corporation to the holders of voting trust certificates and thereupon all liability of Voting Trustee, or his successors, or successor, or of any of them, for the delivery of said stock certificates shall cease and terminate. Voting Trustee may call upon and require the holders of voting trust certificates to surrender them in exchange for certificates of stock of the number of shares to which they are entitled thereunder. 7. Until the actual transfer of stock certificates to the holders of voting trust certificates hereunder, Voting Trustee shall, in his uncontrolled discretion, in respect of any and all of the stock held by him hereunder, except as in this Agreement expressly limited, possess and be entitled to exercise the right to vote thereon for every purpose, in person or by proxy, to waive any stockholder's privilege in respect thereof, excluding any right or privilege to subscribe for any increased stock, and to consent to any lawful corporate act of the Corporation, as though absolute owner of said stock, it being expressly agreed that no voting right shall pass to others by or under said voting trust certificates, or by or under this Agreement, or by or under any other agreement, express or implied. Voting Trustee is specifically authorized by way of example, without limiting his rights hereunder, to vote the stock held by him for, or to consent in respect thereof to, any increase or reduction of the stock of the Corporation, any agreement of consolidation, merger, share exchange or the sale or other disposition of all, substantially all, or any part of the property, assets and franchises of the Corporation and the granting, ratification or confirmation of any option or options therefor (whether executed before or after the execution of this Agreement, and whether or not such option or options extend(s) beyond the term of this Agreement), or the dissolution of the Corporation, and the judgement of Voting Trustee as to the adequacy of the consideration thereby to be received by the Corporation and Stockholder (provided Stockholder and each holder of a voting trust certificate of 2 each class is treated uniformly, share for share) shall be conclusive and binding upon Stockholder and the holders of voting trust certificates and all persons claiming through or under them. Any person acting as a Voting Trustee under this Agreement may, directly or indirectly, transact any lawful business with the Corporation, notwithstanding is position as Voting Trustee. Voting Trustee may also serve as director and compensated officer of the Corporation and may vote for himself, as such. 8. In the event of the death, resignation or other permanent inability to serve of the Voting Trustee, James F. Chen, then Charles C. Chen shall serve as successor Voting Trustee, and in the event of the death, resignation, inability or refusal to serve of such successor, then anything contained herein to the contrary notwithstanding, this Agreement shall cease and terminate without notice by or action of such successor Voting Trustee. Such successor shall serve for the unexpired term in the place and stead of the original Voting Trustee, as above provided, and the authority, powers, duties, obligations, and limitations of the said original Voting Trustee shall devolve upon such successor with the same effect as if such successor had been the person named as original Voting Trustee. The successor of any person acting as Voting Trustee shall, by written agreement, undertake the performance of this voting trust in accordance with its terms. 9. At any meeting of the stockholders of the Corporation, any person then acting as a Voting Trustee may vote or act in person or by proxy to any other person whether or not such other person is a Voting Trustee, and any person acting as a Voting Trustee may give a power or attorney to any other person, whether or not such other person is acting as a Voting Trustee, to sign for him in case of action taken in writing without a meeting. Voting Trustee may adopt his own rules of procedure and may vote as stockholder of the Corporation in person or by proxy. 10. In voting the stock represented by the stock certificates issued to Voting Trustee as hereinbefore provided, the person acting as Voting Trustee shall exercise his best judgment to the end that the business and affairs of the Corporation shall be properly managed; but no person acting as Voting Trustee assumes any responsibility in respect of such management, or in respect of any action taken by Voting Trustee, or of his successor, or of any person acting as such, or taken in pursuance of his consent thereto, or in pursuance of his vote so cast, and no person acting as a Voting Trustee shall incur any responsibility, as stockholder, trustee or otherwise, by reason of any error of law, or of any matter or thing done, except for his own wilful misconduct. 11. The term "Corporation", for the purposes of this agreement and of all rights hereunder, including the issue and delivery of stock certificates, shall be taken to mean Virtual Open Network Environment Corporation, a Maryland corporation, or any corporation successor to it. 3 12. Each and all of the terms and provisions of this agreement shall be and are hereby make binding upon the parties, their heirs, personal representatives, guardians and assigns. 13. Voting Trustee shall have no duty to hold meetings of holders of voting trust certificates, but he shall be entitled to do so if he wishes. Ten days' written notice of every meeting of holders of voting trust certificates shall be given and such notice shall state the place, day and hour and the purpose, if any, of such meeting, but any holder of a voting trust certificate may waive such notice in writing, either before or after the holding of the meeting. No notice of any adjourned meeting need be given. Every such meeting shall be held in the State of Maryland at a place designated by Voting Trustee, unless the holders of voting trust certificates representing two-thirds of the stock held by the Voting Trustee consent in writing to the holding thereof at another place. The failure to hold meetings shall not in any manner or degree impair or reduce the authority of Voting Trustee hereunder. 14. All notices to be given to the holders of voting trust certificates may be given by mailing the same to the registered holders thereof at their addresses as the same last appear on the voting trust certificate books of Voting Trustee, and any notice, mailed as herein provided, shall be taken as though personally served on all the holders of voting trust certificates, and such mailing shall be the only notice required to be given under any provisions of this agreement. 15. This agreement shall be filed with Voting Trustee, and a duplicate hereof shall be filed in the principal office of Corporation. 16. The Voting Trustee, hereby accepts the above trust, subject to all of the terms, conditions and reservations herein contained, and agrees that he will exercise the powers and perform the duties of Voting Trustee as herein set forth, according to his best judgment. IN WITNESS WHEREOF, this agreement is executed at Rockville, Maryland. Witness: ---------------------------- ------------------------------------ James F. Chen, Voting Trustee /s/ Dennie E. Winson 25,000 shares ---------------------------- ------------------------------------ , Stockholder 4 EX-10.1 10 EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered as of this 12th day of June, 1996 ("Effective Date"), by and between Virtual Open Network Environment Corporation, a Delaware corporation with its principal executive offices at 1803 Research Boulevard, Suite 305, Rockville, Maryland 20850 ("Company"), and James F. Chen, an individual residing at 9924 Hall Road, Potomac, Maryland 20854 ("Executive"); WHEREAS, the Company wishes to assure itself of the services of Executive for the period provided in this Agreement, and Executive is willing to serve in the employ of the Company on a full-time basis for said period; WHEREAS, the Company and Executive desire to set forth the amounts payable and benefits to be provided by the Company to Executive in the event of a termination of Executive's employment with the Company under the circumstances set forth herein, including after the happening of a Change in Control (as defined herein); and WHEREAS, the parties intend that the provisions of this Agreement shall be in lieu of Executive's right to make any claim or demand with respect to any presently existing or prospectively adopted severance policy of the Company; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Employment. The Company agrees to continue Executive in its employ, and Executive agrees to remain in the employ of the Company, for the period stated in Section 3 hereof and upon the other terms and conditions herein provided. 2. Position and Responsibilities. ----------------------------- (a) The Company employs Executive, and Executive agrees to serve, as President and Chief Executive Officer of the Company on the conditions hereinafter set forth. Executive agrees to perform such services consistent with his position as President and Chief Executive Officer as shall from time to time be assigned to him by the Company's Board of Directors ("Board") or by an executive designated by the Board. (b) If the Company appoints, or consents to the appointment of, Executive to serve as an executive officer and/or director of any present or future subsidiary or affiliate of the Company, Executive agrees to serve as an officer and/or director of such subsidiary or affiliate without any diminution of his duties or increase in his remuneration under this Agreement. For the purposes of this Agreement, the term "subsidiary" means any organization that is controlled by the Company and the term "affiliate" means any organization that is under common control with the Company. 3. Term and Duties. --------------- (a) Term of Employment. The period of Executive's employment under this Agreement with the Company (i) shall be deemed to have commenced as of the Effective Date, and (ii) shall continue for a period of twenty-four (24) full calendar months thereafter and any extensions thereafter, unless this Agreement is earlier terminated in accordance with the terms hereof. The period of employment shall automatically be extended without further action by the respective parties as of June 12, 1997 and each succeeding June 12 for the twenty-four (24) month period beginning on June 12, 1997 and each June 12 thereafter, unless either party shall have served written notice upon the other prior to June 12, 1997 or prior to June 12 of each succeeding year, as the case may be, of his or its intention that this Agreement shall terminate at the end of the twenty-four (24) month period that begins with the June 12 following such date of written notice. (b) Duties. During the period of his employment hereunder by the Company and except for illness, reasonable vacation periods having an aggregate duration of not less than that provided pursuant to the Company's practices in effect on the Effective Date, and reasonable leaves of absence, Executive shall devote all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder. (c) Headquarters Location. The Company agrees to maintain Executive's offices within Montgomery County in the State of Maryland ("Base Employment Area"). 4. Compensation and Reimbursement of Expenses. ------------------------------------------ (a) Compensation. ------------ (i) For all services rendered by Executive in any capacity during his employment under this Agreement (including, without limitation, services as an executive, officer, or director of the Company, or any subsidiary or affiliate of the Company, or as a member of any committee of the Board of Directors of the Company or any subsidiary or affiliate of the Company), the Company shall pay Executive as compensation (A) an annual salary ("Base Salary") and (B) such bonus for such period, if any, as may be awarded to Executive from time to time by the Board or by a committee designated by the Board. Effective the Effective Date and until adjusted in accordance with the provisions hereof, Base Salary shall be paid at the rate of not less than $125,000 per year. Such bonus shall be based on results of operations, special contributions made by Executive, seniority, competitive conditions in the Company's industry, and - 2 - such other factors as the Board (or a committee or committees designated by the Board) shall consider relevant. (ii) Such salary shall be payable in accordance with the customary payroll practices of the Company, but in no event less frequently than monthly, and any such bonus shall be payable in the manner specified by the Board, or committee of the Board, at the time any such bonus is awarded. (iii) Executive's Base Salary shall be reviewed promptly following the completion of the Company's initial public offering and thereafter at least annually. Such review shall be conducted by the Board or a committee designated by the Board. As a result of such review, the Board or committee may, in its discretion, increase (to reflect Executive's performance, duties, and responsibilities and to maintain a compensation level comparable to that of similarly situated executives in the Company's industry), but not decrease, Executive's Base Salary then in effect; provided, however, that the Board or such committee may, in its discretion and without Executive's consent, proportionally reduce Executive's Base Salary if, at the same time, it reduces the salaries of all the Company's executive officers; provided further, however, that in no event shall Executive's Base Salary be reduced below $125,000 per year without Executive's consent. After any adjustment following the Company's initial public offering, the Board or committee may not increase Executive's Base Salary for any one year by an amount greater than 50% of Executive's then Base Salary. (iv) Executive shall not be entitled to receive any fees for service as a director, officer, or employee of any subsidiary or affiliate of the Company. (b) Reimbursement of Expenses. The Company shall pay or reimburse Executive, in accordance with such policies and procedures as the Board may establish from time to time, for all reasonable travel and other expenses incurred by Executive in the performance of his obligations under this Agreement. 5. Participation in Benefit Plans. The payments provided for in this Agreement, except where specifically provided otherwise, are in addition to any other benefits to which Executive may be, or may become, entitled under any of the Company's group hospitalization, health, dental care, and/or sick-leave plans; life, other insurance and/or death benefit plans; travel and/or accident insurance plans; deferred compensation plans; capital accumulation programs; restricted and/or stock purchase plans; stock option plans; retirement income and/or pension - 3 - plans; supplemental pension plans; excess benefit plans; short- and long- term disability programs; and other present and future group employee benefit plans and programs for which Company executives are or shall become eligible. Executive shall be eligible to receive, during the period of his employment under this Agreement and during any subsequent period for which he shall be entitled to receive payments from the Company under Section 6, all of the foregoing benefits and emoluments for which executives are eligible under every such plan and program to the extent permissible under the general terms and provisions of such plans and programs and in accordance with the provisions thereof. Nothing contained in this Agreement shall prevent the Board from amending or otherwise altering any such plan, program, or arrangement as long as such amendment or alteration equitably affects all the Company's executive officers (of the level of vice president or above). 6. Termination of Employment. Executive's employment under this Agreement may be terminated by the Company or Executive as follows: (a) Disability. (i) If Executive fails to perform his duties under this Agreement on account of Disability (as hereinafter defined), the Company may give notice to Executive to terminate this Agreement on a date not less than thirty (30) days thereafter ("Notice Period") and, if Executive has not resumed full performance of his duties under this Agreement within such Notice Period, then Executive's employment under this Agreement will terminate on the date provided in the notice ("Disability Termination Date"). (ii) During any period of Disability, the Company shall maintain and pay for health insurance benefits for Executive at least equal to those he had at the commencement of such Disability. (iii) As used in this Agreement, the term "Disability" shall mean the complete inability of Executive to perform his duties under this Agreement by reason of his total and permanent disability, as determined by an independent physician selected with the approval of the Board and Executive. (b) Death. If Executive dies while employed under this Agreement, his employment under this Agreement will terminate as of the date of his death ("Date of Death"). Within thirty (30) days after the Date of Death, the Company shall pay to Executive's legal representative Executive's Base Salary as then in effect that has accrued to the last day of the month in which the Date of Death occurs. (c) Termination by Executive. In the event that (i) Executive terminates his employment with the Company (other than - 4 - because of his death) within two (2) years following a Change in Control (as hereinafter defined), (ii) the Company terminates Executive's employment for any reason (other than because of death, Disability, or "just cause" (as hereinafter defined)) within two (2) years following a Change in Control, (iii) Executive terminates his employment with the Company because of the Company's material breach of this Agreement, (iv) Executive's Base Salary, as in effect on the Effective Date or as the same may be increased from time to time, is reduced unless such reduction is permitted by this Agreement, or (v) the Company's principal executive offices are relocated to a location outside the Base Employment Area or the Company requires Executive to be based anywhere other than the Company's principal executive offices (except for required travel on the Company's business), then the Company shall pay Executive within ten (10) days following the date his employment with the Company is so terminated ("Executive Termination Date") as severance pay a lump sum payment equal to the sum of (A) the aggregate amount of the future Base Salary payments Executive would have received if he continued in the employ of the Company until twenty-four (24) months (thirty-six (36) months if an event described in clauses (i) or (ii) of this Section 6(c) occurs) following the Executive Termination Date and (B) Executive's projected bonus for the year in which the Executive Termination Date occurs, which shall be computed assuming that Executive had remained in the Company's employ until the end of that year and that all performance goals or other performance measures have been met at the then current level for the remainder of that year. The payment required by clause (A) shall be calculated at the highest rate of Base Salary paid to Executive at any time under this Agreement with such payments discounted to present value at a discount rate equal to one percent (1%) above the per annum one-year Treasury Bill rate, as published in the Eastern Edition of the Wall Street Journal, on the Executive Termination Date (or the next preceding date on which such rate is published), applied to each such future payment from the time it would have become payable to the date Executive receives payment. No termination of employment pursuant to this Section 6(c) shall operate to prohibit Executive from negotiating and entering into a new employment contract with the Company or such entity as survives the Change in Control. (d) Retirement. Executive shall be entitled to terminate his employment with the Company on, or at any date after, a date on which he is at least sixty-five (65) years old. Any date on which Executive elects to retire shall be referred to as the "Retirement Termination Date." The Company shall pay to Executive his Base Salary as then in effect that has accrued to the last day of the month in which the Retirement Termination Date occurs. (e) Termination By The Company For Just Cause. ----------------------------------------- (i) The Company may terminate Executive's employment for "just cause" at any time by giving written notice thereof to Executive. (Except as provided below, the date of such notice is the "Just Cause Termination - 5 - Date" unless otherwise provided in the notice). Within thirty (30) days after the Just Cause Termination Date, the Company shall pay to Executive his Base Salary as then in effect that has accrued to the Just Cause Termination Date. For the purposes of this subparagraph, "just cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses), or material breach of any provision of this Agreement. Unless otherwise determined by the Board, Executive shall have no right to receive compensation or other benefits under this Agreement after a termination for just cause. (ii) Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for just cause pursuant to this Section 6(e) unless and until he shall have received a copy of a resolution duly adopted by the affirmative vote of a majority of the Board, at a meeting held for that purpose, declaring that in the good faith opinion of the Board one or more of the conditions set forth in clause (i) of this Section 6(e) has occurred and specifying the particulars thereof. 7. Change in Control. For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events, directly or indirectly or in one or more series of transactions: (i) A consolidation or merger of the Company with any third party (which includes a single person or entity or a group of persons or entities acting in concert) not wholly owned directly or indirectly by the Company (a "Third Party"), unless the Company is the entity surviving such merger or consolidation; (ii) A transfer of all or substantially all of the assets of the Company to a Third Party or a complete liquidation or dissolution of the Company; (iii) A Third Party (other than James F. Chen and his affiliates), directly or indirectly, through one or more subsidiaries or transactions or acting in concert with one or more persons or entities: (A) acquires beneficial ownership of more than 20% of the classes of stock of the Company entitled to vote generally in the election of - 6 - directors of the Company ("Voting Stock"); (B) acquires irrevocable proxies representing more than 20% of the Voting Stock; (C) acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing more than 20% of the Voting Stock; (D) acquires the ability to control in any manner the election of a majority of the directors of the Company; or (E) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Company; (iv) any election has occurred of persons to the Board that causes a majority of the Board to consist of persons other than (A) persons who were members of the Board on the Effective Date and/or (B) persons who were nominated for election as members of the Board by the Board (or a committee of the Board) at a time when the majority of the Board (or of such committee) consisted of persons who were members of the Board on the Effective Date; provided, however, that any persons nominated for election by the Board (or a committee of the Board), a majority of whom are persons described in clauses (A) and/or (B), or are persons who were themselves nominated by such Board (or a committee of such Board), shall for this purpose be deemed to have been nominated by a Board composed of persons described in clause (A); or (v) A determination is made by the Securities and Exchange Commission ("SEC") or any similar agency having regulatory control over the Company that a change in control, as defined in the securities laws or regulations then applicable to the Company, has occurred. Notwithstanding any provision contained herein, a Change in Control shall not include any of the above described events if they are the result of a Third Party's inadvertently acquiring beneficial ownership or irrevocable proxies or a combination of both for 20% or more of the Voting Stock, and the Third Party as promptly as practicable thereafter divests itself of beneficial ownership or irrevocable proxies for a sufficient number of shares so that the Third Party no longer has beneficial ownership or - 7 - irrevocable proxies or a combination of both for 20% or more of the Voting Stock. 8. Excise Tax. ---------- (a) Excess Parachute Payment. Notwithstanding anything to the contrary in this Agreement, if tax counsel selected by the Company and acceptable to Executive determines that any portion of any payment by the Company to Executive under this Agreement or otherwise would constitute an "excess parachute payment," then the payments to be made to Executive by the Company shall be reduced such that the value of the aggregate payments that Executive is entitled to receive under this Agreement and any other agreement, plan or program of the Company shall be one dollar ($1.00) less than the maximum amount of payments that Executive may receive without becoming subject to the tax imposed by Section 4999 of the Code; provided, however, that the foregoing limitation shall not apply in the event that such tax counsel determines that the benefits to Executive on an after-tax basis (i.e., after federal, state, and local income and excise taxes) if such limitation is not applied would exceed the after-tax benefits to Executive if such limitation is applied. (b) The Company Not Responsible for Excise Tax. If the Internal Revenue Service assesses an excise tax against Executive pursuant to Sections 280G and 4999 of the Code, the Company shall be under no obligation to Executive with respect to the amount of (i) the excise tax or (ii) any additional federal income tax due from and payable by Executive as the result of his receipt of any payment hereunder or otherwise. 9. Covenant Not to Compete. Executive covenants and agrees that, in consideration of the amounts to be paid Executive hereunder and other good and valuable consideration, for a period of two (2) years beyond the Retirement Termination Date or the Just Cause Termination Date (each a "Termination Date"), Executive shall not be employed as an executive officer of, control, manage, or otherwise participate in the management of the business of a "significant competitor" of the Company. The term "significant competitor" shall mean any company or division of a company that, on the date of its employment of Executive, derives more than 50% of its gross revenues from network security products and/or services, or a company that owns or controls a majority of the voting securities of any such company. The Company and Executive agree that the terms and conditions of this Section 9 shall survive the termination of this Agreement following the Termination Date. 10. Confidential Information. ------------------------ (a) Executive shall not, directly or indirectly, during the term of his employment hereunder and at any time after a termination of his employment for any reason, to the detriment of the Company, knowingly divulge, disclose, disseminate, publish, reveal or otherwise communicate - 8 - to any unauthorized person any Confidential Information relating to the Company, the Company's subsidiaries or affiliates, or to any of the businesses operated by any of them. (b) Executive confirms that Confidential Information constitutes the exclusive property of the Company and the Company's subsidiaries and affiliates. Upon a termination of his employment hereunder, Executive will promptly return to the Company all Materials (whether prepared by Executive or others) containing, constituting, embodying or illustrating Confidential Information, and all other property of the Company or of the Company's subsidiaries and affiliates then in his possession or custody. (c) As used in this Section 10 the following terms shall have the following meanings: (i) the term "Confidential Information" means information disclosed to Executive or known to Executive as a consequence of or through his employment by the Company and not generally known in the Company's industry. Such information includes, but is not limited to, information relating to the Company's products, research, development, accounting, finances, marketing, merchandising and selling, and specifically includes future business plans, client lists, lists of current and prospective employees and consultants, potential acquisition candidates, and training and operating methods and techniques. The term "Confidential Information" does not include information that (A) at the time it was received by Executive was generally available to the public; (B) prior to its use by Executive, becomes generally available to the public through no act or failure of Executive; or (C) is received by Executive from a person who is not a party to this Agreement and who is not under an obligation of confidence with respect to such information. (ii) "Materials" includes, but is not limited to, books, notebooks, documents, records, photographs, films, video tapes, audio tape recordings, computer disks, diskettes or other electronic or optical storage media, software and support materials, and similar or other materials. (d) Executive shall not otherwise knowingly act or conduct himself (i) to the material detriment of the Company or the Company's subsidiaries or affiliates, or (ii) in a manner that is inimical or contrary to the interests thereof. (e) The Company and Executive agree that the provisions of this Section 10 shall survive the termination of this Agreement for any reason whatsoever; provided, however, that this Section 10 shall become - 9 - immediately inoperative and Executive shall no longer be bound by it in the event that Executive's employment with the Company is terminated following a Change in Control. 11. General Provisions. ------------------ (a) Entire Agreement. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Company and Executive. (b) Consolidation, Merger, or Sale of Assets. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation or corporations; provided, however, that such consolidation, merger or transfer shall not affect Executive's rights under Section 6(c) hereof. Upon such a consolidation, merger, or transfer of assets and assumption, the term "the Company," as used herein, shall mean such other corporation or corporations, and this Agreement shall continue in full force and effect and such other corporation or corporations shall be liable for all payments to Executive under the Agreement. (c) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by Executive offset in any manner the obligations of the Company hereunder. (d) Nonassignability. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof is assignable by Executive, his beneficiaries, or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 11(d) shall preclude (i) Executive from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of Executive or his estate from assigning any rights hereunder to the person or persons entitled thereto. (e) No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or the execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. (f) General Creditor. All payments required hereunder shall be made from the Company's general assets and Executive shall have no rights greater than the rights of a general creditor of the Company. (g) Notices. All notices and other communications required or permitted to be given under this Agreement shall be in writing and - 10 - shall be deemed to have been duly given if delivered personally or sent by certified mail, return receipt requested, first-class postage prepaid, to the parties to this Agreement at the following addresses: (i) if to the Company at: Virtual Open Network Environment Corporation 1803 Research Boulevard Suite 305 Rockville, Maryland 20850 Attention: Chief Financial Officer and (ii) if to Executive at the address set forth at the end of this Agreement or to such other address as either party to this Agreement shall have last designated by notice to the other party. All such notices and communications shall be deemed to have been received on the earlier of the date of receipt or the third business day after the date of mailing thereof. (h) Binding Effect; Benefits. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person, other than the parties to this Agreement or their respective successors or permitted assigns, any legal or equitable right, remedy, or claim under or in respect of any agreement or any provision contained herein. (i) Dispute Resolution. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the then existing Commercial Arbitration Rules of the American Arbitration Association ("AAA"). (i) The matter shall be heard and decided, and award rendered, by a panel of three (3) arbitrators ("Arbitration Panel"). The Company and Executive shall each select one (1) arbitrator from the AAA National Panel of Commercial Arbitrators ("Commercial Panel") and the AAA shall elect a third arbitrator from the Commercial Panel. The award rendered by the Arbitration Panel shall be final and binding as between the parties hereto and their heirs, executors, administrators, successors, and assigns. Judgment on the award may be entered by any court having jurisdiction thereof. (ii) The parties irrevocably consent to the jurisdiction of the Federal and state courts located in - 11 - the State of Maryland for this purpose. Each such arbitration proceeding shall be located in Maryland. (iii) The arbitrators may, in the course of the proceedings, order any provisional remedy or conservatory measure (including, without limitation, attachment, preliminary injunction, or the deposit of specified security) that the arbitrators consider to be necessary, just, and equitable. The failure of a party to comply with such an interim order may, after due notice and opportunity to cure such noncompliance, be treated by the arbitrators as a default, and some or all of the claims or defenses of the defaulting party may be stricken and partial or final award entered against such party, or the arbitrators may impose such lesser sanctions as the arbitrators may deem appropriate. A request for interim or provisional relief by a party to a court shall not be deemed incompatible with the agreement to arbitrate or a waiver of that agreement. (iv) The parties acknowledge that any remedy at law for breach of this Agreement may be inadequate, and that, in the event of a breach of Sections 9 and 10 by Executive, any remedy at law would be inadequate in that any such breach would cause irreparable competitive harm to the Company. Consequently, in addition to any other relief that may be available, the arbitrators may also order temporary and permanent injunctive relief, including, without limitation, specific performance, without the necessity of the prevailing party proving actual damages and without regard to the adequacy of any remedy at law. (v) In the event Executive is the prevailing party in such arbitration, then Executive shall be entitled to reimbursement by the Company for all reasonable legal and other professional fees and expenses incurred by him in such arbitration or in enforcing the award, including reasonable attorneys' fees. (j) Waiver. Either party hereto may by written notice to the other (i) extend the time for the performance of any of the obligations or other actions of the other under this Agreement; (ii) waive compliance with any of the conditions or covenants of the other contained in this Agreement; and (iii) waive or modify performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant, or agreement contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver - 12 - of any preceding or succeeding breach, and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise that right or privilege at any subsequent time or times hereunder. (k) Amendment. This Agreement may be terminated, amended, modified, or supplemented only by a written instrument executed by Executive and the Company. (l) Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Maryland, regardless of the law that might be applied under principles of conflict of laws; provided, however, that any arbitration under Section 11(i) hereof shall be conducted in accordance with the United States Arbitration Act as then in force. (m) Section and Other Headings. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. (n) Withholding of Taxes. The Company may withhold from amounts required to be paid to Executive hereunder any applicable federal, state, local, and other taxes with respect thereto; provided, however, that the Company shall promptly pay over the amounts so withheld to the appropriate taxing bodies and provide to Executive appropriate statements on forms proscribed for such purposes on the amounts so withheld. (o) Severability. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provision not held so invalid, and the rest of such provision, together with all other provisions of this Agreement, shall to the full extent consistent with law continue in full force and effect. (p) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. - 13 - IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its officers thereunto duly authorized, and Executive has signed this Agreement, all as of the Effective Date. ATTEST: VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION By: /s/ Ban Leong Eap --------------------------- ----------------------------- (Corporate Seal) WITNESS: EXECUTIVE: /s/ illigible /s/ James F. Chen --------------------------- -------------------------------- James F. Chen - 14 - EX-10.2 11 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION 1995 NON-STATUTORY STOCK OPTION PLAN This 1995 Non-Statutory Stock Option Plan ("Plan") is adopted as of May 15, 1995 by Virtual Open Network Environment Corporation ("Corporation"). 1. PURPOSE OF PLAN. The purpose of this Plan is to attract and retain outstanding key employees, to furnish existing key employees with further inducement to continue their employment with the Corporation and to encourage key employees to acquire a greater stake in the Corporation's success and, thus, provide an additional incentive for them to promote the Corporation's best interests. 2. SHARES RESERVED FOR PLAN. Subject to adjustment as provided in Section 14 hereof, a total of 528,444 ("Shares") of the Corporation's common stock ("Common Stock") shall be subject to the Plan, and such amount shall be, and is hereby reserved for sale for such purpose. The Shares shall consist of shares of the Corporation's Common Stock that are presently authorized but unissued or that were previously issued, reacquired and held by the Corporation as treasury shares. Any of the Shares that remain unsold and that are not subject to outstanding options at the termination of the Plan shall cease to be reserved for the purpose of the Plan. If any Option (as hereinafter defined) granted under the Plan shall expire or terminate for any reason without having been exercised in full, the Shares subject to such Option, but not purchased thereunder, shall be removed from the reserve. 3. ADMINISTRATION OF THE PLAN. -------------------------- 3.1 The Plan shall be administered by a committee appointed from time to time by the Board of Directors of the Corporation ("Committee"). The Committee shall consist of not less than two (2) members, each of which shall be a director of the Corporation. Members of the Committee shall be eligible to receive Options under the Plan, provided that such members do not participate in the decision to grant options to themselves. 3.2 Subject to the terms of the Plan, the Committee shall have full and final authority to determine the persons who are to be granted Options under the Plan, the number of Shares subject to each Option and the schedule by which the Options may be exercised. 3.3 Subject to the terms of the Plan, the Committee shall also have complete authority to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, to determine the details and provisions of each Option Agreement (as hereinafter defined) and to make all other determinations necessary or desirable in the administration of the Plan. 3.4 The Committee shall have the authority to grant options that do not qualify as incentive stock options ("Options") under Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). 4. ELIGIBILITY. ----------- 4.1 The individuals who shall be eligible to participate in the Plan shall be such key employees ("Optionees") of the Corporation as the Committee shall determine, in its sole discretion. In determining the employees to whom Options shall be granted and the number of Shares to be covered by each Option, the Committee may take into account the nature of the services rendered by the respective employees, their present and potential contributions to the success of the Corporation and such other factors as the Committee, in its sole discretion, may deem relevant. Options may be granted to key employees who hold or have held options under previous plans. 4.2 Except as provided herein, or in the agreement between the Corporation and the Optionee with respect to any particular grant of Options ("Option Agreement"), there is no limit on the number or value of Options exercisable in any one (1) year. 5. OPTION AGREEMENT. The grant of each Option shall be evidenced by minutes of a meeting of the Committee or the unanimous written consent of all members of the Committee and by a written Option Agreement effective as of the date of the grant, which Option Agreement shall set forth such terms and conditions as may be determined by the Committee to be consistent with the Plan. 6. TERM AND EXERCISABILITY OF OPTION. --------------------------------- 6.1 Each Option shall commence on the date provided in the Option Agreement ("Date of Grant"). Except as otherwise provided in the Option Agreement, each Option shall terminate ten (10) years after its Date of Grant. If the Optionee shall cease to be a regular full-time employee of the Corporation for any reason, any unexercised Options shall terminate three (3) months from the date of such termination of employment. 6.2 Nothing in the Plan or in any Option shall confer on any Optionee the right to continue in the employ of the Corporation or interfere in any way with the right of the Corporation to terminate the Optionee's employment at any time. 6.3 Unless otherwise provided in an Option Agreement, all Options granted hereunder shall become exercisable in three (3) installments, the Optionee having the right to purchase from the - 2 - Corporation a portion of the Shares subject to the Option ("Option Shares") on and after the following dates on a cumulative basis: (a) on and after the date that is twelve (12) months from the Date of Grant, up to thirty-three and one-third percent (33 1/3%) of the total number of Option Shares; (b) on and after the date that is twenty-four (24) months from the Date of Grant, up to an additional thirty-three and one-third percent (33 1/3%) of the total number of Option Shares; and (c) on and after the date that is thirty-six (36) months from the Date of Grant, up to an additional thirty-three and one-third percent (33 1/3%) of the total number of Option Shares. For example, if Options to acquire 1,000 Shares are granted to an Optionee on May 15, 1995, the Optionee would not have any right to acquire Shares under the Options until May 15, 1996. From May 15, 1996 until May 14, 1997, he would have the right to exercise thirty-three and one-third percent (33 1/3%) of his Options and thereby acquire 333 1/3 Shares. From May 15, 1997 until May 14, 1998, he would have the right to exercise an additional thirty-three and one-third percent (33 1/3%) of his options for an additional 333 1/3 Shares; if, however, he had not previously exercised the Option for the initial 333 1/3 Shares, he would have a continuing right to exercise the initial portion of the Option Shares as well as the second portion, for a total of 66 2/3% or 666 2/3 Shares. 7. PURCHASE PRICE. The purchase price per Share shall be set by the Committee. The purchase price per Share shall be no less than par value per Share. 8. MANNER OF PAYMENT. Options shall be exercised by delivery by the Optionee to the Corporation of an executed Notice of Exercise in the form provided by the Corporation, accompanied by either (i) a check in the amount of the purchase price, or (ii) by previously owned shares of Common Stock with a fair market value equal to the purchase price. 9. RESTRICTIONS ON SHARES. 9.1 As soon as practicable after receipt of the purchase price, the Corporation shall deliver to the Optionee a certificate or certificates for the purchased Shares. The Optionee shall thereupon become a shareholder of the Corporation with respect to the Shares represented by such certificates and, as such, shall be fully entitled to receive dividends and other distributions with respect to such Shares and shall have all of the other rights of a shareholder. Notwithstanding the foregoing, the Optionee shall be prohibited from the sale, exchange, transfer, pledge, hypothecation, gift or other disposition of such Shares until the date on which such Shares are traded on an established - 3 - securities exchange or secondary market; however, such Shares may be used as payment of the purchase price of Shares issued upon the exercise of other Options. The aforesaid restriction shall apply to any new, additional or different securities the Optionee may receive with respect to such Shares by virtue of a stock split or stock dividend or any other change in the corporate or capital structure of the Corporation. 9.2 At any time after termination of employment with the Corporation by the Optionee for any reason, including death, the Corporation shall have the right to repurchase all or any portion of the Shares acquired by such Optionee pursuant to this Plan (whether then held by the Optionee or by a transferee). Such right must be exercised by the Corporation, if at all, at a time when the Shares are not traded on an established securities exchange or secondary market. The purchase price for such re-acquired shares shall be the per share value most recently established by the Board of Directors as the fair market value of the Corporation's Common Stock for purposes of the grant of Options under this Plan. The entire purchase price shall be paid at closing of such purchase, which shall occur on the date set by the Corporation within ninety (90) days after exercise by the Corporation of its right to repurchase. 9.3 Until such time as the restrictions hereunder lapse with respect to the Shares, the certificates representing the Shares shall contain a legend evidencing such restrictions. Alternatively, the Corporation may require the Optionee to deposit the Share certificate(s) with the Corporation or its agent, endorsed in blank or accompanied by a duly executed irrevocable stock power or other instrument of transfer. 10. NON-ASSIGNABILITY OF OPTION. During the Optionee's lifetime, the Option shall not be transferrable by the Optionee. 11. DIVIDENDS. If at any time after an Option is granted but prior to its exercise, the Board of Directors shall declare, with respect to the Common Stock, any dividend payable in shares of stock of the Corporation of any class, then there shall be deliverable upon the subsequent exercise of any Option under this Plan, in addition to each Option Share granted, and for no additional price, such additional share or shares as shall have been distributable as a result of such share dividend in respect of an Option Share; except that fractional shares shall not be so deliverable. Any such share dividend shall be deemed part of the Option Shares for the purpose of this Plan. 12. COMPLIANCE WITH LAWS. Notwithstanding any other provisions of the Plan, each Option Agreement shall contain such provisions as the Committee shall determine to be appropriate to ensure that the Optionee agrees for himself or herself and for his or her legal representatives, that the Option shall not be exercisable by him, her or them and that the Corporation shall not be obligated to issue any Shares, during a time period in which such exercise would adversely affect any - 4 - exemption from registration under applicable state and federal securities laws that is being relied upon, or is being considered by the Corporation for the issuance of any of its securities whether pursuant to the Plan or otherwise. 13. NO RIGHTS IN OPTION STOCK. An Optionee shall not have any rights as a shareholder with respect to Shares for which an Option has not been exercised and payment has not been made as herein provided nor shall an Optionee have rights with respect to shares or the Corporation's stock not expressly conferred by the Plan. 14. ADJUSTMENTS. If there are any changes in the capitalization of the Corporation affecting in any manner the number or kind of outstanding shares of the Corporation's stock, whether such changes have been occasioned by recapitalization, reorganization or other changes in the Corporation's capital structure or its business, merger or consolidation of the Corporation, issuance of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Common Stock or the rights thereof, dissolution or liquidation of the Corporation, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceedings, whether of a similar character or otherwise, then the number and kinds of shares of the Corporation's stock then subject to Options and the price to be paid therefor shall be appropriately adjusted by the Committee. 15. AMENDMENT AND TERMINATION. Unless the Plan has been terminated as hereinafter provided, it shall terminate on the date that is ten (10) years after the date of adoption hereof, except as to Options previously granted and outstanding under the Plan at such date, and no Options shall be granted hereunder after such date. The Plan may be terminated, modified, or amended by the shareholders of the Corporation. The Board of Directors of the Corporation may terminate the Plan or make such modifications or amendment thereof as it shall deem advisable or in order to conform to any change in any law or regulation applicable thereto; provided, however, that the Board of Directors may not, without further approval by the holders of a majority of the outstanding shares of the Corporation having general voting power; (a) increase the maximum number of shares as to which Options may be granted under the Plan, (b) change the class of employees eligible to be granted Options, (c) increase the periods during which Options may be granted or exercised, or (d) provide for the administration of the Plan otherwise than by the Committee. No termination, modification, or amendment of the Plan may, without the consent of the employee to which any Option shall theretofore have been granted, adversely affect the rights of each such employee under such Option. - 5 - This 1995 Non-Statutory Stock Option Plan has been adopted by the Board of Directors of the Corporation, effective as of the date first above written. /s/ James F. Chen -------------------------- James F. Chen /s/ Charles Chen -------------------------- Charles Chen /s/ Maxine Loh -------------------------- Maxine Loh - 6 - EX-10.3 12 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION 1996 Non-Statutory Stock Option Plan ARTICLE I General 1.1 PURPOSE. It is the purpose of the 1996 Non-Statutory Stock Option Plan ("Plan") to promote the interests of Virtual Open Network Environment Corporation ("Corporation") and its stockholders by attracting, retaining, and stimulating the performance of selected Employees, Directors, and Independent Contractors (each an "Optionee") by giving such individuals the opportunity to acquire a proprietary interest in the Corporation and an increased personal interest in its continued success and progress. 1.2 DEFINITIONS. As used herein the following terms have the following meanings: (a) "Board" means the Board of Directors of the Corporation. (b) "Book Value" means the historical cost of the Corporation's assets reduced by the Corporation's liabilities calculated in accordance with generally accepted accounting principles, determined on the last day of the immediately preceding tax year. In no event will Book Value be less than zero. (c) "Change in Control" means any of the events set forth below: (i) The direct or indirect acquisition in one or more transactions, other than from the Corporation, by any individual, entity or group of beneficial ownership of a number of Corporation Voting Securities in excess of 50% of the Corporation Voting Securities unless such acquisition has been approved by the Board; or (ii) The approval by the Board 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 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 50% 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 or trustees, as the case may be, of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the Outstanding Common Stock and Corporation Voting Securities immediately prior to such reorganization, merger or consolidation, as the case may be. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Commencement Date" means the day immediately following the date of adoption of the Plan by the Board in accordance with the provisions of Section 4.10 of Article IV hereof. (f) "Committee" means the Non-Statutory Stock Option Plan Committee of the Board; PROVIDED, HOWEVER, that in the event the Board has not appointed members to the Stock Option Committee, all references to the Committee shall be deemed to refer to the Compensation Committee of the Board. (g) "Corporation" means Virtual Open Network Environment Corporation, a Delaware corporation. (h) "Corporation Voting Securities" means the combined voting power of all outstanding voting securities of the Corporation entitled to vote generally in the election of the Board. (i) "Date of Grant" means April 22, 1996. (j) "Director" means a member of the Board. (k) "Employee" means any employee of the Corporation. (l) "Expiration Date" means December 31, 1996. (m) "Fair Market Value" means the fair market value of a share of Restricted Stock as determined by the Board in good faith. (n) "Formula Price" means the price at which the Corporation shall purchase an Optionee's Restricted Stock upon the Optionee's Termination of Employment. (o) "Independent Contractor" means a person that provides services to the Corporation and who is not an Employee or a Director. (p) "Option" means any option to purchase shares of Restricted Stock granted pursuant to the provisions of Article III or IV of the Plan. (q) "Optionee" means an Employee, Director, or Independent Contractor who has been granted an Option. (r) "Option Term" means the period beginning on April 22, 1996, and ending December 31, 1996. 2 (s) "Outstanding Common Stock" means, at any time, the issued and outstanding Common Stock of the Corporation. (t) "Plan" means this Virtual Open Network Environment Corporation 1996 Non-Statutory Stock Option Plan. (u) "Purchase Price" means the Fair Market Value of shares of Restricted Stock on the Date of Grant of such shares subject to the Options. (v) "Purchase Date" means the day on which Optionee delivers the amount of cash (or other consideration determined by the Board to be acceptable to the Company, pursuant to the Plan) payable hereunder for shares of Restricted Stock. (w) "Restricted Stock" means the $0.001 par value Common Stock of the Corporation subject to the restrictions set forth on Exhibit A attached hereto. (x) "Termination of Employment" means, with respect to an Optionee, the voluntary or involuntary discontinuation of the provision of services to the Corporation for any reason whatsoever, including but not limited to the death, disability, or retirement of the Optionee. 1.3 NUMBER OF SHARES. Optionee may purchase the number of shares of the Restricted Stock set forth on Exhibit B attached hereto and the Corporation does hereby agree to sell to Optionee such shares. If any Option expires or terminates for any reason without having been exercised in full, the unpurchased shares of Restricted Stock subject to such expired or terminated Option shall not be available for purposes of the Plan. ARTICLE II Administration 2.1 The Plan shall be administered by the Committee. Each member of the Committee shall be appointed by and shall serve at the pleasure of the Board. The Board shall have the sole continuing authority to appoint members of the Committee both in substitution for members previously appointed and to fill vacancies however caused. The following provisions shall apply to the administration of the Plan: (a) The Committee shall designate one of its members as Chairman and shall hold meetings at such times and places as it may determine. Each member of the Committee shall be notified in writing of the time and place of any meeting of the Committee at least two days prior to such meeting, provided that such notice may be waived by a Committee member. A majority of the members of the Committee shall constitute a quorum, and any action taken by a majority of the members of the Committee present at any duly called 3 meeting at which a quorum is present (as well as any action unanimously approved in writing) shall constitute action by the Committee. The Committee may act by unanimous written consent of its members. (b) The Committee may appoint a Secretary (who need not be a member of the Committee) who shall keep minutes of its meetings. The Committee may make such rules and regulations for the conduct of its business as it may determine. (c) The Committee shall have full and exclusive authority, subject to the express provisions of the Plan, to interpret the Plan as it relates to Options granted or to be granted to Optionees under the Plan, to provide, modify and rescind rules and regulations relating thereto, to determine the terms and provisions of each Option granted to Optionees and the form of each option agreement evidencing an Option granted to Optionees under the Plan, and to make all other determinations and perform such actions as the Committee deems necessary or advisable to administer the Plan as it relates to Options granted or to be granted to Optionees under the Plan. In addition, the Committee shall have full authority, subject to the express provisions of the Plan, to determine to whom Options shall be granted, the time or date of grant of each such Option, the number of shares subject thereto and the price at which such shares may be purchased. In making such determinations, the Committee may take into account the nature of the services rendered by the Optionees, his or her present and potential contributions to the success of the Corporation's business and such other facts as the Committee in its discretion shall deem appropriate to carry out the purposes of the Plan. (d) No member of the Committee or the Board shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. ARTICLE III Grant of Options 3.1 GRANT OF OPTIONS. On April 22, 1996, Options will be granted under the Plan to the persons listed on Exhibit B hereto to purchase the number of shares of Restricted Stock set forth on Exhibit B opposite such person's name. Any person who has been granted Options under this Article III may decline to accept such Options. Such person may indicate his election to decline to accept the Options by giving notice thereof to the Corporation or by refusing to execute a stock option agreement relating to the Options. 3.2 PRICE. The purchase price per share of Restricted Stock under each Option granted under this Article III shall be an amount equal to Fair Market Value. 3.3 OPTION PERIOD AND TERMS OF EXERCISE OF OPTIONS. 4 (a) Notwithstanding anything contained herein to the contrary or in any option agreement executed by and between Corporation and any Optionee, each Option granted under this Article III shall be fully exercisable during the period beginning on the Date of Grant and ending on the Expiration Date. (b) Notwithstanding anything contained herein to the contrary or in any option agreement executed by and between Corporation, all obligations to an Optionee hereunder shall terminate in the event of the Termination of Employment of the Optionee with the Corporation, for any reason whatsoever, including but not limited to the death, disability, or retirement of the Optionee, prior to the purchase and sale of the shares of Restricted Stock hereunder. Any unexercised Option granted to an Optionee under this Article III shall expire and become null and void immediately upon the Optionee's Termination of Employment. (c) Under the provisions of any option agreement evidencing an Option granted hereunder, the Committee or the Board may impose such other terms and conditions upon the exercise of an Option as are not inconsistent with the terms of the Plan. ARTICLE IV Miscellaneous 4.1 ADJUSTMENTS TO REFLECT CAPITAL AND OTHER CORPORATE CHANGES. The Options and the exercise price for such Options shall be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, recapitalization, merger, consolidation or other change in capitalization with a similar substantive effect upon the Options granted hereunder. After any reorganization, merger or consolidation in which the Corporation is not the surviving corporation, Optionee shall, at no additional cost, be entitled upon the exercise of the Options to receive (subject to any required action by shareholders), in lieu of the number of shares of Restricted Stock receivable pursuant hereto, the number and class of shares of stock or other securities to which Optionee would have been entitled pursuant to the terms of the reorganization, merger or consolidation if, at the time of such reorganization, merger or consolidation, Optionee had been the holder of record of a number of shares of stock equal to the number of shares receivable or exercisable pursuant hereto. Comparable rights shall accrue to Optionee in the event of successive reorganizations, mergers or consolidations of the character described above. In the event of a reclassification of Common Stock not covered by the foregoing, or in the event of a liquidation or reorganization (including a merger, consolidation or sale of assets) of the Corporation, the Board shall make such adjustments, if any, as it may deem appropriate in the number, purchase price and kind of shares covered by the unexercised portions of the Options theretofore granted under the Plan. The provisions of this Section 4.1 shall only be applicable if, and only 5 to the extent that, the application thereof does not conflict with any valid governmental statute, regulation, or rule. 4.2 AMENDMENT AND TERMINATION OF THE PLAN. Subject to the right of the Board to terminate the Plan prior thereto and extend the term of the Plan, the Plan shall terminate on January 1, 1997. No Options may be granted after termination of the Plan. The Board may at any time alter or amend the Plan but the Board may not make any alteration or amendment thereof which operates to (i) abolish the Committee, change the qualifications of its members, or withdraw the administration of the Plan from its supervision, (ii) increase the total number of shares of Restricted Stock which may be granted under the Plan (other than as provided in Section 4.1 of this Article IV), (iii) extend the term of the Plan or the maximum exercise periods provided in Article III hereof, (iv) decrease the minimum purchase price for Restricted Stock under the Plan (other than as provided in Section 4.1 of this Article IV), (v) materially increase the benefits accruing to participants under the Plan, or (vi) materially modify the requirements as to eligibility for participation in the Plan. No termination or amendment of the Plan shall adversely affect the rights of an Optionee under an Option, except with the consent of such Optionee. 4.3 NO FRACTIONAL SHARES. Notwithstanding any contrary indication in the Plan or in any option agreement evidencing an Option granted under the Plan, no fractional shares of Restricted Stock may be purchased upon exercise of any Option. 4.4 LEGEND. Each certificate for the shares of the Restricted Stock issued hereunder or in substitution or exchange therefor, or upon the transfer thereof, together with any other Restricted Stock subject to the restrictions of this Plan, shall be stamped or otherwise imprinted with the legend in substantially the following form: The transfer of this instrument or the securities evidenced hereby is restricted under the terms of the 1996 Non-Statutory Stock Option Plan dated as of April 22, 1996, a copy of which is on file at the principal office of Virtual Open Network Environment Corporation, and no transfer of this instrument or such securities shall be made until the conditions thereof shall have been fulfilled. 4.5 LAPSE OF RESTRICTIONS. The restrictions on each share of Restricted Stock as described in this Plan and Exhibit A attached hereto shall lapse One Hundred Eighty (180) days after any public offering of the Corporation's stock. 4.6 PAYMENT OF PURCHASE PRICE; APPLICATION OF FUNDS. Upon exercise of an Option, the purchase price shall be paid in full by check; provided, however, that at the request of an Optionee and to the extent permitted by applicable law, the Corporation may, in its sole and absolute 6 discretion, approve reasonable arrangements with one or more Optionees, under which such an Optionee may exercise an Option by delivering to the Corporation an irrevocable notice of exercise, together with such other documents as the Corporation shall require, and the Corporation shall, upon receipt of full payment by check, or any other reasonable payment arrangement, of the purchase price and any other amounts due in respect of such exercise, deliver to such Optionee one or more certificates representing the shares of Restricted Stock issued in respect of such exercise. The proceeds of any sale of Restricted Stock covered by Options shall constitute general funds of the Corporation. Upon exercise of an Option, the Optionee will be required to pay, or arrange with the Corporation for the payment of, the amount of any federal, state, or local taxes required by law to be withheld in connection with such exercise. No shares of Restricted Stock shall be issued upon exercise of an Option until full payment therefor has been made, and an Optionee shall have none of the rights of a stockholder until shares are issued to him. 4.7 REQUIREMENTS OF LAW. The granting of Options and the issuance of Restricted Stock upon the exercise of an Option shall be subject to all applicable laws, rules and regulations, and to such approval by governmental agencies as may be required. 4.8 NONTRANSFERABILITY OF OPTIONS. An Option granted under the Plan shall not be transferable by the Optionee and shall be exercisable during the lifetime of the Optionee only by the Optionee. 4.9 OPTION AGREEMENT; INVESTMENT LETTER. (a) Each person who accepts an Option offered to him hereunder shall enter into an agreement with the Corporation, in such form as the Committee may prescribe, setting forth the terms and conditions of the Option, whereupon such person shall become a participant in the Plan. (b) The Corporation's obligation to deliver Restricted Stock with respect to an Option shall be conditioned upon its receipt from the Optionee, to whom such Restricted Stock is to be delivered, of an executed investment letter containing such representations and agreements as the Committee may determine to be necessary or advisable in order to enable the Corporation to issue and deliver such Restricted Stock to such Optionee in compliance with applicable federal, state, or local securities laws, rules, or regulations. 4.10 EFFECTIVE DATE OF THE PLAN. The Plan shall become effective, as of the date of its adoption by the Board. If the Plan is not so adopted, the Plan shall terminate and all Options granted hereunder shall be null and void. 4.11 TERMINATION OF EMPLOYMENT. A transfer of employment within the Corporation shall not be considered to be a Termination of Employment for the purposes of the Plan. Nothing in the Plan or in any option agreement evidencing an Option granted under the Plan to an Optionee shall 7 confer upon any Optionee any right to continue in the employ of the Corporation or in any way interfere with the right of the Corporation to terminate the employment or contractual relationship with the Optionee at any time, with or without cause. 4.12 CONSTRUCTION. Options granted under the Plan are not intended to be treated as incentive stock options under Section 422 of the Code. Words of any gender used in the Plan shall be construed to include any other gender, unless the context requires otherwise. 4.13 INTERPRETATION. The section headings hereof are inserted solely for convenience of reference only and shall be disregarded in interpreting the provisions hereof. As used in this Plan, any gender shall include any other gender, the plural shall include the singular and the singular shall include the plural, the disjunctive shall include the conjunctive and the conjunctive shall include the disjunctive, wherever appropriate. 4.14 GOVERNING LAW. This Plan and all the terms and provisions hereof, shall be interpreted and construed in accordance with the laws of the State of Delaware, except for its rules relating to the conflict of laws; provided, however, that such terms and provisions relating to federal income tax law shall be interpreted and construed in accordance with federal law, and such terms and provisions relating to the application of securities laws shall be interpreted and construed in accordance with federal law and the laws of the jurisdiction in which Optionee resides or is domiciled. 4.15 SEVERABILITY. If any provision, or portion thereof, of this Plan, or the application thereof to any person or circumstances, shall, to any extent be invalid or unenforceable, the remainder hereof, or the application of such provision, or portion thereof, to any other person or circumstance shall not be affected thereby; and each provision of this Plan shall be valid and enforceable to the fullest extent permitted by law. 8 EXHIBIT A ARTICLE I Restrictions on Transferability 1.1 GENERAL RESTRICTIONS. Upon the purchase of Restricted Stock pursuant to the Plan, all of the shares of stock shall not be sold, assigned, transferred, pledged or otherwise disposed of, within six years of the Purchase Date, except as otherwise provided in Section 1.2. and Section 1.3 of Article I hereof. Transfers are permitted under Article II hereof following the passage of six years after the Purchase Date. As long as the aforesaid restrictions remain in effect, no holder of Restricted Stock shall have the right to vote the restricted shares for any purpose. All voting rights with respect to the Restricted Stock shall be exercised by a majority vote of the Board. 1.2 LAPSE OF RESTRICTIONS. The restrictions set forth herein shall lapse One Hundred Eighty (180) days following any public offering of the Corporation's stock or the acquisition of the Corporation in exchange for publicly traded shares. 1.3 REQUIRED TRANSFERS. (a) Except as provided in Section 1.2 of Article I hereof, in the event of the Optionee's Termination of Employment within the time period specified below after the Purchase Date, for any reason whatsoever, Optionee, within ten (10) business days after the date of the said termination (75 days in the case of the death of an Optionee), shall give to the Corporation a written offer to sell the Restricted Stock purchased by him or her hereunder for the purchase price specified hereunder as payable by the Corporation and, for a period of ninety (90) days thereafter, the Corporation shall have an option to purchase such Restricted Stock, in whole or in part, for such price and on such terms as set forth herein. (b) The Formula Price payable by the Corporation for the Restricted Stock shall be as follows: Upon the Optionee's Termination The price per share of Restricted of Employment after acquiring Stock to be paid to Optionee Restricted Stock within: shall be: One year The lesser of the (a) Purchase Price or (b) Book Value. 80% of Optionee's Restricted Two years Stock shall be purchased for the lesser of the Purchase Price or Book Value; 20% shall be purchased for Book Value. i Upon the Optionee's Termination The price per share of Restricted of Employment after acquiring Stock to be paid to Optionee Restricted Stock within: shall be: 60% of Optionee's Restricted Three years Stock shall be purchased for the lesser of the Purchase Price or Book Value; 40% shall be purchased for Book Value. 40% of Optionee's Restricted Four years Stock shall be purchased for the lesser of the Purchase Price or Book Value; 60% shall be purchased for Book Value. 20% of Optionee's Restricted Five years Stock shall be purchased for the lesser of the Purchase Price or Book Value; 80% shall be purchased for Book Value. Six or more years 100% of Optionee's Restricted Stock shall be purchased for Book Value. (c) The purchase price payable for the Restricted Stock shall be paid to or for the benefit of Optionee in the event of the exercise by the Corporation of the option provided hereunder at a closing, the time, date and place of which shall be established by the Corporation upon the exercise of such option by written notice to Optionee; provided, however, that the time thereof shall be during regular business hours, the date thereof shall be a regular business day no earlier than five (5) business days and no later than twenty (20) business days following such notice and the place thereof shall be the principal business offices of the Corporation. At such closing, against performance by the Corporation of its obligations hereunder, Optionee shall deliver to the Corporation the certificate or certificates evidencing the Restricted Stock to be sold hereunder, duly endorsed for transfer, subject only to those restrictions provided in this Plan; and, against performance by Optionee of his or her obligations hereunder, the Corporation shall pay to or for the benefit of Optionee the purchase price therefor in cash. 1.4 THE RESTRICTED STOCK. For the purposes hereof, the Restricted Stock purchased by Optionee hereunder shall include any stock dividends, stock splits and capital stock or other securities subsequently issued with respect to such shares of Restricted Stock following the date hereof. ii ARTICLE II Other Transfers 2.1 RIGHT OF FIRST REFUSAL UPON PRESENTATION OF THIRD-PARTY OFFER. (a) Except as provided in Section 1.2 and Section 1.3 of Article I and Section 2.2 of Article II hereof, and provided Optionee holds the Restricted Stock for a period in excess of six years beyond the Purchase Date, Optionee may sell any of the shares of Restricted Stock provided Optionee gives to the Corporation written notice containing a copy of a bona fide, legally enforceable written offer of a third party forthwith to purchase such Restricted Stock for a consideration consisting solely of cash to be paid upon the delivery of such Restricted Stock, in transferable form, free and clear of all liens, encumbrances, purchase options, equities, claims and restrictions, except for those set forth in this Plan; and for a period of twenty (20) days thereafter or such shorter period as the Board of the Corporation may then designate, the Corporation shall have an option to purchase such Restricted Stock from Optionee, in whole but not in part, for a price equal to the Book Value per share of such Restricted Stock. (b) If the Corporation shall fail to exercise its option provided in this Section 2.1 of Article II with respect to any of the Restricted Stock, within the twenty (20) day period thereof, then, for a period of ten (10) days thereafter, such option shall be suspended with respect to the Restricted Stock as to which such option shall not be exercised, and Optionee shall have the right to accept the written offer to purchase such Restricted Stock as to which such option shall be suspended as contained in the notice thereof and shall have the right to transfer such Restricted Stock in accordance with the terms of such offer, subject to the restrictions set forth in this Plan. 2.2 PERMITTED TRANSFERS TO CORPORATION, STOCK OR BENEFIT PLAN, OR OTHER SHAREHOLDER. Except as provided in Section 1.2 and Section 1.3 of Article I and Section 2.1 of Article II hereof, and provided Optionee holds the Restricted Stock for a period in excess of six years beyond the Purchase Date, Optionee may sell any Restricted Stock to (a) the Corporation, (b) any employee stock or employee benefit plan sponsored by the Corporation, or (c) any other person who shall then be a shareholder of the Corporation, nothing contained in this Plan hereof shall prevent the sale, of any Restricted Stock thereto; provided, however, that such Restricted Stock may not be sold for a price in excess of the Book Value per share of such stock; provided, further, that any transferee, other than the Corporation or any such employee stock plan, to whom such securities shall be sold shall execute and deliver to the Corporation an addendum hereto, pursuant to which such transferee shall agree to be a party hereto bound by the provisions of this Plan, with the same force and effect as if such transferee shall have been Optionee hereunder. For the purposes hereof, the trustees of any trust forming part of a stock bonus, iii profit sharing or pension plan sponsored by the Corporation for the benefit of all or any part of its employees or the employees of any subsidiaries thereof, including but not limited to an employee stock ownership plan, shall constitute an employee stock plan. 2.3 RIGHT TO PLEDGE. Provided the Optionee holds the Restricted Stock more than six years beyond the Purchase Date, the Optionee may pledge as security for a loan, encumber, hypothecate, or otherwise borrow against Optionee's Restricted Stock. iv EXHIBIT B Number of Common Shares Exercisable Optionee Number of Options With Options -------- ----------------- ------------------ Jieh-Shan Wang 250,000 250,000 William Wilson 100,000 100,000 Ban Leong Eap 32,870 32,870 Maxine Loh 150,000 150,000 David K. Rowland 10,000 10,000 Joseph D. Gallagher 33,081 33,081 EX-10.4 13 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION 1996 INCENTIVE STOCK PLAN Article I. Purpose, Adoption and Term of the Plan 1.01 Purpose. The purpose of the Virtual Open Network Environment Corporation 1996 Incentive Stock Plan (hereinafter referred to as the "Plan") is to advance the interests of the Company (as hereinafter defined) and its Subsidiaries (as hereinafter defined), if any, by encouraging and providing for the acquisition of an equity interest in the Company by non-employee directors, key employees and consultants through the grant of awards with respect to shares of Common Stock (as hereinafter defined). The Plan will enable the Company to retain the services of non- employee directors, key employees and consultants upon whose judgment, interest, and special effort the successful conduct of its operations is largely dependent and to compete effectively with other enterprises for the services of non-employee directors, key employees and consultants as may be needed for the continued improvement of its business. 1.02 Adoption and Term. The Plan shall become effective on June 12, 1996 ("Effective Date"), subject to the prior approval of a simple majority of the holders of Voting Stock (as hereinafter defined) represented, by person or by proxy, and entitled to vote at an annual or special meeting of the holders of Voting Stock. The Plan shall terminate on June 11, 2006, or such earlier date as shall be determined by the Board (as hereinafter defined). Article II. Definitions For purposes of the Plan, capitalized terms shall have the following meanings: 2.01 Award means (a) any grant to an Employee or a Consultant Participant of any one or a combination of Non-Qualified Stock Options or Incentive Stock Options described in Article VI, or Restricted Shares described in Article VII, or (b) any grant to a Non-Employee Director of a Non-Employee Director Option described in Article VIII. 2.02 Award Agreement means a written agreement between the Company and a Participant or a written acknowledgment from the Company specifically setting forth the terms and conditions of an Award granted to a Participant under the Plan. 2.03 Beneficiary means an individual, trust or estate who or that, by will or the laws of descent and distribution, succeeds to the rights and obligations of the Participant under the Plan and an Award Agreement upon the Participant's death. 2.04 Board means the Board of Directors of the Company. 2.05 Cause means, with respect to an Employee Participant or a Consultant Participant, termination for, as determined by the Committee in its sole discretion, (i) dishonest or fraudulent conduct relating to the Company or any of its Subsidiaries or their businesses; (ii) conviction of any felony that, in the judgment of the Committee, involves moral turpitude or otherwise reflects on the Company or any of its Subsidiaries in a significantly adverse way; or (iii) gross neglect by the Participant in the performance of his or her duties as an employee or a consultant, or any material breach by a Participant under any employment agreement or consulting agreement with the Company or any of its Subsidiaries. 2.06 Change in Control shall mean the occurrence, after the Effective Date, of any of the following events, directly or indirectly or in one or more series of transactions: (i) Approval of the Company's shareholders of a consolidation or merger of the Company with any Third Party, unless the Company is the entity surviving such merger or consolidation; (ii) Approval of the Company's shareholders of a transfer of all or substantially all of the assets of the Company to a Third Party or a complete liquidation or dissolution of the Company; (iii) A Third Party (other than James F. Chen and his affiliates), directly or indirectly, through one or more subsidiaries or transactions or acting in concert with one or more persons or entities: (A) acquires beneficial ownership of more than 20% of the Voting Stock; (B) acquires irrevocable proxies representing more than 20% of the Voting Stock; (C) acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing more than 20% of the Voting Stock; (D) acquires the ability to control in any manner the election of a majority of the directors of the Company; or (E) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Company; (iv) any election has occurred of persons to the Board that causes a majority of the Board to consist of - 2 - persons other than (A) persons who were members of the Board on the Effective Date and/or (B) persons who were nominated for election as members of the Board by the Board (or a committee of the Board) at a time when the majority of the Board (or of such committee) consisted of persons who were members of the Board on the Effective Date; provided, however, that any persons nominated for election by the Board (or a committee of the Board), a majority of whom are persons described in clauses (A) and/or (B), or are persons who were themselves nominated by such Board (or a committee of such Board), shall for this purpose be deemed to have been nominated by a Board composed of persons described in clause (A); or (v) A determination is made by the SEC or any similar agency having regulatory control over the Company that a change in control, as defined in the securities laws or regulations then applicable to the Company, has occurred. Notwithstanding any provision contained herein, a Change in Control shall not include any of the above described events if they are the result of a Third Party's inadvertently acquiring beneficial ownership or irrevocable proxies or a combination of both for 20% or more of the Voting Stock, and the Third Party as promptly as practicable thereafter divests itself of beneficial ownership or irrevocable proxies for a sufficient number of shares so that the Third Party no longer has beneficial ownership or irrevocable proxies or a combination of both for 20% or more of the Voting Stock. 2.07 Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements, or supersedes said section. 2.08 Committee means a committee of the Board as may be appointed, from time to time, by the Board. The Board may, from time to time, appoint members of the Committee in substitution for those members who were previously appointed and may fill vacancies, however caused, in the Committee. The Committee shall be composed of at least three directors of the Company, each of whom is a "disinterested person" as defined in Rule 16b-3, as promulgated by the SEC under the Exchange Act, and an "outside director" within the meaning of Section 162(m). The Committee shall have the power and authority to administer the Plan in accordance with Article III. 2.09 Common Stock means the Common Stock, par value $.001 per share, of the Company. - 3 - 2.10 Company means Virtual Open Network Environment Corporation, a corporation organized under the laws of the State of Delaware, and its successors. 2.11 Consultant Participant means a Participant who is a consultant to the Company or one of its Subsidiaries. 2.12 Date of Grant means the date designated by the Plan or the Committee as the date as of which an Award is granted, which shall not be earlier than the date on which the Committee approves the granting of such Award. 2.13 Disability means any physical or mental injury or disease of a permanent nature that renders an Employee or a Consultant Participant incapable of meeting the requirements of the employment or other work that Employee or Consultant Participant performed immediately before that disability commenced. The determination of whether an Employee or a Consultant Participant is disabled and when an Employee or a Consultant Participant becomes disabled shall be made by the Committee in its sole and absolute discretion. 2.14 Disability Date means the date which is six months after the date on which an Employee or a Consultant Participant is first absent from active employment or work with the Company due to a Disability. 2.15 Employee Participant means a Participant who is an employee of the Company or one of its Subsidiaries. 2.16 ERISA means the Employee Retirement Income Security Act of 1974, as amended. 2.17 Exchange Act means the Securities Exchange Act of 1934, as amended. 2.18 Fair Market Value of a share of Common Stock means, as of any given date, the closing sales price of a share of Common Stock on such date on the principal national securities exchange on which the Common Stock is then traded or, if the Common Stock is not then traded on a national securities exchange, the closing sales price or, if none, the average of the bid and asked prices of the Common Stock on such date as reported on the National Association of Securities Dealers Automated Quotation System ("Nasdaq"); provided, however, that, if there were no sales reported as of such date, Fair Market Value shall be computed as of the last date preceding such date on which a sale was reported; provided, further, that, if any such exchange or quotation system is closed on any day on which Fair Market Value is to be determined, Fair Market Value shall be determined as of the first date immediately preceding such date on which such exchange or quotation system was open for trading. In the event the Common Stock is not admitted to trade on a securities exchange or quoted on Nasdaq, the Fair Market Value of a share of Common Stock as of any given date shall be as determined in good faith by the Committee, which determination may be based on, among other things, the opinion of - 4 - one or more independent and reputable appraisers qualified to value companies in the Company's line of business. Notwithstanding the foregoing, the Fair Market Value of a share of Common Stock shall never be less than par value per share. 2.19 Incentive Stock Option means an Option designated as an incentive stock option and that meets the requirements of Section 422 of the Code. 2.20 Non-Employee Director means each member of the Board who is not an employee of the Company or of any of its Subsidiaries. 2.21 Non-Employee Director Option means an Option granted in accordance with Article VIII. 2.22 Non-Qualified Stock Option means an Option that is not an Incentive Stock Option. 2.23 Option means any option to purchase Common Stock granted to a Participant pursuant to Article VI or to a Non-Employee Director pursuant to Article VIII. 2.24 Participant means any employee of or consultant to the Company or any of its Subsidiaries selected by the Committee to receive an Option under the Plan in accordance with Article VI and/or Restricted Shares under the Plan in accordance with Article VII and, solely to the extent provided in Article VIII, any Non-Employee Director. 2.25 Plan means the Virtual Open Network Environment Corporation 1996 Incentive Stock Plan as set forth herein, and as the same may be amended from time to time. 2.26 Reload Option shall have the meaning set forth in Section 6.03(e) of the Plan. 2.27 Restricted Shares means shares of Common Stock subject to restrictions imposed in connection with Awards granted under Article VII. 2.28 Rule 16b-3 means Rule 16b-3 promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, as amended, and any successor rule. 2.29 SEC means the Securities and Exchange Commission. 2.30 Section 162(m) means Section 162(m) of the Code and the regulations thereunder. 2.31 Subsidiary means a company more than 50% of the equity interests of which are beneficially owned, directly or indirectly, by the Company. - 5 - 2.32 Ten Percent Shareholder means a Participant who, at the time of grant of an Option, owns (or is deemed to own under Section 424(d) of the Code) more than 10% of the Voting Stock. 2.33 Termination of Employment means, with respect to an Employee Participant, the voluntary or involuntary termination of a Participant's employment with the Company or any of its Subsidiaries for any reason, including death, Disability, retirement or as the result of the sale or other divestiture of the Participant's employer or any similar transaction in which the Participant's employer ceases to be the Company or one of its Subsidiaries. Whether entering military or other government service shall constitute Termination of Employment, and whether a Termination of Employment is a result of Disability, shall be determined in each case by the Committee. Termination of Employment means, with respect to a consultant, termination of his or her services as a consultant to the Company or one of its Subsidiaries. 2.34 Third Party includes a single person or a group of persons or entities acting in concert not wholly owned directly or indirectly by the Company. 2.35 Voting Stock means the classes of stock of the Company entitled to vote generally in the election of directors of the Company. Article III. Administration 3.01 Committee. The Plan shall be administered by the Committee, which shall have exclusive and final authority in each determination, interpretation, or other action affecting the Plan and its Participants other than with respect to Non-Employee Director Options granted under Article VIII. The Committee shall have the sole and absolute discretion to interpret the Plan, to establish and modify administrative rules for the Plan, to select the officers, other key employees and consultants to whom Awards may be granted, to determine the terms and provisions of the respective Award Agreements (which need not be identical), to determine all claims for benefits under the Plan, to impose such conditions and restrictions on Awards as it determines appropriate, to determine whether the shares offered with respect to an Award will be treasury shares or will be authorized but previously unissued shares, and to take such steps in connection with the Plan and Award granted hereunder as it may deem necessary or advisable. No action of the Committee will be effective if it contravenes or amends the Plan in any respect. 3.02 Actions of the Committee. All determinations of the Committee shall be made by a majority vote of its members. Any decision or determination reduced to writing and signed by all of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee shall also have express authorization to hold Committee meetings by conference telephone, or similar communication equipment by means of which all persons participating in the meeting can hear each other. - 6 - Article IV. Shares of Common Stock 4.01 Number of Shares of Common Stock Issuable. Subject to adjustments as provided in Section 9.05, 3,500,000 shares of Common Stock shall be available for Awards under the Plan. The Common Stock to be offered under the Plan shall be authorized and unissued Common Stock, or issued Common Stock that shall have been reacquired by the Company and held in its treasury. 4.02 Calculation of Number of Shares of Common Stock Awarded to any Participant. In the event the purchase price of an Option is paid, or tax or withholding payments relating to an Award are satisfied, in whole or in part through the delivery of shares of Common Stock, a Participant will be deemed to have received an Award with respect to those shares of Common Stock. 4.03 Shares of Common Stock Subject to Terminated Awards. The Common Stock covered by any unexercised portions of terminated Options, shares of Common Stock forfeited as provided in Section 7.02(a) and shares of Common Stock subject to Awards that are otherwise surrendered by the Participant without receiving any payment or other benefit with respect thereto may again be subject to new Awards under the Plan. Article V. Participation 5.01 Eligible Participants. Participants in the Plan shall include such officers, other key employees of and consultants to the Company or its Subsidiaries, whether or not directors of the Company, as the Committee, in its sole discretion, may designate from time to time. In making such designation, the Committee may take into account the nature of the services rendered by the officers, key employees and consultants, their present and potential contributions to the success of the Company, and such other factors as the Committee, in its discretion, may deem relevant. The Committee's designation of a Participant in any year shall not require the Committee to designate such person to receive Awards in any other year. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Awards. A Participant may hold more than one Award granted under the Plan. During the term of the Plan, no Employee Participant may receive Awards with respect to more than 750,000 shares of Common Stock. Non-Employee Directors shall receive Non-Employee Director Options in accordance with Article VIII, the provisions of which are automatic and non-discretionary in operation. Non-Employee Directors shall not be eligible to receive any other Awards under the Plan unless they are no longer Non-Employee Directors on the Date of Grant of such Awards. - 7 - Article VI. Stock Options 6.01 Grant of Option. Any Option granted under this Article VI shall have such terms as the Committee may, from time to time, approve, and the terms and conditions of Options need not be the same with respect to each Participant. Under this Article VI, the Committee may grant to any Employee or Consultant Participant one or more Incentive Stock Options, Non-Qualified Stock Options or both types of Options; provided, however, that Incentive Stock Options may only be granted to Employee Participants. To the extent any Option does not qualify as an Incentive Stock Option (whether because of its provisions, the time or manner of its exercise or otherwise), that Option or the portion thereof that does not so qualify shall constitute a separate Non-Qualified Stock Option. 6.02 Incentive Stock Options. In the case of any grant of an Incentive Stock Option, whenever possible, each provision hereof and in any Award Agreement relating to such Option shall be interpreted to entitle the holder thereof to the tax treatment afforded by Section 422 of the Code, except in connection with the exercise of Options following a Participant's Termination of Employment, except in accordance with a specific determination of the Committee with the consent of the affected Participant and except to the extent that the operation of Section 9.05 would cause an Option to no longer be entitled to such treatment. If any provision hereof or that Award Agreement is held not to comply with requirements necessary to entitle that Option to that tax treatment, then except as otherwise provided in the preceding sentence: (a) that provision shall be deemed to have contained from the outset such language as is necessary to entitle the Option to the tax treatment afforded under Section 422 of the Code; and (b) all other provisions hereof and of that Award Agreement remain in full force and effect. Except as otherwise specified in the first sentence of this Section 6.02, if any Award Agreement covering an Option the Committee designates to be an Incentive Stock Option hereunder does not explicitly include any term required to entitle that Incentive Stock Option to the tax treatment afforded by Section 422 of the Code, all such terms shall be deemed implicit in the designation of that Option, and that Option shall be deemed to have been granted subject to all such terms. 6.03 Terms of Options. Options granted under this Article VI shall be subject to the following terms and conditions and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) Option Price. The option price per share of Common Stock purchasable under an Option shall be determined by the Committee at the time of grant but, if the Option is an Incentive Stock Option, the option price per share shall not be less than 100% of the Fair Market Value of a share of Common Stock on the Date of Grant; provided, however, that, if an Incentive Stock Option is granted to a Ten Percent Shareholder, the option price - 8 - per share shall be at least 110% of the Fair Market Value of a share of Common Stock on the Date of Grant. (b) Option Term. The term of each Option shall be fixed by the Committee, but no Option shall be exercisable more than ten years after its Date of Grant; provided, however, that, if an Incentive Stock Option is granted to a Ten Percent Shareholder, the Option shall not be exercisable more than five years after its Date of Grant. (c) Exercisability. An Award Agreement with respect to Options may contain such performance targets, waiting periods, exercise dates, restrictions on exercise (including, but not limited to, a requirement that an Option is exercisable in periodic installments), and restrictions on the transfer of the underlying shares of Common Stock, if any, as may be determined by the Committee at the time of grant. To the extent not exercised, installments shall cumulate and be exercisable, in whole or in part, at any time after becoming exercisable, subject to the limitations set forth in Sections 6.03(b) and (h). If an Option is an Incentive Stock Option and if required by Section 422 of the Code, the aggregate Fair Market Value of the shares of Common Stock underlying such Option (determined at the time the Option is granted) that becomes exercisable in any one calendar year shall not exceed $100,000. (d) Method of Exercise. Subject to whatever installment exercise and waiting period provisions that apply under Section 6.03(c) above, Options may be exercised in whole or in part at any time during the term of the Option, by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased. Such notice shall be accompanied by payment in full of the purchase price in such form as the Committee may accept (including payment in accordance with a cashless exercise program approved by the Committee). If and to the extent the Committee determines in its sole discretion at or after grant, payment in full or in part may also be made in the form of shares of Common Stock already owned by the Participant (and for which the Participant has good title, free and clear of any liens or encumbrances) based on the Fair Market Value of the shares of Common Stock on the date the Option is exercised; provided, however, that the right to make payment of the purchase price of an Incentive Stock Option in the form of already owned shares may be authorized only at the time of grant. Any already owned Common Stock used for payment must have been held by the Participant for at least six months. No - 9 - Common Stock shall be issued on exercise of an Option until payment, as provided herein, therefor has been made. A Participant shall generally have the right to dividends or other rights of a stockholder with respect to Common Stock subject to the Option only when certificates for shares of Common Stock are issued to the Participant. (e) Reload Options. The Committee shall have the authority to specify, at the time of grant or, with respect to Non-Qualified Stock Options, at or after the time of grant, that an Employee or a Consultant Participant shall be granted a Non- Qualified Stock Option (a "Reload Option") in the event such Participant exercises all or a part of an Option (an "Original Option") by surrendering in accordance with Section 6.03(d) of the Plan already owned shares of Common Stock in full or partial payment of the purchase price under the Original Option, subject to the availability of shares of Common Stock under the Plan at the time of such exercise; provided, however, that no Reload Option shall be granted to a Non-Employee Director. Each Reload Option shall cover a number of shares of Common Stock equal to the number of shares of Common Stock surrendered in payment of the purchase price under such Original Option, shall have a purchase price per share of Common Stock equal to the 100% of the Fair Market Value of a share of Common Stock on the Date of Grant of such Reload Option, and shall expire on the stated expiration date of the Original Option. A Reload Option shall be exercisable at any time and from time to time after the time of grant of such Reload Option (or, as the Committee in its sole discretion shall determine at or after the time of grant, at such time or times as shall be specified in the Reload Option). Any Reload Option may provide for the grant, when exercised, of subsequent Reload Options to the extent and upon such terms and conditions, consistent with this Section 6.03(e), as the Committee in its sole discretion shall specify at or after the Date of Grant of such Reload Option. A Reload Option shall contain such other terms and conditions, which may include a restriction on the transferability of the shares of Common Stock received upon exercise of the Original Option representing at least the after-tax profit received upon exercise of the Original Option, as the Committee in its sole discretion shall deem desirable, and which may be set forth in rules or guidelines adopted by the Committee or in the Award Agreements evidencing the Reload Options. (f) Non-Transferability of Options. No Option shall be transferable by the Participant otherwise than by will or the laws of descent and distribution. (g) Acceleration or Extension of Exercise Time. The Committee, in its sole discretion, shall have the right (but shall not in any case be obligated) to permit - 10 - purchase of Common Stock subject to any Option granted to an Employee or a Consultant Participant prior to the time such Option would otherwise become exercisable under the terms of the Award Agreement. In addition, the Committee, in its sole discretion, shall have the right (but shall not in any case be obligated) to permit any Option granted to an Employee or a Consultant Participant to be exercised after its expiration date, subject, however to the limitation set forth in Section 6.03(b). (h) Exercise of Options Upon Termination of Employment. (i) Exercise of Vested Options Upon Termination of Employment. (A) Termination. Unless the Committee, in its sole discretion, provides for a shorter or longer period of time in the Award Agreement or a longer period of time in accordance with Section 6.03(g), upon an Employee or a Consultant Participant's Termination of Employment other than by reason of death or Disability, an Employee or a Consultant Participant may, within three months from the date of such Termination of Employment, exercise all or any part of his or her Options as were exercisable on the date of Termination of Employment if such Termination of Employment is not for Cause. If such Termination of Employment is for Cause, the right of the Employee or Consultant Participant to exercise such Options shall terminate on the date of Termination of Employment. In no event, however, may any Option be exercised later than the date determined pursuant to Section 6.03(b). (B) Disability. Unless the Committee, in its sole discretion, provides for a shorter or longer period of time - 11 - in the Award Agreement or a longer period of time in accordance with Section 6.03(g), upon an Employee or a Consultant Participant's Disability Date, the Employee or Consultant Participant may, within one year after the Disability Date, exercise all or a part of his or her Options, whether or not such Option was exercisable on the Disability Date, but only to the extent not previously exercised. In no event, however, may any Option be exercised later than the date determined pursuant to Section 6.03(b). (C) Death. Unless the Committee, in its sole discretion, provides for a shorter or longer period of time in the Award Agreement or a longer period of time in accordance with Section 6.03(g), in the event of the death of an Employee or a Consultant Participant while employed by the Company, the right of the Employee or Consultant Participant's Beneficiary to exercise the Option in full (whether or not all or any part of the Option was exercisable as of the date of death of the Employee or Consultant Participant, but only to the extent not previously exercised) shall expire upon the expiration of one year from the date of the Employee or Consultant Participant's death or on the date of expiration of the Option determined pursuant to Section 6.03(b), whichever is earlier. (ii) Expiration of Unvested Options Upon Termination of Employment. Subject to Sections 6.03(g) and 6.03(h)(i)(B) and (C), to the extent all or any part of an Option granted to an Employee or a Consultant Participant was - 12 - not exercisable as of the date of Termination of Employment, such right shall expire at the date of such Termination of Employment. Notwithstanding the foregoing, the Committee, in its sole discretion and under such terms as it deems appropriate, may permit an Employee or a Consultant Participant who will continue to render significant services to the Company after his or her Termination of Employment to continue to accrue service with respect to the right to exercise his or her Options during the period in which the individual continues to render such services. Article VII. Restricted Shares 7.01 Restricted Share Awards. Restricted Shares may be issued either alone or in addition to other Awards granted under the Plan. The Committee may grant to any Employee or Consultant Participant an Award of shares of Common Stock in such number, and subject to such terms and conditions relating to forfeitability and restrictions on delivery and transfer (whether based on performance standards, periods of service or otherwise) as the Committee shall establish. The terms of any Restricted Share Award granted under the Plan shall be set forth in an Award Agreement, which shall contain provisions determined by the Committee and not inconsistent with the Plan. The provisions of Restricted Share Awards need not be the same for each Participant receiving such Awards. (a) Issuance of Restricted Shares. As soon as practicable after the Date of Grant of a Restricted Share Award by the Committee, the Company shall cause to be transferred on the books of the Company shares of Common Stock, registered on behalf of the Participant in nominee form, evidencing the Restricted Shares covered by the Award, but subject to forfeiture to the Company retroactive to the Date of Grant if an Award Agreement delivered to the Participant by the Company with respect to the Restricted Shares covered by the Award is not duly executed by the Participant and timely returned to the Company. Each Participant, as a condition to the receipt of a Restricted Share Award, shall pay to the Company in cash the par value of a share of Common Stock multiplied by the number of shares of Common Stock covered by such Restricted Share Award. All shares of Common Stock covered by Awards under this Article VII shall be subject to the restrictions, terms and conditions contained in the Plan and the Award Agreement entered into by and between the Company and the Participant. Until the lapse or release of all restrictions applicable to an Award of Restricted Shares, the stock certificates representing such Restricted Shares shall be held in custody by the Company or its designee. Upon the lapse - 13 - or release of all restrictions with respect to an Award as described in Section 7.01(d), one or more stock certificates, registered in the name of the Participant, for an appropriate number of shares of Common Stock as provided in Section 7.01(d), free of any restrictions set forth in the Plan and the Award Agreement, shall be delivered to the Participant. (b) Shareholder Rights. Beginning on the Date of Grant of the Restricted Share Award and subject to execution of the Award Agreement as provided in Section 7.01(a), the Participant shall become a shareholder of the Company with respect to all shares of Common Stock subject to the Award Agreement and shall have all of the rights of a shareholder, including, but not limited to, the right to vote such shares of Common Stock and, except as otherwise determined by the Committee and specified in the applicable Award Agreement, the right to receive dividends (or dividend equivalents); provided, however, that any shares of Common Stock distributed as a dividend or otherwise with respect to any Restricted Shares as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Shares and shall be held in custody by the Company as prescribed in Section 7.01(a). (c) Restriction on Transferability. None of the Restricted Shares may be assigned or transferred (other than by will or the laws of descent and distribution), pledged or sold prior to lapse or release of the restrictions applicable thereto. (d) Delivery of Shares of Common Stock Upon Release of Restrictions. Upon expiration or earlier termination of the forfeiture period without a forfeiture and the satisfaction of or release from any other conditions prescribed by the Committee, the restrictions applicable to the Restricted Shares shall lapse. As promptly as administratively feasible thereafter, subject to the requirements of Section 9.04, the Company shall deliver to the Participant or, in case of the Participant's death, to the Participant's Beneficiary, one or more stock certificates for the appropriate number of shares of Common Stock, free of all such restrictions, except for any restrictions that may be imposed by law. 7.02 Terms of Restricted Shares. (a) Forfeiture of Restricted Shares. Subject to Section 7.02(b), all Restricted Shares shall be forfeited and returned to the Company and all rights of the Participant with respect to such Restricted Shares shall terminate unless the Participant continues in the service of the Company or any Subsidiary of the Company as an employee or consultant, as the case may be, until the expiration of the forfeiture period for such Restricted Shares and satisfies any and all other conditions set forth in the Award Agreement. The Committee, in its sole - 14 - discretion, shall determine the forfeiture period (which may, but need not, lapse in installments) and any other terms and conditions applicable with respect to any Restricted Share Award. (b) Waiver of Forfeiture Period. Notwithstanding anything contained in this Article VII to the contrary, the Committee may, in its sole discretion, waive the forfeiture period and any other conditions set forth in any Award Agreement under appropriate circumstances (including the death, Disability or retirement of the Participant or a material change in circumstances arising after the date of an Award) and subject to such terms and conditions (including forfeiture of a proportionate number of Restricted Shares) as the Committee shall deem appropriate, provided that the Participant shall at that time have completed at least one year of employment or service as a consultant after the Date of Grant. Article VIII. Non-Employee Director Options 8.01 Grant of Non-Employee Director Options. On the date a Non- Employee Director is elected as such for the first time by the holders of Voting Stock, such person shall be granted a Non-Employee Director Option consisting of an Option to purchase 10,000 shares of Common Stock; provided, however, that Non-Employee Directors who are first elected as such by the holders of Voting Stock prior to the 1996 annual meeting of holders of Voting Stock shall not be entitled to receive a Non-Employee Director Option under this Article VIII. The option price for such Non- Employee Director Options shall be the Fair Market Value of a share of Common Stock on the Date of Grant. All such Options shall be designated as Non-Qualified Stock Options and shall have a five year term. Each such Option shall be exercisable in full on the Date of Grant of such Option. If a Non-Employee Director's service with the Company terminates by reason of death, any Option held by such Non-Employee Director may be exercised for a period of one year from the date of death or until the expiration of the Option, whichever is shorter. If a Non-Employee Director's service with the Company terminates other than by reason of death, any Option held by such Non-Employee Director may be exercised for a period of three months from the date of such termination, or until the expiration of the stated term of the Option, whichever is shorter. All applicable provisions of the Plan (other than Sections 6.03(g) and (h)) not inconsistent with this Section 8.01 shall apply to Options granted to Non-Employee Directors. Article IX. Terms Applicable to All Awards Granted Under the Plan 9.01 Award Agreement. No person shall have any rights under any Award granted under the Plan unless and until the Company and the Participant to whom such Award shall have been granted shall have executed and delivered an Award Agreement authorized by the Committee expressly - 15 - granting the Award to such person and containing provisions setting forth the terms of the Award. 9.02 Plan Provisions Control Award Terms. The terms of the Plan shall govern all Awards granted under the Plan, and in no event shall the Committee have the power to grant to a Participant any Award under the Plan that is contrary to any provisions of the Plan. If any provision of any Award shall conflict with any of the terms in the Plan as constituted on the Date of Grant of such Award, the terms in the Plan as constituted on the Date of Grant of such Award shall control. 9.03 Modification of Award After Grant. Except as provided by the Committee, in its sole discretion, in the Award Agreement or as provided in Section 9.05, no Award granted under the Plan to a Participant may be modified (unless such modification does not materially decrease the value of the Award) after the Date of Grant except by express written agreement between the Company and the Participant, provided that any such change (a) shall not be inconsistent with the terms of the Plan, and (b) shall be approved by the Committee. 9.04 Taxes. The Company shall be entitled, if the Committee deems it necessary or desirable, to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any Award. The Company may defer issuance of Common Stock under an Award unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee or its delegate and shall be payable by the Participant at such time as the Committee determines. A Participant shall be permitted to satisfy his or her tax or withholding obligation by (a) having cash withheld from the Participant's salary or other compensation payable by the Company, (b) the payment of cash by the Participant to the Company, (c) the payment in shares of Common Stock already owned by the Participant valued at Fair Market Value, and/or (d) the withholding from the Award, at the appropriate time, of a number of shares of Common Stock sufficient, based upon the Fair Market Value of such Common Stock, to satisfy such tax or withholding requirements. The Committee shall be authorized, in its sole discretion, to establish rules and procedures relating to any such withholding methods it deems necessary or appropriate (including, without limitation, rules and procedures relating to elections by Participants who are subject to the provisions of Section 16 of the Exchange Act to have shares of Common Stock withheld from an Award to meet those withholding obligations). 9.05 Adjustments to Reflect Capital Changes; Change in Control. (a) Recapitalization. The number and kind of shares subject to outstanding Awards, the purchase price or exercise price of such Awards, the amount of Non- Employee Director Options to be granted on any date under Article VIII, and the number and kind of shares available for Awards subsequently granted under the Plan shall be - 16 - appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the Plan or the Awards granted under the Plan. The Committee shall have the power and sole discretion to determine the nature and amount of the adjustment to be made in each case. In no event shall any adjustments be made under the provisions of this Section 9.05(a) to any outstanding Restricted Share Award if an adjustment has been or will be made to the shares of Common Stock awarded to a Participant in such person's capacity as a stockholder. (b) Sale or Reorganization. After any reorganization, merger, or consolidation in which the Company is or is not the surviving entity, each Participant shall, at no additional cost, be entitled upon the exercise of an Option outstanding prior to such event to receive (subject to any required action by stockholders), in lieu of the number of shares of Common Stock receivable on exercise pursuant to such Option, the number and class of shares of stock or other securities to which such Participant would have been entitled pursuant to the terms of the reorganization, merger, or consolidation if, at the time of such reorganization, merger, or consolidation, such Participant had been the holder of record of a number of shares of Common Stock equal to the number of shares of Common Stock receivable on exercise of such Option. Comparable rights shall accrue to each Participant in the event of successive reorganizations, mergers, or consolidations of the character described above. (c) Options to Purchase Stock of Acquired Companies. After any reorganization, merger, or consolidation in which the Company shall be a surviving entity, the Committee may grant substituted Options under the provisions of the Plan, replacing old options granted under a plan of another party to the reorganization, merger, or consolidation whose stock subject to the old options may no longer be issued following such reorganization, merger, or consolidation. The foregoing adjustments and manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustments may provide for the elimination of any fractional shares of Common Stock that might otherwise become subject to any Options. (d) Change in Control. Upon a Change in Control, unless otherwise specifically prohibited by Rule 16b-3: - 17 - (1) Any and all Options shall become exercisable as of the date of the Change in Control; and (2) The restrictions on vesting on all Restricted Share Awards shall be deemed to have satisfied as of the date of the Change in Control. (e) Existence of Awards. The existence of outstanding Awards shall not affect the right of the Company or its stockholders to make or authorize any and all adjustments, recapitalizations, reclassifications, reorganizations and other changes in the Company's capital structure, the Company's business, any merger or consolidation of the Company, any issue of bonds, debentures or preferred stock of the Company, the Company's liquidation or dissolution, any sale or transfer of all or any part of the Company's assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise. 9.06 Surrender of Awards. Any Award granted to a Participant under the Plan may be surrendered to the Company for cancellation on such terms as the Committee and holder approve. 9.07 No Right to Award; No Right to Employment. Except as provided in Article VIII, no director, employee, consultant or other person shall have any claim or right to be granted an Award. Neither the Plan nor any action taken hereunder shall be construed as giving any director, employee or consultant any right to be retained by the Company or any of its Subsidiaries. 9.08 Awards Not Includable for Benefit Purposes. Income recognized by a Participant pursuant to the provisions of the Plan shall not be included in the determination of benefits under any employee pension benefit plan (as such term is defined in Section 3(2) of ERISA) or group insurance or other benefit plans applicable to the Participant that are maintained by the Company or any of its Subsidiaries, except as may be provided under the terms of such plans or determined by resolution of the Board. 9.09 Governing Law. The Plan and all determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Delaware other than the conflict of laws provisions of such laws, and shall be construed in accordance therewith. 9.10 No Strict Construction. No rule of strict construction shall be implied against the Company, the Committee, or any other person in the interpretation of any of the terms of the Plan, any Award granted under the Plan or any rule or procedure established by the Committee. 9.11 Compliance with Rule 16b-3 and Section 162(m). It is intended that the Plan be applied and administered in compliance with Rule 16b-3 and with Section 162(m). If any provision of the Plan would be in - 18 - violation of Rule 16b-3 or Section 162(m) if applied as written, such provision shall not have effect as written and shall be given effect so as to comply with Rule 16b-3 or Section 162(m), as the case may be, as determined by the Committee. The Board is authorized to amend the Plan and to make any such modifications to Award Agreements to comply with Rule 16b-3 and Section 162(m), as they may be amended from time to time, and to make any other such amendments or modifications deemed necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments made to Rule 16b-3 and Section 162(m). Notwithstanding the foregoing, the Board may amend the Plan so that it (or certain of its provisions) no longer comply with either or both of Rule 16b-3 or Section 162(m) if the Board specifically determines that such compliance is no longer desired. 9.12 Captions. The captions (i.e., all Section headings) used in the Plan are for convenience only, do not constitute a part of the Plan, and shall not be deemed to limit, characterize, or affect in any way any provisions of the Plan, and all provisions of the Plan shall be construed as if no captions have been used in the Plan. 9.13 Severability. Whenever possible, each provision in the Plan and every Award at any time granted under the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan or any Award at any time granted under the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law, and (b) all other provisions of the Plan and every other Award at any time granted under the Plan shall remain in full force and effect. 9.14 Legends. All certificates for Common Stock delivered under the Plan shall be subject to such transfer restrictions set forth in the Plan and such other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the SEC, any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law. The Committee may cause a legend or legends to be put on any such certificates to make appropriate references to such restrictions. 9.15 Investment Representation. The Committee may, in its discretion, demand that any Participant awarded an Award deliver to the Committee at the time of grant or exercise of such Award a written representation that the shares of Common Stock subject to such Award are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such written representation by the Participant prior to the delivery of any shares of Common Stock pursuant to the grant or exercise of his or her Award shall be a condition precedent to the Participant's right to purchase or otherwise acquire such shares of Common Stock by such grant or exercise. The Company is not legally obliged hereunder if fulfillment of its obligations under the Plan would violate federal or state securities laws. - 19 - 9.16 Amendment and Termination. (a) Amendment. The Board shall have complete power and authority to amend the Plan at any time it is deemed necessary or appropriate; provided, however, that the Board shall not, without the affirmative approval of a simple majority of the holders of Voting Stock, represented, by person or by proxy, and entitled to vote at an annual or special meeting of the holders of Voting Stock, make any amendment that requires stockholder approval under any applicable law or rule, unless the Board determines that compliance with such law or rule is no longer desired. No termination or amendment of the Plan may, without the consent of the Participant to whom any Award shall theretofore have been granted under the Plan, adversely affect the right of such individual under such Award; provided, however, that the Committee may, in its sole discretion, make provision in an Award Agreement for such amendments that, in its sole discretion, it deems appropriate. If required by Rule 16b-3, Article VIII shall not be amended or modified more frequently than once in any period of six consecutive months other than to comport with changes in ERISA, the Code or the rules and regulations promulgated thereunder. (b) Termination. The Board shall have the right and the power to terminate the Plan at any time. No Award shall be granted under the Plan after the termination of the Plan, but the termination of the Plan shall not have any other effect and any Award outstanding at the time of the termination of the Plan may be exercised and may vest after termination of the Plan at any time prior to the expiration date of such Award to the same extent such Award would have been exercisable or vest had the Plan not terminated. 9.17 Costs and Expenses. All costs and expenses incurred in administering the Plan shall be borne by the Company. 9.18 Unfunded Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or make any other segregation of assets to assure the payment of any award under the Plan. 9.19 Additional Restrictions on Transfer; Company's Repurchase Right; Legends. (a) Additional Restrictions on Transfer. Each Participant who receives an Award under the Plan shall be prohibited from selling, exchanging, transferring, pledging, hypothecating, giving or otherwise disposing of the underlying shares of Common - 20 - Stock until 180 days have elapsed following such time as the Company has consummated an initial public offering of its Common Stock; provided, however, that shares of Common Stock may be used to pay the option price of Options and to pay withholding and other taxes as otherwise provided in the Plan. (b) Company's Repurchase Right. Upon a Participant's Termination of Employment, the Company shall have the right to repurchase any or all of the shares of Common Stock issued to the Participant with respect to Awards made under the Plan, whether then held by the Participant or a transferee. If the Company wishes to exercise such right, it must pay the repurchase price for such shares of Common Stock to the Participant within sixty (60) days following the date of Termination of Employment. If the Company determines to repurchase shares of Common Stock from the Participant, the Company shall pay the affected Participant the Fair Market Value of the shares of Common Stock to be repurchased, as determined by the Committee, without regard to any restrictions on transfer to which the underlying shares of Common Stock may be subject. The Company's right to repurchase shares of Common Stock under this Section 9.19(b) shall terminate with respect to all Awards granted under the Plan once the Company consummates an initial public offering of its Common Stock (even if the Company is within the sixty (60) day period referred to above with respect to a particular Participant). (c) Legends. Until the restrictions provided by Sections 9.19(a) and (b) lapse by their own terms, each share of Common Stock issued under the Plan shall bear legends describing or referring to the existence of these restrictions. 9.20 Loans. The Committee shall be entitled to grant to Participants granted Non-Qualified Stock Options (other than Non-Employee Director Options) the right to pay the exercise price of such Options by delivery to the Company of an amount of cash equal to the par value per share of Common Stock purchased on exercise and a recourse promissory note. Each such recourse promissory note shall have the following terms and conditions: (a) such promissory note shall not bear interest for the first year following the issuance thereof but thereafter shall bear interest at 2% over the prime rate of Citibank on such one year anniversary date, (b) interest shall be due and payable quarterly in arrears beginning in the second year, (c) the principal amount shall be due in full on the second anniversary date, (d) principal and accrued interest may be prepaid at any time, in whole or in part, without penalty, (e) in the event of a default in the payment of principal or interest when due and the continuance of such default for ten (10) days, the full principal amount of the promissory note plus accrued and unpaid interest - 21 - shall become immediately due and payable, and (vi) the promissory note shall be secured by a pledge to the Corporation of shares of Common Stock having a Fair Market Value equal to 110% of the principal amount of the promissory note. - 22 - EX-10.5 14 TRUSTED INFORMATION SYSTEMS, INC. (TIS) SOFTWARE LICENSE AGREEMENT (SOURCE AND OBJECT CODE) (Version: September 21, 1994) THIS SOFTWARE LICENSE AGREEMENT ("Agreement") is entered on the date of execution of this Agreement by the last party hereto between Trusted Information Systems, Inc. ("TIS"), a Maryland corporation having its principal mailing address at 3060 Washington Road (Rt. 97), Glenwood, Maryland 21738 and Virtual Open network Environment Corp. ("V-ONE"), having a principal mailing address at 12300 Twinbrook Parkway, Suite 235, Rockville, MD 20852. RECITALS -------- A. TIS is the owner of the TIS Software (as defined below) B. V-ONE is engaged in the business of installing and marketing certain software and hardware products and desires to obtain a license from TIS to market, install, and sublicense the TIS Software, and make suitable modifications and/or enhancements to such software to serve the needs of V-ONE customers. AGREEMENT --------- NOW, THEREFORE, and in consideration of the mutual promises and covenants set forth herein, TIS and V-ONE agree as follows: 1. DEFINITIONS -------------- The following terms when used in this Agreement shall have the following meanings: 1.1 "END USER CUSTOMER" means a person or entity sublicensing TIS Software from V-ONE solely for personal or internal use (whether or not such TIS Software is bundled with other software or hardware), and without right to sublicense, transfer or assign to any other entity, except as otherwise provided herein. 1.2 "LICENSE FEES" shall have the meaning set forth in Section 3. 1.3 "TIS OBJECT CODE" means any part of the TIS Software in machine-readable object code form. 1.4 "TIS SOFTWARE" means the software computer program(s) as described in Exhibit "A" and the TIS Documentation associated therewith including the TIS Object Code and TIS Source Code. "TIS Software" shall also include any modifications, enhancements, improvements, or new versions of such programs that may be provided under this agreement by TIS to V-ONE. V-ONE shall have the rights under this Agreement to receive modifications, enhancements, improvements, or new versions of the TIS Software, as provided under Section 4. 1.5 "TIS SOURCE CODE" means the mnemonic, high level statement versions of the TIS Software written in the source language used in programmers. 1.6 "TERRITORY" means those countries or portions of countries listed in Exhibit "A" hereto. 1.7 "TIS DOCUMENTATION" means the most current version of the TIS Software system documentation at any time that TIS delivers to V-ONE copies of the TIS Object Code and TIS Source Code. 1.8 "TIS SOFTWARE UPDATE" means software components that repair bugs and/or provide additional functionality and/or increased assurance to the TIS Software. 1.9 "TIS SOFTWARE SUBSCRIPTION" means the software service as described in Exhibit "A". 2. GRANT OF LIMITED LICENSES ----------------------------- 2.1 OBJECT CODE LICENSE. TIS hereby grants V-ONE, and V-ONE accepts, a non-exclusive, non-transferable, non-assignable limited license in the Territory during the term specified in Section 8 below to: 2.1.1 Make, have made, copy, use, market, and sublicense the TIS Object Code for End User Customers. 2.1.2 Make, have made, copy, use, market, enhance, improve, adapt, and sublicense the TIS Documentation to support End User Customer installations. TIS proprietary notices will be included. 2.2 LIMITATIONS ON TIS OBJECT CODE LICENSE. The license granted in Section 2.1.1 shall be limited as follows: 2 2.2.1 All sublicenses of the TIS Object Code shall be only to End User Customers. 2.2.2 V-ONE may not in any way sell, rent, license, sublicense or otherwise distribute the TIS Object Code or the right to use the TIS Object Code by any other product name than that which is identified in Exhibit "A", or such other product name as V-ONE shall reasonably select which shall not be confusingly similar to the name specified in Exhibit A. 2.3 TIS SOURCE CODE LICENSE. TIS hereby grants V-ONE, and V- ONE accepts, a non-exclusive, non-transferable, non-assignable limited license in the Territory during the term specified in Section 8 below to: 2.3.1 Use, copy, modify, enhance, improve, and adapt the TIS Source Code to create interfaces and other software necessary to permit the TIS Object Code to operate in accordance with the TIS Documentation on an End User Customer's system and to add additional features, enhancements or improvements to the TIS Software (all such features, modifications, enhancements, improvements, or adaptations to the TIS Source Code, interfaces and such other software referenced collectively as "Software Modifications"). 2.3.2 Make, have made, copy, use, market, enhance, improve, adapt, and sublicense the TIS Source Code for End User Customers. TIS proprietary notices will be included. 2.3.3 Use the TIS Source Code in the support of End User Customers. 2.3.4 Compile the TIS Source Code to create TIS Object Code. 2.3.5 V-ONE is not authorized to distribute, loan, license or in any manner make TIS Source Code available to any entity or individual who is not a V-ONE employee directly involved with the support of TIS Object Code for End User Customers or not a V-ONE End User Customer for the TIS Object Code. V-ONE may disclose TIS Source Code to persons or entities that may be contacted by V-ONE to assist it in performing its duties or utilizing its rights under this Agreement, so long as they agree to be bound by the pertinent provisions of this License Agreement. 2.4 TITLE. 2.4.1 Except for the limited license granted in Section 2.1 and 2.3 above, as between the parties hereto, TIS shall at all times retain full and exclusive right, title and ownership interest in and to the TIS Software and in any and all related patents, trademarks, copyrights or proprietary or trade secret rights therein. TIS retains unto itself the right to distribute copies of the TIS Software as a standalone product or bundled with other equipment or programs. 3 2.4.2 V-ONE shall at all times retain full and exclusive right, title and ownership interest in and to any Software Modifications developed solely by V-ONE and without any assistance from TIS and in any and all related patents, trademarks, copyrights or proprietary or trade secret rights therein. 3. FEES -------- 3.1 ADVANCE FEE. In consideration of TIS's grant to V-ONE of the limited license rights hereunder, V-ONE shall pay to TIS A one-time fee (the "Advance Fee") as set forth in Exhibit "B". Such Advance Fee shall be paid within thirty (30) days from the date of Exhibit "B". 3.2 PER COPY LICENSE AND ANNUAL SUBSCRIPTION FEES. V-ONE shall pay to TIS License Fees in the amount calculated as set forth on Exhibit "B" hereto (the "Per Copy License Fee") for each copy of TIS Software used or sublicensed by V-ONE. Additionally, V-ONE shall pay to TIS fees in the amount calculated as set forth on Exhibit "B" hereto (the "Per Annual Subscription Fee") for each TIS Software Annual Subscription provided to an End User Customer. 3.3 TERMS OF PAYMENT. Per Copy License Fees and Per Annual Subscription Fees shall accrue with respect to TIS Software licensed by V- ONE upon the date of invoice, shipment, or use, whichever comes first, of the TIS Software by V-ONE to an End User Customer. Fees due TIS hereunder shall be paid by V-ONE to TIS at TIS's address set forth on page 1 of this Agreement on or before the thirtieth (30th) day after the close of the calendar quarter during which the fees accrued. A late payment penalty of one percent (1%) of any fees not paid when due shall be assessed for each thirty (30)-day period, or portion thereof, compounded monthly, not in advance, during which such payment is delayed, beginning on the thirty- first (31st) day after the last day of the calendar quarter to which the delayed payment relates until payment is made. 3.4 U.S. CURRENCY. All payments hereunder shall be made in lawful United States currency. All fee currency rates identified in this Agreement and Exhibits are in United States Dollars. 3.5 REMITTANCE REPORT. A remittance report in reasonably detailed form setting forth the calculation of fees due from V-ONE and signed by a responsible officer of V-ONE shall be delivered quarterly to TIS concurrently with payments made pursuant to paragraph 3.3, above. V- ONE shall keep separate, complete, and accurate books of account relating to its licensing of the TIS Software and TIS Software subscriptions. Subject to the confidentiality restrictions provided in this Agreement, V- ONE hereby grants TIS or its authorized representative the right, after reasonable notice, but no less than three (3) working days, and during normal business hours, to enter V-ONE's premises, in which such accounts are located, no more frequently than annually, solely for purposes of auditing all such books of account. The parties shall promptly meet to 4 review the results of such audit and resolve any discrepancies arising from such audit. The cost of any such audit shall be borne solely by TIS, unless discrepancies exceed ten percent (10%) of the TIS Software payments paid by V-ONE during any quarter in which case the cost of such audit shall be borne solely by V-ONE. All payments necessary to eliminate any underpayments discovered in any such audit and costs of such audits by TIS shall be made by V-ONE to TIS within thirty (30) days after the discrepancy is reported to V-ONE. 3.6 TAXES. All taxes, duties, fees and other government charges of any kind (except United States or state taxes based on the net income of TIS, or Maryland sales taxes associated with TIS' license or software to V-ONE under this Agreement) which are levied, assessed or otherwise imposed by or under the authority of any government or any political subdivision thereof on the fees payable hereunder, or any aspect of this Agreement shall be borne by V-ONE and shall not be considered a part of, a deduction from, or an offset against the fees. 4. MAINTENANCE --------------- 4.1 MAINTENANCE. V-ONE has inspected the TIS Internet Firewall Toolkit upon which the TIS Software and the TIS Documentation are based and has determined the suitability, adequacy and proper operation of the software to its satisfaction. TIS will provide V-ONE software telephone technical support during substantially all normal TIS working hours. TIS shall provide V-ONE with any modifications, enhancements, or new versions of the TIS Software promptly when ready for delivery to end user customers. 4.2 CUSTOMER SUPPORT. TIS shall not be responsible for providing any support for the TIS Software to End User Customers. V-ONE will provide first line support to End User Customers. 4.3 TIS SOFTWARE PROBLEM RESOLUTION TEAM. V-ONE will establish a TIS Software Problem Resolution Team consisting of qualified UNIX programmer personnel, with a maximum of five (5). These personnel will gain familiarity with the TIS Software and the installation process and provide the first line technical support for TIS Software for V-ONE and End User Customers. V-ONE will identify the members of this TIS Software Problem Resolution Team to TIS. The members of this team will be the only personnel associated with V-ONE that TIS will provide with TIS Software telephone technical support. 4.4 UPDATES. TIS shall provide V-ONE with copies of all updates for the TIS Software promptly when ready for delivery to end user customers. V-ONE shall pay TIS fees identified in Schedule "B" for TIS Software Updates provided to End User Customers without an active annual TIS Software Subscription. V-ONE shall distribute reasonably promptly TIS Software Updates to End User Customers with an active TIS Software Subscription. 5 5. MASTER COPY --------------- As soon as practicable, TIS shall deliver to V-ONE two (2) electronic copies of the TIS Object Code and TIS Source Code, TIS Documentation and any such other information, documentation and instructions reasonably deemed necessary by TIS to enable V-ONE to perform its obligations under this Agreement (collectively the "Master Copy"). TIS shall provide additional copies as necessary or appropriate upon any changes to TIS Object Code, TIS Source Code or TIS Documentation promptly when ready for delivery to end user customers. 6. ADDITIONAL OBLIGATION OF V-ONE ---------------------------------- 6.1 PRODUCT IDENTIFICATION. V-ONE agrees that it shall clearly identify on all TIS Software packaging, supporting document, and advertisements that the TIS Software is "Trusted Information Systems' Gauntlet Internet Firewall", except as otherwise provided in this Agreement, and shall include such proprietary notices as may be reasonably requested by TIS. 6.2 PRODUCT MARKETING. V-ONE is authorized to represent to its End User Customers only such facts about the TIS Software as TIS states in its product descriptions, advertising and promotional materials or as may be stated in other non-confidential written material furnished by TIS. V-ONE agrees to obtain written TIS concurrence, prior to publication, on the accuracy of statements describing TIS Software that are developed by V-ONE for product packaging, advertising and promotional materials. TIS will use its best efforts to provide written approval or corrections within three TIS working days following the receipt of V-ONE's request for concurrence, and if approval or disapproval is not provided within five TIS working days, TIS waives its right to approve the particular publication. 6.3 LICENSE AGREEMENTS. V-ONE shall cause to be delivered to each End user Customer a license agreement which shall contain, at a minimum, all of the limitations of rights and the protection for TIS which are contained in Section 2.4.1., 7.1, 7.2, 7.3, 7.4, and 9.19 of this Agreement to the extent they apply to the rights granted to End user Customers. V-ONE shall submit to TIS for its approval of such terms, which shall not be unreasonably withheld, a copy of its general form of sublicense agreement. V-ONE shall use its reasonable efforts to ensure that all End user Customers abide by the terms of such license agreements and TIS shall retain the right to enforce such license agreements directly. 6.4 CONFIDENTIALITY. 6.4.1 Each party understands and agrees that in the other party's performance of its duties and exercise of its rights 6 hereunder, such party will communicate certain confidential and proprietary information concerning TIS Software, Software Modifications, know-how, technology, techniques or marketing plans (collectively, the "Know-How). Neither party shall use the Know-How of the other for any purpose other than the performance of this Agreement. To the extent such information is confidential and proprietary to and trade secrets of the party disclosing such information, all such disclosures are made in utmost confidence. Except as expressly authorized herein, each party agrees to hold all the Know-How within its own organization and shall not, without specific written consent of the disclosing party or as authorized herein, utilize in any manner, publish, communicate or disclose any part of such Know-How to third parties. Each party will take all reasonable steps to protect the security, confidentiality and trade secrets status of the Know-How and will take such steps as are consistent with protection of its own confidential and proprietary information (but will in no event exercise less than reasonable care) to ensure that the provisions of this Agreement are not violated by such party's End User Customers, employees, agents or any other person to whom such has made lawful disclosure hereunder. A party's obligations with respect to a particular portion of the Know-How will cease if and when that portion (i) becomes part of the public domain without any wrongful act attributable to such party; (ii) is lawfully received by such party from a third party without violation of this Agreement or any similar agreement; (iii) is approved for release by written authorization of the other party; (iv) is already known by such party as evidenced by its written records; or (v) is independently developed by such party, provided that the person or persons responsible for development did not have access to the Know-How. 6.4.2 V-ONE agrees to take all reasonable steps to protect the security and confidentiality of all data, information, programs, systems, materials, techniques and/or procedures relating to the TIS Source Code and further agrees not to remove or destroy any copyright or proprietary markings or confidential legends placed upon or contained within the TIS Source Code or Documentation, and to insert such copyright or proprietary markings or confidential legends in any copies of the TIS Source Codes or Documentation. Except as specifically permitted in this Agreement, V-ONE agrees that it will not sell, license, distribute, copy or duplicate, or permit anyone else to sell, license, distribute, copy or duplicate, any aspect of the TIS Source Code. 6.4.3 Each party acknowledges that the restrictions contained in this Section are reasonable and necessary to protect the other party's legitimate interests, that remedies at law will be inadequate, that any violation of these restrictions will cause irreparable damage within a short period of time and that the non-breaching party will be entitled to injunctive relief against such violation. Each party further agrees that all confidentiality commitments hereunder shall survive the expiration or termination of this Agreement or the license granted herein. 6.5 PROTECTION OF PROPRIETARY RIGHTS. V-ONE shall, at its own costs and expense, protect and defend TIS's exclusive ownership of the TIS Software and all patents, copyrights, trademarks, proprietary and 7 trade secret rights associated with the foregoing against all claims, liens, and legal processes of creditors of V-ONE brought against V-ONE or TIS and keep the same free and clear from all such claims, liens and processes. V-ONE shall immediately advise TIS in writing of the occurrence of any such claim, lien or legal process, and TIS, at its option and expense, shall have the right at any time, but not the obligation, to either monitor and participate in, or to control and direct (but not with respect to any aspect involving solely the liability of V- ONE, the investigation, preparation and settlement of any such claim, lien and legal process. V-ONE shall fully cooperate with TIS in any such action. 6.6 NOTICES. Each party shall promptly advise the other of any legal notices served on such party which might affect the other party or other party's products. 6.7 COSTS AND EXPENSES. Except as otherwise expressly provided in this Agreement, each party shall be solely responsible for all of its costs, salaries and other expenses incurred in connection with the performance of its obligations hereunder, and the other party shall not have any liability, obligation or responsibility whatsoever therefore. 6.8 INDEMNITY, V-ONE EXPRESSLY SAVES, INDEMNIFIES AND HOLDS TIS, ITS SUBSIDIARIES, AGENTS AND AFFILIATES HARMLESS FROM (i) ANY AND ALL LIABILITY OF ANY KIND OR NATURE WHATSOEVER TO V-ONE's CUSTOMERS, DISTRIBUTORS AND THIRD PARTIES WHICH MAY ARISE FROM ACTS OF V-ONE OR FROM THE LICENSE OF THE TIS SOFTWARE BY V-ONE, OR ANY DOCUMENTATION, SERVICES OR ANY OTHER ITEM FURNISHED BY V-ONE TO ITS CUSTOMERS; AND (ii) ANY LIABILITY ARISING IN CONNECTION WITH AN UNAUTHORIZED STATEMENT OR MISREPRESENTATION OF FACT MADE BY V-ONE OR ITS AGENTS, EMPLOYEES OR DISTRIBUTORS TO ANY PARTY WITH RESPECT TO THE TIS SOFTWARE. 7. DISCLAIMER LIMITATION OF LIABILITY, WARRANTY AND INTELLECTUAL PROPERTY INDEMNITIES ---------------------------------------------------- 7.1 DISCLAIMER. THE TIS SOFTWARE IS PROVIDED "AS-IS" WITHOUT ANY WARRANTY WHATSOEVER. TIS DISCLAIMS ALL WARRANTIES WITH REGARD TO THE TIS SOFTWARE INCLUDING ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ALL OBLIGATIONS OR LIABILITIES ON THE PART OF TIS FOR DAMAGES INCLUDING BUT NOT LIMITED TO CONSEQUENTIAL DAMAGES ARISING OUT OF, OR IN CONNECTION WITH, THE USE OR PERFORMANCE OF THE TIS SOFTWARE. 7.2 LIMITATION OF LIABILITY. IN NO EVENT WILL TIS BE LIABLE TO V-ONE OR ANY THIRD PARTIES FOR DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS EVEN IF TIS HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7.3 PROPRIETARY RIGHTS INFRINGEMENT BY TIS 7.3.1 TIS shall indemnify and hold V-ONE harmless from any and all liability, damages, costs or expenses (including reasonable 8 attorneys' fees) which may be sustained or incurred by V-ONE as a result of any claim or claims that the unmodified TIS Software as delivered by TIS (excluding Software Modifications) infringes on a patent, copyright or trade secret. TIS shall have no obligation to V-ONE pursuant to this Section 7.3 unless: (i) V-ONE gives TIS prompt written notice of the claim; (ii) TIS is given the right to control and direct the investigation, preparation, defense and settlement of the claim; and (iii) the claim is based on V-ONE's use of the unmodified TIS Software in accordance with this Agreement. 7.3.2 If TIS receives notice of an alleged infringement, TIS shall have the right, at its sole option, to obtain the right to continue use of the TIS Software or modify the TIS Software so that it is not longer infringing. If neither of the foregoing options is reasonably available to TIS, then the license rights granted pursuant to Section 2 of this Agreement may be terminated at the option of any party hereto. 7.3.3 The rights and remedies set forth in Section 7.3.1 and 7.3.2 above state the entire obligation of TIS and the exclusive remedies of V-ONE concerning TIS's proprietary rights infringement. 7.4 PROPRIETARY RIGHTS INFRINGEMENT BY V-ONE 7.4.1 V-ONE shall indemnify and hold TIS harmless from any and all liability, damage, costs or expenses to third parties (including reasonable attorneys' fees) which may be sustained or incurred as a result of any claim or claims that the Software Modifications infringe on a patent, copyright or trade secret. V-ONE shall have no obligation to TIS pursuant to this Section 7.4.1 unless: (i) TIS gives V- ONE prompt written notice of the claim; (ii) V-ONE is given the right to control and direct the investigation, preparation, defense and settlement of the claim; and (iii) the claim is not based solely on V-ONE's use of the unmodified TIS Software. 7.4.2 If V-ONE receives notice of an alleged infringement, V-ONE shall have the right, at its sole option, to obtain the right to continued use of the Software Modifications or to replace or modify the Software Modifications so that they are no longer infringing. If neither of the foregoing options is reasonably available to V-ONE, then the license rights granted pursuant to Section 2 of this Agreement may be terminated at the option of any party hereto, and in the event of such termination, TIS shall retain all License Fees paid by V-ONE hereunder. 7.4.3 The rights and remedies set forth in Sections 7.4.1 and 7.4.2 above state the entire obligation of V-ONE and the exclusive remedies of TIS concerning V-ONE's proprietary rights infringement. 9 8. TERM AND TERMINATION ------------------------ 8.1 TERM. The license rights granted pursuant to Section 2 hereof shall be effective as of the date hereof and shall continue in full force and effect until December 31, following the second anniversary of this Agreement unless sooner terminated pursuant to the terms of this Agreement. 8.2 RENEWAL. The license rights granted pursuant to Section 2 of this agreement shall be automatically extended twice for successive one-year terms on the first day of each calendar year, provided that V- ONE: 8.2.1 Is not in material breach of this Agreement. 8.2.2 Is not delinquent in any payments to TIS at the same time of the renewal. 8.2.3 Provides TIS with a minimum of $20,000 in combined fees from Per copy License Fees and Per Copy Annual Subscription Fees in the preceding full calendar year. Failure shall result in the termination of the license rights granted pursuant to Section 2 of this Agreement effective as of the last day of the calendar year for which the minimum combined fees from annual Per Copy License Fees and Per Copy Annual Subscription Fees were not paid to TIS. 8.3 TERMINATION. Notwithstanding the foregoing, either party shall be entitled to terminate the license rights granted pursuant to this Agreement at any time on written notice to the other in the event of a material breach of this Agreement by such other party and a failure to cure such breach within a period of thirty (30) days following receipt of written notice specifying that a breach has occurred, or if such breach is not reasonably susceptive to cure within such 30 day period and the breaching party does not commence remedial action within such 30 day period, and thereafter diligently continues such action until the breach is cured. Notwithstanding the foregoing, should V-ONE on one or more occasion in any twelve (12) month period perform or fail to perform any act which gives TIS the right to terminate all or any part of the licensed rights granted to V-ONE, but for V-ONE's right to remedy such breach, TIS may on such second or subsequent breach, terminate this agreement forthwith by giving notice of such termination to V-ONE. 8.4 INSOLVENCY. In the event that V-ONE be adjudged insolvent or bankrupt, or upon the institution of any proceedings by or against it seeking relief, reorganization or arrangement under any laws relating to insolvency, or upon any assignment for the benefit of creditors, or upon the appointment of a receiver, liquidator or trustee of any of its property or assets, or upon the liquidation, dissolution or winding up of its business, then and in any such events the license rights granted pursuant to Section 2 of this Agreement may forthwith be terminated or canceled by the other part upon giving written notice 10 thereof, and upon the giving of such notice the license rights granted pursuant to Section 2 of this Agreement shall terminate forthwith; provided that, the rights of any sublicenses with respect to the TIS Software shall remain unaffected by such termination. 8.5 TRANSFER AND ASSIGNMENT. The license rights granted pursuant to Section 2 of this Agreement may not be transferred, by operation of law or otherwise, to any entity (including any successor or affiliate of V-ONE) except with the prior written consent of TIS that will not be unreasonably withheld; provided that, TIS hereby confirms and agrees that such consent will not be withheld for any proposed assignment or transfer in connection with a change of control in ownership of V-ONE or any sublicensee hereunder. TIS may freely assign its rights under this Agreement. 8.6 DISPOSITION OF TIS SOFTWARE AND TIS DOCUMENTATION ON TERMINATION. Upon the expiration or termination of the license rights granted pursuant to this Agreement for any reason, the license rights granted pursuant to Section 2 of this Agreement shall immediately cease and terminate (except as provided below) and the remaining provisions hereof (including without limitation the confidentiality provisions of Section 6.4 hereof) shall remain in full force and effect. If the license rights granted pursuant to Section 2 of this Agreement have expired or are terminated for any reason, V-ONE shall cease making copies of, using or licensing the TIS Software, except for such actions by V-ONE as are reasonably necessary to provide for sublicenses previously granted and orders placed with V-ONE in the ordinary course of business prior to such expiration or termination. V-ONE shall return the Master Copies in V- ONE's possession to TIS as soon practicable after such expiration or termination and shall destroy or deliver to TIS all copies of the TIS Software. Notwithstanding the above, for a period of two years after the date of expiration or termination of the license rights granted under this Agreement, V-ONE may retain one copy of the TIS Source Code and is hereby licensed for such term to use such TIS Source Code internally solely for the purpose of supporting End user Customers of TIS Software. Upon the expiration of such two-year period, V-ONE shall destroy or return to TIS such single copy of TIS Source Code. 9. MISCELLANEOUS PROVISIONS ---------------------------- 9.1 GOVERNING LAWS. It is the intention of the parties hereto that the internal laws of the State of Maryland, U.S.A. (irrespective of its choice of law principles) shall govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. 9.2 BINDING UPON SUCCESSOR AND ASSIGNS. Subject to, and unless otherwise provided in this Agreement, each and all of the covenants, terms, provisions, and agreements contained herein shall be binding upon, and inure to the benefit of, the permitted successors, 11 representative, administrators and assigns of the parties hereto. TIS (i) has investigated V-ONE in connection with the execution and delivery of this Agreement by TIS, (ii) has selected V-ONE as a licensee of the TIS Software hereunder because of V-ONE's business, reputation, and competitive posture and (iii) but for V-ONE's business, reputation, and competitive posture and (iii) but for V-ONE's unique qualifications would not have entered into this Agreement. 9.3 SEVERABILITY. If any provision of this Agreement, or the application hereof, shall for any reason and to any extent, be invalid or unenforceable, the remained of this Agreement and application of such provisions to other persons or circumstances shall be interrupted so as best to reasonably effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provisions of this Agreement with valid and enforceable provisions which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provisions. 9.4 ENTIRE AGREEMENT. This Agreement and the exhibits hereto constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof. 9.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original as against any party whose signature appears thereon and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as signatories. 9.6 EXPENSES. Each party shall pay all of its own costs and expenses incurred with respect to the negotiation, execution and delivery of this Agreement and the exhibit hereto. 9.7 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be amended, and the observance of any term 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 thereby. 9.8 SURVIVAL OF AGREEMENTS. All covenants, agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. 12 9.9 NO WAIVER. The failure of any party to enforce any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce such provisions. 9.10 OTHER REMEDIES. Any and all remedies herein expressly conferred upon a party shall be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law, and the exercise of any one remedy shall not preclude the exercise of any other. 9.11 RESOLUTION OF PROBLEMS; ATTORNEY'S FEES. In the event of any problem, claim, or dispute arising from this Agreement, the aggrieved party shall promptly notify the other party of the existence of the problem, claim, or dispute, and such party shall promptly undertake all reasonable efforts to resolve the matter within thirty days of such notice. If such efforts are not successful, the parties shall meet promptly thereafter to resolve the matter amicably, and each party shall exert its reasonable best efforts toward this solution. If the matter cannot be resolved through this process, then the parties shall submit the matter to non-binding arbitration, in accordance with the rules of the American Arbitration Association. The arbitration shall be held in Washington, D.C., and shall utilize a single arbitrator selected by the parties. Each party shall bear one-half of the costs of the arbitration. In the event the arbitration process does not lead to resolution of the problem, then the parties shall then have recourse to all available rights and remedies under applicable law. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party shall be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorneys' fees to be fixed by the court (including without limitation, costs, expenses and fees on any appeal). 9.12 NOTICES. Whenever any party hereto desires or is required to give any notice, demand, or request with respect to this Agreement, each such communication shall be in writing and shall be effective only if it is delivered by personal service or mailed, United States certified mail, postage prepaid, return receipt requested, addressed as follows: TIS: To the address set forth on page 1 hereof V-ONE: To the address set forth on page 1 hereof Such communications shall be effective when they are received by the addressee thereof; but if sent by certified mail in the manner set forth above, they shall be effective five (5) days after being deposited in the United States mail. Any party may change its address for such communications by giving notice thereof to the other party in conformity with this Section. 9.13 TIME. Time is of the essence of this Agreement. 9.14 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated by the respective parties hereto and the language hereof shall not be construed for or against any party. A reference in this Agreement 13 to any Section shall include a reference to every Section the number of which begins with the number of the Sections to which reference is specifically made (e.g., a reference to Section 2.1 shall include a reference to Section 2.1.2). 9.15 NO JOINT VENTURE. Nothing contained in this Agreement shall be deemed or construed as creating a joint venture or partnership between any of the parties hereto. No party is by virtue of this Agreement authorized as an agent, employee or legal representative of any other party. No party shall have the power to control the activities and operations of any other, and their status is, and at all times, will continue to be, that of independent contractors with respect to each other. No party shall have any power or authority to bind or commit any other. No party shall hold itself out as having any authority or relationship in contravention of this Section. 9.16 PRONOUNS. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identify of the person, entity or entities may require. 9.17 FURTHER ASSISTANCES. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances, as may be reasonably requested by any party to better evidence and reflect the transactions described herein and contemplated hereby, and to carry into effect the intents and purposes of this Agreement. 9.18 EXPORT. This Agreement is expressly made subject to any laws, regulations, or other restrictions on the export from the United states of America of the TIS Software or of information about such TIS Software which may be imposed from time to time by the Government of the United states of America. Notwithstanding anything contained in this Agreement to the contrary, V-ONE shall not export or re-export, directly or indirectly, any TIS Software or information pertaining thereto to any country for which such government or any agency thereof requires an export license or other governmental approval at the time of export or reexport without first obtaining such license or approval. 9.19 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this Agreement are intended nor shall be interpreted to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, partner of any party hereto or any other person; unless specifically provided otherwise herein, and, except as so provided, all provisions hereof shall be personal solely between the parties of this Agreement. 14 IN WITNESS WHEREOF, the parties have execute this Agreement as of the date indicated below: Trusted Information Systems, Inc. Virtual Open Network Environment Corp. BY /s/ BY /s/ ------------------------------- ----------------------------- TITLE Vice President TITLE President ----------------------------- -------------------------- DATE Oct. 6, 1994 DATE Oct. 6, 1994 ----------------------------- --------------------------- 15 EXHIBIT "A" ---------- DESCRIPTIONS AND TERRITORY "TIS Software" includes the following: Gauntlet[Trademark] software, Trusted Information Systems' firewall product which is based on the TIS Internet Firewall Toolkit, source and object code. "TIS Software Annual Subscription" includes the following: Gauntlet[Trademark] software, TIS Software Annual Subscription provides the End User Customer with the following for one (1) year: For V-ONE's End User Customers, TIS will provide V-ONE with the right to redistribute software updates, TIS Software, TIS Documentation, and the TIS Firewall Newsletter, and discounts at TIS security workshops and training. "Territory" consists of the following areas: United States, Taiwan, Australia, Hong Kong, Singapore, Canada, Mexico In the event that V-ONE fails to provide TIS with at least $5,000 in combined fees from Per Copy License Fees and Per Annual Subscription Fees from any country in the Territory in each full year beginning January 1, 1995, TIS shall have the right to remove that country from the Territory by giving 60 days' notice to V-ONE. Approved (initials): TIS: AA -------------------------- V-ONE: JL ------------------------ Date: Oct. 6, 1994 ------------------------ 16 EXHIBIT "B" SCHEDULE OF FEES ADVANCE FEE. V-ONE shall pay to TIS an Advance Fee of Ten Thousand Dollars ($10,000). Such Advance fee shall be credited in the following manner: 1. Five Thousand Dollars ($5,000) will cover the cost of firewall installation and configuration training at V-ONE's site. This training consists of 16 hours of lecture/lab experiences and will be delivered to a maximum of 10 students by experienced TIS personnel. TIS will make all reasonable effort to deliver this training within 60 (sixty) days of the signing of this agreement. 2. Five Thousand Dollars ($5,000) will be credited to Per Copy License Fees and Per Annual Subscription Fees paid by V-ONE to TIS under the terms of this Agreement during the first year this Agreement is in effect. Gauntlet[Trademark] Firewall fees. Additionally, shall pay a Per Copy License Fee for each unit of the TIS software licensed for use on a single host computer system, in accordance with the following pricing schedule: for licenses one (1) to six (6), Two Thousand and Five Hundred Dollars ($2,500) for each license; for licenses seven (7) to two hundred and fifty (250), One Thousand, Seven Hundred and Fifty Dollars ($1,750) for each license; for licenses two hundred and fifty-one (251) to five hundred (500), One Thousand and Five Hundred Dollars ($1,500) for each license; for licenses five hundred and one (501) to one thousand (1000), One Thousand Two Hundred and Fifty Dollars ($1,250) for each license; for licenses one thousand and one (1001) and subsequent licenses, One Thousand Dollars ($1,000) for each license. TIS SOFTWARE PER ANNUAL SUBSCRIPTION FEES. V-ONE shall pay to TIS A Per Annual Subscription Fee of Five Hundred ($500.00) for each TIS Software Annual Subscription sold to the End user Customer for each copy of the TIS Software. 17 FEES FOR UPDATES FOR NON-SUBSCRIBERS. V-ONE shall pay to TIS a Per Annual Subscription Fee of Five Hundred ($500.00) for each TIS Software Annual Subscription sold to the End User Customer for each copy of the TIS Software. FEES FOR UPDATES FOR NON-SUBSCRIBERS. V-ONE shall pay to TIS an Update Fee in an amount to be specified by TIS but not to exceed the TIS Software Annual Subscription Fee for each instance in which an end User Customer who is not covered by an Annual Subscription wishes to update the TIS Software to a new version. Approved (initials): TIS: AA -------------------------- V-ONE: JL ------------------------ Date: Oct. 6, 1994 ------------------------ 18 EX-10.6 15 FIRST AMENDMENT to SOFTWARE LICENSE AGREEMENT THIS FIRST AMENDMENT (this "Amendment") is entered into as of November 15, 1995 between VIRTUAL OPEN NETWORK ENVIRONMENT CORP. ("V- ONE"), a Maryland corporation, and TRUSTED INFORMATION SYSTEMS, INC. ("TIS"), a Maryland corporation, in order to revise, supplement and reaffirm the Software License Agreement (the "Agreement") entered into by the parties as of October 6, 1994. Capitalized terms employed in this Amendment and not otherwise defined herein shall have the meanings given in definition of such terms in the Agreement. 1. AMENDMENT OF SECTION 2.4.2. Section 2.4.2 of the Agreement is hereby amended by the addition, at the end of the present section, of the following: V-ONE shall have the right to market and distribute, directly through third-party resellers, software products designed by V-ONE that combine the TIS Software and Software Modifications. V-ONE shall submit to TIS for advance review and approval all training materials intended to instruct such third-party resellers regarding the design, functionality, operation, maintenance or support of the modified TIS Software. 2. RATIFICATION OF AGREEMENT. Except as expressly modified by this Amendment, all provisions of the Agreement, which is incorporated herein by this reference, shall remain in full force and effect following the execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their duly authorized representatives as of the ate first written above. VIRTUAL OPEN NETWORK ENVIRONMENT CORP. By: /s/ Bob Rybicki ---------------------------------- Title: V.P., Bus. Dev. ------------------------------- TRUSTED INFORMATION SYSTEMS, INC. By: /s/ Steven Lipner ---------------------------------- Title: Vice President ------------------------------- EX-10.7 16 SECOND AMENDMENT to SOFTWARE LICENSE AGREEMENT THIS SECOND AMENDMENT (this "Amendment") is entered into as of May 8, 1996, between VIRTUAL OPEN NETWORK ENVIRONMENT CORP. ("V-ONE"), a Delaware corporation, and TRUSTED INFORMATION SYSTEMS, INC. ("TIS"), a Maryland corporation, in order to revise, supplement and reaffirm the Software License Agreement (the "Agreement") entered into by the parties as of October 6, 1994. Capitalized terms employed in this Amendment and not otherwise defined herein shall have the meanings given in definition of such terms in the Agreement. 1. AMENDMENT OF EXHIBIT "A" Exhibit "A" of the Agreement is hereby amended by the addition, at the end of the present section, of the following: and all other countries in the world where the distribution is allowed by law. 2. RATIFICATION OF AGREEMENT. Except as expressly modified by this Amendment all provisions of the Agreement, which is incorporated herein by this reference, shall remain in full force and effect following the execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their duly authorized representatives as of the date first written above. VIRTUAL OPEN NETWORK ENVIRONMENT CORP. By: /s/ Bob Rybicki ----------------------------------- Title: V.P. Business Development -------------------------------- TRUSTED INFORMATION SYSTEMS, INC. By: /s/ Gina Dubbe ----------------------------------- Title: V.P. Sales -------------------------------- EX-10.8 17 THIRD AMENDMENT to SOFTWARE LICENSE AGREEMENT THIS THIRD AMENDMENT (this "Amendment") is entered into as of May 8, 1996, between VIRTUAL OPEN NETWORK ENVIRONMENT CORP. ("V-ONE"), a Delaware corporation, and TRUSTED INFORMATION SYSTEMS, INC. ("TIS"), a Maryland corporation, in order to revise, supplement and reaffirm the Software License Agreement (the "Agreement") entered into by the parties as of October 6, 1994. Capitalized terms employed in this Amendment and not otherwise defined herein shall have the meanings given in definition of such terms in the Agreement. 1. AMENDMENT OF SECTION 3.3 Section 3.3 of the Agreement is hereby amended by replacing the existing Section with the following: TERMS OF PAYMENT Per Copy License Fees and Per Annual Subscription Fees shall accrue with respect to TIS Software licensed excluding evaluation copies by V-ONE upon the date of invoice, shipment, or use, whichever comes first, of the TIS Software by V-ONE to an End User Customer. Fees due TIS hereunder shall be paid by V-One to TIS at TIS's address set forth on page 1 of this Agreement on or before the thirtieth (30th) day after the close of the month during which the fees accrued. A late payment penalty of one percent (1%) of any fees not paid when due shall be assessed for each thirty (30)-day period, or portion thereof, compounded monthly, not in advance, during which such payment is delayed, beginning on the thirty-first (31st) day after the last day of the month to which the delayed payment relates until payment is made. 2. AMENDMENT OF SECTION 3.5 Section 3.5 of the Agreement is hereby amended by the replacement of the first sentence in the Section with the following: REMITTANCE REPORT A remittance report in reasonably detailed form setting forth the calculation of fees due from V-ONE and signed by a responsible officer of V-ONE shall be delivered monthly to TIS concurrently with payments made pursuant to paragraph 3.3. above. V-ONE shall use its best effort to provide a detailed report and will, at a minimum, provide the quantity shipped, the date of invoice and shipment for each product shipped and a breakdown of the general location. 3. RATIFICATION OF AGREEMENT Except as expressly modified by this Amendment, all provisions of the Agreement, which is incorporated herein by this reference, shall remain in full force and effect following the execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their duly authorized representatives as of the date first written above. VIRTUAL OPEN NETWORK ENVIRONMENT CORP. By: /s/ Bob Rybicki ---------------------------------- Title: V.P. Business Development ------------------------------- TRUSTED INFORMATION SYSTEMS, INC. By: /s/ G. Dubbe ----------------------------------- Title: V.P. Sales -------------------------------- EX-10.9 18 FOURTH AMENDMENT to SOFTWARE LICENSE AGREEMENT THIS FOURTH AMENDMENT (this "Amendment") is entered into as of May 8, 1996, between VIRTUAL OPEN NETWORK ENVIRONMENT CORP. ("V-ONE"), a Delaware corporation, in order to revise, supplement and reaffirm the Software License Agreement (the "Agreement") entered into by the parties as of October 6, 1994. Capitalized terms employed in this Amendment and not otherwise defined herein shall have the meanings given in definition of such terms in the Agreement. 1. AMENDMENT OF SECTION 8.2 Section 8.2 of the Agreement is hereby amended by the replacement of the first sentence with the following: 8.2 RENEWAL. The license rights granted pursuant to Section 2 of this agreement shall be automatically extended for successive terms of three-years on the first day of the calendar year after expiration, provided that V-ONE: 8.2.1 Is hereby deleted in its entirety and replaced with the following: "Is not in material breach of this Agreement and has not cured such breach as prescribed in 8.3 below. 8.2.2 Is hereby deleted in its entirety and replaced with the following: "Is not delinquent in any payments to TIS at the time of renewal and has not cured such delinquency within (30) days following receipt of written notice specifying such delinquency has occurred." 2. RATIFICATION OF AGREEMENT. Except as expressly modified by this Amendment, all provisions of the Agreement, which is incorporated herein by this reference, shall remain in full force and effect following the execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their duly authorized representatives as of the date first written above. VIRTUAL OPEN NETWORK ENVIRONMENT CORP. By: /s/ Bob Rybicki ----------------------------------- Title: V.P. Business Development ------------------------------- TRUSTED INFORMATION SYSTEMS, INC. By: /s/ G. Dubbe ---------------------------------- Title: V.P. Sales ------------------------------- EX-10.10 19 OEM Master License Agreement Number: 1294-VON-O-MLA-1 Date of Agreement: 12/30/94 BSAFE/TIPEM OEM MASTER LICENSE AGREEMENT This OEM MASTER LICENSE AGREEMENT ("Agreement") is entered into on the date set forth below between RSA Data Security, Inc., a Delaware corporation ("RSA"), having a principal mailing address at 100 Marine Parkway, Suite 500, Redwood City, California 94065, and the entity named below as "OEM" ("OEM"), having a principal address as set forth below. OEM: Virtual Open Network Environment Corp., a corporation -------------------------------------------------------------------------- (Name and jurisdiction of incorporation) OEM Address: 12300 Twinbrook Pkwy., Suite 235 Rockville, MD 20852 -------------------------------------------------------------------------- OEM Legal Contact: Karen Casser, Esq., (202) 429-6824 ------------------------------------------------------------------------- (name, telephone and title) OEM Billing Contact: Bob Dorsey, (301) 881-2297, Exec. Assist. ------------------------------------------------------------------------- (name, telephone and title) OEM Technical Contact: Jason Wang, (301) 881-2297, Chief Engineer ------------------------------------------------------------------------- (name, telephone and title) RSA Data Security, Inc. OEM Master License Agreement Page 2 OEM Commercial Contact: Ray Hanner, (301) 881-2297, Director of Marketing ------------------------------------------------------------------------- (name, telephone and title) OEM Initial P.O. Number: ------------------------------------------------------------------------- Territory: WORLDWIDE; PROVIDED, HOWEVER, THAT OEM SHALL NOT GRANT LICENSES FOR USE OF THE BUNDLED PRODUCT IN ANY FOREIGN COUNTRY WHERE THE TERMS OF THE LICENSE AGREEMENT WOULD NOT PROVIDE THE INTELLECTUAL PROPERTY PROTECTIONS INTENDED TO BE PROVIDED BY SUCH LICENSE, OR WHERE THERE IS A SIGNIFICANT RISK THAT THE RSA SOFTWARE OR ANY PART THEREOF WOULD THEREBY FALL INTO THE PUBLIC DOMAIN. EXHIBIT "D" HERETO SETS FORTH A LIST OF COUNTRIES WHERE RSA AGREES THAT OEM MAY IN ANY EVENT GRANT LICENSES FOR USE OF THE BUNDLED PRODUCT. IF OEM WISHES TO GRANT A LICENSE IN A COUNTRY NOT LISTED ON EXHIBIT "D," RSA WILL CONSIDER IN GOOD FAITH ANY INFORMATION PROVIDED BY OEM TO DETERMINE WITHIN THIRTY (30) CALENDAR DAYS WHETHER RSA BELIEVES LICENSES GRANTED IN SUCH COUNTRY WOULD MEET THE REQUIREMENTS SET FORTH IN THIS PARAGRAPH. Exhibit "C" Special Terms and Conditions Attached: YES [ X ] NO [ ] 1. DEFINITIONS ----------- The following terms when used in this Agreement shall have the following meanings: 1.1 "BUNDLED PRODUCTS" means one or more of the specific products described on a License/Product Schedule attached hereto and referencing this Agreement which has been or will be developed by OEM and which incorporates in the OEM Product in any manner any portion of the RSA Object Code. A Bundled Product must represent a significant functional and value enhancement to the Licensed Software such that the primary reason for an End User Customer to license such Bundled Product is other than the right to receive a license to the Licensed Software included in the Bundled Product. RSA Data Security, Inc. OEM Master License Agreement Page 3 1.2 "DISTRIBUTOR" means a dealer or distributor in the business of reselling or sublicensing Bundled Products by virtue of authority of OEM. Bundled Products resold and sublicensed by a Distributor shall bear OEM's trademarks and service marks and shall not be privately labeled by such Distributor or other parties. A Distributor shall have no right to modify any part of the Licensed Software. 1.3 "END USER CUSTOMER" means a person or entity sublicensing RSA Object Code as part of a Bundled Product from OEM or a Distributor solely for personal or internal use and without right to sublicense, assign or otherwise transfer such Bundled Product to any other person or entity. 1.4 "LICENSE/PRODUCT SCHEDULE" shall mean a schedule substantially in the form of Exhibit "A" hereto completed and executed with respect to each Bundled Product specifying the Licensed Software and Licensed Functionality with respect to such Bundled Products. A License/Product Schedule can be amended pursuant to Section 9.5 to provide additional Licensed Software or Licensed Functionality with respect to a specified Bundled Product. Additional Bundled Products may be added to this License Agreement by executing an additional License/Product Schedule referencing this Agreement. All such License/Product Schedules are incorporated in this Agreement by this reference. 1.5 "INTERFACE MODIFICATIONS" shall have the meaning set forth in Section 2.1.1. 1.6 "KNOW-HOW" shall have the meaning set forth in Section 6.4.1. 1.7 "LICENSE FEES" shall have the meaning set forth in Section 3.1. 1.8 "LICENSED FUNCTIONALITY" means with respect to the Licensed Software for a Bundled Product the functionality listed on the License/Product Schedule for such Bundled Product. 1.9 "LICENSED SOFTWARE" means that portion of the RSA Software specified on a License/Product Schedule hereto as having been licensed by OEM and that produces the functionality specified in the associated User Manual section relating to the named Licensed Software. Only those portions of the RSA Software specified as having been licensed are included in the Licensed Software. Licensed Software shall include modifications and enhancements (including all New Releases and New Versions) to such software as provided by RSA to OEM under this Agreement. Licensed Software shall be specified by Bundled Product and OEM may elect as set forth on the License/Product Schedule to license different Licensed Software with respect to different Bundled Products. RSA Data Security, Inc. OEM Master License Agreement Page 4 1.10 "NEW RELEASE" means a version of the RSA Software which shall generally be designated by a new version number which has changed from the prior number only to the right of the decimal point (e.g., Version 2.2 to Version 2.3). 1.11 "NEW VERSION" means a version of the RSA Software which shall generally be designated by a new version number which has changed from the prior number to the left of the decimal point (e.g., Version 2.3 to Version 3.0). 1.12 "OEM PRODUCT" means any product developed by OEM which is to be bundled with the Licensed Software or into which the Licensed Software is to be incorporated to create a Bundled Product. 1.13 "RSA OBJECT CODE" means the Licensed Software in machine- readable, compiled object code form. 1.14 "RSA SOFTWARE" means RSA proprietary software known as BSAFE and TIPEM as described in the User Manuals associated therewith. "RSA Software" shall also include all modifications and enhancements (including all New Releases and New Versions) to such programs as provided by RSA to OEM. 1.15 "RSA SOURCE CODE" means the mnemonic, high level statement versions of the RSA Software written in the source language used by programmers. 1.16 "TERRITORY" means those countries or portions of countries listed on page 1 hereof. 1.17 "USER MANUAL" means the most current version of the user manual customarily supplied by RSA to end users who license the RSA Object Code. 2. GRANT OF LIMITED LICENSES ------------------------- 2.1 RSA SOURCE CODE LICENSE. For OEM's convenience, RSA wishes to permit OEM to port the RSA Software to any environment OEM desires in accordance with the following license, if granted. If a source code license is specified in a License/Product Schedule, RSA hereby grants OEM a non-exclusive, non-transferable, non-assignable limited license in the Territory during the term specified in Section 8 to: 2.1.1 Modify the RSA Source Code to create interfaces and other software necessary to permit the object code to the RSA Software to operate in accordance with the User Manual in any of OEM's proprietary products (all such modifications to the RSA Source Code referenced collectively as "Interface Modifications"). RSA Data Security, Inc. OEM Master License Agreement Page 5 2.1.2 Use the RSA Source Code to provide support of Bundled Products to End User Customers. 2.1.3 Compile the RSA Source Code to create object code solely to permit creation of Interface Modifications and for the purposes set forth in Section 2.2 (with the limitations set forth in Section 2.3). 2.2 OBJECT CODE LICENSE. RSA wishes to permit OEM to incorporate into Bundled Products only specified portions and functionality of the RSA Software; additional portions and functionality of the RSA Software can be added and additional Bundled Products can be added by executing an amendment to a License/Product Schedule or a new License/Product Schedule. RSA hereby grants OEM a non-exclusive, non- transferable, non-assignable limited license in the Territory during the term specified in Section 8 to: 2.2.1 Incorporate the Licensed Functionality of the RSA Object Code into the OEM Product to create a Bundled Product. 2.2.2 Reproduce, have reproduced, and sublicense the Licensed Functionality of the RSA Object Code and the User Manual incorporated in a Bundled Product. 2.3 LIMITATIONS ON OBJECT CODE LICENSE. The licenses granted in Section 2.2 shall be limited as follows: 2.3.1 Sublicenses of the RSA Object Code to Licensed Software shall be granted only to (i) Distributors and (ii) End User Customers. 2.3.2 OEM may not in any way sell, rent, license, sublicense or otherwise distribute the RSA Software or any part thereof or the right to use the RSA Software or any part thereof as a stand-alone product to any person or entity. 2.3.3 OEM may not incorporate into any Bundled Product any algorithm or other functionality included within the RSA Software which is not Licensed Software as set forth on the License/Product Schedule with respect to such Bundled Product. 2.3.4 If Licensed Software with respect to a Bundled Product has a specified Licensed Functionality, it may be incorporated, reproduced, or sublicensed only with respect to such Licensed Functionality and no other functionality of such Licensed Software is permitted to be incorporated, reproduced, or sublicensed in such Bundled Product. If no Licensed Functionality restriction is specified for an item of Licensed Software with respect to a Bundled Product, then OEM shall have the rights set forth in Section 2.2 with respect to all RSA Data Security, Inc. OEM Master License Agreement Page 6 functionalities of such Licensed Software with respect to such Bundled Product. 2.4 TITLE. 2.4.1 Except for the limited licenses granted in Sections 2.1 and 2.2, RSA shall at all times retain full and exclusive right, title and ownership interest in and to the RSA Software and in any and all related patents, trademarks, copyrights or proprietary or trade secret rights. 2.4.2 OEM shall at all times retain full and exclusive right, title and ownership interest in and to the Interface Modifications and in any and all related copyrights or proprietary or trade secret rights; provided, however, that OEM hereby agrees that it will not assert against RSA any of such copyrights or proprietary or trade secret rights with respect to any interfaces independently developed by RSA without reference to the source code to the Interface Modifications. 3. LICENSE FEES ------------ 3.1 LICENSE FEES. In consideration of RSA's grant to OEM of the limited license rights hereunder, OEM shall pay to RSA the amounts set forth below (the "License Fees"): 3.1.1 SOURCE CODE LICENSE FEES. If RSA is granting to OEM RSA Source Code license rights as specified in a License/Product Schedule, OEM shall pay to RSA the license fee as specified on each such License/Product Schedule. 3.1.2 OBJECT CODE LICENSE FEES. In consideration of RSA's grant to OEM of the RSA Object Code sublicense rights for each Bundled Product described in each License/Product Schedule, OEM shall pay to RSA the license fees set forth in each such License/Product Schedule, subject to the following: 3.1.2.1 FIXED DOLLAR AMOUNT. If a fixed dollar fee is specified for each copy/unit of a Bundled Product licensed or otherwise distributed by OEM or a Distributor, the License Fee per copy/unit shall be in the amount specified in the License Product Schedule. 3.1.2.2 PERCENTAGE OF NET SALES. If a License Fee based on Net Sales is specified in the License/Product Schedule, a License Fee shall be due for each copy/unit of a Bundled Product licensed or otherwise distributed by OEM or a Distributor, in the amount of the specified percentage of the Net Sales Price of the Bundled Product. The "Net Sales Price" shall be the gross amount of all cash, in-kind or other RSA Data Security, Inc. OEM Master License Agreement Page 7 consideration receivable by OEM or such Distributor at any time in consideration of the licensing or other distribution of the Bundled Product, excluding any amounts received by OEM or such Distributor for sales and use taxes, shipping, insurance and duties, and reduced by all discounts, rebates, refunds or allowances granted in the ordinary course of business. For the purposes of determining Net Sales Price, the amount of in-kind or other non-cash consideration receivable by OEM shall be deemed to have a dollar value equal to the standard price (as listed in OEM's published price schedule on the date of the grant of the license or the sale in question) ("Standard Price") for such Bundled Product, less all cash paid. With respect to a Bundled Product which is licensed or otherwise distributed by OEM or a Distributor as part of a larger group of products or as an integral part of another product, a license fee shall be due as set forth above as though the Bundled Product had been licensed or distributed separately by OEM or such Distributor; provided, however, that if the amount invoiced for the Bundled Product when licensed or distributed in this manner is more than five percent (5%) below the Standard Price for the Bundled Product, then the Net Sale Price relating to such invoice shall be deemed to be no less than ninety-five percent (95%) of the Standard Price, notwithstanding the actual amount of the invoice. 3.1.3 PREPAYMENT OF LICENSE FEES. OEM shall prepay license fees in the amount set forth in the License/Product Schedule upon execution of the License/Product Schedule. In no event shall such prepayment be refundable. If OEM has prepaid License Fees with respect to a Bundled Product, one-half (1/2) of the License Fees accrued may be offset against such prepaid License Fees. OEM shall show the application of prepaid fees in the licensing reports provided to RSA pursuant to Section 3.5. 3.2 TAXES. All taxes, duties, fees and other governmental charges of any kind (including sales and use taxes, but excluding United States or California taxes based on the gross revenues or net income of RSA) which are imposed by or under the authority of any government or any political subdivision thereof on the License Fees or any aspect of this Agreement shall be borne by OEM and shall not be considered a part of, a deduction from or an offset against, the License Fees. 3.3 TERMS OF PAYMENT. License fees shall accrue with respect to Bundled Products licensed or otherwise distributed by OEM or Distributors upon the date of invoice of the Bundled Product to an End User Customer or Distributor. License fees due RSA hereunder shall be paid by OEM to the attention of the Software Licensing Department at RSA's address set forth above on or before the thirtieth (30th) day after the close of the calendar quarter during which the fees accrued. If OEM has prepaid License Fees with respect to a Bundled Product, one-half (1/2) of License Fees accrued with respect to that Bundled Product may be offset against such prepaid License Fees. A late payment penalty of one percent RSA Data Security, Inc. OEM Master License Agreement Page 8 (1%) of any license fees not paid when due shall be assessed for each thirty (30) day period, or portion thereof, during which such payment is delayed, beginning on the thirty-first (31st) day after the last day of the calendar quarter to which the delayed payment relates. 3.4 U.S. Currency. All payments hereunder shall be paid in lawful United States currency. If OEM receives payment in foreign currencies, the amount of its license fees to RSA shall be calculated using the closing exchange rate published in THE WALL STREET JOURNAL Western Edition on the last business day such journal is published in the calendar quarter immediately preceding the date of payment. 3.5 LICENSING REPORT. A report in reasonably detailed form setting forth the calculation of license fees due from OEM and signed by a responsible officer of OEM shall be delivered to RSA on or before the thirtieth (30th) day after the close of each calendar quarter during the term of this Agreement, regardless of whether royalty payments are required to be made pursuant to Section 3.3. The report shall include, at a minimum, the following information (if applicable to OEM's designated method of calculating license fees) with respect to the relevant quarter: (i) the total number of copies/units of Bundled Products licensed or otherwise distributed (indicating the names and versions thereof); (ii) if applicable, the total Net Set Sales Price invoiced to Distributors and End User Customers; and (iii) total license fees accrued. 3.6 AUDIT RIGHTS. RSA shall have the right, at its sole cost and expense, to conduct during normal business hours and not more frequently than annually, an audit of the appropriate records of OEM to verify the number of copies/units of Bundled Products licensed or otherwise distributed by OEM and Distributors and, if relevant to OEM's designated method of calculating license fees, the Net Sales Price therefor. If such amounts are found to be different than those reported, or the license fees accrued are different than those reported, OEM will be invoiced or credited for the difference, as applicable. Any additional license fees, along with the late payment penalty assessed in accordance with Section 3.3, shall be payable within thirty (30) days of such invoice. If OEM has prepaid License Fees with respect to a Bundled Product, one-half (1/2) of License Fees accrued with respect to that Bundled Product may be offset against such prepaid License Fees. If the deficiency in license fees paid by OEM is greater than five percent (5%) of the license fees reported by OEM for any quarter, OEM will pay the reasonable expenses associated with such audit, in addition to the deficiency. 4. WARRANTY AND MAINTENANCE ------------------------ 4.1 LIMITED WARRANTY. During the initial ninety (90)-day term of each License/Product Schedule RSA warrants that the Licensed RSA Data Security, Inc. OEM Master License Agreement Page 9 Functionality of the Licensed Software specified in each License/Product Schedule will operate in material conformance to RSA's published specifications for such Licensed Functionality of the Licensed Software. RSA does not warrant that the RSA Software or any portion thereof is error-free. OEM's exclusive remedy, and RSA's entire liability in tort, contract or otherwise, shall be correction of any warranted nonconformity as provided in Section 4.4. This limited warranty and any obligations of RSA under Section 4.2 shall not apply to any Interface Modifications or any nonconformities caused thereby and shall terminate immediately if OEM makes any modification to the RSA Software other than Interface Modifications. 4.2 OPTIONAL MAINTENANCE. For the year commencing upon the expiration of the first ninety (90) days of each License/Product Schedule and for each year thereafter commencing on the anniversary of such expiration, OEM may elect to purchase annual maintenance, as defined in Section 4.4, by paying the then-current annual maintenance fee. Such amount shall be payable for the first year upon the execution of each License/Product Schedule and for each subsequent year in advance of the commencement of such year. RSA may cease to offer maintenance by notice delivered to OEM ninety (90) days or more before the end of the then- current maintenance term. 4.3 ADDITIONAL CHARGES. In the event RSA is required to take actions to correct a difficulty or defect which is traced to OEM errors, modifications, enhancements, software or hardware, then OEM shall pay to RSA its time and materials charges at RSA's rates then in effect. In the event RSA's personnel must travel to perform maintenance or on-site support, OEM shall reimburse RSA for any reasonable out-of-pocket expenses incurred, including travel to and from OEM's sites, lodging, meals and shipping, as may be necessary in connection with duties performed under this Section 4 by RSA. 4.4 MAINTENANCE PROVIDED BY RSA. During the ninety (90) days following commencement of a License/Product Schedule and for periods for which OEM has paid an annual maintenance fee, RSA will provide OEM with the following services: 4.4.1 RSA will provide telephone support to OEM during RSA's normal business hours. RSA may provide on-site support reasonably determined to be necessary by RSA at OEM's location specified on page 1 hereof. RSA shall provide the support specified in this Section 4.4.1 to OEM's employees responsible for developing Bundled Products, maintaining Bundled Products, and providing support to End User Customers. No more than two (2) OEM employees may obtain such support from RSA at any one time. On RSA's request, OEM will provide a list with the names of the employees designated to receive support from RSA. OEM may change the names on the list at any time by providing written notice to RSA. RSA Data Security, Inc. OEM Master License Agreement Page 10 4.4.2 In the event OEM discovers an error in the Licensed Functionality of the Licensed Software which causes the Licensed Functionality of the Licensed Software not to operate in material conformance to RSA's published specifications therefor, OEM shall submit to RSA a written report describing such error in sufficient detail to permit RSA to reproduce such error. Upon receipt of any such written report, RSA will use its reasonable business judgment to classify a reported error as either: (i) a "Level 1 Severity" error, meaning an error that causes the Licensed Functionality of the Licensed Software to fail to operate in a material manner or to produce materially incorrect results and for which there is no workaround or only a difficult workaround; or (ii) a "Level 2 Severity" error, meaning an error that produces a situation in which the Licensed Functionality of the Licensed Software is usable but does not function in the most convenient or expeditious manner, and the use or value of the Licensed Functionality of the Licensed Software suffers no material impact. RSA will acknowledge receipt of a conforming error report within two (2) business days and (A) will use its continuing best efforts to provide a correction for any Level 1 Severity error to OEM as early as practicable; and (B) will use its reasonable efforts to include a correction for any Level 2 Severity error in the next release of the RSA Software. 4.4.3 RSA will provide OEM information relating to New Releases and New Versions of the RSA Software during the term of this Agreement. New Releases will be provided at no additional charge. New Versions will be provided at RSA's standard upgrade charges in effect at the time. Any New Releases or New Versions acquired by OEM shall be governed by all of the terms and provisions of this Agreement. 4.5 LICENSE OF NEW RELEASES. In the event OEM has not purchased optional maintenance with respect to any Licensed Software, OEM may obtain a license of a New Release of such Licensed Software or any service which is provided as a part of maintenance by paying the maintenance fees which would otherwise have been due from the expiration of maintenance provided pursuant to Section 4.1 to the date of license of such New Release. 5. MASTER COPY ----------- As soon as practicable but not later than five (5) business days after the date of execution of a License/Product Schedule RSA shall deliver to OEM one (1) copy of each of the RSA Object Code, the RSA Source Code and the User Manual licensed hereunder and such other information, documentation and instructions reasonably deemed necessary by RSA to enable OEM to perform its obligations under this Agreement. RSA Data Security, Inc. OEM Master License Agreement Page 11 6. ADDITIONAL OBLIGATIONS OF OEM ----------------------------- 6.1 BUNDLED PRODUCT MARKETING. OEM is authorized to represent to Distributors and End User Customers only such facts about the RSA Software as RSA states in its published product descriptions, advertising and promotional materials or as may be stated in other non- confidential written material furnished by RSA. 6.2 CUSTOMER SUPPORT. OEM shall, at its expense, provide all support for the Bundled Products to Distributors and End User Customers. 6.3 LICENSE AGREEMENTS. OEM shall cause to be delivered to each Distributor and End User Customer a license agreement which shall contain, at a minimum, substantially all of the limitations of rights and the protections for RSA which are contained in Sections 2.3, 6.4.2, 6.6, 7.1, 7.2, 9.8 and 9.9 of this Agreement and shall prohibit Distributors and End User Customers pursuant to written agreements from modifying, reverse engineering, decompiling or disassembling the RSA Object Code or any part thereof. OEM shall use its reasonable best efforts to ensure that all Distributors and End User Customers abide by the terms of such agreements. 6.4 CONFIDENTIALITY. ---------------- 6.4.1 OEM acknowledges that in RSA's performance of its duties hereunder RSA will communicate to OEM (or its designees) certain confidential and proprietary information concerning the RSA Software, and know-how, technology, techniques or marketing plans related thereto (collectively, the "Know-How") all of which are confidential and proprietary to, and trade secrets of, RSA. OEM agrees to hold all the RSA Software and Know-How within its own organization and shall not, without specific written consent of RSA or as expressly authorized herein, utilize in any manner, publish, communicate or disclose any part of the RSA Software or Know-How to third parties. This Section 6.4.1 shall impose no obligation on OEM with respect to any Know-How which: (i) at the time of disclosure in writing is not marked or stamped with a legend identifying it as "Company Private," "Proprietary," "Confidential" or a similar legend, or, within thirty (30) days after oral disclosure, is not so identified in writing; (ii) is in the public domain at the time disclosed by RSA; (iii) enters the public domain after disclosure other than by breach of OEM's obligations hereunder or by breach of another party's confidentiality obligations; or (iv) is shown by documentary evidence to have been known by OEM prior to its receipt from RSA. OEM will take such steps as are consistent with OEM's protection of its own confidential and proprietary information (but will in no event exercise less than reasonable care) to ensure that the provisions of this Section 6.4.1 are RSA Data Security, Inc. OEM Master License Agreement Page 12 not violated by OEM's End User Customers, Distributors, employees, agents or any other person. 6.4.2 OEM agrees not to remove or destroy any proprie- tary, trademark or copyright markings or confidentiality legends placed upon or contained within the RSA Source Code, RSA Object Code, User Manuals or any related materials or documentation. OEM further agrees to insert and maintain: (i) within every Bundled Product and any related materials or documentation a copyright notice in the name of OEM; and (ii) within the splash screens, user documentation, printed product collateral, product packaging and advertisements for the Bundled Product, the appropriate RSA "Licensee Seal" from the form attached as Exhibit "B" to this Agreement and a statement that the Bundled Product contains the RSA Software. OEM shall not take any action which might adversely affect the validity of RSA's proprietary, trademark or copyright markings or ownership by RSA thereof, and shall cease to use the markings, or any similar markings, in any manner on the expiration or other termination of the license rights granted pursuant to Section 2. 6.4.3 OEM acknowledges the extreme importance of the confidentiality and trade secret status of the RSA Source Code and OEM agrees, in addition to complying with the requirements of Sections 6.4.1 and 6.4.2 as they relate to the RSA Source Code, to: (i) inform any employee that is granted access to all or any portion of the RSA Source Code of the importance of preserving the confidentiality and trade secret status of the RSA Source Code; and (ii) maintain a controlled, secure environment for the storage and use of the RSA Source Code. 6.4.4 The placement of a copyright notice on any of the RSA Software shall not constitute publication or otherwise impair the confidential or trade secret nature of the RSA Software. 6.4.5 OEM acknowledges that the restrictions contained in this Section 6.4 are reasonable and necessary to protect RSA's legitimate interests and that any violation of these restrictions will cause irreparable damage to RSA within a short period of time and OEM agrees that RSA will be entitled to injunctive relief against each violation. OEM further agrees that all confidentiality commitments hereunder shall survive the expiration or termination for any reason of this Agreement or the license rights granted pursuant to Section 2. 6.5 FEDERAL GOVERNMENT SUBLICENSE. Any sublicense of a Bundled Product acquired from OEM or any Distributor under a United States government contract shall be subject to restrictions as set forth in subparagraph (c)(1)(ii) of Defense Federal Acquisition Regulations Supplement (DFARs) Section 252.227-7013 for Department of Defense contracts and as set forth in Federal Acquisition Regulations (FARs) Section 52.227-19 for civilian agency contracts or any successor regulations. OEM agrees that any such sublicense shall set forth all of RSA Data Security, Inc. OEM Master License Agreement Page 13 such restrictions and the tape or diskette label for the Bundled Product and any documentation delivered with the Bundled Product shall contain a restricted rights legend conforming to the requirements of the current, applicable DFARs or FARs. 6.6 NOTICES. OEM shall immediately advise RSA of any legal notices served on OEM which might affect RSA, the RSA Software or any Bundled Products. 6.7 INDEMNITY. OEM EXPRESSLY INDEMNIFIES AND HOLDS HARMLESS RSA, ITS SUBSIDIARIES, AGENTS AND AFFILIATES FROM: (i) ANY AND ALL LIABILITY OF ANY KIND OR NATURE WHATSOEVER TO OEM'S END USER CUSTOMERS, DISTRIBUTORS AND THIRD PARTIES WHICH MAY ARISE FROM ACTS OF OEM OR FROM THE LICENSE OF BUNDLED PRODUCTS BY OEM OR ANY DOCUMENTATION, SERVICES OR ANY OTHER ITEM FURNISHED BY OEM TO ITS END USER CUSTOMERS OR DISTRIBUTORS; AND (ii) ANY LIABILITY ARISING IN CONNECTION WITH AN UNAUTHORIZED REPRESENTATION OR ANY MISREPRESENTATION OF FACT MADE BY OEM OR ITS AGENTS, EMPLOYEES OR DISTRIBUTORS TO ANY PARTY WITH RESPECT TO THE RSA SOFTWARE OR ANY BUNDLED PRODUCTS. 7. DISCLAIMER OF WARRANTIES; LIMITATION OF LIABILITY; INTELLECTUAL PROPERTY INDEMNITIES --------------------------------------------------------------- 7.1 DISCLAIMER. EXCEPT FOR THE EXPRESS LIMITED WARRANTY PROVIDED IN SECTION 4.1, THE RSA SOFTWARE IS PROVIDED "AS IS" WITHOUT ANY WARRANTY WHATSOEVER. RSA DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER WHATSOEVER, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. RSA DISCLAIMS ANY WARRANTY OR REPRESENTATION TO ANY PERSON OTHER THAN OEM WITH RESPECT TO THE RSA SOFTWARE. OEM SHALL NOT, AND SHALL TAKE ALL MEASURES NECESSARY TO INSURE THAT ITS AGENTS AND EMPLOYEES DO NOT, MAKE OR PASS THROUGH ANY SUCH WARRANTY ON BEHALF OF RSA TO ANY DISTRIBUTOR, END USER CUSTOMER OR OTHER THIRD PARTY. 7.2 LIMITATION OF LIABILITY. IN NO EVENT WILL RSA BE LIABLE TO OEM (OR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM OEM) FOR INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES ARISING OUT OF OR RELATED TO THE TRANSACTIONS CONTEMPLATED UNDER THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST PROFITS, BUSINESS INTERRUPTION OR LOSS OF BUSINESS INFORMATION, EVEN IF RSA HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. UNDER NO CIRCUMSTANCES SHALL RSA'S TOTAL LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE TOTAL AMOUNT PAID BY OEM TO RSA HEREUNDER, REGARDLESS OF WHETHER ANY ACTION OR CLAIM IS BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE. RSA Data Security, Inc. OEM Master License Agreement Page 14 7.3 PROPRIETARY RIGHTS INFRINGEMENT BY RSA. -------------------------------------- 7.3.1 Subject to the limitations set forth below, RSA, at its own expense, shall: (i) defend, or at its option settle, any claim, suit or proceeding against OEM on the basis of infringement of any United States patent, copyright or trade secret in the field of cryptography by the unmodified Licensed Software as delivered by RSA (excluding the Interface Modifications) or any claim that RSA has no right to license the Licensed Software hereunder; and (ii) pay any final judgment entered or settlement against OEM on such issue in any such suit or proceeding defended by RSA. RSA shall have no obligation to OEM pursuant to this Section 7.3.1 unless: (A) OEM gives RSA prompt written notice of the claim; (B) RSA is given the right to control and direct the investigation, preparation, defense and settlement of the claim; and (C) the claim is based on OEM's use of the unmodified License Software in accordance with this Agreement. 7.3.2 If RSA receives notice of an alleged infringement, RSA shall have the right, at its sole option, to obtain the right to continue use of the Licensed Software or to replace or modify the Licensed Software so that it is no longer infringing. If neither of the foregoing options is reasonably available to RSA, then the license rights granted pursuant to Section 2 may be terminated at the option of either party hereto without further obligation or liability except as provided in Sections 7.3.1 and 8.3 and in the event of such termination, RSA shall refund the License Fees paid by OEM hereunder less depreciation for use assuming straight line depreciation over a five (5)-year useful life. 7.3.3 THE RIGHTS AND REMEDIES SET FORTH IN SECTIONS 7.3.1 AND 7.3.2 CONSTITUTE THE ENTIRE OBLIGATION OF RSA AND THE EXCLUSIVE REMEDIES OF OEM CONCERNING RSA'S PROPRIETARY RIGHTS INFRINGEMENT. 7.4 PROPRIETARY RIGHTS INFRINGEMENT BY OEM. -------------------------------------- 7.4.1 Subject to the limitations set forth below, OEM, at its own expense, shall: (i) defend, or at its option settle, any claim, suit or proceeding against RSA on the basis of infringement of any United States patent, copyright or trade secret by any Bundled Product (excluding the unmodified RSA Software) or the Interface Modifications; and (ii) pay any final judgment entered or settlement against RSA on such issue in any such suit or proceeding defended by OEM. OEM shall have no obligation to RSA pursuant to this Section 7.4.1 unless: (A) RSA gives OEM prompt written notice of the claim; and (B) OEM is given the right to control and direct the investigation, preparation, defense and settlement of the claim. RSA Data Security, Inc. OEM Master License Agreement Page 15 7.4.2 If OEM receives notice of an alleged infringement, OEM shall have the right, at its sole option, to obtain the right to continued use of the Interface Modifications or the Bundled Product or to replace or modify the Interface Modifications or Bundled Product so that they are no longer infringing. If neither of the foregoing options is reasonably available to OEM, then the license rights granted pursuant to Section 2 of this Agreement may be terminated at the option of either party hereto without further obligation or liability except as provided in Sections 7.4.1 and 8.3, and in the event of such termination, RSA shall retain all License Fees paid by OEM hereunder. 7.4.3 THE RIGHTS AND REMEDIES SET FORTH IN SECTIONS 7.4.1 AND 7.4.2 CONSTITUTE THE ENTIRE OBLIGATION OF OEM AND THE EXCLUSIVE REMEDIES OF RSA CONCERNING OEM'S PROPRIETARY RIGHTS INFRINGEMENT. 8. TERM AND TERMINATION -------------------- 8.1 TERM. The license rights granted pursuant to Section 2 shall be effective with respect to each License/Product Schedule as of the date thereof and shall continue in full force and effect for each item of Licensed Software for an initial period as set forth on each License/Product Schedule unless sooner terminated pursuant to the terms of this Agreement. Such license rights shall be automatically renewed for successive one (1)-year terms unless either party notifies the other party in writing of its intention not to renew at least sixty (60) days prior to the expiration of the then-current term. Such non-renewal option may be exercised by either party with or without cause. Notwithstanding the foregoing, either party shall be entitled to terminate all the license rights granted pursuant to this Agreement at any time on written notice to the other in the event of a default by the other party and a failure to cure such default within a period of thirty (30) days (five (5) if the default involves the payment of money) following receipt of written notice specifying that a default has occurred. 8.2 INSOLVENCY. In the event that either party is adjudged insolvent or bankrupt, or upon the institution of any proceedings by or against either party seeking relief, reorganization or arrangement under any laws relating to insolvency, or upon any assignment for the benefit of creditors, or upon the appointment of a receiver, liquidator or trustee of any of either party's property or assets, or upon the liquidation, dissolution or winding up of either party's business, then and in any such events all the license rights granted pursuant to this Agreement may immediately be terminated by the other party upon giving written notice. 8.3 DISPOSITION OF RSA SOFTWARE AND USER MANUALS ON TERMINATION. Upon the expiration or termination pursuant to this Section 8 of the license rights granted pursuant to Section 2, the remaining provisions of this Agreement (including without limitation the RSA Data Security, Inc. OEM Master License Agreement Page 16 confidentiality provisions of Section 6.4) shall remain in full force and effect, and OEM shall cease making copies of, using or licensing the RSA Software and Bundled Products excepting only such copies of Bundled Products necessary to fill orders placed with OEM prior to such expiration or termination. OEM shall destroy all copies of the RSA Software and Bundled Products not subject to any then-effective license agreement with an End User Customer and all information and documentation provided by RSA to OEM (including all Know-How), other than such copies of the RSA Object Code, the User Manual and the Bundled Products as are necessary to enable OEM to perform its continuing support obligations in accordance with Section 6.2, if any, and except as provided in the next following sentence. If OEM has licensed Source Code hereunder, for a period of one (1) year after the date of expiration or termination of the license rights granted under this Agreement, OEM may retain one (1) copy of the RSA Source Code and is hereby licensed for such term to use such RSA Source Code solely for the purpose of supporting End User Customers of Bundled Products. Upon the expiration of such one (1)-year period, OEM shall destroy or return to RSA such single copy of the RSA Source Code. 9. MISCELLANEOUS PROVISIONS. 9.1 GOVERNING LAWS. IT IS THE INTENTION OF THE PARTIES HERETO THAT THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, U.S.A. (IRRESPECTIVE OF ITS CHOICE OF LAW PRINCIPLES) SHALL GOVERN THE VALIDITY OF THIS AGREEMENT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION AND ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO. THE PARTIES AGREE THAT THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS SHALL NOT APPLY TO THIS AGREEMENT. THE PARTIES HEREBY AGREE THAT ANY SUIT TO ENFORCE ANY PROVISION OF THIS AGREEMENT OR ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE BUSINESS RELATIONSHIP BETWEEN THE PARTIES HERETO SHALL BE BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA OR THE SUPERIOR OR MUNICIPAL COURT IN AND FOR THE COUNTY OF SAN MATEO, CALIFORNIA, U.S.A. Each party hereby agrees that such courts shall have exclusive in personam jurisdiction and venue with respect to such party, and each party hereby submits to the exclusive in personam jurisdiction and venue of such courts. 9.2 BINDING UPON SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall be binding upon, and inure to the benefit of, the successors, executors, heirs, representatives, administrators and assigns of the parties hereto; provided, however, that this Agreement shall not be assignable by OEM, by operation of law or otherwise, without the prior written consent of RSA, which shall not be unreasonably withheld. Any such purported assignment or delegation without RSA's written consent shall be void and of no effect. 9.3 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall for any reason and to any extent, be invalid or RSA Data Security, Inc. OEM Master License Agreement Page 17 unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances shall be interpreted so as best to reasonably effect the intent of the parties hereto. IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF WARRANTIES OR EXCLUSION OF DAMAGES IS INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER PROVISION AND TO BE ENFORCED AS SUCH. 9.4 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules hereto constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings between the parties. 9.5 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived, only by a writing signed by the party to be bound thereby. 9.6 ATTORNEYS' FEES. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party shall be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorneys' fees to be fixed by the court (including without limitation, costs, expenses and fees on any appeal). 9.7 NOTICES. Whenever any party hereto desires or is required to give any notice, demand, or request with respect to this Agreement, each such communication shall be in writing and shall be effective only if it is delivered by personal service or mailed, United States certified or registered mail, postage prepaid, return receipt requested, addressed as follows: RSA: To the address set forth on page 1 If to RSA, with a copy to: Timothy Tomlinson, Esq. Tomlinson Zisko Morosoli & Maser 200 Page Mill Road, Second Floor Palo Alto, California 94306 OEM: To the address set forth on page 1 Such communications shall be effective when they are received by the addressee thereof; but if sent by certified or registered mail in the manner set forth above, they shall be effective five (5) days after being deposited in the United States mail in the contiguous 48 states or ten (10) days after being deposited in the United States mail in any other RSA Data Security, Inc. OEM Master License Agreement Page 18 location. Any party may change its address for such communications by giving notice thereof to the other party in conformity with this Section. 9.8 FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON THE EXPORT FROM THE UNITED STATES OF AMERICA OF THE RSA SOFTWARE OR BUNDLED PRODUCTS OR OF INFORMATION ABOUT SUCH RSA SOFTWARE OR BUNDLED PRODUCTS WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE GOVERNMENT OF THE UNITED STATES OF AMERICA. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY, OEM SHALL NOT EXPORT OR REEXPORT,DIRECTLY OR INDIRECTLY, ANY RSA SOFTWARE OR BUNDLED PRODUCTS OR INFORMATION PERTAINING THERETO TO ANY COUNTRY FOR WHICH SUCH GOVERNMENT OR ANY AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE TIME OF EXPORT OR REEXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL. 9.9 TRADE NAMES, LOGOS; PUBLICITY. By reason of this Agreement or the performance hereof, OEM shall acquire no rights of any kind in any RSA trademark, trade name, logo or product designation under which the RSA Software was or is marketed and OEM shall not make any use of the same for any reason except as expressly authorized by this Agreement or otherwise authorized in writing by RSA. RSA shall have the right during the term of the license rights granted hereunder to disclose to third parties that OEM is an OEM of the RSA Software and that any publicly-announced Bundled Product incorporates the RSA Software. OEM shall provide to RSA, solely for RSA's display purposes, one (1) working copy of each Bundled Product which consists solely of computer software and one (1) working or non-working unit of any hardware product in which is incorporated a Bundled Product which consists of an integrated circuit or other hardware. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. OEM: By: /s/ James F. Chen ----------------------------------------------------------------- Printed Name: James F. Chen --------------------------------------------------------- Title: President ----------------------------------------------------------------- RSA Data Security, Inc. OEM Master License Agreement Page 19 RSA DATA SECURITY, INC.: By: /s/ D. James Bidzos ---------------------------------------------------------------- Printed Name: D. JAMES BIDZOS --------------------------------------------------------- Title: President ----------------------------------------------------------------- License/Product Schedule Number: 1 ------------------------------ Date of this License/Product Schedule: 12/30/94 --------------------- EXHIBIT "A"
LICENSE/PRODUCT SCHEDULE OEM: Virtual Open Network Environment Corp. --------------------------------------------------------- SOURCE CODE LICENSE OEM Master License Agreement Number: ------------------- 1294-VON-0-MLA-1 --------------------------------------------------------- BSAFE YES [ ] NO [X] TIPEM Date of OEM Master License Agreement: YES [ ] NO [X] 12/30/94 --------------------------------------------------------- This License/Product Schedule Amends Schedules Dated: N/A --------------------------------------------------------- Term of Agreement for this Bundled Product: Perpetual ---------------------------------------------------------- Bundled Product: OEM's smart card product currently known as "SmartCat," and OEM's smart card plus firewall product currently known as "SmartWall," and scaled-down versions of the foregoing products. ---------------------------------------------------------- RSA Software: BSAFE, TIPEM ---------------------------------------------------------- RSA Software Distribution Method: __ X___ Tangible Media or _______ Electronic Transmission
Exhibit "A" License/Product Schedule Page 2
OBJECT CODE LICENSES -------------------- LICENSED SOFTWARE AND FUNCTIONALITY FOR THIS BUNDLED PRODUCT: RIGHT TO INCLUDE LICENSED SOFTWARE DESCRIBE LICENSED OBJECT CODE FOR FUNCTIONALITY FUNCTIONALITY BUNDLED PRODUCT RESTRICTION BSAFE YES NO YES NO RSA Public Key [x] [] [] [x] Cryptosystem Diffie-Hellman Key [x] [] [] [x] Negotiation Data Encryption [x] [] [] [x] Standard (DES) Extended Data Encryption [x] [] [] [x] Standard (DESX) RC2 Variable-Key Size [x] [] [] [x] Symmetric Block Cipher RC4 Variable-Key Size [x] [] [] [x] Symmetric Stream Cipher MD Hashing Algorithm [x] [] [] [x] MD2 Hashing Algorithm [x] [] [] [x] MD5 Hashing Algorithm [x] [] [] [x] TIPEM (all set forth below) [x] [] [] [x] RSA Public Key Cryptosystem Data Encryption Standard (DES) RC2 Variable Key Size Symmetric Block Cipher MD2 Hashing Algorithm MD5 Hashing Algorithm
Exhibit "A" License/Product Schedule Page 3
LICENSE AND MAINTENANCE FEES ---------------------------- Prepayment of License Fees: APPROVED: -------------------------- Total of $15,000 invoiced on the date of execution of this License/Product Schedule OEM: and payable as follows: . $5,000 due within 30 days after execution of this License/Product By: /s/ Jame F. Chen Schedule ------------------------ . $5,000 due within 90 days after Printed Name: JAMES F. CHEN execution of this License/Product -------------- Schedule Title: President --------------------- . $5,000 due within 180 days after execution of this License/Product Schedule Percentage of Net Sales License Fees: RSA DATA SECURITY, INC.: ------------------------------------ For SmartCat (including scaled-down By: /s/ D. James Bidzos versions): -------------------------- Printed Name: D. JAMES BIDZOS' 3% of Net Sales with a minimum of $3.00 per ----------------- unit Title: President ----------------------- For SmartWall (including scaled-down versions): 3% of Net Sales with a minimum of $500.00 per unit Notwithstanding the foregoing, after OEM has paid an aggregate of Three Million Dollars ($3,000,000) in License Fees under this License/Product Schedule, no further License Fees shall be payable under this License/Product Schedule. Present Annual Maintenance Fee for this License/Product Schedule: $5,000 ------------------------
EXHIBIT "C" SPECIAL TERMS AND CONDITIONS OEM: Virtual Open Network Environment Corp. -------------------------------------------------------------------- Master License Agreement Number: 1294-VON-0-MLA-1 ----------------------------------------- Master License Agreement Date: 12/30/94 ------------------------------------------- Exhibit "C" Date: 12/30/94 ------------------------------------------------------- THE OEM MASTER LICENSE AGREEMENT between RSA Data Security, Inc. and the OEM set forth above dated as of the date set forth above ("Agreement") is amended as set forth below. 1. DEFINITIONS. Capitalized terms used and not otherwise defined in this Exhibit "C" shall have the meanings designated for such terms in the Agreement. 2. AMENDMENTS TO AGREEMENT. The following provisions of the Agreement, referenced by the applicable Section numbers in the Agreement, are hereby amended as follows: 2.1 SECTION 2.4. The existing Section 2.4 is renumbered as Section 2.5, and a new Section 2.4 is added, as follows: 2.4 TRANSLATION OF USER MANUAL. RSA hereby grants OEM a non-exclusive, nontransfer- rable, non-assignable limited license in the Territory during the terms specified in Section 8 to translate the User Manual into languages other than the English language for the purpose of creating non-English language versions of user documentation ("Translations") for any Bundled Product and only for use and distribution with such Bundled Product. 2.2 SECTION 2.5.2 (formerly Section 2.4.2). The following language is added at the end of Section 2.5.2: "OEM SHALL AT ALL TIMES RETAIN FULL AND EXCLUSIVE RIGHT, TITLE AND OWNERSHIP INTEREST IN AND TO THE TRANSLATIONS AND IN ANY AND ALL RELATED COPYRIGHTS; PROVIDED, HOWEVER, THAT (I) OEM AGREES THAT IT SHALL NOT USE, REPRODUCE, MODIFY, DISPLAY, PERFORM, DISTRIBUTE OR OTHERWISE EXERCISE ANY OF ITS COPYRIGHTS WITH RESPECT TO THE TRANSLATIONS, OR ALLOW OTHERS TO DO SO, OTHER THAN FOR THE PURPOSE OF SUPPORTING BUNDLED PRODUCTS AND (II) AT THE REQUEST OF RSA, OEM SHALL GRANT TO RSA A NON-EXCLUSIVE, NON-TRANSFERRABLE LICENSE TO USE, REPRODUCE AND DISTRIBUTE THE TRANSLATIONS, SUBJECT TO THE PAYMENT OF A Exhibit "C" Page 2 LICENSE FEE WHICH IS REASONABLE BASED UPON THE EFFORTS OF OEM IN CREATING THE TRANSLATIONS. 2.3 SECTION 6.7. Section 6.7 is amended by inserting the following parenthetical after the "DOCUMENTATION": "(INCLUDING ANY TRANSLATIONS)." 2.4 SECTION 7.4.1. Section 7.4.1 is amended by adding the following language after the parenthetical expression "(excluding the unmodified RSA Software)": "..., the Translations...." 2.5 SECTION 7.4.2. Section 7.4.2 is amended by adding the words "..., the Translations" after each occurrence of the term "Interface Modifications." 3. EFFECT OF AMENDMENT. This Exhibit "C" is an amendment to the Agreement. Except as expressly amended above, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Exhibit "C" as of the date set forth above. OEM RSA DATA SECURITY, INC. By: /s/ James F. Chen By: /s/ D. James Bidzos ----------------------------- ----------------------------- Printed Name: James F. Chen Printed Name: D. James Bidzos ------------------- ------------------- Title: President Title: President -------------------------- -------------------------- FIRST AMENDMENT TO BSAFE/TIPEM OEM MASTER LICENSE AGREEMENT THIS FIRST AMENDMENT (the "Amendment") modifies that certain BSAFE/TIPEM OEM Master License Agreement dated as of December 30, 1994 by and between RSA Data Security, Inc. ("RSA") and Virtual Open Network Environment Corp. ("OEM") (the "Agreement"). 1. DEFINITIONS. Capitalized terms used in this Amendment and not otherwise defined shall have the meanings set forth in the Agreement. 2. AMENDMENTS TO THE AGREEMENT. RSA and OEM agree that, effective on the execution of this Amendment, the following Sections of the Agreement are amended as follows: 2.1 SECTION 1.1. Section 1.1. is amended by adding the following language at the end thereof: "THE RSA SECURITY FACILITIES PROVIDED BY THE LICENSED SOFTWARE SHALL ONLY BE ACCESSIBLE WITHIN THE BUNDLED PRODUCT; THEREFORE, OEM WILL NOT PROVIDE IN ANY BUNDLED PRODUCT ANY APPLICATION PROGRAMMING INTERFACE (API) WHICH WOULD, IF EXPOSED, PERMIT A THIRD PARTY APPLICATION TO PULL OUT RSA SECURITY PRIMITIVES FROM THE BUNDLED PRODUCT TO BE USED IN THE APPLICATION." 2.2 SECTION 4.5. Section 4.5 is amended by adding the following language at the end thereof: "RSA AGREES THAT, UPON OEM'S WRITTEN REQUEST, OEM WILL BE INCLUDED IN THE "BETA" TEST GROUP OF LICENSEES OF THE LICENSED SOFTWARE AND WILL BE GRANTED ACCESS TO NEW RELEASES OF THE LICENSED SOFTWARE AT THE SAME TIME AS OTHER SIMILARLY- SITUATED OEMS OF THE LICENSED SOFTWARE." 2.3 EXHIBIT "A". Exhibit "A" (License/Product Schedule) of the Agreement is replaced in its entirety with the Exhibit "A" (License/Product Schedule) attached to this Amendment. 3. EFFECT OF AMENDMENT. This Amendment constitutes an amendment to the Sections and Exhibits of the Agreement referenced in Section 2 of this Amendment and, in the event of any inconsistency between the terms of this Amendment and the Agreement with respect to such Sections, the terms of this Amendment shall be controlling. Except as specifically and to the extent modified by this Amendment all of the terms and provisions of the Agreement shall continue to remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above. OEM RSA DATA SECURITY, INC. By: /s/ James F. Chen By: /s/ D. James Bidzos ----------------------------- ----------------------------- Printed Name: James F. Chen Printed Name: D. James Bidzos ------------------- ------------------- Title: President Title: President -------------------------- -------------------------- License/Product Schedule Number: ___________________________ Date of this License/Product Schedule:______________________
EXHIBIT "A" LICENSE/PRODUCT SCHEDULE OEM: Virtual Open Network Environment Corp. ---------------------------------------- RSA Software Distribution Method: OEM Master License Agreement Number: __X__ Tangible Media or 1294-VON-0-MLA-1 __X__ Electronic Transmission --------------------------------------------- Date of OEM Master License Agreement: December 30, 1994 ---------------------------------------------- SOURCE CODE LICENSE This License/Product Schedule Amends Schedules ------------------- Dated: December 30, 1994 BSAFE YES [X] NO [ ] Term of Agreement for this Bundled Product: TIPEM Perpetual YES [X] NO [ ] ---------------------------------------------- Bundled Product: 1. OEM's hardware token currently known as "SmartCAT" and scaled-down versions of "SmartCAT" ----------------------------------------- 2. OEM's hardware token plus firewall product currently known as "SmartWall," and scaled-down versions of "SmartWall." ----------------------------------------- 3. OEM's Software token currently known as "Virtual SmartCAT" and scaled-down versions of Virtual SmartCat. ----------------------------------------- Exhibit "A" License/Product Schedule Page 2 OEM: Virtual Open Network Environment Corp. ---------------------------------------- 4. OEM's secure electronic payment product currently known as "SmartCAT Cyber Wallet," provided that such product provides no functionality other than processing payment information working in conjunction with an OEM financial transaction server where OEM is receiving a transaction processing fee. ----------------------------------------- RSA Software: BSAFE, TIPEM ----------------------------------------------
Exhibit "A" License/Product Schedule Page 3
OBJECT CODE LICENSES LICENSED SOFTWARE AND FUNCTIONALITY FOR THIS BUNDLED PRODUCT: RIGHT TO LICENSED SOFTWARE DESCRIBE INCLUDE OBJECT FUNCTIONALITY LICENSED CODE FOR RESTRICTION FUNCTIONALITY BUNDLED PRODUCT RESTRICTION BSAFE YES NO YES NO RSA Public Key [x] [] [] [x] Cryptosystem Diffie-Hellman Key [x] [] [] [x] Negotiation Data Encryption [x] [] [] [x] Standard (DES) Extended Data Encryption [x] [] [] [x] Standard (DESX) RC2 Variable-Key Size [x] [] [] [x] Symmetric Block Cipher RC4 Variable-Key Size [x] [] [] [x] Symmetric Stream Cipher MD Hashing Algorithm [x] [] [] [x] MD2 Hashing Algorithm [x] [] [] [x] MD5 Hashing Algorithm [x] [] [] [x] TIPEM (all set forth below) [x] [] [] [x] RSA Public Key Cryptosystem Data Encryption Standard (DES) RC2 Variable Key Size Symmetric Block Cipher MD2 Hashing Algorithm MD5 Hashing Algorithm
Exhibit "A" License/Product Schedule Page 4 LICENSE AND MAINTENANCE FEES: ---------------------------- Prepayment of License Fees: -------------------------- Waived for this License/Product Schedule Source Code and Object Code License Fees: ---------------------------------------- 1. AMOUNT OF LICENSE FEES. The provisions of Sections 3.1.1 and 3.1.2 of the Agreement shall not apply to this License/Product Schedule. As consideration for the RSA Source Code and RSA Object Code licenses granted in this License/Product Schedule, OEM shall pay to RSA an amount equal to two percent (2%) of OEM's Gross Revenues during the term of this License/Product Schedule. "Gross Revenues" means OEM's gross revenues from all of its products and services, as reflected in OEM's financial statements prepared in accordance with generally accepted accounting principles. RSA shall have the option, at any time following the date of the Amendment until the date of the initial public offering of OEM's securities, to convert its right to future License Fees described in this paragraph 1 to Common Stock of OEM representing two percent (2%) of OEM's then-outstanding voting securities on an as-converted basis. 2. PAYMENT AND REPORTING. Sections 3.3, 3.5 and 3.6 of the Agreement shall not apply to this License/Product Schedule. License Fees with respect to this License/Product Schedule shall accrue when OEM's Gross Revenues are realized, as determined for OEM's accounting purposes, in accordance with generally accepted accounting principles. License Fees due RSA shall be paid by OEM to the attention of the Software Licensing Department at RSA's address set forth on the first page of the Agreement on or before the thirtieth (30th) day after the close of the calendar quarter during which the License Fees accrued. A late payment penalty of one percent (1%) of any License Fees not paid when due shall be assessed for each thirty (30)-day period, or portion thereof, during which such payment is delayed beginning on the thirty-first (31st) day after the last day of the calendar quarter to which the delayed payment relates. OEM's unaudited quarterly financial statementsin reasonably detailed form setting forth OEM's Gross Revenues and the calculation of License Fees due from OEM, certified by a responsible officer of OEM, shall be delivered to RSA on or before the thirtieth (30th) day after the close of each calendar quarter during the term of this License/Product Schedule, regardless of whether License Fees are due for such quarter pursuant to the preceding sentences. Within sixty (60) days after the close of OEM's fiscal year, OEM shall provide RSA with a copy of OEM's audited financial statements showing OEM's Gross Revenues for such fiscal year, along with a Exhibit "A" License/Product Schedule Page 5 reconciliation of those Gross Revenues with the Gross Revenues previously reported on a quarterly basis with respect to such fiscal year. OEM shall, at the same time, pay to RSA any deficiency in License Fees previously paid for such fiscal year. If OEM has overpaid License Fees for such fiscal year, such overpayment shall be credited against OEM's next required payment of License Fees. 3. MINIMUM LICENSE FEES FOR VIRTUAL SmartCAT. In addition to the License Fees payable by OEM pursuant to paragraph 2 above, OEM shall pay to RSA the amount of One Dollar ($1.00) for each copy of Virtual SmartCAT sublicensed or otherwise distributed by OEM, unless: (i) OEM charges more than a de minimis amount of royalties or other fees such copy, or (ii) such copy contains a feature which disables the functionality of Virtual SmartCAT within forty-five (45) days or less of the date the copy is delivered. 4. ADDITIONAL CONSIDERATION. As additional consideration for the RSA Source Code and RSA Object Code licenses granted in this License/Product Schedule, OEM will: a. Promptly after the date of execution of this License/Product Schedule provide to RSA at no cost to RSA one complete SmartWall system and grant RSA a non-exclusive, perpetual, irrevocable, royalty-free license to use such SmartWall system for RSA's internal business purposes. Such license shall include all bug fixes, updates, enhancements, support, and new releases provided to OEM's other licensees, at no additional cost to RSA. b. Each copy of SmartCAT Cyber Wallet distributed by or under authority of OEM will identify RSA as the provider of the encryption technology within the product by displaying, with each occurrence of the product name "Cyber Wallet," the words "with RSA encryption" or the appropriate RSA licensee seal from Exhibit B to the Agreement. Maintenance Fees for this License/Product Schedule: -------------------------------------------------- Annual maintenance fees for the Bundled Products covered by this License/Product Schedule shall be waived during the periods that License Fees are paid to RSA pursuant to this License/Product Schedule. Notwithstanding the provisions of Section 4.4.3 of the Agreement, New Versions of the Licensed Software will be provided to OEM at no additional charge during the period that License Fees are paid to RSA pursuant to this License/Product Schedule; provided, however, that OEM shall not on the basis of so obtaining any New Version receive any rights under this License/Product Schedule to any algorithms not included with the Licensed Software as designated on page 2 of this License/Product Schedule. Exhibit "A" License/Product Schedule Page 6 APPROVED: OEM: VIRTUAL OPEN NETWORK ENVIRONMENT CORP. By: /s/ James F. Chen ------------------------------------- Printed Name: James F. Chen --------------------------- Title: President --------------------------------- RSA DATA SECURITY, INC.: By: /s/ D. James Bidzos ------------------------------------- Printed Name: D. JAMES BIDZOS ---------------------------- Title: President ---------------------------------- EX-10.11 20 AMENDMENT NUMBER TWO TO BSAFE/TIPEM OEM MASTER LICENSE AGREEMENT THIS AMENDMENT NUMBER TWO TO BSAFE/TIPEM OEM MASTER LICENSE AGREEMENT (the "Amendment") modifies that certain BSAFE/TIPEM OEM Master License Agreement dated as of December 30, 1994 by and between RSA Data Security, Inc. ("RSA") and Virtual Open Network Environment Corp. ("OEM"), as amended by that certain First Amendment thereto (the "First Amendment") (collectively, the "Agreement"). 1. DEFINITIONS. Capitalized terms used in this Amendment and not otherwise defined shall have the meanings set forth in the Agreement. 2. EXERCISE OF OPTION. Pursuant to the First Amendment, OEM granted RSA an option to convert its right to [certain] future License Fees to Common Stock of OEM, as more particularly set forth in the First Amendment. RSA hereby exercises such option to convert, and the parties hereby agree, in connection therewith, to enter into the Conversion Agreement attached to this Amendment as Attachment 1 (the "Conversion Agreement") contemporaneously with the execution of this Amendment. 3. AMENDMENTS TO THE AGREEMENT. RSA and OEM agree that, effective upon the date of the later signature below, the Agreement is amended as follows: 3.1 Section 7.2. Section 7.2 of the Agreement is amended to read in its entirety as follows: 3.2 LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY (OR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM THE OTHER PARTY) FOR INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES ARISING OUT OF OR RELATED TO THE TRANSACTIONS CONTEMPLATED UNDER THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST PROFITS, BUSINESS INTERRUPTION OR LOSS OF BUSINESS INFORMATION, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WILL EITHER PARTY'S LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE AMOUNT OF $250,000, REGARDLESS OF WHETHER ANY ACTION OR CLAIM IS BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE. NONE OF THE ABOVE LIMITATIONS OF LIABILITY SHALL APPLY TO EITHER PARTY'S INDEMNITY OBLIGATIONS HEREUNDER OR TO ANY BREACHES OF SECTIONS 2 AND 6.4 AS SUCH BREACHES RELATE TO RSA'S SOURCE CODE, OR TO ANY OTHER BREACHES OF SECTIONS 2, 6.1, 6.3, 6.4 AND 6.5 ARISING OUT OF A PARTY'S INTENTIONAL CONDUCT OR FAILURE TO EXERCISE REASONABLE CARE. 3.3 Section 7.3.1. Section 7.3.1 of the Agreement is amended by inserting the following after the word "OEM" in the fourth line: "...(including any claim, suit or proceeding instituted by Cylink Corporation, Caro-Kann Corporation, or an entity related to either of them)...." 3.4 Section 7.3.2. Section 7.3.2 is amended by replacing the words "the License Fees paid by OEM hereunder" with the words "...an amount equal to the value of the Common Stock issued by OEM to RSA pursuant to the Conversion Agreement, assuming a per-share value of $3.00,...." 3.5 Exhibit "A." Exhibit "A" (License/Product Schedule) to the Agreement (attached to the First Amendment) is replaced in its entirety with the "Exhibit "A" (License/Product Schedule No. 0596-VON-O- LPS-3) attached to this Amendment. 4. EFFECT OF AMENDMENT. This Amendment constitutes an amendment to the Sections and Exhibits of the Agreement referenced in this Amendment and, in the event of any inconsistency between the terms of this Amendment and the Agreement with respect to such Sections and Exhibits, the terms of this Amendment shall be controlling. Except as specifically and to the extent modified by this Amendment all of the terms and provisions of the Agreement shall continue to remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment and the attached Exhibit "A" to be executed by their duly authorized representatives. OEM: VIRTUAL OPEN NETWORK ENVIRONMENT RSA DATA SECURITY, INC. CORP. By:/s/ Bob Rybicki By: /s/ D. James Bidzos -------------------------------- ---------------------------- Printed Name: Bob Rybicki Printed Name: D. James Bidzos Title: Vice President Title: President Date: 5/24/96 Date: 5/24/96 - 2 - 54177.3 License/Product Schedule Number: 0596-VON-O-LPS-3 Date of this License/Product Schedule: May , 1996 EXHIBIT "A" LICENSE/PRODUCT SCHEDULE OEM: Virtual Open Network Environment Corp. --------------------------------------- OEM Master License Agreement Number: 1294-VON-Q-MLA-1 --------------------------------------- Date of OEM Master License Agreement: December 30, 1994 --------------------------------------- This License/Product Schedule Amends Schedules Dated: December 30, 1994 and the Schedule attached to the First Amendment and replaces them in their entirety as of the date of this License/Product Schedule. ----------------------------------------------------------------------- Term of Agreement for this Bundled Product: Perpetual ------------------------------------------- Bundled Product: A. The following current products and all future versions of such OEM products (provided such future versions meet the definition of "Bundled Product" and do not function as a cryptographic toolkit or provide an exposed API to the functionality provided by the Licensed Software): -------------------------------------------------------------------------- 1. OEM's hardware token currently known as "SmartCAT" and scaled-down versions of "SmartCAT." -------------------------------------------------------------------------- 2. OEM's hardware token plus firewall product currently known as "SmartWall" and scaled-down versions of "SmartWall." -------------------------------------------------------------------------- 3. OEM's Software token currently known as "Virtual SmartCat" and scaled-down versions of Virtual SmartCat. -------------------------------------------------------------------------- 4. OEM's secure electronic payment product currently known as "SmartCAT Cyber Wallet," provided that such product provides no functionality other than processing payment information working in conjunction with an OEM financial transaction server where OEM is receiving a transaction processing fee. - 3 - 54177.3 5. OEM's client/server security software product currently known as "SmartGate" and scaled-down version of "SmartGate." -------------------------------------------------------------------------- B. The parties acknowledge that, in addition to the future versions of the OEM products set forth above, additional products of OEM meeting the definition of "Bundled Product" set forth in Section 1.1 of the Agreement may be added to this License/Product Schedule upon mutual agreement of the parties evidenced by a written amendment hereto. If OEM wishes to add such additional products in the manner described above, it will provide written notice to RSA with sufficient detail for RSA to determine the structure and function of the proposed additional Bundled Product. RSA agrees that it will approve any additional firewall product similar to OEM's "SmartWall" product and any client/server product with substantial value added to the Licensed Software in which there are no exposed API's to the functionality provided by the Licensed Software. The parties acknowledge that RSA will not approve any product that functions as a cryptographic toolkit or which provides an exposed API to the functionality provided by the Licensed Software. -------------------------------------------------------------------------- RSA Software: BSAFE, TIPEM -------------------------------------------------------------------------- RSA Software Distribution Method: OEM acknowledges receipt of the items specified in Section 5 of the Agreement. SOURCE CODE LICENSE BSAFE YES [x] NO [ ] TIPEM YES [x] NO [ ] - 4 - 54177.3 OBJECT CODE LICENSES -------------------- LICENSED SOFTWARE AND FUNCTIONALITY FOR THIS BUNDLED PRODUCT:
BSAFE YES NO YES NO RSA Public Key Cryposystem [X] [ ] [ ] [X] Diffie-Hellman Key Negotiation [X] [ ] [ ] [X] Data Encryption Standard (DES) [X] [ ] [ ] [X] Extended Data Encryption [X] [ ] [ ] [X] Standard (DESX) RC2 Variable-Key Size [X] [ ] [ ] [X] Symmetric Block Cipher RC4 Variable-Key Size [X] [ ] [ ] [X] Symmetric Stream Cipher MD Hashing Algorithm [X] [ ] [ ] [X] MD2 Hashing Algorithm [X] [ ] [ ] [X] MD5 Hashing Algorithm [X] [ ] [ ] [X] TIPEM (all set forth below) [X] [ ] [ ] [X] RSA Public Key Cryptosystem Data Encryption Standard (DES) RC2 Variable Key Size Symmetric Block Cipher MD2 Hashing Algorithm MD5 Hashing Algorithm
- 5 - 54177.3 LICENSE AND MAINTENANCE FEES Prepayment of License Fees: -------------------------- The provisions of Section 3.1.3 of the Agreement shall not apply to this License/Product Schedule. Source Code and Object Code License Fees: ---------------------------------------- 1. AMOUNT OF LICENSE FEES. The provisions of Sections 3.1.1 and 3.1.2 of the Agreement shall not apply to this License/Product Schedule. As consideration for the RSA Source Code and RSA Object Code licenses granted in this License/Product Schedule, OEM shall issue to RSA shares of OEM's Common Stock as more fully described in the Conversion Agreement attached to this Amendment as Attachment 1 and executed by the parties contemporaneously with the execution of this License/Product Schedule. 2. PAYMENT AND REPORTING. Sections 3.3, 3.5 and 3.6 of the Agreement shall not apply to this License/Product Schedule. 3. ADDITIONAL CONSIDERATION. As additional consideration for the RSA Source Code and RSA Object Code licenses granted in this License/Product Schedule, OEM will: a. At no cost to RSA, grant RSA a non-exclusive, perpetual, irrevocable, royalty-free license to use one complete SmartWall system for RSA's internal business purposes. Such license shall include all bug fixes, updates, enhancements, support, and new releases provided to OEM's other licensees, at no additional cost to RSA. RSA acknowledges receipt of the SmartWall system. b. Each copy of SmartCAT Cyber Wallet distributed by or under authority of OEM will identify RSA as the provider of the encryption technology within the product by displaying, with each occurrence of the product name "Cyber Wallet," the words "with RSA encryption" or the appropriate RSA licensee seal from Exhibit B to the Agreement. Present Annual Maintenance Fees for this License/Product Schedule: ------------------------------------------------------------------ $5,000.00. If OEM elects to purchase annual maintenance pursuant to Section 4.2 of the Agreement, the initial maintenance term under this License/Product Schedule shall commence on the date hereof, and the annual maintenance fee for the initial maintenance term shall be payable upon execution of this License/Product Schedule. The annual maintenance fee under this License/Product Schedule may not be increased by more than ten percent (10%) per maintenance year elapsed. - 6 - 54177.3 SPECIAL TERMS AND CONDITIONS ---------------------------- 1. Limited Rights to Sublicense. ----------------------------- Notwithstanding the provisions of Section 2.3.1 of the Agreement, RSA further hereby grants to OEM a non-exclusive, non-transferable, non- assignable license during the term of this License/Product Schedule to sublicense its rights granted in Section 2.2, as limited by Section 2.3, of the Agreement with respect to the RSA Object Code as part of the Bundled Products to OEM's licensees in the Territory (each, an "OEM Sublicensee") for use only (i) in their own products in which substantial functionality or value is added to the Bundled Products so that such products are not a substitute for the RSA Software, or (ii) in their own privately-labelled products consisting of the Bundled Products with no modifications other than minor packaging changes (collectively, "Sublicensee Products"). All sublicenses permitted under this paragraph shall be subject to all of the following conditions: (i) all such sublicenses will be granted in a signed writing containing at a minimum all of the restrictions set forth in Exhibit "A-1" attached hereto, and RSA shall be an express third party beneficiary of such sublicense agreements; (ii) OEM shall use its best efforts to enforce the provisions of such sublicenses as they relate to RSA and the RSA Software; (iii) the Sublicensee Products shall incorporate the Licensed Functionality of the RSA Object Code in such a way so as to ensure that the security functions of the RSA Object Code may only be accessed by the functionality of the Sublicensee Product in which it is included so that the RSA Object Code shall not be directly accessible to End User Customers or to software products other than the Sublicensee Products; (iv) the OEM Sublicensees to whom such rights are sublicensed shall have no further right to sublicense such rights; (v) on or before the date that OEM grants any sublicense hereunder, OEM shall submit to RSA an Exhibit "A" Extension in the form attached as Exhibit "A-2" for the applicable OEM Sublicensee; and (vi) any rights of any OEM Sublicensee sublicensed by OEM shall survive only so long as both the Agreement and the sublicense between OEM and such OEM Sublicensee remain in effect. In connection with the foregoing, RSA further hereby grants to OEM a non-exclusive, non-transferable, non- assignable license during the term of this License/Product Schedule to use the RSA Source Code to provide support of Bundled Products to OEM Sublicensees. 2. New Versions. ------------- a. RSA agrees that the upgrade fees payable by OEM for any New Version pursuant to Section 4.3.3 with respect to Bundled Products covered by this License/Product Schedule shall be no less favorable than the upgrade fees for the same New Version paid by RSA's other similarly- situated OEMs. b. RSA agrees that the upgrade fees payable by OEM for New Versions pursuant to Section 4.3.3 with respect to Bundled Products - 7 - 54177.3 covered by this License/Product Schedule shall not include any periodic License Fees in the nature of royalties. 3. Section 8.1. The second and third sentences of Section 8.1 shall not apply to this License/Product Schedule. APPROVED: OEM: VIRTUAL OPEN NETWORK ENVIRONMENT CORP. By: /s/ Bob Rybicki ------------------------------------- Printed Name: Bob Rybicki Title: V.P. RSA DATA SECURITY, INC. By: /s/ D. James Bidzos ------------------------------------- Printed Name: D. James Bidzos Title: President - 8 - 54177.3 EXHIBIT "A-1" MANDATORY SUBLICENSE TERMS All sublicense agreements for the license of the RSA Object Code in Bundled Products by OEM to OEM Sublicensees will include all of the following restrictions: I. The OEM Sublicensee will receive no greater rights with respect to the Bundled Products than those permitted in Sections 2.2 of the Agreement as limited by Section 2.3 of the Agreement. II. The OEM Sublicensee will agree not to remove or destroy any proprietary, trademark or copyright markings or confidentiality legends placed upon or contained within the Bundled Products or any related materials or documentation. III. If applicable, the OEM Sublicensee will agree that any sublicense of the Bundled Products to the United States Government or any agency thereof will state that such software is subject to limited rights in technical data and restricted rights applicable to commercial computer software developed entirely at private expense and that any associated documentation will include a restricted rights legend conforming to the Federal Acquisition Regulations (FARs) or the Department of Defense Federal Acquisition Regulations Supplement (DFARS), as applicable, then in effect that apply to software developed entirely at private expense. IV. The OEM Sublicensee will agree not to export or reexport any Bundled Products or any part thereof or information pertaining thereto any country for which a U.S. government agency requires an export license or other governmental approval without first obtaining such license or approval. V. The OEM Sublicensee will agree that, except for the limited licenses granted under the license agreement, OEM and its licensors will retain full and exclusive right, title and ownership interest in and to the Bundled Products and in any and all related patents, trademarks, copyrights or proprietary or trade secret rights. VI. OEM will have the right to terminate the license for the OEM Sublicensee's breach of a material term. The OEM Sublicensee will agree that, upon termination of the license, the OEM Sublicensee will return to OEM all copies of the object code and documentation for the Bundled Products or certify to OEM that the OEM Sublicensee has destroyed all such copies, except that the OEM Sublicensee may retain one (1) copy of the object code for the Bundled Products solely for the purpose of supporting the OEM Sublicensee's existing licensees. VII. The OEM Sublicensee will agree not to reverse compile, disassemble or modify the Bundled Product. - 9 - 54177.3 VIII. The OEM Sublicensee will agree not to distribute the Bundled Product or any part thereof except pursuant to a license agreement meeting the requirements in Section 6.3 of the Agreement. IX. The sublicense agreement will state that in no event will OEM or its licensors be liable for indirect, incidental, special, consequential or exemplary damages arising out of or related to the Bundled Product, including but not limited to lost profits, business interruption or loss of business information, even if such party has been advised of the possibility of such damages. - 10 - 54177.3 Exhibit A Extension Number:________________________________ Date of this Exhibit A Extension:__________________________
EXHIBIT "A-2" EXHIBIT A (LICENSE/PRODUCT SCHEDULE) EXTENSION OEM: APPROVED: Virtual Open Network Environment Corp. -------------------------------------- OEM: OEM Master License Agreement Number: VIRTUAL OPEN NETWORK ENVIRONMENT CORP. 1294-VON-O-MLA-1 -------------------------------------- By:______________________________________ Date of OEM Master License Agreement: Printed Name: ___________________________ December 30, 1994 ------------------------------------- Title:___________________________________ This Extension Extends License/Product Schedule Number: 0596-VON-O-LPS-3 -------------------------------------- RSA DATA DESCURITY, INC. Name and Jurisdiction of Incorporation of OEM Sublicensee: By:________________________________________ -------------------------------------- Printed Name:______________________________ Sublicensee Product which Incorporates Bundled Product: Title:_____________________________________ --------------------------------------
- 11 - 54177.3 CONVERSION AGREEMENT This Conversion Agreement ("Agreement") is made and entered into between Virtual Open Network Environment Corporation, a Delaware corporation with its principal offices at 1803 Research Boulevard, Rockville, Maryland 20850 ("V-ONE"), RSA Data Security, Inc., a Delaware corporation, with its principal offices at 100 Marine Parkway, Redwood City, California 94065 ("RSA"), and Massachusetts Institute of Technology, a corporation organized under the laws of the Commonwealth of Massachusetts, as a third party beneficiary, with its principal offices at 77 Massachusetts Avenue, Cambridge, Massachusetts 02139 ("MIT"). Recitals -------- WHEREAS, V-ONE has granted to RSA the option to convert the right to receive future license fees under the BSAFE/TIPEM OEM Master License Agreement (No. 1294-VON-O-MLA-1), originally dated as of December 30, 1994 and subsequently amended ("License Agreement"), between them into an equity interest in V-ONE, and WHEREAS, RSA has granted to MIT the right to receive 7.2% of the royalties received by RSA under the License Agreement, and WHEREAS, V-ONE proposes to issue to RSA 243,690 shares of its common stock, which number of shares is equal to 1.856% of V-ONE's currently issued and outstanding voting securities on an as-converted basis, and to issue to MIT 18,907 shares of its common stock, which number of shares is equal to 0.144% of V-ONE's currently issued and outstanding voting securities on an as-converted basis, and to deliver promptly a certificate representing such shares, and WHEREAS, V-ONE proposes to issue to RSA additional shares of its common stock equal to 1.856% of all additional issuances of voting securities, on an as-converted basis, that take place on or before the effective date of the registration statement for V-ONE's initial public offering, and to issue to MIT additional shares of its common stock equal to 0.144% of all additional issuances of voting securities, on an as- converted basis, that take place on or before the effective date of the registration statement for V-ONE's initial public offering, each issuance to be reduced by the number of any such shares that are repurchased by V- ONE prior to such effective date, and to deliver promptly a certificate or certificates representing such shares, and WHEREAS, RSA desires to exercise its option to convert its right to receive future license fees under the License Agreement into an equity interest in V-ONE, and WHEREAS, RSA desires to receive shares of V-ONE common stock in satisfaction of V-ONE's obligation to pay future license fees to RSA, and to have V-ONE issue shares of V-ONE common stock to MIT in satisfaction of - 12 - 54177.3 RSA's obligation to pay MIT 7.2% of the royalties received by RSA from V- ONE, and WHEREAS, MIT desires to receive shares of V-ONE common stock in satisfaction of RSA's obligation to pay MIT an amount of 7.2% of the royalties received by RSA from V-ONE; NOW, THEREFORE, in consideration of the covenants and agreements herein contained, and intending to be legally bound hereby, V-ONE, RSA and MIT agree as follows: 1. RSA exercises the option granted to RSA to convert the right to receive future license fees under the BSAFE/TIPEM OEM Master License Agreement (No. 1294-VON-O-MLA-1), originally dated as of December 30, 1994 and subsequently amended, between them into an equity interest in V-ONE as of the date set forth below. 2. V-ONE agrees to issue to RSA 243,690 shares of its common stock, which number of shares is equal to 1.856% of V-ONE's currently issued and outstanding voting securities on an as-converted basis, and to issue to MIT 18,907 shares of its common stock, which number of shares is equal to 0.144% of V-ONE's currently issued and outstanding voting securities on an as-converted basis, and to deliver promptly a certificate representing such shares. 3. V-ONE agrees to issue to RSA additional shares of its common stock equal to 1.856% of all additional issuances of voting securities, on an as-converted basis, that take place on or before the effective date of the registration statement for V-ONE's initial public offering, and to issue to RSA additional shares of its common stock equal to 0.144% of all additional issuances of voting securities, on an as-converted basis, that take place on or before the effective date of the registration statement for V-ONE's initial public offering, each issuance to be reduced by the number of any such shares that are repurchased by V-ONE prior to such effective date, and to deliver promptly a certificate or certificates representing such shares. 4. RSA is a key licensor to V-ONE. MIT is a third party beneficiary of the License Agreement and this Agreement. RSA and MIT are aware of V-ONE's business affairs and financial condition, are accredited investors for purposes of the Securities Act of 1933, as amended ("Securities Act"), and have acquired sufficient information about V-ONE to reach an informed and knowledgeable decision to exercise the conversion option and acquire the common stock as herein provided. In making their decision, RSA and MIT are not relying on representations of any officer, director, stockholder or agent of the Company. RSA is exercising the conversion option and acquiring the common stock for its own account for investment purposes only and not with a view to, or for the resale in connection with any "distribution" thereof for purposes of the Securities Act. MIT is entering into this Agreement as a third party beneficiary of the License Agreement and this Agreement and is acquiring the common stock for its own account for investment purposes only and not with a view to, - 13 - 54177.3 or for the resale in connection with any "distribution" thereof for purposes of the Securities Act. 5. RSA and MIT understand and acknowledge that the common stock to be issued upon exercise of the conversion option will be issued pursuant to an exemption from the registration provisions of the Securities Act, that they may be required to hold such shares indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available, that such common stock will be "restricted stock" as that term is defined in Rule 144 under the Securities Act and will be subject to that Rule, and that the certificates for such shares will be so legended. RSA and MIT understand and acknowledge that V-ONE is under no obligation to register the common stock for sale under the Securities Act. IN WITNESS WHEREOF, V-ONE, RSA, and MIT, as a third party beneficiary, have entered this Conversion Agreement as of the Effective Date set forth below. Virtual Open Network RSA Data Security, Inc. Environment Corporation By: /s/ Bob Raybicki By: /s/ D. James Bidzos -------------------- ------------------- Name: Bob Raybicki Name: D. James Bidzos Title: Vice President Title: President Massachusetts Institute of Technology By: /s/ John H. Turner, Jr. ----------------------- Name: John H. Turner, Jr. Title: Assistant Director Technology Licensing Office Effective Date: 05/23/96 - 14 - 54177.3 EX-10.12 21 Promissory Note --------------- V-ONE hereby acknowledges that Scientek Corporation has agreed to lend the sum of $330,000 to V-ONE corporation. This loan will be delivered as soon as possible. The principal loan amount shall bear no interest and shall be due on the anniversary date of this agreement. As further consideration for the aforementioned loan, Mr. James Chen, President of V-ONE corporation will transfer 23,000 shares of V-ONE stocks over from his personal account. The transfer shall occur immediately after the repayment of the loan. /s/ James F. Chen ------------------------- James F. Chen President V-ONE Corporation ALLONGE AND AMENDMENT TO PROMISSORY NOTE THIS ALLONGE AND AMENDMENT TO PROMISSORY NOTE ("Amendment") is made this 12th day of June, 1996, by and between HAI HUA CHENG ("Mr. Cheng") and VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION ("V-ONE"). WHEREAS, on June 1, 1995, V-ONE executed that certain Promissory Note ("Note") with a term of one year in favor of Scientek Corporation ("Scientek") in the original principal amount of Three Hundred Thirty Thousand and No Hundredths Dollars ($330,000.00); WHEREAS, the Note obligated James F. Chen, the president of V-ONE ("President"), to transfer 23,000 old shares of the common stock of V-ONE ("Old Shares") to Scientek in consideration for the loan immediately upon satisfaction of the Note; WHEREAS, prior and subsequent to the execution of the Note, Scientek, the President, and V-ONE intended for the Old Shares to be issued by V-ONE and not by the President; WHEREAS, on November 13, 1995, each Old Share was split into 10 new shares of common stock of V-ONE ("New Shares"); WHEREAS, for valuable consideration Scientek assigned its rights, title, and interest in the Note to Mr. Cheng; WHEREAS, as further consideration for the Note, V-ONE issued 115,000 New Shares to a voting trust for the benefit of Mr. Cheng; WHEREAS, on May 17, 1996, Mr. Cheng agreed to extend the term of the Note to May 31, 1997; WHEREAS, in consideration for Mr. Cheng's agreement not to demand payment of the Note until after the public offering of New Shares, V-ONE offered Mr. Cheng the option of receiving New Shares in lieu of cash as full consideration for the principal amount of the Note, the value of each such New Share to be determined by reference to the price of a New Share on April 26, 1996; and WHEREAS, V-ONE and Mr. Cheng desire to amend the terms of the Note (i) to reflect the assignment of Scientek's rights, title, and interest therein to Mr. Cheng, (ii) to extend the Note's term, and (iii) to modify certain other terms of the Note, all as more particularly set forth herein. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, V-ONE and Mr. Cheng hereby agree that the Note shall be amended as follows: 1. PRINCIPAL The outstanding principal balance of the Note is $330,000.00. 2. PARTIES The obligor under the Note shall remain V-ONE. The obligee under the Note shall be Mr. Cheng. 3. TERM The Note shall become due and payable on May 31, 1997. 4. TRANSFER OF SHARES V-ONE shall transfer 230,000 New Shares to Mr. Cheng immediately upon repayment of the outstanding balance of the Note. 5. ELECTION REGARDING PAYMENT OF PRINCIPAL At Mr. Cheng's election, on or prior to May 31, 1997, V-ONE shall transfer to Cheng an amount of cash sufficient to satisfy the then outstanding balance of the Note, or a sufficient number of New Shares that, in the aggregate, equal the then outstanding balance of the Note at $3.00 per New Share. 6. REAFFIRMATION; RENEWAL; NO NOVATION V-ONE hereby ratifies, confirms and renews its obligations under the Note, and promises to pay and perform all of such obligations, as modified by this Amendment. V-ONE hereby reaffirms all of its representations, covenants and warranties set forth in the Note. The execution and delivery of this Amendment does not constitute a novation of the debt evidenced by the Note. All references in the Note to the term "loan" shall mean the Note as amended hereby. EXCEPT AS EXPRESSLY MODIFIED HEREBY, all of the terms, covenants and conditions of the Note remain in full force and effect. - 2 - IN WITNESS WHEREOF, the parties hereto have placed their respective hands and seals as of the date first above written. By: /s/ James F. Chen, President ------------------------------------ (SEAL) JAMES F. CHEN, PRESIDENT, VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION By: /s/ Hai Hua Cheng ------------------------------------ HAI HUA CHENG - 3 - EX-10.13 22 EXCHANGE AND PURCHASE AGREEMENT This Exchange and Purchase Agreement ("Agreement") is entered into this _____ day of April, 1996 by and between Virtual Open Network Environment Corporation ("V-ONE"), a Delaware Corporation and _________________________________________ ("Investor"). Recitals WHEREAS, V-ONE borrowed $2.5 million in the aggregate through the sale of interest-bearing, unsecured Promissory Notes ("Notes") to fourteen investors ("Investors") in December 1995 and January 1996 ("Offering"), and WHEREAS, pursuant to a Purchase Agreement between Investor and V-ONE dated ___________________ ("Purchase Agreement"), Investor purchased an interest-bearing, unsecured Promissory Note from V-ONE in the amount of _____________, payable in full by V-ONE on June 30, 1996 ("Note"), as part of the Offering, and WHEREAS, V-ONE proposes to repay the full amount of the Notes and accrued interest thereon by transferring to Investors whole shares of V-ONE Series A Convertible Preferred Stock ("Preferred Stock"), valued at a price of $3.00 per share, in exchange for the Notes, and paying cash to Investors in an amount equal to the value of any fractional shares of Preferred Stock to be transferred to Investors in exchange for the Note and accrued interest thereon, and WHEREAS, V-ONE proposes to offer to those Investors who exchange their Notes for shares of Preferred Stock, an additional 333,333 shares of Preferred Stock, at a price of $3.00 per share, based upon Investors' pro-rata interest in the Offering, and WHEREAS, Investor desires to receive shares of Preferred Stock in exchange for the Note, in repayment of the full amount of the Note and the accrued interest thereon, and to receive cash in lieu of any fractional shares or Preferred Stock, and WHEREAS, Investor desires to subscribe for the number of shares of Preferred Stock set forth on lines three and four of the signature page of this Agreement; NOW, THEREFORE, in consideration of the promises set forth herein, the parties hereby covenant and agree as follows: SECTION 1 Exchange and Sale of Preferred Stock ------------------------------------ 1.1. Investor agrees to deliver the Note to V-ONE and to accept in full payment of the Note and accrued interest thereon calculated up to and including the closing date hereunder a) the number of shares of Preferred Stock set forth on the signature page of this Agreement, and, if applicable, b) the amount in cash set forth on line two of the signature page of this Agreement, which shall be the amount to be received by Investor in lieu of any fractional shares of Preferred Stock. 1.2. Contingent upon Investor's exchange of the Note for shares of Preferred Stock, Investor subscribes for the number of shares of Preferred Stock set forth on the signature page of this Agreement, on the terms and conditions described herein. The number of shares of Preferred Stock initially allocated to Investor or to be made available to Investor in the event that all Investors do not purchase their full allocation of shares, shall be in the same proportion as the Investor's Note bears to the $2.5 million of Notes in the Offering. Investor is entitled to an amount of any such additional shares at least equal to his pro-rata portion, but may subscribe for any amount ranging from "none" to "all available." Investor must indicate such amount on line four of the signature page. Investor will not be apportioned a greater number of shares of Preferred Stock than subscribed for on lines three and four of the signature page of this Agreement and for which payment is timely received by V-ONE. SECTION 2 Closing Dates; Delivery ----------------------- 2.1. The exchange and purchase and sale of the Preferred Stock shall take place at a closing ("Closing") to be held at the offices of V- ONE on April ___, 1996, or on such other date as mutually agreed upon by V-ONE and Investor. 2.2. Not less than two (2) days prior to Closing, Investor will deliver to V-ONE an executed copy of this Agreement, accompanied by the Note and, if applicable, a check payable to V-ONE for the number of shares of Preferred Stock (indicated on line three of the signature page), at a price of $3.00 per share, equal to Investor's pro-rata interest in the Offering. 2.3. Immediately prior to the Closing, V-ONE will apportion any shares of Preferred Stock that are not initially allocated among those Investors who have subscribed for additional shares on the signature page of this Agreement and notify such Investors of the number of additional shares of Preferred Stock to be allocated to them. Investor must deliver payment for the additional shares to V-ONE at the Closing. 2.4. At the Closing, V-ONE will: (a) accept delivery of Investor's Note; (b) deliver to Investor a certificate in Investor's name representing the shares of Preferred Stock issued in payment of the principal amount of the Note and interest thereon calculated up to and including the date of Closing; - 2 - (c) deliver to Investor its check payable to Investor equal to the value of any fractional shares of Preferred Stock to be transferred to Investor in exchange for the Note and accrued interest thereon; (d) accept Investor's subscription for the number of shares of Preferred Stock initially allocated to Investor and for which payment was received by V-ONE; and (e) accept payment for any additional shares allocated to Investor by V-ONE. 2.5. Not more than five (5) days after the Closing, V-ONE will deliver to Investor a certificate in Investor's name representing the additional shares of Preferred Stock allocated to Investor. SECTION 3 Representations, Warranties, and Covenants of V-ONE and Investor ---------------------------------------------- 3.1. V-ONE Represents, Warrants and Covenants: ----------------------------------------- 3.1.1. V-ONE is a corporation duly organized and existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. V-ONE has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. V-ONE is presently qualified to do business as a foreign corporation in each jurisdiction where the failure to be so qualified would have a material adverse effect on V-ONE's business as now conducted or as now proposed to be conducted. 3.1.2. The authorized capital stock of V-ONE consists of 50,000,000 shares of Common Stock, of which 11,926,641 are issued and outstanding, and 20,000,000 shares of Preferred Stock. 1,183,402 shares of Preferred Stock have been designated "Series A Convertible Preferred Stock," none of which are issued and outstanding prior to the date of the Closing. The outstanding shares have been duly authorized and validly issued in compliance with applicable securities laws, and are fully paid and nonassessable. V-ONE has reserved all 1,183,402 shares of Series A Convertible Preferred Stock for issuance hereunder. The Common and Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in the Certificate. 3.1.3. All corporate action on the part of V-ONE, its directors and stockholders necessary for the authorization, execution and delivery of this Agreement by V-ONE, the authorization, sale, issuance and delivery of the Preferred Stock and the performance of V-ONE's obligations under this Agreement has been taken or will be taken prior to the Closing. The Agreement, when executed and delivered by V-ONE, shall constitute valid and binding obligations of V-ONE, enforceable in accordance with its - 3 - terms. The shares of Preferred Stock, when issued in compliance with the provisions of this Agreement, will be validly issued, will be fully paid and nonassessable, and will have the rights, preferences and privileges described in the Certificate, and will be free of any liens or encumbrances, other than any liens or encumbrances created by or imposed upon Investor; provided, however, that shares of Preferred Stock are subject to restrictions on transfer under state and/or federal securities laws as set forth herein. The shares of Preferred Stock are not subject to any preemptive rights or rights of first refusal. 3.1.4. V-ONE makes no representation or warranty as to the minimum amount of any subscription or capital investment it may require and reserves the right to treat the shares of Preferred Stock as finally sold and to retain the purchase price for the Preferred Stock provided herein without regard to the amount of subscriptions. 3.2. Investor Represents, Warrants and Covenants: -------------------------------------------- 3.2.1. Investor represents that no events have occurred since the date of the Purchase Agreement that have altered Investor's representation that he or she was an accredited investor at that time, and Investor is, and remains, an accredited investor, as defined in the federal securities laws. 3.2.2. Investor acknowledges that he or she has been provided with and has carefully read a copy of the V-ONE Corporation Business Plan dated March 1996, V-ONE's 1995 Annual Report, balance sheets of V-ONE as of December 31, 1994 and 1995 and the related statements of operations, stockholders' equity and cash flows for the period from February 16, 1993 (date of inception) to December 31, 1993 and for the years ended December 31, 1994 and 1995, and unaudited balance sheets for January and February of 1996 ("Financial Statements"), and a copy the Certificate of Designation, Preferences, and Rights of Series A Convertible Preferred Stock of V-ONE. 3.2.3. Investor represents and affirms that he or she has prior investment experience, including investments in unregistered securities, recognizes the highly speculative nature of this investment and is able to bear the economic risk of such an investment. 3.2.4. The shares of Preferred Stock are being purchased for Investor's own account, for investment purposes only, and not with a view to the sale and distribution thereof, in whole or in part. 3.2.5. Investor acknowledges that shares of Preferred Stock must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. Investor is aware of the provisions of Rule 144 promulgated under the Securities Act (as defined below) which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about V-ONE, the resale occurring not less than two years - 4 - after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three-month period not exceeding specified limitations. 3.2.6. Investor has either: (a) employed the services of an investment adviser, attorney or accountant who has read the Business Plan and who is qualified by training and experience in business and financial matters to evaluate the merits and risks of purchasing the Notes; or (b) had the opportunity to seek the advice of such an investment adviser, attorney, or accountant with respect to this matter and has willingly and consciously chosen not to seek such advice. 3.2.7. Investor and his or her investment adviser, attorney and accountant, if any, have been furnished, during the course of this transaction, with all the information regarding V-ONE which any of them has requested or desired; all documents which could be reasonably provided have been made available for inspection and review by Investor or his or her advisers. 3.2.8. Investor acknowledges that V-ONE is relying upon Investor's representations as to Investor's accredited investor status and Investor's ability to read and understand information supplied herein, in determining Investor's suitability as an investor and in making the decision to enter in this Agreement with Investor. Accordingly, Investor represents and covenants that the information supplied herein is complete, does not omit any material item, and is true, accurate and correct in all respects. SECTION 4 Restrictions on Transferability of Securities; Compliance with Securities Act; Registration Rights --------------------------------------------------- 4.1. The Preferred Stock shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Section 4. Investor will cause any proposed purchaser, assignee, transferee, or pledgee of any such shares held by Investor to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 4. 4.2. As used in this Agreement, the following terms shall have the following respective meanings: "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "REGISTRATION SHARES" shall mean shares of Preferred Stock and any shares issued in respect of the Preferred Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event of V-ONE. - 5 - "RESTRICTED SECURITIES" shall mean the securities of V-ONE required to bear the legend in Section 4.3. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 4.3. The certificates representing Preferred Stock and any other securities issued in respect of the Preferred Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 4.4 below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under any other agreement between Investor and V-ONE or under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND ARE NOT THE SUBJECT OF A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SAID ACT. Investor consents to V-ONE making a notation on its records and giving instructions to any transfer agent of the Preferred Stock in order to implement the restrictions on transfer established in this Section 4. 4.4. The holder of Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 4.4. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities (other than (i) a transfer not involving a change in beneficial ownership, (ii) in transactions involving the distribution without consideration of Restricted Securities by Investor to any of its partners, or retired partners or to the estate of any of its partners or retired partners, or (iii) in transactions in compliance with Rule 144), and unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to V-ONE of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied, at such holder's expense by either (i) a written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to V-ONE addressed to V-ONE, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the - 6 - terms of the notice delivered by the holder to V-ONE. Any certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 4.3 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for such holder and V-ONE such legend is not required in order to establish compliance with any provision of the Securities Act. 4.5. Registration Right. ------------------ (a) Demand Registration Right on Two Occasions ------------------------------------------ (i) Pursuant to this Section 4.5, V-ONE will provide Investors as a group and not individually, subject to underwriter approval, with a right to register Registration Shares in underwritten offerings on two occasions. Investor may exercise this right at any time commencing the date of Closing and ceasing on the second anniversary thereof, unless the holding period under Rule 144 shall be shorter, by giving notice to V-ONE that Investor desires to have the Registration Shares registered for sale under the Securities Act. Upon receipt of such notice, on two and only two occasion, V-ONE promptly will file a registration statement with the Commission so that the Registration Shares may be publicly sold as promptly as practical thereafter and V-ONE will use its best efforts to cause such registration statement to be declared effective by the Commission promptly. (ii) Within ten days after receiving any such notice, V-ONE shall give notice to all other Investors advising that V-ONE is proceeding with such registration statement and offering to include shares of the other Investors provided that they notify V-ONE within ten days of receipt of such notice that they desire to have their shares included in such registration rights. (iii) If Form S-3 (or its successor) is available for the offering of the Registration Shares, then V-ONE will, promptly after receipt of such notice from Investor, file a registration statement on Form S-3 under the same procedures set forth above and shall use its best efforts to cause such registration statement to be declared effective by the Commission and to remain effective for a period of one year. (iv) In connection with such underwriting, V-ONE shall execute an appropriate underwriting agreement in customary form and supply prospectuses to the Investors and shall use its best efforts to register and qualify the Registration Shares for sale in such states as the Investors shall reasonably request ("States"). The two-time registration right provided for in this Section 4.5 shall not be deemed to be satisfied if V-ONE (alone and not in conjunction with a determination by the managing underwriter) unilaterally determines not to include any portion of the Registration Shares in a registration statement filed pursuant to this Section. - 7 - (v) V-ONE shall bear all expenses relating to the filing of a registration statement relating to the Registration Shares and the States, except for underwriting discounts or commissions and shall have the right to approve any underwriter, investment broker or adviser retained by an Investor to effect a distribution of the Registration Shares, which approval shall not be unreasonably withheld. Notwithstanding anything to the contrary set forth herein, V-ONE may postpone the filing of the registration statement for a period not to exceed ninety days if the postponement will avoid the necessity of preparing audited financial statements as of a date other than the end of a fiscal year or the Chief Executive Officer of V-ONE determines in good faith that the postponement is necessary to avoid serious jeopardy to V- ONE, any significant business prospect of V-ONE or the security holders of V-ONE considered as a group. (b) Piggyback Registration Rights. ------------------------------ (i) If V-ONE determines that it will file a registration statement, at any time after the date of Closing, for any public offering of shares of Preferred Stock, either for its own account or the account of any security holder, V-ONE shall give written notice to all Investors, at least (30) days in advance of filing such registration statement, that such filing is expected to be made. Upon the written request of any of the Investors received by V-ONE at least fifteen (15) days in advance of the filing, and subject to the limitations set forth in this Section 4.5(b), V-ONE shall include in such registration statement Registration Shares for the purpose of registering such Registration Shares for sale by or for the account of such Investors. (ii) V-ONE shall have exclusive control over the filing, amending, withdrawal and other actions regarding such registration statement. V-ONE shall have no obligation to give notice to any Investors with respect to the filing of, or to include any shares for any Investors in, any registration statement on Form S-4 or Form S-8 (or successor forms thereto) or on any other form that does not include substantially the same information or is not in substantially the same format as would be required for a registration statement for a sale of shares by Investors. SECTION 5 Miscellaneous ------------- 5.1. Notwithstanding the place where this Agreement may be executed by Investor, all the terms and provisions hereof shall be construed in accordance with and governed by the internal laws of the State of Delaware. 5.2. This Agreement constitutes the entire agreement of Investor and V-ONE with respect to the subject matter hereof and may be amended only by a writing executed by Investor and V-ONE. This Agreement shall - 8 - inure to the benefit of and be binding upon each of the parties hereto and their respective heirs and legal representatives. 5.3. Neither this Agreement nor any term or provision hereof shall be modified, changed, discharged or terminated except by an instrument in writing signed by the party against whom any modification, change, discharge or termination is sought to be enforced. 5.4. This Agreement and the rights provided for herein may not be transferred or assigned by Investor. Any attempted assignment of this Agreement shall be null and void. All rights and obligations of Investor shall survive Investor's death, permanent incapacitation, bankruptcy, insolvency or dissolution. * * * Please review the following Notices concerning state securities laws. NOTICE TO NEW YORK RESIDENTS ---------------------------- THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. NOTICE TO FLORIDA RESIDENTS --------------------------- THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE FLORIDA SECURITIES ACT. EACH FLORIDA RESIDENT HAS THE RIGHT, PURSUANT TO FLORIDA STATUTES SECTION 517.061, TO VOID A PURCHASE OF THESE SECURITIES WITHIN THREE(3) DAYS AFTER THE TENDER OF A SUBSCRIPTION AND THE CONSIDERATION THEREFOR. NOTICE TO TEXAS RESIDENTS ------------------------- THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE TEXAS SECURITIES ACT, TEXAS STATUTES, ARTICLE 581 AND ARE OFFERED AND SOLD PURSUANT TO AN EXEMPTION THEREFROM. THE SECURITIES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER THE TEXAS SECURITIES ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN COMPLIANCE WITH SUCH ACT. NOTICE TO NEW JERSEY RESIDENTS ------------------------------ THESE SECURITIES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION FROM REGISTRATION UNDER SECTION 49:3-50(b)(9) OF THE NEW JERSEY UNIFORM SECURITIES LAWS AND HAVE NOT BEEN REGISTERED UNDER THE NEW JERSEY UNIFORM SECURITIES LAW. THE SECURITIES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER THE NEW JERSEY UNIFORM SECURITIES LAW OR - 9 - PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAW OR IN A TRANSACTION WHICH IS OTHERWISE IN COMPLIANCE WITH SUCH LAW. NOTICE TO CONNECTICUT RESIDENTS ------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE BANKING COMMISSIONER OF THE STATE OF CONNECTICUT NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. NOTICE TO PENNSYLVANIA RESIDENTS -------------------------------- THESE SECURITIES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION FROM REGISTRATION UNDER SECTION 203(D) OF THE PENNSYLVANIA SECURITIES ACT AND HAVE NOT BEEN REGISTERED UNDER THE PENNSYLVANIA SECURITIES ACT. THE SECURITIES CANNOT BE SOLD OR TRANSFERRED FOR TWELVE MONTHS AFTER THE DATE OF PURCHASE, EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SECTION 204.011 OF THE PENNSYLVANIA SECURITIES ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN COMPLIANCE WITH SUCH ACT. WITHIN TWO (2) BUSINESS DAYS FROM THE DATE OF RECEIPT BY V-ONE OF YOUR WRITTEN, BINDING PURCHASE AGREEMENT, YOU MAY ELECT TO WITHDRAW FROM YOUR PURCHASE AGREEMENT AND RECEIVE A FULL REFUND OF ALL MONIES PAID BY YOU. YOUR WITHDRAWAL WILL BE WITHOUT ANY FURTHER LIABILITY TO ANY PERSON. TO ACCOMPLISH THIS WITHDRAWAL, YOU NEED ONLY SEND A LETTER OR TELEGRAM TO THE CORPORATION INDICATING YOUR INTENTION TO WITHDRAW. SUCH LETTER OR TELEGRAM MUST BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED SECOND BUSINESS DAY. IF YOU ARE SENDING A LETTER, IT IS PRUDENT TO SENT IT BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ENSURE THAT IT IS RECEIVED AND ALSO TO EVIDENCE THE TIME WHEN IT WAS MAILED. IF YOU MAKE THIS REQUEST ORALLY, YOU SHOULD ASK FOR AND OBTAIN WRITTEN CONFIRMATION THAT YOUR REQUEST HAS BEEN RECEIVED. NOTICE TO SOUTH CAROLINA RESIDENTS ---------------------------------- IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAW, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. - 10 - IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the __ day of ______, 1996. NUMBER OF SHARES IN EXCHANGE FOR NOTE AND ACCRUED INTEREST Line 1. _____________________ CASH PAYMENT IN LIEU OF FRACTIONAL SHARES Line 2. $ ____________________ PRO-RATA MINIMUM NUMBER OF SHARES AVAILABLE TO INVESTOR Line 3. _____________________ MAXIMUM NUMBER OF ADDITIONAL SHARES WILLING TO SUBSCRIBE FOR AT $3.00 PER SHARE Line 4. _____________________ VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION by _________________________________________ James F. Chen, President ____________________________________________ Investor (Signature) ____________________________________________ Investor (Printed Name) - 11 - EX-10.14 23 REGISTRATION RIGHTS AGREEMENT June 18, 1996 JMI Equity Fund II, L.P. 1119 St. Paul St. Baltimore, MD 21202 Dear Sirs: This will confirm that in consideration of your agreement on the date hereof to purchase Common Stock Purchase Warrants for the purchase of an aggregate of 500,000 shares of Common Stock, $.001 par value (the "Warrant Shares"), of Virtual Open Network Environment Corporation, a Delaware corporation (the "Company"), pursuant to the Senior Subordinated Note and Warrant Purchase Agreement of even date herewith (the "Purchase Agreement") between the Company and you as purchaser thereunder (the "Purchaser") and as an inducement to you to consummate the transactions contemplated by the Purchase Agreement, the Company covenants and agrees with each of you as follows: 1. Certain Definitions. As used in this Agreement, the following terms have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "Common Stock" means the Common Stock, $.001 par value, of the Company, as constituted as of the date of this Agreement. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Registration Expenses" means the expenses described in Section 8 of this Agreement. "Restricted Stock" means the Warrant Shares, excluding Warrant Shares that (a) have been registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them, (b) have been publicly sold pursuant to Rule 144 under the Securities Act, or (c) may be sold within the volume limitations of Rule 144(e) under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Registration Rights Agreement - 2 "Selling Expenses" means the expenses described in Section 8 of this Agreement. 2. Restrictive Legend. Each certificate representing Warrant Shares shall, except as otherwise provided in this Section 2 or in Section 3, be stamped or otherwise imprinted with a legend substantially in the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE WITH RESPECT THERETO, AS DEMONSTRATED BY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY. A certificate shall not bear such legend if in the opinion of counsel satisfactory to the Company (it being agreed that Testa, Hurwitz & Thibeault, LLP shall be satisfactory) the securities represented thereby may be publicly sold without registration under the Securities Act and any applicable state securities laws. 3. Notice of Proposed Transfer. Prior to any proposed transfer of any Warrant Shares (other than under the circumstances described in Sections 4, 5 or 6), the holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel satisfactory to the Company (it being agreed that Testa, Hurwitz & Thibeault, LLP shall be satisfactory) to the effect that the proposed transfer may be effected without registration under the Securities Act and any applicable state securities laws, whereupon the holder of such stock shall be entitled to transfer such stock in accordance with the terms of its notice. Each certificate for Warrant Shares transferred as above provided shall bear the legend set forth in Section 2, except that such certificate shall not bear such legend if (i) such transfer is in accordance with the provisions of Rule 144 (or any other rule permitting public sale without registration under the Securities Act) or (ii) the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. The restrictions provided for in this Section 3 shall not apply to securities that are not required to bear the legend prescribed by Section 2 in accordance with the provisions of that Section. 4. Required Registration. (a) At any time after six months after any registration statement covering a public offering of Registration Rights Agreement - 3 securities of the Company under the Securities Act shall have become effective, Purchaser may request the Company to register under the Securities Act all or any portion of the shares of Restricted Stock held by Purchaser for sale in the manner specified in such notice, provided that the reasonably anticipated aggregate price to the public of such public offering would exceed $500,000. Notwithstanding anything to the contrary contained herein, no request may be made under this Section 4 within 120 days after the effective date of a registration statement filed by the Company covering a firm commitment underwritten public offering in which the holders of Restricted Stock shall have been entitled to join pursuant to Sections 5 or 6 and in which there shall have been effectively registered all shares of Restricted Stock as to which registration shall have been requested. (b) Following receipt of any notice under this Sec- tion 4, the Company shall immediately notify all holders of Restricted Stock from whom notice has not been received and shall use its best efforts to register under the Securities Act, for public sale in accordance with the method of disposition specified in such notice from requesting holders, the number of shares of Restricted Stock specified in such notice (and in all notices received by the Company from other holders within 30 days after the giving of such notice by the Company). If such method of disposition shall be an underwritten public offering, the holders of a majority of the shares of Restricted Stock to be sold in such offering may designate the managing underwriter of such offering, subject to the approval of the Company, which approval shall not be unreasonably withheld or delayed. The Company shall be obligated to register Restricted Stock pursuant to this Section 4 on one occasion only, provided, however, that such obligation shall be deemed satisfied only when a registration statement covering all shares of Restricted Stock specified in notices received as aforesaid, for sale in accordance with the method of disposition specified by the requesting holders, shall have become effective and, if such method of disposition is a firm commitment underwritten public offering, all such shares shall have been sold pursuant thereto (other than shares, if any, that may be sold in the underwriters' overallotment option). (c) The Company shall be entitled to include in any registration statement referred to in this Section 4, for sale in accordance with the method of disposition specified by the requesting holders, shares of Common Stock to be sold by the Company for its own account, except as and to the extent that, in the opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering), such inclusion would adversely affect the marketing of the Restricted Stock to be sold. Except for registration statements on Form S-4, S-8, a combination S-8/S-3 relating to the resale of shares issued under a stock plan only, or any successor thereto, the Company will not file with the Commission any other registration statement with respect to its Common Stock, whether for its own account or that of other stockholders, from the date of receipt of a notice from requesting holders pursuant to this Section 4 until the completion of the period of distribution of the registration contemplated thereby. Registration Rights Agreement - 4 5. Incidental Registration. If the Company at any time (other than pursuant to Section 4 or Section 6 or in the Company's initial public offering) proposes to register any of its securities under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Forms S-4, S-8, a combination S-8/S-3 relating to the resale of shares issued under a stock plan only, or another form not available for registering the Restricted Stock for sale to the public), each such time it will give written notice to all holders of out- standing Restricted Stock of its intention so to do. Upon the written request of any such holder, received by the Company within 30 days after the giving of any such notice by the Company, to register any of its Restricted Stock, the Company will use its best efforts to cause the Restricted Stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the holder of such Restricted Stock so registered. In the event that any registration pursuant to this Section 5 shall be, in whole or in part, an underwritten public offering of Common Stock, the number of shares of Restricted Stock to be included in such an underwriting may be reduced (pro rata among the requesting holders based upon the number of shares of Restricted Stock owned by such holders) if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein, provided, however, that such number of shares of Restricted Stock shall not be reduced if any shares are to be included in such underwriting for the account of any person other than the Company or requesting holders of Restricted Stock. Notwithstanding the foregoing provisions, the Company may withdraw any registration statement referred to in this Section 5 without thereby incurring any liability to the holders of Restricted Stock. 6. Registration on Form S-3. If at any time (i) a holder or holders of at least 20% of the total shares of Restricted Stock then outstanding request that the Company file a registration statement on Form S-3 or any successor thereto for a public offering of all or any portion of the shares of Restricted Stock held by such requesting holder or holders, the reasonably anticipated aggregate price to the public of which would exceed $500,000, and (ii) the Company is a registrant entitled to use Form S-3 or any successor thereto to register such shares, then the Company shall use its best efforts to register under the Securities Act on Form S-3 or any successor thereto, for public sale in accordance with the method of disposition specified in such notice, the number of shares of Restricted Stock specified in such notice. Whenever the Company is required by this Section 6 to use its best efforts to effect the registration of Restricted Stock, each of the procedures and requirements of Section 4 (including but not limited to the requirement that the Company notify all holders of Restricted Stock from whom notice has not been received and provide them with the opportunity to participate in the offering) shall apply to such registration, provided, however, that there shall be no limitation on the number of registrations on Form S-3 which may be requested and obtained under this Section 6, and provided, further, Registration Rights Agreement - 5 however, that the requirements contained in the first sentence of Section 4(a) shall not apply to any registration on Form S-3 which may be requested and obtained under this Section 6. 7. Registration Procedures. If and whenever the Company is required by the provisions of Sections 4, 5 or 6 to use its best efforts to effect the registration of any shares of Restricted Stock under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 4, shall be on Form S-1 or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in paragraph (a) above and comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period; (c) furnish to each seller of Restricted Stock and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or other disposition of the Restricted Stock covered by such registration statement; (d) use its best efforts to register or qualify the Restricted Stock covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the sellers of Restricted Stock or, in the case of an underwritten public offering, the managing underwriter reasonably shall request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) use its best efforts to list the Restricted Stock covered by such registration statement with any securities exchange on which the Common Stock of the Company is then listed; (f) immediately notify each seller of Restricted Stock and each underwriter under such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has Registration Rights Agreement - 6 knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (g) if the offering is underwritten and at the request of any seller of Restricted Stock, use its best efforts to furnish on the date that Restricted Stock is delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such seller, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that pur- pose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus and each amendment or supplement thereof comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as to financial statements, schedules and other financial and statistical data contained therein) and (C) to such other effects as reasonably may be requested by counsel for the underwriters or by such seller or its counsel and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters and to such seller, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to such registration as such underwriters reasonably may request; and (h) make available for inspection by each seller of Restricted Stock, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. For purposes of Section 7(a) and 7(b) and of Sec- tion 4(c), the period of distribution of Restricted Stock in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Restricted Stock in any other registration shall be deemed to extend until the earlier of the sale Registration Rights Agreement - 7 of all Restricted Stock covered thereby and 90 days after the effective date thereof. In connection with each registration hereunder, the sel- lers of Restricted Stock will furnish to the Company in writing such information with respect to themselves and the proposed distribution by them as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration pursuant to Sec- tions 4, 5 or 6 covering an underwritten public offering, the Company and each seller agree to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature; provided, however, that the provisions of such agreement whereby each seller shall agree to indemnify other parties to such agreement shall not exceed or be broader in scope than the indemnification set forth in Section 9(b) hereof. 8. Expenses. All expenses incurred by the Company in complying with Sections 4, 5 and 6, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance and fees and disbursements of one counsel for the sellers of Restricted Stock, but excluding any Selling Expenses, are called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Restricted Stock are called "Selling Expenses." The Company will pay all Registration Expenses in con- nection with each registration statement under Sections 4, 5 or 6. All Selling Expenses in connection with each registration statement under Sections 4, 5 or 6 shall be borne by the participating sellers in proportion to the number of shares sold by each, or by such participating sellers other than the Company (except to the extent the Company shall be a seller) as they may agree. 9. Indemnification and Contribution. (a) In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Sections 4, 5 or 6, the Company will indemnify and hold harmless each seller of such Restricted Stock thereunder, each underwriter of such Restricted Stock thereunder and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue Registration Rights Agreement - 8 statement of any material fact contained in any registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such seller, any such underwriter or any such controlling person in writing specifically for use in such registration statement or prospectus. (b) In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Sections 4, 5 or 6, each seller of such Restricted Stock thereunder, severally and not jointly, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that such seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller, as such, furnished in writing to the Company by such seller specifically for use in such registration statement or prospectus, and provided, further, however, that the liability of each seller hereunder shall be limited to the pro- portion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the shares sold by such seller under such registration statement bears to the total public Registration Rights Agreement - 9 offering price of all securities sold thereunder, but not in any event to exceed the proceeds received by such seller from the sale of Restricted Stock covered by such registration statement. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 9 and shall only relieve it from any liability which it may have to such indemnified party under this Section 9 if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to parti- cipate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 9 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any holder of Restricted Stock exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for indemnification pursuant to this Section 9 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 9 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling holder or any such controlling person in circumstances for which indemnification is provided under this Section 9; then, and in each such case, the Company and such holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such holder is responsible for the portion Registration Rights Agreement - 10 represented by the percentage that the public offering price of its Restricted Stock offered by the registration statement bears to the public offering price of all securities offered by such registration statement, and the Company is responsible for the remaining portion; provided, however, that, in any such case, (A) no such holder will be required to contribute any amount in excess of the public offering price of all such Restricted Stock offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 10. Changes in Common Stock. If, and as often as, there is any change in the Common Stock by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with respect to the Common Stock as so changed. 11. Rule 144 Reporting. With a view to making avail- able the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Stock to the public without registration, at all times after 90 days after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act; (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to each holder of Restricted Stock forth- with upon request a written statement by the Company as to its compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such holder to sell any Restricted Stock without registration. 12. Representations and Warranties of the Company. The Company represents and warrants to you as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Charter or By-laws of the Company or any provision of any indenture, agreement or other instrument Registration Rights Agreement - 11 to which it or any or its properties or assets is bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. 13. Miscellaneous. ------------- (a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including without limitation transferees of any Restricted Stock), whether so expressed or not, provided, however, that registration rights conferred herein on the holders of Restricted Stock shall only inure to the benefit of a transferee of Restricted Stock if (i) there is transferred to such transferee at least 20% of the total shares of Restricted Stock originally issued pursuant to the Purchase Agreement to the direct or indirect transferor of such transferee or (ii) such transferee is a partner, shareholder or affiliate of a party hereto. (b) All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed as follows: if to the Company or any other party hereto, at the address of such party set forth in the Purchase Agreement; if to any subsequent holder of Restricted Stock, to it at such address as may have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been furnished in writing to the Company (in the case of a holder of Restricted Stock) or to the holders of Restricted Stock (in the case of the Company) in accordance with the provisions of this paragraph. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland. (d) This Agreement may not be amended or modified, and no provision hereof may be waived, without the written consent of the Company and the holders of at least two-thirds of the outstanding shares of Restricted Stock. Registration Rights Agreement - 12 (e) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) The obligations of the Company to register shares of Restricted Stock under Sections 4, 5 or 6 shall terminate on the earlier of the tenth anniversary of the date of this Agreement or the date when all shares of Restricted Stock may be sold without limitation pursuant to Rule 144(k) under the Securities Act. (g) Each holder of Restricted Stock who is a party to this Agreement shall agree not to sell publicly any shares of Restricted Stock or any other shares of Common Stock without the consent of such underwriters, for a period of not more than 180 days following the effective date of the registration statement relating to the Company's initial public offering. (h) Notwithstanding the provisions of Section 7(a), the Company's obligation to file a registration statement, or cause such registration statement to become and remain effective, shall be suspended for a period not to exceed 90 days in any 24-month period if there exists at the time material non-public information relating to the Company which, in the reasonable opinion of the Company, should not be disclosed. (i) The Company shall not grant to any third party any registration rights that would in any way hinder or prevent the exercise of your rights hereunder. (j) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. Registration Rights Agreement - 13 Please indicate your acceptance of the foregoing by signing and returning the enclosed counterpart of this letter, whereupon this Agreement shall be a binding agreement between the Company and you. Very truly yours, VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION By: /s/ James F. Chen ------------------------------ Title: President/CEO ------------------------------ AGREED TO AND ACCEPTED as of the date first above written. JMI EQUITY FUND II, L.P. By: JMI Partners II, L.P. Its General Partner By: /s/ Harry S. Gruner ------------------------------ General Partner EX-10.15 24 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE LAWS IS AVAILABLE WITH RESPECT THERETO, AS DEMONSTRATED BY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY. VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION 8% SENIOR SUBORDINATED NOTE DUE 2000 $1,500,000.00 June 18, 1996 FOR VALUE RECEIVED, Virtual Open Network Environment Corporation, a Delaware corporation (the "Company"), hereby promises to pay to the order of JMI Equity Fund II, L.P., or registered assigns (hereinafter referred to as the "Payee"), on or before June 18, 2000, the principal sum of One Million, Five Hundred Thousand Dollars ($1,500,000.00) or such part thereof as then remains unpaid and to pay interest from the date hereof on the whole amount of said principal sum remaining from time to time unpaid at the rate of eight percent (8%) per annum, such interest shall be payable quarterly in arrears on the last day of March, June, September and December in each year, the first such payment to be due and payable on September 30, 1996, and at maturity or prior prepayment of the Notes in full; provided, however, that if an Event of Default (as defined in the Agreement (defined below) has occurred and is continuing, from and after the date such Event of Default occurred the entire outstanding unpaid principal balance of this Note and any matured but unpaid interest from time to time due thereon shall bear interest, payable on demand, at the rate twelve percent (12%) per annum, or such lower rate as then may be the maximum rate permitted by applicable law; and further provided, however, that upon the cessation or cure of such Event of Default, if no other Event of Default is then continuing, this Note shall again bear interest at the rate of eight percent (8%) per annum. Principal and interest shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Payee or at such other place as the legal holder may designate from time to time in writing to the Company. Interest shall be computed on the basis of a 360-day year and a 30-day month, counting actual days elapsed. This Note is issued pursuant to, and is entitled to the benefits of, (i) the Senior Subordinated Note and Warrant Purchase Agreement dated as of June 18, 1996 between the Company and the Payee (as the same may be amended from time to time, hereinafter referred to as the "Agreement"), and (ii) the Subordination Agreement dated as of June 18, 1996 among the Company, the Payee, James F. Chen and Hai Hua Cheng (as the same may be amended from time to time, hereinafter referred to as the "Subordination Agreement"). Each holder of this Note, by his acceptance hereof, agrees to be bound by the provisions of the Agreement and the Subordination Agreement. Capitalized terms used but not otherwise defined in this Note shall have the meanings assigned to them in the Agreement. Payments of principal, interest and premium, if any, on this Note shall be made without setoff or counterclaim directly by check duly mailed or delivered to the Payee at its address referred to in Section 9.03 of the Agreement, without any presentment or notation of payment, except that prior to any transfer of this Note, the holder hereof shall endorse on this Note a record of the date to which interest has been paid and all payments made on account of principal of this Note. The Company shall have no duty to pro rate interest payments with respect to this Note and shall pay the entire amount of any interest payment on this Note solely to the holder of this Note as reflected on the Company's transfer records as of the date of such payment. On the earliest to occur of: (1) a Qualified IPO; (2) a Change in Control; or (3) sale of all or substantially all of the assets of the Company, the Company shall prepay, without premium, this Note in whole, together with interest due hereon through the date of prepayment. This Note may also be prepaid in whole or in part at any time without premium or penalty. Nothing in the Agreement or in this Note shall require the Company to pay interest at a rate in excess of the maximum rate permitted by applicable law. Whenever any payment to be made shall be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest due. The indebtedness evidenced by this Note and the rights and remedies of the Payee under the Agreement and the Operative Documents shall be subordinate and junior to certain indebtedness of the Company to the Bank. This Note will be senior subordinated indebtedness of the Company ranking pari passu with all other existing and future senior subordinated indebtedness and senior to all existing and future subordinated indebtedness of the Company. As further provided in, and provided by, the Agreement, upon surrender of this Note for transfer or exchange, a new Note or new Notes of the same tenor dated the date to which interest has been paid on the surrender Note and in an aggregate principal amount equal to the unpaid principal amount of the Note so surrendered will be issued to, and registered in the name of, the transferee or transferees. The Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes. In case any payment herein provided for shall not be paid when due, the Company promises to pay all cost of collection, including all reasonable attorney's fees. This Note shall be governed by, and construed in accordance with, the laws of the State of Maryland, without giving effect to the principles of conflicts of laws thereof. The Company and all endorsers and guarantors of this Note hereby waive presentment, demand, notice of nonpayment, protest and all other demands and notices in connection with the delivery, acceptance, performance or enforcement of this Note. IN WITNESS WHEREOF, the Company has executed this Note on the date first above written. VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION By /s/ James F. Chen ------------------------------ Name: James F. Chen Title: President/CEO 405JGP4739/12.227116-3 EX-10.16 25 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE WITH RESPECT THERETO, AS DEMONSTRATED BY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY. COMMON STOCK PURCHASE WARRANT Warrant No. W-1 Number of Shares: 100,000 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION Void after June 18, 2006 1. Issuance. This Warrant is issued to JMI Equity Fund II, L.P., a Delaware limited partnership, by Virtual Open Network Environment Corporation, a Delaware corporation (hereinafter with its successors called the "Company"). ------- 2. Purchase Price; Number of Shares. Subject to the terms and conditions hereinafter set forth, the registered holder of this Warrant (the "Holder"), commencing on the date hereof, is entitled upon surrender of this Warrant with the subscription form annexed hereto duly executed, at the principal office of the Company, or such other office as the Company shall notify the Holder of in writing, to purchase from the Company at a price (the "Purchase Price") of $.01 per share, 100,000 fully paid and nonassessable shares of Common Stock, par value $.001 per share, of the Company (the "Common Stock"). Until such time as this Warrant is exercised in full or expires, the Purchase Price and the securities issuable upon exercise of this Warrant are subject to adjustment as hereinafter provided. 3. Payment of Purchase Price. The Purchase Price may be paid (i) in cash or by check, (ii) by the surrender by the Holder to the Company of any promissory notes or other obligations issued by the Company, with all such notes and obligations so surrendered being credited against the Purchase Price in an amount equal to the principal amount thereof plus accrued interest to the date of surrender, (iii) through delivery by the Holder to the Company of other securities issued by the Company, with such securities being credited against the Purchase Price in an amount equal to the fair market value thereof, as determined in accordance with Section 4, or (iv) by any combination of the foregoing. The Board shall promptly respond in writing to an inquiry by the Holder as to the fair market value of any securities the Holder may wish to deliver to the Company pursuant to clause (iii) above. Warrant--Page 2 4. Net Issue Election. The Holder may elect to receive, without the payment by the Holder of any additional consideration, shares equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company, with the net issue election notice annexed hereto duly executed, at the office of the Company. Thereupon, the Company shall issue to the Holder such number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y (A-B) ------- A where X = the number of shares to be issued to the Holder pursuant to this Section 4. Y = the number of shares covered by this Warrant in respect of which the net issue election is made pursuant to this Section 4. A = the fair market value of one share of Common Stock, as determined in accordance with this Section 4, as at the time the net issue election is made pursuant to this Section 4. B = the Purchase Price in effect under this Warrant at the time the net issue election is made pursuant to this Section 4. The "fair market value" of a share of Common Stock shall be determined as follows: (a) If the Common Stock is publicly traded on a particular measurement date, the fair market value of a share of Common Stock on such measurement date shall be: (i) the average of the closing sale prices for the Common Stock, as quoted on any national securities exchange or the Nasdaq National Market on which such stock shall be listed or designated for trading, or (ii) if the Common Stock is not then traded on a national securities exchange or on the Nasdaq National Market, but is quoted on the National Association of Securities Dealers, Inc. s Automated Quotation System ("NASDAQ"), the average of the closing bid and asked prices for the Common Stock as reported on NASDAQ, in each case for the five trading days ending on the second trading day prior to the measurement date; provided, however, that if the Company shall declare a dividend or distribution (as discussed in Section 9) payable to holders of the Common Stock of record on any date during the period (inclusive) beginning with the first date of any period of trading days utilized to determine a fair market value and ending on the date immediately prior to the measurement date, then the calculation of fair market value shall be appropriately discounted to remove the effect of the value of such Warrant--Page 3 dividend or distribution from the calculation of the fair market value for dates prior to and including the record date. (b) If the Common Stock is not publicly traded on a particular measurement date, the fair market value of a share of Common Stock as of such measurement date shall be determined by the Board of Directors of the Company acting in good faith (taking into account any recent corporate events involving a determination of value for the Company's securities (e.g., the closing of an offering of securities or the granting of incentive stock options)). The Board shall promptly respond in writing to an inquiry by the Holder as to the fair market value of one share of Common Stock. 5. Partial Exercise. This Warrant may be exercised in part, and the Holder shall be entitled to receive a new warrant, which shall be dated as of the date of this Warrant, covering the number of shares in respect of which this Warrant shall not have been exercised. 6. Issuance Date. The person or persons in whose name or names any certificate representing shares of Common Stock is issued hereunder shall be deemed to have become the holder of record of the shares represented thereby as at the close of business on the date this Warrant is exercised with respect to such shares, whether or not the transfer books of the Company shall be closed. 7. Expiration Date; Automatic Exercise. This Warrant shall expire at the close of business on June 18, 2006, and shall be void thereafter. Notwithstanding the foregoing, this Warrant shall automatically be deemed to be exercised in full pursuant to the provisions of Section 4, without any further action on behalf of the Holder, upon the earliest of (i) June 30, 1996, (ii) immediately prior to the closing of the Company s initial public offering of shares of Common Stock or (iii) immediately prior to the time this Warrant would otherwise expire pursuant to the preceding sentence. 8. Reserved Shares; Valid Issuance. The Company covenants that it will at all times from and after the date hereof reserve and keep available such number of its authorized shares of Common Stock, free from all preemptive or similar rights therein, as will be sufficient to permit the exercise of this Warrant in full. The Company further covenants that such shares as may be issued pursuant to the exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. 9. Dividends. If the Company shall subdivide the Common Stock, by split-up or otherwise, or combine the Common Stock, or issue additional shares of Common Stock in payment of a stock dividend on the Common Stock, the number of shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination, Warrant--Page 4 and the Purchase Price shall forthwith be proportionately decreased in the case of a subdivision or stock dividend, or proportionately increased in the case of a combination. The Company shall not pay any dividend or make any other distribution upon the Common Stock payable in cash, property or securities of the Company other than Common Stock or in securities of a corporation other than the Company. 10. Mergers and Reclassifications. If there shall be any reclassification, capital reorganization or change of the Common Stock (other than as a result of a subdivision, combination or stock dividend provided for in Section 9), or any consolidation of the Company with, or merger of the Company into, another corporation or other business organization (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or change of the outstanding Common Stock), or any sale or conveyance to another corporation or other business organization of all or substantially all of the assets of the Company, then, as a condition of such reclassification, reorganization, change, consolidation, merger, sale or conveyance, lawful provisions shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall thereafter have the right to receive, at a total price not to exceed that payable upon the exercise of this Warrant in full, the kind and amount of shares of stock and other securities and property receivable upon such reclassification, reorganization, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been received by the Holder immediately prior to such reclassification, reorganization, change, consolidation, merger, sale or conveyance if the Holder had exercised this Warrant in full prior thereto, and in any such case appropriate provisions shall be made with respect to the rights and interest of the Holder to the end that the provisions hereof (including without limitation, provisions for the adjustment of the Purchase Price and the number of shares issuable hereunder) shall thereafter be applicable in relation to any shares of stock or other securities and property thereafter deliverable upon exercise hereof. 11. Adjustments for Issuances Below Purchase Price. In case the Company shall at any time or from time to time issue or sell any shares of Common Stock (other than (i) shares issued in transactions to which Sections 9 or 10 of this Warrant apply, (ii) shares issuable pursuant to obligations existing on the date hereof and (iii) up to 4,028,444 shares of Common Stock (appropriately adjusted for subdivisions, combinations, stock dividends and the like) issued to employees, officers, directors or consultants of the Company in connection with their service to the Company, plus such number of shares of Common Stock (as so adjusted) which are repurchased by the Company from such persons pursuant to contractual rights held by the Company and at repurchase prices not exceeding the respective original purchase prices paid by such persons to the Company therefor) for a consideration per share less than the Purchase Price in effect for this Warrant immediately prior to the time of such issue or sale, then forthwith upon such issue or sale, the Purchase Price shall (until another such issue or sale) be reduced to the price at which the Warrant--Page 5 Company issued or sold such shares of Common Stock. Further, the number of shares purchasable hereunder shall be increased to a number determined by dividing (i) the number of shares purchasable hereunder immediately prior to such issue or sale, multiplied by the Purchase Price hereunder immediately prior to such event, by (ii) the Purchase Price in effect immediately after the foregoing adjustment. For the purpose of this Section 11, the following provisions shall also be applicable: A. In case the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called "Options" and such convertible or exchangeable stock or securities being called "Convertible Securities"), at a price less than the Purchase Price in effect immediately prior to the time of the offering of such Options, all shares of Common Stock which the holders of such Options shall be entitled to subscribe for or purchase pursuant to such Options shall be deemed to be issued or sold as of the date of the granting of such Options, as the case may be, and the minimum aggregate consideration named in such Options for the Common Stock or Convertible Securities covered thereby, plus the consideration received by the Company for such Options, shall be deemed to be the consideration actually received by the Company (as of the date of the granting of such Options, as the case may be) for the issue or sale of such shares. B. In case the Company shall in any manner issue or sell any Convertible Securities and the price per share for which Common Stock is deliverable upon such conversion or exchange (determined by dividing (i) the total minimum amount received or receivable by the Company in consideration of the issue or sale of such Convertible Securities, plus the total minimum amount of premiums, if any, payable to the Company upon conversion or exchange, by (ii) the total number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities) shall be less than the Purchase Price in effect immediately prior to the time of such issue or sale, then such issue or sale shall be deemed to be an issue or sale (as of the date of issue or sale of such convertible or exchangeable shares or obligations) of the total maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities, and the total minimum amount received or receivable by the Company in consideration of the issue or sale of such Convertible Securities, plus the total minimum amount of premiums, if any, payable to the Company upon exchange or conversion, shall be deemed to be the consideration actually received (as of the date of the issue or sale of such Warrant--Page 6 convertible or exchangeable shares or obligations) for the issue or sale of such Common Stock. C. If there shall be any change in (i) the minimum aggregate consideration named in the Options, (ii) the consideration received by the Company for such Options, (iii) the price per share for which Common Stock is deliverable upon the conversion or exchange of the Convertible Securities, (iv) the number of shares which may be subscribed for or purchased pursuant to the Options, or (v) the rate at which the Convertible Securities are convertible into or exchangeable for Common Stock, then the Purchase Price in effect at the time of such event shall be readjusted to the Purchase Price which would have been in effect at such time had such rights, options, or convertible or exchangeable shares or obligations provided for such changed consideration, price per share, number of shares, or rate of conversion or exchange, as the case may be, at the time initially offered, granted, issued or sold, but only if as a result of such adjustment the Purchase Price then in effect hereunder is not increased above $3.00 per share (appropriately adjusted to reflect the occurrence of any event described in Section 9 hereto). D. In case the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock (except for dividends or distributions upon the Common Stock), Options or Convertible Securities, any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold at a price per share equal to $.001. E. In determining the amount of consideration received by the Company for Common Stock, Options or Convertible Securities, no deduction shall be made for expenses or underwriting discounts or commissions paid by the Company. The Board shall determine in good faith the fair value of the amount of consideration other than money received by the Company upon the issue by it of any of its securities. The Board shall, in case any Common Stock, Options or Convertible Securities are issued with other stock, securities or assets of the Company, determine in good faith what part of the consideration received therefor is applicable to the issue of the Common Stock, Options or Convertible Securities. F. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or Warrant--Page 7 sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. G. The disposition of any shares of Common Stock owned or held by or for the account of the Company shall be considered an issue or sale of Common Stock for the purpose of this Section 11. 12. Fractional Shares. In no event shall any fractional share of Common Stock be issued upon any exercise of this Warrant. If, upon exercise of this Warrant as an entirety, the Holder would, except as provided in this Section 12, be entitled to receive a fractional share of Common Stock, then the Company shall issue the next higher number of full shares of Common Stock, issuing a full share with respect to such fractional share. 13. Certificate of Adjustment. Whenever the Purchase Price is adjusted, as herein provided, the Company shall promptly deliver to the Holder a certificate of a firm of independent public accountants setting forth the Purchase Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. 14. Notices of Record Date, Etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, (b) any reclassification of the capital stock of the Company, capital reorganization of the Company, consolidation or merger involving the Company, or sale or conveyance of all or substantially all of its assets, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which any such reclassification, reorganization, consolidation, merger, sale or conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record in respect of such event are to be determined. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken. Warrant--Page 8 15. Amendment. The terms of this Warrant may be amended, modified or waived only with the written consent of the Company and the Holder. 16. Warrant Register; Transfers, Etc. --------------------------------- A. The Company will maintain a register containing the name and address of the Holder. The Holder may change its address as shown on the warrant register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be given by certified mail or delivered to the Holder at its address as shown on the warrant register. B. If this Warrant or the shares of Common Stock issued or issuable upon exercise of this Warrant shall have been registered under the Securities Act and applicable state securities laws, or if such registration is not required, as demonstrated by opinion of counsel satisfactory to the Company, this Warrant may be transferred by the Holder with respect to any or all of the shares purchasable hereunder. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed, for transfer of this Warrant as an entirety by the Holder, the Company shall issue a new warrant of the same denomination to the assignee. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed, by the Holder for transfer with respect to a portion of the shares of Common Stock purchasable hereunder, the Company shall issue a new warrant to the assignee, in such denomination as shall be requested by the Holder hereof, and shall issue to such Holder a new warrant covering the number of shares in respect of which this Warrant shall not have been transferred. C. In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall issue a new warrant of like tenor and denomination and deliver the same (i) in exchange and substitution for and upon surrender and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or destroyed, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft or destruction of such Warrant (including a reasonably detailed affidavit with respect to the circumstances of any loss, theft or destruction) and of indemnity reasonably satisfactory to the Company, provided, however, that so long as JMI Equity Fund, L.P. is the registered holder of this Warrant, no indemnity shall be required other than its written agreement to indemnify the Company against any loss arising from the issuance of such new warrant. 17. No Impairment. The Company will not, by amendment of its Amended and Restated Certificate of Incorporation or through any reclassification, capital reorganization, consolidation, merger, sale or Warrant--Page 9 conveyance of assets, dissolution, liquidation, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder. 18. Governing Law. The provisions and terms of this Warrant shall be governed by and construed in accordance with the internal laws of the State of Delaware. 19. Successors and Assigns. This Warrant shall be binding upon the Company's successors and assigns and shall inure to the benefit of the Holder's successors, legal representatives and permitted assigns. 20. Business Days. If the last or appointed day for the taking of any action required or the expiration of any right granted herein shall be a Saturday or Sunday or a legal holiday in Delaware, then such action may be taken or right may be exercised on the next succeeding day which is not a Saturday or Sunday or such a legal holiday. Dated as of June 18, 1996 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION By: /s/ James F. Chen --------------------------- Attest: Title: President/CEO ___________________________ Warrant--Page 10 SUBSCRIPTION To:____________________ Date:_________________________ The undersigned hereby subscribes for __________ shares of Common Stock covered by this Warrant. The certificate(s) for such shares shall be issued in the name of the undersigned or as otherwise indicated below: ______________________________ Signature ______________________________ Name for Registration ______________________________ Mailing Address NET ISSUE ELECTION NOTICE To:____________________ Date:_________________________ The undersigned hereby elects under Section 4 to surrender the right to purchase _______ shares of Common Stock pursuant to this Warrant. The certificate(s) for the shares issuable upon such net issue election shall be issued in the name of the undersigned or as otherwise indicated below. ______________________________ Signature ______________________________ Name for Registration ______________________________ Mailing Address Warrant--Page 11 ASSIGNMENT For value received ____________________________ hereby sells, assigns and transfers unto ___________________________________________________________________ the within Warrant, and does hereby irrevocably constitute and appoint _______________________ its attorney to transfer the within Warrant on the books of the within named Company with full power of substitution on the premises. Dated:_______________________ ______________________________ In the Presence of: _____________________________ EX-10.17 26 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS AVAILABLE WITH RESPECT THERETO, AS DEMONSTRATED BY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY. COMMON STOCK PURCHASE WARRANT Warrant No. W-2 Number of Shares: 400,000 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION Void after June 18, 2006 1. Issuance. This Warrant is issued to JMI Equity Fund II, L.P., a Delaware limited partnership, by Virtual Open Network Environment Corporation, a Delaware corporation (hereinafter with its successors called the "Company"). ------- 2. Purchase Price; Number of Shares. Subject to the terms and conditions hereinafter set forth, the registered holder of this Warrant (the "Holder"), commencing on the date hereof, is entitled upon surrender of this Warrant with the subscription form annexed hereto duly executed, at the principal office of the Company, or such other office as the Company shall notify the Holder of in writing, to purchase from the Company at a price (the "Purchase Price") of $3.00 per share, 400,000 fully paid and nonassessable shares of Common Stock, par value $.001 per share, of the Company (the "Common Stock"). Until such time as this Warrant is exercised in full or expires, the Purchase Price and the securities issuable upon exercise of this Warrant are subject to adjustment as hereinafter provided. 3. Payment of Purchase Price. The Purchase Price may be paid (i) in cash or by check, (ii) by the surrender by the Holder to the Company of any promissory notes or other obligations issued by the Company, with all such notes and obligations so surrendered being credited against the Purchase Price in an amount equal to the principal amount thereof plus accrued interest to the date of surrender, (iii) through delivery by the Holder to the Company of other securities issued by the Company, with such securities being credited against the Purchase Price in an amount equal to the fair market value thereof, as determined in accordance with Section 4, or (iv) by any combination of the foregoing. The Board shall promptly respond in writing to an inquiry by the Holder as to the fair market value of any securities the Holder may wish to deliver to the Company pursuant to clause (iii) above. Warrant - Page 2 4. Net Issue Election. The Holder may elect to receive, without the payment by the Holder of any additional consideration, shares equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company, with the net issue election notice annexed hereto duly executed, at the office of the Company. Thereupon, the Company shall issue to the Holder such number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y (A-B) ------- A where X = the number of shares to be issued to the Holder pursuant to this Section 4. Y = the number of shares covered by this Warrant in respect of which the net issue election is made pursuant to this Section 4. A = the fair market value of one share of Common Stock, as determined in accordance with this Section 4, as at the time the net issue election is made pursuant to this Section 4. B = the Purchase Price in effect under this Warrant at the time the net issue election is made pursuant to this Section 4. The "fair market value" of a share of Common Stock shall be determined as follows: (a) If the Common Stock is publicly traded on a particular measurement date, the fair market value of a share of Common Stock on such measurement date shall be: (i) the average of the closing sale prices for the Common Stock, as quoted on any national securities exchange or the Nasdaq National Market on which such stock shall be listed or designated for trading, or (ii) if the Common Stock is not then traded on a national securities exchange or on the Nasdaq National Market, but is quoted on the National Association of Securities Dealers, Inc.'s Automated Quotation System ("NASDAQ"), the average of the closing bid and asked prices for the Common Stock as reported on NASDAQ, in each case for the five trading days ending on the second trading day prior to the measurement date; provided, however, that if the Company shall declare a dividend or distribution (as discussed in Section 9) payable to holders of the Common Stock of record on any date during the period (inclusive) beginning with the first date of any period of trading days utilized to determine a fair market value and ending on the date immediately prior to the measurement date, then the calculation of fair market value shall be appropriately discounted to remove the effect of the value of such Warrant - Page 3 dividend or distribution from the calculation of the fair market value for dates prior to and including the record date. (b) If the Common Stock is not publicly traded on a particular measurement date, the fair market value of a share of Common Stock as of such measurement date shall be determined by the Board of Directors of the Company acting in good faith (taking into account any recent corporate events involving a determination of value for the Company's securities (e.g., the closing of an offering of securities or the granting of incentive stock options)). The Board shall promptly respond in writing to an inquiry by the Holder as to the fair market value of one share of Common Stock. 5. Partial Exercise. This Warrant may be exercised in part, and the Holder shall be entitled to receive a new warrant, which shall be dated as of the date of this Warrant, covering the number of shares in respect of which this Warrant shall not have been exercised. 6. Issuance Date. The person or persons in whose name or names any certificate representing shares of Common Stock is issued hereunder shall be deemed to have become the holder of record of the shares represented thereby as at the close of business on the date this Warrant is exercised with respect to such shares, whether or not the transfer books of the Company shall be closed. 7. Expiration Date; Automatic Exercise. This Warrant shall expire at the close of business on June 18, 2006, and shall be void thereafter. Notwithstanding the foregoing, this Warrant shall automatically be deemed to be exercised in full pursuant to the provisions of Section 4, without any further action on behalf of the Holder, immediately prior to the time this Warrant would otherwise expire pursuant to the preceding sentence. 8. Reserved Shares; Valid Issuance. The Company covenants that it will at all times from and after the date hereof reserve and keep available such number of its authorized shares of Common Stock, free from all preemptive or similar rights therein, as will be sufficient to permit the exercise of this Warrant in full. The Company further covenants that such shares as may be issued pursuant to the exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. 9. Dividends. If the Company shall subdivide the Common Stock, by split-up or otherwise, or combine the Common Stock, or issue additional shares of Common Stock in payment of a stock dividend on the Common Stock, the number of shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination, and the Purchase Price shall forthwith be proportionately decreased in the case of a subdivision or stock dividend, or proportionately increased in Warrant - Page 4 the case of a combination. The Company shall not pay any dividend or make any other distribution upon the Common Stock payable in cash, property or securities of the Company other than Common Stock or in securities of a corporation other than the Company. 10. Mergers and Reclassifications. If there shall be any reclassification, capital reorganization or change of the Common Stock (other than as a result of a subdivision, combination or stock dividend provided for in Section 9), or any consolidation of the Company with, or merger of the Company into, another corporation or other business organization (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or change of the outstanding Common Stock), or any sale or conveyance to another corporation or other business organization of all or substantially all of the assets of the Company, then, as a condition of such reclassification, reorganization, change, consolidation, merger, sale or conveyance, lawful provisions shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall thereafter have the right to receive, at a total price not to exceed that payable upon the exercise of this Warrant in full, the kind and amount of shares of stock and other securities and property receivable upon such reclassification, reorganization, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been received by the Holder immediately prior to such reclassification, reorganization, change, consolidation, merger, sale or conveyance if the Holder had exercised this Warrant in full prior thereto, and in any such case appropriate provisions shall be made with respect to the rights and interest of the Holder to the end that the provisions hereof (including without limitation, provisions for the adjustment of the Purchase Price and the number of shares issuable hereunder) shall thereafter be applicable in relation to any shares of stock or other securities and property thereafter deliverable upon exercise hereof. 11. Adjustments for Issuances Below Purchase Price. In case the Company shall at any time or from time to time issue or sell any shares of Common Stock (other than (i) shares issued in transactions to which Sections 9 or 10 of this Warrant apply, (ii) shares issuable pursuant to obligations existing on the date hereof and (iii) up to 4,028,444 shares of Common Stock (appropriately adjusted for subdivisions, combinations, stock dividends and the like) issued to employees, officers, directors or consultants of the Company in connection with their service to the Company, plus such number of shares of Common Stock (as so adjusted) which are repurchased by the Company from such persons pursuant to contractual rights held by the Company and at repurchase prices not exceeding the respective original purchase prices paid by such persons to the Company therefor) for a consideration per share less than the Purchase Price in effect for this Warrant immediately prior to the time of such issue or sale, then forthwith upon such issue or sale, the Purchase Price shall (until another such issue or sale) be reduced to the price at which the Company issued or sold such shares of Common Stock. Further, the number of shares purchasable hereunder shall be increased to a number determined Warrant - Page 5 by dividing (i) the number of shares purchasable hereunder immediately prior to such issue or sale, multiplied by the Purchase Price hereunder immediately prior to such event, by (ii) the Purchase Price in effect immediately after the foregoing adjustment. For the purpose of this Section 11, the following provisions shall also be applicable: A. In case the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called "Options" and such convertible or exchangeable stock or securities being called "Convertible Securities"), at a price less than the Purchase Price in effect immediately prior to the time of the offering of such Options, all shares of Common Stock which the holders of such Options shall be entitled to subscribe for or purchase pursuant to such Options shall be deemed to be issued or sold as of the date of the granting of such Options, as the case may be, and the minimum aggregate consideration named in such Options for the Common Stock or Convertible Securities covered thereby, plus the consideration received by the Company for such Options, shall be deemed to be the consideration actually received by the Company (as of the date of the granting of such Options, as the case may be) for the issue or sale of such shares. B. In case the Company shall in any manner issue or sell any Convertible Securities and the price per share for which Common Stock is deliverable upon such conversion or exchange (determined by dividing (i) the total minimum amount received or receivable by the Company in consideration of the issue or sale of such Convertible Securities, plus the total minimum amount of premiums, if any, payable to the Company upon conversion or exchange, by (ii) the total number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities) shall be less than the Purchase Price in effect immediately prior to the time of such issue or sale, then such issue or sale shall be deemed to be an issue or sale (as of the date of issue or sale of such convertible or exchangeable shares or obligations) of the total maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities, and the total minimum amount received or receivable by the Company in consideration of the issue or sale of such Convertible Securities, plus the total minimum amount of premiums, if any, payable to the Company upon exchange or conversion, shall be deemed to be the consideration actually received (as of the date of the issue or sale of such convertible or exchangeable shares or obligations) for the issue or sale of such Common Stock. Warrant - Page 6 C. If there shall be any change in (i) the minimum aggregate consideration named in the Options, (ii) the consideration received by the Company for such Options, (iii) the price per share for which Common Stock is deliverable upon the conversion or exchange of the Convertible Securities, (iv) the number of shares which may be subscribed for or purchased pursuant to the Options, or (v) the rate at which the Convertible Securities are convertible into or exchangeable for Common Stock, then the Purchase Price in effect at the time of such event shall be readjusted to the Purchase Price which would have been in effect at such time had such rights, options, or convertible or exchangeable shares or obligations provided for such changed consideration, price per share, number of shares, or rate of conversion or exchange, as the case may be, at the time initially offered, granted, issued or sold, but only if as a result of such adjustment the Purchase Price then in effect hereunder is not increased above $3.00 per share (appropriately adjusted to reflect the occurrence of any event described in Section 9 hereto). D. In case the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock (except for dividends or distributions upon the Common Stock), Options or Convertible Securities, any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold at a price per share equal to $.001. E. In determining the amount of consideration received by the Company for Common Stock, Options or Convertible Securities, no deduction shall be made for expenses or underwriting discounts or commissions paid by the Company. The Board shall determine in good faith the fair value of the amount of consideration other than money received by the Company upon the issue by it of any of its securities. The Board shall, in case any Common Stock, Options or Convertible Securities are issued with other stock, securities or assets of the Company, determine in good faith what part of the consideration received therefor is applicable to the issue of the Common Stock, Options or Convertible Securities. F. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. Warrant - Page 7 G. The disposition of any shares of Common Stock owned or held by or for the account of the Company shall be considered an issue or sale of Common Stock for the purpose of this Section 11. 12. Fractional Shares. In no event shall any fractional share of Common Stock be issued upon any exercise of this Warrant. If, upon exercise of this Warrant as an entirety, the Holder would, except as provided in this Section 12, be entitled to receive a fractional share of Common Stock, then the Company shall issue the next higher number of full shares of Common Stock, issuing a full share with respect to such fractional share. 13. Certificate of Adjustment. Whenever the Purchase Price is adjusted, as herein provided, the Company shall promptly deliver to the Holder a certificate of a firm of independent public accountants setting forth the Purchase Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. 14. Notices of Record Date, Etc. In the event of: --------------------------- (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, (b) any reclassification of the capital stock of the Company, capital reorganization of the Company, consolidation or merger involving the Company, or sale or conveyance of all or substantially all of its assets, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which any such reclassification, reorganization, consolidation, merger, sale or conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record in respect of such event are to be determined. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken. 15. Amendment. The terms of this Warrant may be amended, modified or waived only with the written consent of the Company and the Holder. Warrant - Page 8 16. Warrant Register; Transfers, Etc. --------------------------------- A. The Company will maintain a register containing the name and address of the Holder. The Holder may change its address as shown on the warrant register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be given by certified mail or delivered to the Holder at its address as shown on the warrant register. B. If this Warrant or the shares of Common Stock issued or issuable upon exercise of this Warrant shall have been registered under the Securities Act and applicable state securities laws, or if such registration is not required, as demonstrated by opinion of counsel satisfactorily to the Company, this Warrant may be transferred by the Holder with respect to any or all of the shares purchasable hereunder. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed, for transfer of this Warrant as an entirety by the Holder, the Company shall issue a new warrant of the same denomination to the assignee. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed, by the Holder for transfer with respect to a portion of the shares of Common Stock purchasable hereunder, the Company shall issue a new warrant to the assignee, in such denomination as shall be requested by the Holder hereof, and shall issue to such Holder a new warrant covering the number of shares in respect of which this Warrant shall not have been transferred. C. In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall issue a new warrant of like tenor and denomination and deliver the same (i) in exchange and substitution for and upon surrender and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or destroyed, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft or destruction of such Warrant (including a reasonably detailed affidavit with respect to the circumstances of any loss, theft or destruction) and of indemnity reasonably satisfactory to the Company, provided, however, that so long as JMI Equity Fund, L.P. is the registered holder of this Warrant, no indemnity shall be required other than its written agreement to indemnify the Company against any loss arising from the issuance of such new warrant. 17. No Impairment. The Company will not, by amendment of its Amended and Restated Certificate of Incorporation or through any reclassification, capital reorganization, consolidation, merger, sale or conveyance of assets, dissolution, liquidation, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and Warrant - Page 9 in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder. 18. Governing Law. The provisions and terms of this Warrant shall be governed by and construed in accordance with the internal laws of the State of Delaware. 19. Successors and Assigns. This Warrant shall be binding upon the Company's successors and assigns and shall inure to the benefit of the Holder's successors, legal representatives and permitted assigns. Warrant - Page 10 20. Business Days. If the last or appointed day for the taking of any action required or the expiration of any right granted herein shall be a Saturday or Sunday or a legal holiday in Delaware, then such action may be taken or right may be exercised on the next succeeding day which is not a Saturday or Sunday or such a legal holiday. Dated as of June 18, 1996 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION By: /s/ James F. Chen -------------------------- Attest: Title: President/CEO ___________________________ Warrant - Page 11 SUBSCRIPTION To:____________________ Date:_________________________ The undersigned hereby subscribes for __________ shares of Common Stock covered by this Warrant. The certificate(s) for such shares shall be issued in the name of the undersigned or as otherwise indicated below: ______________________________ Signature ______________________________ Name for Registration ______________________________ Mailing Address NET ISSUE ELECTION NOTICE To:____________________ Date:_________________________ The undersigned hereby elects under Section 4 to surrender the right to purchase _______ shares of Common Stock pursuant to this Warrant. The certificate(s) for the shares issuable upon such net issue election shall be issued in the name of the undersigned or as otherwise indicated below. ______________________________ Signature ______________________________ Name for Registration ______________________________ Mailing Address Warrant - Page 12 ASSIGNMENT For value received ____________________________ hereby sells, assigns and transfers unto ______________________________________________ the within Warrant, and does hereby irrevocably constitute and appoint _______________________ its attorney to transfer the within Warrant on the books of the within named Company with full power of substitution on the premises. Dated:_______________________ ______________________________ In the Presence of: _____________________________ EX-11 27
EXHIBIT 11 VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION COMPUTATION OF PRIMARY LOSS PER SHARE For the period February 16, 1993 (date of inception) to Year Ended Three Months Ended December 31, December 31, March 31, 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- (Unaudited) Net (loss) . . . . . . . . . . . . . . (35,684) (406,288) (1,032,311) (132,291) (994,660) Weighted average common shares outstanding . . . . . . . . . . . . . . 7,265,753 10,003,143 12,388,918 11,794,710 12,797,032 Stock options issued within one year of initial filing (using the treasury stock method and the anticipated public 51,347 58,682 58,682 58,682 58,682 offering price of $6.00 per share) . . --------- ---------- ---------- ---------- ---------- Weighted average number of common 7,317,100 10,061,825 12,447,600 11,853,392 12,855,714 shares outstanding . . . . . . . . . . ========= ========== ========== ========== ========== Net (loss) income per common share and (.00) (.04) (.08) (.01) (.08) common share equivalent ========== ========== ========== ========== ==========
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION COMPUTATION OF FULLY DILUTED LOSS PER SHARE For the period February 16, 1993 (date of Years Ended Three Months Ended inception) to December 31, March 31, December 31, ----------------------- -------------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- (Unaudited) Net (loss) . . . . . . . . . . . . . (35,684) (406,288) (1,032,311) (132,291) (994,660) Weighted average common shares outstanding . . . . . . . . . . . . . 7,265,753 10,003,143 12,362,847 11,794,710 12,795,134 Stock options issued within one year of initial filing (using the treasury stock method and the anticipated public offering price of $6.00 per 51,347 58,682 58,682 58,682 58,682 share) . . . . . . . . . . . . . . . --------- ---------- ---------- ---------- ---------- Weighted average number of common 7,317,100 10,061,825 12,421,529 11,853,392 12,853,816 shares outstanding . . . . . . . . . ========= ========== ========== ========== ========== Net (loss) income per common share and (.00) (.04) (.08) (.01) (.08) common share equivalent . . . . . . . ========= ========= ========= ========= ==========
EX-23.1 28 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated June 7, 1996, on our audits of the balance sheets of Virtual Open Network Environment Corporation ("the Company"), as of December 31, 1994 and 1995, and March 31, 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the period from February 16, 1993 (date of inception) to December 31, 1993 and for each of the two years in the period ended December 31, 1995, and the three month period ended March 31, 1996 and the related financial statement schedule. We also consent to the references to our firm under the caption "Experts" in the Prospectus. Coopers & Lybrand L.L.P. Washington, D.C. June 20, 1996 EX-27 29
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE ACCOMPANYING REGISTRATION STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1995 MAR-31-1996 JAN-1-1995 JAN-1-1996 DEC-31-1995 MAR-31-1996 1,328 1,446 0 0 266 957 (23) (100) 258 192 1,842 2,561 234 719 (35) (48) 2,051 2,946 2,011 3,857 0 0 0 0 0 0 12 12 (152) (1,147) 2,051 2,946 1,104 1,022 1,104 1,022 377 322 1,697 1,613 0 0 0 0 62 81 (1,032) (995) 0 0 (1,032) (995) 0 0 0 0 0 0 (1,032) (995) (0.08) (0.08) (0.08) (0.08)
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