<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 4, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VISUAL NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2092 GAITHER ROAD
ROCKVILLE, MARYLAND 20850
(301) 296-2300
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
3576
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
52-1837515
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
SCOTT E. STOUFFER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VISUAL NETWORKS, INC.
2092 GAITHER ROAD
ROCKVILLE, MARYLAND 20850
(301) 296-2300
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
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Copies to:
EDWIN M. MARTIN, JR., ESQUIRE
NANCY A. SPANGLER, ESQUIRE
PIPER & MARBURY L.L.P.
1200 19TH STREET, N.W.
WASHINGTON, D.C. 20036
(202) 861-3900
MARK G. BORDEN, ESQUIRE
DAVID SYLVESTER, ESQUIRE
HALE AND DORR LLP
1455 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004
(202) 942-8400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, par value $.01...... 4,025,000 shares $11.00 $44,275,000 $13,061
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(1) Includes 525,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(a) under the Securities Act.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 4, 1997
3,500,000 SHARES
VISUAL NETWORKS LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
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All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price per
share will be between $9.00 and $11.00. For factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "VNWK".
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROCEEDS
INITIAL PUBLIC UNDERWRITING TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ ----------
<S> <C> <C> <C>
Per Share.............................................. $ $ $
Total (3).............................................. $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".
(2) Before deducting estimated expenses of $750,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 525,000 shares at the initial offering price per share,
less the underwriting discount, solely to cover over-allotments. If such
option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting".
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The shares are offered severally by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
orders in whole or in part. It is expected that certificates for the shares will
be ready for delivery in New York, New York, on or about , 1998,
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DEUTSCHE MORGAN GRENFELL
WESSELS, ARNOLD & HENDERSON
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The date of this Prospectus is , 1998.
<PAGE> 3
[Photo of optical cables.] [Photo of central office.]
HOW CAN WAN SERVICE PROVIDERS COST-EFFECTIVELY MEET
THE SERVICE LEVELS THAT SUBSCRIBERS DEMAND FOR
MISSION-CRITICAL COMPUTING APPLICATIONS?
[Photo of network support center.] [Photo of IP/Frame Relay topology.]
[Visual Networks logo.]
The Company intends to furnish to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited interim financial information for the first three quarters of each
fiscal year of the Company.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
Visual Networks and Visual UpTime are trademarks of the Company. This
Prospectus contains other product names, trade names and trademarks of the
Company and of other organizations.
<PAGE> 4
VISUAL UPTIME, A WAN SERVICE LEVEL MANAGEMENT SYSTEM
Visual UpTime combines WAN access functionality with innovative software for
performance monitoring, troubleshooting and planning. Visual UpTime provides
instrumentation for network performance measurement and analysis that allows WAN
service providers to achieve the service levels required by their customers and
to lower the costs associated with statistically multiplexed services.
Improving the service levels achievable with statistically multiplexed services
such as Frame Relay and IP/Internet results in:
- - Increased subscriber confidence in using such services for both host-centric
and distributed mission-critical computing applications.
- - (When used as part of network infrastructure) increased scaleability for
providers of their deployment models and achievable economies of scale for
their business.
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[Photo of Troubleshooting
[Photo of Monitoring screen.] screen.] [Photo of Planning screen.]
<S> <C> <C>
Rapidly and cost effectively Rapidly and cost effectively Accurately plan and engineer
provision WAN services. solve service level problems. the network.
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[Graphic of globe depicting a Frame Relay and/or IP network across North
America, Europe, Asia and with Visual UpTime system comprised of "instrumented"
WAN access equipment and centralized system manager.]
[Visual Networks logo.]
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes no exercise of the over-allotment option granted to the Underwriters and
the conversion of the Company's convertible preferred stock (the "Convertible
Preferred Stock") into 10,605,735 shares of Common Stock upon the closing of the
offering. See "Description of Capital Stock" and "Underwriting".
THE COMPANY
Visual Networks, Inc. ("Visual" or the "Company") designs, manufactures and
sells wide-area-network ("WAN") service level management systems for
statistically multiplexed technologies such as Frame Relay and IP/Internet. The
Company's Visual UpTime system combines WAN access functionality with innovative
software for performance monitoring, troubleshooting and network planning.
Visual UpTime provides instrumentation for network performance measurement and
analysis that allows WAN service providers ("providers") to achieve the service
levels required by their customers ("subscribers") and to lower operating costs
associated with statistically multiplexed services. The availability of
performance monitoring and troubleshooting instrumentation also allows
subscribers to verify the service levels being supplied by their WAN provider
and monitor traffic traversing the WAN, a requirement for many subscribers
wishing to use statistically multiplexed services to carry mission-critical data
traffic. The Company believes Visual UpTime systems are deployed in
configurations managing as few as 3 circuits and as many as 1,000 circuits. The
system is designed to scale up to 3,000 circuits on a single managed network.
The Company believes it is a worldwide leader in field deployment of WAN
service level management systems. The Company introduced Visual UpTime in the
summer of 1995 and has since shipped systems configured for deployment on over
12,000 WAN circuits in over 300 subscriber Frame Relay networks, including those
of Cargill, Inc., Delta Air Lines, Inc., Federal Express Corporation ("FedEx"),
Household International, Inc. and Waste Management, Inc. For the nine months
ended September 30, 1997, the Company had revenue of $15.5 million.
Vertical Systems Group ("Vertical Systems"), a leading WAN industry
analyst, estimates that approximately 920,000 Frame Relay circuits will be
installed worldwide over the next three years. To take advantage of this
projected growth in the Frame Relay market, the Company has developed
relationships with major Frame Relay service providers such as AT&T Corp.
("AT&T"), Sprint/United Management Company ("Sprint"), MCI Telecommunications
Corp. ("MCI"), Ameritech Corp. ("Ameritech") and BellAtlantic Network
Integration, Inc. ("BellAtlantic"). The percentage of revenue attributable to
sales to providers, which either resell or lease the systems to subscribers,
increased in each of the first three quarters of 1997, with Sprint and AT&T
accounting for 31% and 5%, respectively, of revenue for the nine months ended
September 30, 1997.
The Company was incorporated in Maryland in August 1993 under the name
Avail Networks, Inc. and reincorporated in Delaware in December 1994 as Visual
Networks, Inc. The Company's principal executive offices are located at 2092
Gaither Road, Rockville, Maryland 20850, and its telephone number is (301)
296-2300.
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THE OFFERING
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Common Stock offered by the Company............................ 3,500,000 shares
Common Stock to be outstanding after the offering.............. 17,060,119 shares(1)
Use of proceeds................................................ General corporate purposes.
See "Use of Proceeds".
Proposed Nasdaq National Market symbol......................... VNWK
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(1) Excludes 1,600,092 shares of Common Stock issuable upon exercise of options
outstanding at September 30, 1997, at a weighted average exercise price of
$1.14 per share. See "Capitalization" and "Management -- Stock Plans".
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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FOR THE PERIOD
FROM INCEPTION NINE MONTHS ENDED
(AUGUST 12, 1993) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
THROUGH --------------------------- ------------------
DECEMBER 31, 1993 1994 1995 1996 1996 1997
----------------- ----- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................... $ -- $ -- $ 250 $ 6,335 $ 3,944 $15,524
Gross profit................ -- -- 206 3,785 2,330 10,465
Loss from operations........ (5) (222) (1,831) (7,058) (4,845) (852)
Net loss.................... $ (5) $(222) $(1,791) $(6,983) $(4,793) $ (841)
=============== ====== ======== ======== ======== ========
Pro forma net loss per
common share(1)........... $ (0.53) $ (0.38) $ (0.06)
======== ======== ========
Pro forma weighted average
common shares
outstanding(1)............ 13,104 12,774 14,133
======== ======== ========
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SEPTEMBER 30, 1997
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PRO FORMA
ACTUAL AS ADJUSTED(2)
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 4,140 $ 35,940
Working capital................................................... 1,626 33,426
Total assets...................................................... 9,428 41,228
Redeemable convertible preferred stock............................ 14,491 --
Total stockholders' equity........................................ (11,912) 34,379
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(1) See Notes 1, 4 and 5 of Notes to Financial Statements included elsewhere in
this Prospectus.
(2) As adjusted to reflect the conversion upon the closing of the offering of
all outstanding shares of Convertible Preferred Stock into 10,605,735
shares of Common Stock, the sale of Common Stock offered by the Company
hereby and the application of the estimated net proceeds therefrom.
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RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating the
Company and its business before purchasing Common Stock in the offering.
IMPLEMENTATION OF PROVIDER DEPLOYMENT MODEL; LENGTHY SALES CYCLE
To date, substantially all of the Company's sales of its products have been
attributable to sales to subscribers, and the Company expects that such sales
will continue to account for a significant portion of its revenue through at
least mid-1999. The Company is currently implementing a sales and marketing
strategy whereby sales of Visual UpTime will be made directly to providers,
which will deploy the systems as part of their network infrastructure ("provider
deployment model"). The Company anticipates that a significant portion of its
future revenue will be attributable to sales of Visual UpTime to these
providers. The Company's future performance will therefore be substantially
dependent on incorporation of Visual UpTime by providers into their service
offerings to subscribers. Providers have not typically offered solutions that
enable the subscriber to measure and test the WAN service levels offered by the
provider, and the Company could encounter resistance on the part of some
providers to offering these solutions. There can be no assurance that the
Company will be successful in persuading providers to adopt the provider
deployment model. The Company believes the success or failure of the provider
deployment model, and the timing of success, if achieved, will depend on a
number of factors over which the Company may have little or no control,
including: provider and subscriber acceptance of and satisfaction with the
Company's systems; the realization of operating cost efficiencies for providers
when service level management systems are deployed and the ability of the
Company to demonstrate such operational benefits; generation of demand for these
systems from subscribers and support for the systems within the providers' sales
forces; competitive dynamics between WAN service providers and the development
of the WAN services market overall; successful development by the Company of
systems and products which address the requirements for systems deployed as part
of a provider's infrastructure; the timing and successful completion of
integration development work by providers to incorporate the Company's service
level management functionality into their operational support systems; and the
absence of new technologies which make the Company's products and systems
obsolete before they can achieve broad acceptance. The failure of the Company's
products to become an accepted part of the providers' service offerings or a
slower than expected increase in the volume of sales by the Company to providers
would have a material adverse effect upon the Company's business, financial
condition and results of operations.
The Company expects that the provider deployment model will be
characterized by a lengthy sales cycle. The Company expects that sales of Visual
UpTime will require a substantial commitment of capital from providers, with the
attendant delays frequently associated with providers' internal procedures to
approve large capital expenditures and lengthy decision-making processes. The
sales cycle can also be expected to be subject to a number of significant risks,
including providers' budgetary constraints and technology assessment and other
internal acceptance reviews over which the Company has little or no control.
Sales of Visual UpTime generally involve significant testing by and education of
both providers and subscribers as well as a substantial commitment of the
Company's sales and marketing resources. As a result, the Company may expend
significant resources pursuing potential sales that will not be consummated.
Even if the provider deployment model is implemented, curtailment or termination
of provider purchasing programs, decreases in provider capital budgets or
reduction in the purchasing priority assigned to products such as Visual UpTime,
particularly if significant and unanticipated by the Company, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON MAJOR CUSTOMERS
The Company is dependent on a small number of customers for a substantial
portion of its revenue. For the nine months ended September 30, 1997, sales of
products or services to Sprint,
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FedEx and AT&T accounted for 31%, 10% and 5%, respectively, of the Company's
revenue, substantially all of which was attributable to sales to subscribers.
For the three months ended September 30, 1997, sales of products or services to
Sprint, FedEx and AT&T accounted for 35%, 16% and 11%, respectively, of the
Company's revenue. If the Company's evolution to the provider deployment model
is successful, the Company's customer base will consist predominantly of large
public network service providers. There are only a small number of these
providers, and the substantial capital requirements involved in the
establishment of public networks significantly limit additional entrants into
this market. In addition, the number of these providers may decrease if and as
providers merge or acquire one another. Accordingly, the loss of any provider
customer, or the reduction, delay or cancellation of orders or a delay in
shipment of the Company's products to any provider customer, could materially
and adversely affect the Company's business, financial condition and results of
operations.
The Company's anticipated dependence on sizable orders from a limited
number of providers will make the relationship between the Company and each
provider critically important to the Company's business. As relationships evolve
over time, adjustments to product specifications, forecasts and delivery
timetables may be required in response to provider demands and expectations.
Further, because none of the Company's agreements contain minimum purchase
requirements, there can be no assurance the issuance of a purchase order will
result in significant repeat business. The inability of the Company to manage
its provider relationships successfully would have a material adverse effect on
the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE; EMERGING SERVICES MARKET; NEW
PRODUCTS
Visual UpTime is the Company's only product and is focused on service level
management for WANs that utilize statistically multiplexed technologies.
Accordingly, the Company's future financial performance will depend in large
part on continued growth in the number of enterprises adopting solutions based
on Frame Relay, Asynchronous Transfer Mode ("ATM") and IP/Internet services. The
market for these services is characterized by rapid changes, including
continuing advances in technology, frequent new product introductions, changes
in customer requirements and preferences and changes in industry standards,
particularly with respect to Web technologies. The introduction of new
technologies or advances in techniques for statistically multiplexed WAN
services or the integration of WAN service level management functionality into
other network hardware components could render Visual UpTime obsolete or
unmarketable. Further, the Company will be required to make enhancements and
refinements to the product for wide scale implementation through the provider
deployment model. There can be no assurance that (i) Visual UpTime will continue
to compete successfully; (ii) the Company's future product offerings will keep
pace with the technological changes implemented by its competitors; (iii) the
Company's products will satisfy evolving industry standards or preferences of
existing or prospective customers; or (iv) 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.
Because Visual UpTime is deployed predominantly on Frame Relay networks,
the Company's near-term success will depend on the continued market acceptance
of Frame Relay technology as a preferred networking solution. The failure of
Frame Relay-based services to maintain widespread market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company is currently devoting significant resources
toward the development of additional products, including those based on ATM
technologies. There can be no assurance that the Company will complete
successfully the development of these or any future products in a timely
fashion, that the Company will successfully manage the transition from existing
products, that the Company's future products will achieve market acceptance, or
if market acceptance is achieved, that the Company will be able to maintain such
acceptance for a significant period of time. Any inability of the Company to
develop products on a timely basis that address
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changing customer needs and technologies may require the Company to
substantially increase development expenditures or may result in a loss of
market share to a competitor. There also can be no assurance that products or
technologies developed by others will not adversely affect the Company's
competitive position or render its products or technologies noncompetitive or
obsolete.
Products as complex as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found in new products after commencement
of commercial shipments. The occurrence of such errors could result in the loss
of or delay in market acceptance of the Company's products, diversion of
development resources, damage to the Company's reputation or increases in
service or warranty costs, any of which could have a material adverse effect
upon the Company's business, financial condition and results of operations.
INTENSE AND EVOLVING COMPETITION
The WAN equipment market is highly competitive. The Company faces
competition from participants in three distinct market segments: the WAN access
equipment market, the network test and analysis market and the market for
telecommunications support systems. Companies participating in these market
segments which compete or can be expected to compete with the Company include
ADC Telecommunications, Inc. ("ADC"), Adtran, Inc. ("Adtran"), Digital Link
Corp. ("Digital Link"), NetScout Systems, Inc. ("NetScout"), Network General
Corporation ("Network General"), Paradyne Corporation ("Paradyne"), Sync
Research, Inc. ("Sync"), Hewlett-Packard Company ("HP") and Concord
Communications, Inc. ("Concord").
The Company expects that it may experience price competition from products
and services that provide a portion of the functionality provided by Visual
UpTime. In particular, as prices for network equipment components such as data
service units/channel service units ("DSU/CSUs") decrease, customers may decide
to purchase these less expensive products even though they lack certain features
offered by the Company's products. The Company expects that, in some cases,
participants with strong capabilities in these various segments may partner with
each other to offer products that supply functionality approaching that provided
by Visual UpTime. The Company is aware of such an arrangement between Digital
Link and NetScout, who jointly offer a WAN service level product.
Many of the Company's current and possible competitors have greater
financial, technical, marketing and other resources than the Company, and some
have well established relationships with current and potential customers of the
Company. As a result, these competitors may be able to respond to new or
emerging technologies and changes in customer requirements more effectively than
the Company, or devote greater resources than the Company to the development,
promotion and sale of products. Increased competition may result in price
reductions, reduced profitability and loss of market share, any of which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenue and operating results may vary significantly from
quarter to quarter and from year to year as a result of a number of factors,
including the size and timing of orders, product mix and shipment of systems.
The timing of order placement, size of orders, satisfaction of contractual
customer acceptance criteria, as well as order delays or deferrals and shipment
delays and deferrals, may cause material fluctuations in revenue. Operating
results may also fluctuate on a quarterly basis based upon factors such as the
continued acceptance of Frame Relay-based products, demand for the Company's
current and future product offerings, the introduction of product enhancements
by the Company or its competitors, market acceptance of new products offered by
the Company or its competitors and the size, timing, cancellation or delay of
customer
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<PAGE> 10
orders, including cancellation or delay in anticipation of new product
offerings. The Company's quarterly operating results are also affected by the
budgeting cycles of customers, the relative percentages of products sold through
the Company's direct and indirect sales channels, product pricing and
competitive conditions in the industry. Any unfavorable changes in these or
other factors could have a material adverse effect on the Company's business,
financial condition and results of operations. Accordingly, the Company believes
that period-to-period comparisons of its results of operations may not be
meaningful and should not be relied upon as an indication of future performance.
Furthermore, there can be no assurance that the Company will be able to sustain
profitability on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
HISTORY OF LOSSES AND ACCUMULATED DEFICIT
The Company was organized in 1993 and introduced Visual UpTime in late
1995. Accordingly, the Company has only a limited operating history upon which
an evaluation of the Company, its product and prospects can be based. As of
September 30, 1997, the Company had an accumulated deficit of approximately
$12.2 million. The Company incurred losses from operations for the years ended
December 31, 1994, 1995 and 1996, of approximately $0.2 million, $1.8 million
and $7.1 million, respectively, and had a loss from operations for the nine
months ended September 30, 1997 of approximately $0.9 million. These losses
resulted primarily from expenditures associated with the development and
marketing of the Company's products. While the Company reported net income for
the three month periods ended June 30, 1997 and September 30, 1997, there can be
no assurance that the Company will sustain or again achieve profitability. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
There can be no assurance that the Company's revenue will grow or be
sustained in future periods. Although the Company has recently experienced an
increase in revenue from providers, such growth should not be considered
indicative of future revenue growth, if any, or of future operating results. The
Company's revenue in any period depends primarily on the volume and timing of
orders received during the period, which are difficult to predict. The Company's
expense levels are based, in part, on its expectation of future revenue. If
revenue levels are below expectations due to delays associated with customers'
decision-making processes or for any other reason, operating results are likely
to be materially and adversely affected. Net income may be affected
disproportionately by a reduction in revenue because a large portion of the
Company's expenses are fixed and cannot be easily reduced without adversely
affecting the Company's business. In addition, the Company currently intends to
increase its funding of research and product development, increase its sales and
marketing and customer support operations and expand distribution channels. To
the extent such expenses precede or are not promptly followed by increased
revenue, the Company's business, financial condition and results of operations
could be materially and adversely affected. For the foregoing reasons, there can
be no assurance that the Company will be profitable in any future period, and
recent operating results should not be considered indicative of future financial
performance. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS AND FLUCTUATIONS IN COMPONENT
PRICING
Certain key components used in the manufacture of Visual UpTime are
currently purchased only from sole, single or limited sources. At present,
sole-source components, where the Company has identified no other supplier for
the components, include T-1 framers, certain semiconductors, embedded
communications processors and line interface components. While alternative
suppliers have been identified for certain key components, those alternative
sources have not been qualified by the Company. The qualification process could
be lengthy and no assurance can be given that any additional sources would
become available to the Company on a timely basis, or, if such sources
8
<PAGE> 11
were to become available, that the Company would not experience a degradation in
the quality of components provided by such new suppliers. The Company generally
does not have long-term agreements with its suppliers that guarantee the
continuity of supply for sole, single or limited source components or that
provide protection against sudden increases in component prices. The Company has
from time to time experienced minor delays in the receipt of key components, and
any future difficulty in obtaining sufficient and timely delivery of them could
result in delays or reductions in product shipments, which, in turn, could have
a material adverse effect on the Company's business, financial condition and
results of operations. In the event any significant supplier becomes unable or
unwilling to continue to supply required components for the Company's products,
the Company would have to identify and qualify acceptable replacements. Any
interruption in the supply of such components, or the inability of the Company
to procure these components from alternate sources at acceptable prices and
within a reasonable time, could have a material adverse effect upon the
Company's business, financial condition and results of operations. In the event
of significant increases in the cost of components, the Company would be forced
either to increase the price of its products or accept lower profit margins. In
particular, certain of Visual UpTime's key components, including dynamic random
access memories ("DRAMs") and embedded communications processors, are subject to
fluctuations in pricing. An increase in prices for the Company's products
resulting from such component price fluctuations would make the Company's
products less competitive with products which do not incorporate such
components. Lower margins or less competitive product pricing could have a
material adverse effect on the Company's business, financial condition and
results of operations.
MANAGEMENT OF CHANGE AND EXPANSION
Since its inception, the Company has experienced rapid and significant
growth, including a significant increase in its number of employees. This growth
and changes in the Company's operations have placed significant demands on the
Company's administrative, operational, technical and financial resources. To
compete effectively, and to manage future growth, if any, the Company must
continue to strengthen its operational, financial and management information
reporting systems, controls and procedures on a timely basis and expand, train
and manage its work force. There can be no assurance that the Company will be
able to take such actions successfully. The failure of the Company's management
team to effectively manage growth could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its key management and technical employees, particularly Scott
E. Stouffer, Chairman, President and Chief Executive Officer. The loss of the
services of any key employee would adversely affect the Company's business,
financial condition and results of operations. The Company believes that its
future success will depend in large part upon its ability to attract and retain
highly-skilled managerial, sales, marketing, customer support and product
development personnel. The Company requires sales consultants and product
development personnel who are highly technically trained in the field of
telecommunications, and the competition for such individuals is intense. The
Company has at times experienced, and continues to experience, difficulty in
recruiting qualified personnel. There can be no assurance that the Company will
be successful in retaining its key employees or that it can attract or retain
additional skilled personnel as required. Failure to attract and retain key
personnel would have a material adverse effect on the Company's business,
financial condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
As the number of products in the network management industry increases and
the functionality of these products further overlaps, companies may increasingly
become subject to claims of
9
<PAGE> 12
infringement or misappropriation of the intellectual property or proprietary
rights of others. There can be no assurance that third parties will not assert
infringement or misappropriation claims against the Company in the future with
respect to current or future products, or that any such assertion will not
require the Company to enter into royalty arrangements or litigation that would
be costly to the Company. Any claims or litigation, with or without merit, could
result in a diversion of management's attention and the Company's financial
resources, 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.
While the Company believes that its success will depend principally upon
its ability to develop and effectively market products that meet the
requirements of customers for service level management functionality, its
ability to compete is also dependent in part upon its proprietary technology and
rights. The Company holds one patent and also relies on copyright and trade
secret laws, trademarks, confidentiality procedures and contractual provisions
to protect its proprietary software, documentation and other proprietary
information. There can be no assurance that the confidentiality agreements and
other methods on which the Company relies to protect its trade secrets and
proprietary information and rights will be adequate to prevent competitors from
developing similar technology. Moreover, in the absence of patent protection,
the Company's business may be adversely affected by competitors that develop
functionally equivalent technology. Furthermore, the Company may be subject to
additional risk as it enters into transactions in countries where intellectual
property laws are not well developed or enforced effectively. Legal protection
of the Company's rights may be ineffective in such countries, and technology
developed or used in such countries may not be protectable in jurisdictions
where protection is ordinarily available. Litigation to defend and enforce the
Company's intellectual property rights, regardless of the final outcome of such
litigation, could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can also be no assurance that the
Company's trade secrets or non-disclosure agreements will provide meaningful
protection of the Company's proprietary information. The Company's inability to
protect its proprietary rights would have a material adverse effect on the
Company's business, financial condition and results of operations.
CONTROL BY DIRECTORS AND OFFICERS
The Company's officers, directors and their affiliates will, in the
aggregate, beneficially own approximately 51.1% of the Company's outstanding
Common Stock after the offering. As a result, these stockholders, if acting
together, would be able effectively to control substantially all matters
requiring approval by the stockholders of the Company, including the election of
directors. This ability may have the effect of delaying or preventing a change
in control of the Company, or causing a change in control of the company which
may not be favored by the Company's other stockholders. See "Management" and
"Principal Stockholders".
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Common Stock
of the Company. The initial public offering price has been determined through
negotiations among the Company and the Representatives of the Underwriters. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. There can be no assurance that an active public
market will develop or be sustained after the offering or that the market price
of the Common Stock will not decline below the public offering price. Future
announcements concerning the Company or its competitors, quarterly fluctuations
in operating results, announcements of technological innovations, the
introduction of new products or changes in product pricing policies by the
Company or its competitors, proprietary rights or changes in earnings estimates
by analysts could cause the market price of the Common Stock to fluctuate
substantially. In addition, stock prices for
10
<PAGE> 13
many technology companies fluctuate widely for reasons which may be unrelated to
operating results. Such fluctuations in the Company's market price of the Common
Stock may affect the visibility and credibility of the Company in its markets.
Although the Company has no current plans for acquisitions, fluctuations in the
market price could affect the Company's ability to use stock for acquisitions.
These fluctuations, as well as general economic, political and market conditions
such as recessions, international instabilities or military conflicts, may
materially and adversely affect the market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer immediate and
substantial dilution of $7.98 per share in the net tangible book value of the
Common Stock from the initial public offering price. To the extent outstanding
options to purchase the Company's Common Stock are exercised, there will be
further dilution. See "Dilution".
BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS
After the offering, it is expected that a public market will exist for the
Common Stock. At an assumed initial offering price of $10.00 per share, there
will be a substantial increase in the market value of the shares of Common Stock
held by management and existing stockholders over their original purchase price.
As of November 30, 1997, the directors, officers, key employees and 5%
stockholders of the Company held an aggregate of 10.9 million shares of Common
Stock having an aggregate original purchase price of approximately $9.8 million
and a market value, based on an assumed initial public offering price of $10.00
per share, of $108.8 million. See "Management" and "Principal Stockholders".
ANTITAKEOVER CONSIDERATIONS
Following the offering, the Company's Board of Directors will have the
authority to issue up to 5,000,000 shares of preferred stock ("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 stockholders. 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. See "Description of Capital
Stock -- Preferred Stock". The issuance of Preferred Stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Furthermore, certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company. The Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner.
The Company's Certificate of Incorporation contains other provisions that
may have the effect of delaying or preventing a change in control of the
Company, including a classified Board of Directors and a limitation on
stockholder action by written consent. See "Description of Capital
Stock -- Delaware Law and Certain Charter Provisions". In addition, the
Company's credit facility with Silicon Valley Bank prohibits the Company from
engaging in a merger with or being acquired by another entity without the Bank's
consent.
DISCRETIONARY USE OF PROCEEDS
The net proceeds to the Company from the offering, estimated at $31.8
million, will be used for general corporate purposes and have not been
designated for any particular purpose. Accordingly,
11
<PAGE> 14
the Company will have broad discretion as to the application of such proceeds.
See "Use of Proceeds".
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock after the offering
could adversely affect the market price for the Common Stock and could impair
the Company's ability to raise capital through the sale of equity securities.
The 3,500,000 shares of Common Stock offered hereby will be freely tradable
without restriction in the public market as of the date of this Prospectus
except as described in "Underwriting". Approximately 3,431,864 shares will be
eligible for immediate sale in the public market pursuant to Rule 144(k) under
the Securities Act of 1933, as amended (the "Securities Act"), of which
3,424,864 shares are subject to lock-up agreements. Within 90 days after the
date of this Prospectus, approximately 10,100,255 shares will become eligible
for sale in the public market, subject in some cases to the volume and other
restrictions of Rule 144. Of these shares, 10,070,630 shares are subject to
lock-up agreements. Shares covered by these lock-up agreements are subject to
restrictions on resale in the public market for a period of 180 days following
the date of this Prospectus, subject to release, at the discretion of the
Representatives of the Underwriters. Upon the expiration of the lock-up period,
approximately 13,477,239 shares will become eligible for sale in the public
market subject in some cases to the volume and other restrictions of Rule 144.
The holders of 10,605,735 shares of Common Stock are entitled to certain
registration rights with respect to such shares under the Securities Act. In
addition, the Company intends to file a registration statement under the
Securities Act promptly following the effective date of this Registration
Statement to register all of the shares of Common Stock issued or reserved for
issuance upon the exercise of options issued or that may be issued under the
Company's 1994 Stock Option Plan, 1997 Omnibus Stock Plan and the 1997
Directors' Stock Option Plan. As of September 30, 1997, there were outstanding
options for the purchase of 1,600,092 shares, of which options for approximately
280,293 shares were vested. See "Management -- Stock Plans", "Underwriting" and
"Shares Eligible for Future Sale".
12
<PAGE> 15
USE OF PROCEEDS
The principal purposes of the offering are to increase the Company's
working capital and equity base, create a public market for the Company's Common
Stock, facilitate future access to public capital markets and provide increased
visibility and credibility for the Company in its marketplace. The net proceeds
to the Company from the sale of the 3,500,000 shares of Common Stock offered by
the Company hereby are estimated to be $31.8 million ($36.7 million if the
Underwriters' over-allotment option is exercised in full) at an assumed initial
public offering price of $10.00 per share, after deducting the underwriting
discount and estimated offering expenses.
The Company has no current plans for the net proceeds of the offering. The
Company intends to add the net proceeds from the offering to working capital,
where such proceeds will be available to support general corporate purposes
which are expected to include capital equipment expenditures to support selling
and marketing, manufacturing and product development activities. A portion of
the proceeds may also be used to acquire or invest in complementary businesses
or products or to obtain the right to use complementary technologies. From time
to time, in the ordinary course of business, the Company evaluates potential
acquisitions of such businesses, products or technologies. However, the Company
has no present understandings, commitments or agreements with respect to any
material acquisition of other businesses, products or technologies. Pending use
of the net proceeds for any purposes, the Company intends to invest such funds
in short-term, interest-bearing, investment grade obligations.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on its Common
Stock. It is the present policy of the Company to retain earnings to finance the
growth and development of the business and, therefore, the Company does not
anticipate declaring or paying cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's credit facility with Silicon
Valley Bank prohibits the Company from paying cash dividends without the Bank's
consent. See Note 2 of Notes to Financial Statements.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, (i) on an actual basis and (ii) as adjusted to reflect the
conversion of all outstanding shares of convertible preferred stock into
10,605,735 shares of Common Stock upon the closing of the offering and the sale
of 3,500,000 shares of Common Stock offered by the Company hereby (at an assumed
initial public offering price of $10.00 per share) and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Company's Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt....................................................... $ 312 $ 312
Redeemable convertible cumulative preferred stock, $.01 par value;
7,229,438 shares authorized, 7,228,473 shares issued and
outstanding (actual); no shares issued and outstanding (as
adjusted) (1)...................................................... 14,491 --
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares authorized, no
shares issued and outstanding (actual and as adjusted) (1)..... -- --
Series A convertible cumulative preferred stock, $.01 par value;
347,070 shares authorized, 347,070 shares issued and
outstanding (actual); no shares issued and outstanding (as
adjusted) (1).................................................. 3 --
Common Stock, $.01 par value; 50,000,000 shares authorized,
2,929,131 shares issued and outstanding (actual); 17,034,866
shares issued and outstanding (as adjusted) (2)................ 29 170
Deferred compensation........................................... (247) (247)
Additional paid-in capital...................................... 508 46,661
Accumulated deficit............................................. (12,205) (12,205)
-------- ----------
Total stockholders' equity (deficit)................................. (11,912) 34,379
-------- ----------
Total capitalization................................................. $ 2,891 $ 34,691
======== ==========
</TABLE>
- ---------------
(1) See Note 3 of Notes to Financial Statements.
(2) Excludes 3,275,000 shares of Common Stock reserved for issuance under the
Company's 1994 Stock Option Plan, 1997 Omnibus Stock Plan and 1997
Directors' Stock Option Plan, under which options to purchase 1,600,092
shares at a weighted average exercise price of $1.14 were outstanding as of
September 30, 1997. See "Management -- Stock Plans" and Note 5 of Notes to
Financial Statements.
14
<PAGE> 17
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997, was approximately $2.6 million, or approximately $0.19 per share of Common
Stock. Pro forma net tangible book value per share represents the amount of the
Company's pro forma stockholders' equity, less intangible assets, divided by
13,534,866 pro forma shares of Common Stock outstanding as of September 30,
1997. The preceding pro forma information gives effect to the conversion of the
Company's Convertible Preferred Stock into 10,605,735 shares of Common Stock.
Assuming the sale by the Company of 3,500,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $10.00 per share and
receipt of the estimated net proceeds therefrom, the pro forma adjusted net
tangible book value of the Company as of September 30, 1997 would have been
approximately $34.4 million or $2.02 per share. This represents an immediate
increase in such net tangible book value of $1.83 per share to existing
stockholders and an immediate dilution of $7.98 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price........................................... $ 10.00
-------
Pro forma net tangible book value per share as of September 30,
1997................................................................ $ 0.19
Increase per share of Common Stock attributable to the offering....... 1.83
------
Pro forma net tangible book value per share after the offering.......... 2.02
-------
Net tangible book value dilution per share to new investors............. $ 7.98
=======
</TABLE>
The following table summarizes on a pro forma basis as of September 30,
1997, the total number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid by
existing stockholders and the new investors (at an assumed initial public
offering price of $10.00 per share and without giving effect to the underwriting
discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........ 13,534,866 79.5% $12,476,882 26.3% $ 0.92
New investors................... 3,500,000 20.5 35,000,000 73.7 10.00
---------- ------ ----------- ------ -------
Total........................... 17,034,866 100.0% $47,476,882 100.0% $ 2.79
========== ====== =========== ====== =======
</TABLE>
- ---------------
(1) Excludes 3,275,000 shares of Common Stock reserved for issuance under the
Company's 1994 Stock Option Plan, 1997 Omnibus Stock Plan and 1997
Directors' Stock Option Plan under which options to purchase 1,600,092
shares at a weighted average exercise price of $1.14 were outstanding as of
September 30, 1997. See "Management -- Stock Plans" and Note 5 of Notes to
Financial Statements.
15
<PAGE> 18
SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, notes thereto and other financial
information included elsewhere in this Prospectus. The selected financial data
as of and for the years ended December 31, 1994, 1995 and 1996, are derived from
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent public accountants. See "Experts". The selected financial data
for the period from inception to December 31, 1993, are derived from audited
financial statements not included in this Prospectus. The data presented for the
nine month periods ended September 30, 1996 and 1997, are derived from unaudited
financial statements and include, in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary to present fairly the data
for such periods. The results for the nine month period ended September 30, 1997
are not necessarily indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM NINE MONTHS
INCEPTION ENDED
(AUGUST 12, 1993) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
THROUGH ------------------------------- -------------------
DECEMBER 31, 1993 1994 1995 1996 1996 1997
----------------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $ -- $ -- $ 250 $ 6,335 $ 3,944 $15,524
Cost of goods sold............................ -- -- 44 2,550 1,614 5,059
-------- ------- ------- ------- ------- -------
Gross profit................................ -- -- 206 3,785 2,330 10,465
-------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.................... -- 163 994 2,988 2,075 2,950
Sales and marketing......................... -- -- 700 6,386 4,260 6,751
General and administrative.................. (5) 59 343 1,469 840 1,616
-------- ------- ------- ------- ------- -------
Total operating expenses.................. (5) 222 2,037 10,843 7,175 11,317
-------- ------- ------- ------- ------- -------
Loss from operations.......................... (5) (222) (1,831) (7,058) (4,845) (852)
Interest income, net.......................... -- -- 40 75 52 11
-------- ------- ------- ------- ------- -------
Net loss...................................... $ (5) $ (222) $(1,791) $(6,983) $(4,793) $ (841)
======== ======== ======= ======= ======= =======
Pro forma net loss per common share (1)....... $ (0.53) $ (0.38) $ (0.06)
======= ======= =======
Pro forma weighted average common shares
outstanding (1)............................. 13,104 12,774 14,133
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997
-------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 1 $ 1,137 $ 993 $ 3,404 $ 4,140
Working capital............................... -- 1,063 1,151 2,494 1,626
Total assets.................................. 1 1,167 1,728 7,249 9,428
Long-term debt, net of current portion........ 6 -- 81 28 312
Redeemable convertible preferred stock........ -- 1,170 3,385 13,398 14,491
Stockholders' equity (deficit)................ (5) (83) (2,124) (10,119) (11,912)
</TABLE>
- ---------------
(1) For an explanation of the determination of the number of shares used in
computing pro forma per share amounts, see Note 1 of Notes to Financial
Statements.
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
financial statements, the related notes thereto, and other financial information
included elsewhere in this Prospectus.
OVERVIEW
The Company was incorporated in Maryland in August 1993 as Avail Networks,
Inc. and reincorporated in Delaware in December 1994 as Visual Networks, Inc.
From incorporation through December 1994, the Company's principal objective was
to secure sufficient equity financing to enable the Company to accelerate
product development efforts. The Company secured its initial round of equity
financing in December 1994.
During 1995 and 1996, the Company devoted substantial resources to
developing Visual UpTime for Frame Relay deployment and to developing sales and
marketing functions and general and administrative infrastructure. Visual UpTime
was first shipped in mid-1995. The Company began generating significant revenue
from sales of Visual UpTime during 1996.
During 1995 and 1996, most of the Company's sales were to subscribers. In
August 1996, the Company entered into a master reseller agreement with Sprint,
resulting in the Company's products shipping through Sprint to subscribers.
During 1997, the Company began expanding its sales force and distribution
capabilities in order to sell Visual UpTime directly to providers for deployment
of the system as part of their network infrastructure.
The Company generally recognizes revenue upon shipment or delivery of the
product and passage of title to the customer. Where the agreements provide for
evaluation or customer acceptance, the Company recognizes revenue upon the
completion of the evaluation process and acceptance of the product by the
customer. Maintenance contracts call for the Company to provide technical
support and software updates to customers. The Company recognizes maintenance
revenue, including maintenance revenue that is bundled with product sales,
ratably over the contract period, which currently ranges from one to three
years.
The Company currently contracts with third parties for board assembly and
has a manufacturing operation that performs final assembly, testing and shipping
of its product at its facility in Rockville, Maryland. The Company anticipates
maintaining a portion of its internal manufacturing function for the foreseeable
future, but is exploring opportunities with contract manufacturers to have its
products assembled, tested and shipped at a third-party location.
17
<PAGE> 20
RESULTS OF OPERATIONS
The following table presents for the periods indicated certain statement of
operations data as a percentage of the Company's revenue:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- ----------------
1995 1996 1996 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................ 17.6 40.3 40.9 32.6
------ ------ ------ -----
Gross profit................................ 82.4 59.7 59.1 67.4
------ ------ ------ -----
Operating expenses:
Research and development.................... 397.6 47.1 52.6 19.0
Sales and marketing......................... 280.0 100.8 108.0 43.5
General and administrative.................. 137.2 23.2 21.3 10.4
------ ------ ------ -----
Total operating expenses................. 814.8 171.1 181.9 72.9
------ ------ ------ -----
Loss from operations.......................... (732.4) (111.4) (122.8) (5.5)
Interest income, net.......................... 16.0 1.2 1.3 0.1
------ ------ ------ -----
Net loss...................................... (716.4)% (110.2)% (121.5)% (5.4)%
====== ====== ====== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
For the year ended December 31, 1994, the Company was in the development
stage, generated no revenue and had losses from operations of $0.2 million.
For the year ended December 31, 1995, the Company had revenue of $0.3
million. The Company devoted substantial resources to research and development
efforts as well as to the development of sales and marketing functions and
general and administrative infrastructure in anticipation of sales of Visual
UpTime during 1996.
For the year ended December 31, 1996, the Company had revenue of $6.3
million, gross profit of $3.8 million and operating expenses of $10.8 million.
Operating expenses increased $8.8 million over 1995 because the Company
continued to add personnel for research and development, sales and marketing and
general and administrative infrastructure to support anticipated growth in
revenue.
The Company has recorded a valuation allowance to offset the Company's net
deferred tax assets, including the possible future benefit from realization of
tax operating loss carryforwards. The recording of such valuation allowance was
based upon management's determination that realization of the net deferred tax
assets was not "more likely than not" (as defined in Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes").
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUE. The Company recognized $15.5 million in revenue for the nine
months ended September 30, 1997, as compared to $3.9 million for the nine months
ended September 30, 1996, an increase of $11.6 million. The increase was due
primarily to acceptance of Visual UpTime in the Frame Relay market and to sales
resulting from the reseller agreement signed with Sprint in August 1996. Revenue
from this reseller agreement accounted for approximately 31% of revenue for the
nine month period ended September 30, 1997.
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees and overhead expenses related to
18
<PAGE> 21
manufacturing operations. Gross profit was $10.5 million for the nine months
ended September 30, 1997, as compared to $2.3 million for the nine months ended
September 30, 1996, an increase of $8.2 million. Gross margin was 67.4% for the
nine months ended September 30, 1997, as compared to 59.1% for the nine months
ended September 30, 1996. The increase in gross margin percentage was due
primarily to product cost reductions. The Company's future gross margins may be
affected by the product mix of sales and the allocation of sales among its
various sales channels. The Company's future gross margins also may be adversely
affected by a number of factors, including competitive pricing, manufacturing
volumes and increases in component costs.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
consists of compensation for research and development staff, depreciation of
test and development equipment, certain software development costs and prototype
materials. The Company expenses research and development costs as incurred.
Research and development expense was $3.0 million for the nine months ended
September 30, 1997, as compared to $2.1 million for the nine months ended
September 30, 1996, an increase of $0.9 million. The increase in research and
development expense was due primarily to increased staffing levels and to a
lesser extent, purchases of materials used in the development of new or enhanced
products. Research and development expense was 19.0% of revenue for the nine
months ended September 30, 1997. The Company expects that research and
development expenditures will increase in absolute dollars, and may decrease as
a percentage of revenue, during the remainder of 1997 and thereafter. This
increase in absolute dollars will support continued development of new and
enhanced products and the exploration of new or complementary technologies.
SALES AND MARKETING EXPENSE. Sales and marketing expense consists of
compensation for the sales and marketing staff, commissions, pre-sales support,
travel and entertainment expense, trade shows and other marketing programs.
Sales and marketing expense was $6.8 million for the nine months ended September
30, 1997, as compared to $4.3 million for the nine months ended September 30,
1996, an increase of $2.5 million. The increase in sales and marketing expense
was due primarily to increased staffing levels. Sales and marketing expense was
43.5% of revenue for the nine months ended September 30, 1997. The Company
expects that sales and marketing expenditures will increase in absolute dollars,
and may decrease as a percentage of revenue, during the remainder of 1997 and
thereafter. This increase in absolute dollars is expected to be incurred as
additional personnel are hired, field offices are opened and promotional
expenditures increase to allow the Company to increase its market penetration
and to pursue new market opportunities.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists of finance, administration and general management activities. General
and administrative expense was $1.6 million for the nine months ended September
30, 1997, as compared to $0.8 million for the nine months ended September 30,
1996, an increase of $0.8 million. The increase in general and administrative
expense was due primarily to increased staffing levels. General and
administrative expense was 10.4% of revenue for the nine months ended September
30, 1997. The Company expects that general and administrative expenditures will
increase in absolute dollars, and may decrease as a percentage of revenue,
during the remainder of 1997 and thereafter. This increase in absolute dollars
is expected to be required for the expansion of the Company's administrative
staff and internal systems to support expanding operations and operating as a
public company.
OPERATING LOSS. The Company's operating loss was $0.9 million for the nine
months ended September 30, 1997, as compared to an operating loss of $4.8
million for the nine months ended September 30, 1996, a decrease of $3.9
million. This improvement was due primarily to the revenue and gross profit
increases described above.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present statement of operations data in dollars and as
a percentage of the Company's revenue. This quarterly information is unaudited
but has been prepared on a basis
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<PAGE> 22
consistent with the Company's audited financial statements presented elsewhere
herein, and in the Company's opinion, includes all adjustments (consisting only
of normal recurring adjustments), necessary for a fair presentation of the
information for the quarters presented. The results of operations for any
quarter are not necessarily indicative of results that may be expected for any
subsequent periods. See "Risk Factors -- Potential Fluctuations in Quarterly
Operating Results".
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31 JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................ $ 433 $ 1,556 $ 1,955 $ 2,391 $ 3,079 $ 5,428 $ 7,017
Cost of goods sold................. 182 643 789 936 1,051 1,797 2,211
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 251 913 1,166 1,455 2,028 3,631 4,806
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development......... 564 617 894 913 880 937 1,133
Sales and marketing.............. 744 1,452 2,064 2,126 2,063 2,137 2,551
General and administrative....... 238 246 356 629 483 545 588
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses....... 1,546 2,315 3,314 3,668 3,426 3,619 4,272
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations...... (1,295) (1,402) (2,148) (2,213) (1,398) 12 534
Interest income, net............... 27 20 5 23 8 1 2
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................. $(1,268) $(1,382) $(2,143) $(2,190) $(1,390) $ 13 $ 536
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of good sold.................. 42.0 41.3 40.4 39.1 34.1 33.1 31.5
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 58.0 58.7 59.6 60.9 65.9 66.9 68.5
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development......... 130.2 39.7 45.7 38.2 28.6 17.3 16.1
Sales and marketing.............. 171.8 93.3 105.6 88.9 67.0 39.4 36.4
General and administrative....... 55.0 15.8 18.2 26.4 15.7 10.0 8.4
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses....... 357.0 148.8 169.5 153.5 111.3 66.7 60.9
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations...... (299.0) (90.1) (109.9) (92.6) (45.4) 0.2 7.6
Interest income, net............... 6.2 1.3 0.3 1.0 0.3 0.0 0.0
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................. (292.8)% (88.8)% (109.6)% (91.6)% (45.1)% 0.2% 7.6%
========= ========= ========= ========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997, JUNE 30, 1997 AND SEPTEMBER 30, 1997
Revenue has increased in each of the last three quarters from $3.1 million
for the three months ended March 31, 1997 to $5.4 million and $7.0 million for
the three months ended June 30, 1997 and September 30, 1997, respectively. These
increases were due primarily to the acceptance of Visual UpTime in the Frame
Relay market and increases in sales to subscribers by Sprint and other
providers. The Company's sales strategy is to focus on selling Visual UpTime to
providers for deployment as part of their core network infrastructure. There can
be no assurance that the Company will be successful in executing this provider
deployment sales model and the impact of this sales model, if successfully
implemented, on the Company's future growth is uncertain. See
"Business -- Sales, Marketing and Support".
Gross margins have increased in each of the last three quarters from 65.9%
in the three months ended March 31, 1997 to 66.9% and 68.5% in the three months
ended June 30, 1997 and September 30, 1997, respectively. These increases were
due primarily to product cost reductions. The Company expects continued
reductions in product costs; however, future gross margins may
20
<PAGE> 23
be adversely affected by a number of factors, including competitive market
pricing, increases in component costs, manufacturing volumes and the mix of
products sold during the period.
The Company's operating expenses have increased in each of the last three
quarters, from $3.4 million in the three month period ended March 31, 1997 to
$3.6 million and $4.3 million in the three month periods ended June 30, 1997 and
September 30, 1997, respectively. The increases were due primarily to increased
staffing in sales and marketing and to a lesser extent increases in research in
development and administrative personnel. The Company expects that operating
expenses will continue to increase in 1998 as the Company attempts to increase
its market penetration, develops new and enhanced products, and increases
administrative staff and the systems required to support the Company's expanding
operations. Operating expenses as a percentage of revenue have declined from
111.3% of revenue for the three months ended March 31, 1997 to 66.7% and 60.9%
of revenues for the three month periods ended June 30, 1997 and September 30,
1997, respectively. The Company expects that operating expenses as a percentage
of revenue will continue to decrease as, and if, its revenue increases.
The Company's quarterly revenue and operating results may vary
significantly as a result of a number of factors, including the size and timing
of orders, product mix and shipment of systems. Operating results may also
fluctuate on a quarterly basis based upon factors such as the continued
acceptance of Frame Relay-based products, demand for the Company's current and
future product offerings, the introduction of product enhancements by the
Company or its competitors and market acceptance of new products offered by the
Company or its competitors. The Company's quarterly operating results are also
affected by the budgeting cycles of customers, the relative percentages of
products sold through the Company's direct and indirect sales channels, product
pricing and competitive conditions in the industry. Any unfavorable changes in
these or other factors could have a material adverse effect on the Company's
business, financial condition and results of operations. Accordingly, the
Company believes that period-to-period comparisons of its results of operations
may not be meaningful and should not be relied upon as an indication of future
performance. Furthermore, there can be no assurance that the Company will be
able to sustain profitability on a quarterly or annual basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company, since inception, has financed its operations and capital
expenditures through the sale of Convertible Preferred Stock, for aggregate
proceeds, net of issuance costs, of approximately $12.1 million, and through
capital lease and other debt financing. Cash used in operating activities was
approximately $2.0 million in 1995 and $6.6 million in 1996. During the nine
months ended September 30, 1997, the Company's operating activities provided net
cash of approximately $1.8 million, primarily due to improved collections from
customers. Capital expenditures were approximately $0.2 million in 1995, $0.8
million in 1996 and $0.8 million for the nine months ended September 30, 1997.
The Company expects capital expenditures to increase significantly in 1998 to
support the Company's growth. Any delay in these expenditures could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company's future capital requirements will depend on many
factors, including the rate of revenue growth, if any, the timing and extent of
spending to support product development efforts and expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products and market acceptance of the Company's products. There can be
no assurance that additional equity or debt financing, if required, will be
available on acceptable terms, if at all.
The Company's principal source of liquidity as of September 30, 1997,
consisted of $4.1 million in cash and cash equivalents and a bank credit
facility. The credit facility includes a revolving line of credit providing for
borrowings up to the lesser of $3.0 million or 75% of eligible accounts
receivable
21
<PAGE> 24
(as defined in the credit facility). The agreement entitles Silicon Valley Bank
to a first priority security interest in the Company's inventory and related
accounts receivable equal to the amount drawn on the line of credit. The
agreement contains restrictive financial covenants, including tangible net worth
minimums and certain operating requirements. Interest is payable monthly at the
prime rate plus 1.5%. As of September 30, 1997, there were no borrowings
outstanding under the bank credit facility.
The Company believes that the net proceeds from the offering and cash
generated from operations, together with existing sources of liquidity will be
sufficient to meet its capital expenditures and working capital for the next 18
to 24 months. The Company may consider from time to time various financing
alternatives and may seek to raise additional capital through equity or debt
financing or to enter into strategic arrangements. There can be no assurance,
however, that any such financing alternatives will be available on terms
acceptable to the Company, if at all.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No.
131, "Disclosures about Segments of an Enterprise and Related Information."
These statements become effective for the Company's 1998 financial statements.
The Company is evaluating these statements to determine the impact on its
reporting and disclosure requirements.
22
<PAGE> 25
BUSINESS
OVERVIEW
The Company designs, manufactures and sells WAN service level management
systems for statistically multiplexed technologies such as Frame Relay and
IP/Internet. The Company's Visual UpTime system combines WAN access
functionality with innovative software for performance monitoring,
troubleshooting and network planning. Visual UpTime provides instrumentation for
network performance measurement and analysis that allows providers to achieve
the service levels required by their subscribers and to lower operating costs
associated with statistically multiplexed services. The availability of
performance monitoring and troubleshooting instrumentation also allows
subscribers to verify the service levels being supplied by their WAN provider
and monitor traffic traversing the WAN, a requirement for many subscribers
wishing to use statistically multiplexed services to carry mission-critical data
traffic. The Company believes Visual UpTime systems are deployed in
configurations managing as few as 3 circuits and as many as 1,000 circuits. The
system is designed to scale up to 3,000 circuits on a single managed network.
The Company believes it is a worldwide leader in field deployment of WAN
service level management systems. The Company introduced Visual UpTime in the
summer of 1995 and has since shipped systems configured for deployment on over
12,000 WAN circuits in over 300 subscriber Frame Relay networks, including those
of Cargill, Inc., Delta Air Lines, Inc., FedEx, Household International, Inc.
and Waste Management, Inc. For the nine months ended September 30, 1997, the
Company had revenue of $15.5 million.
Vertical Systems estimates that approximately 920,000 Frame Relay circuits
will be installed worldwide over the next three years. To take advantage of this
projected growth in the Frame Relay market, the Company has developed
relationships with major Frame Relay service providers such as AT&T, Sprint,
MCI, Ameritech and BellAtlantic. The percentage of revenue attributable to sales
to providers, which either resell or lease the systems to subscribers, increased
in each of the first three quarters of 1997, with Sprint and AT&T accounting for
31% and 5%, respectively, of revenue for the nine months ended September 30,
1997.
INDUSTRY BACKGROUND
WAN SERVICES MARKET
The WAN services market has grown rapidly with the increase in computing
and the associated data traffic volumes carried over WANs. WAN services are used
to interconnect the computing facilities of geographically dispersed sites
within an enterprise or to connect the computing facilities of one enterprise to
another. The Company believes WAN data traffic volumes will continue to expand
rapidly due to three key trends driving telecommunications markets worldwide:
- Proliferation of distributed computing applications such as electronic
mail, electronic transaction processing, enterprise resource planning and
inter-enterprise information transfer based on Web technologies;
- Deregulation of the telecommunications services industry, which has
intensified competition and resulted in decreasing prices of WAN
services; and
- The continued deployment of high capacity fiber-optic networks and the
emergence of high-bandwidth network access technologies that increase the
ability to transfer large volumes of electronic information.
Vertical Systems forecasts that WAN traffic on leased-line, Frame Relay and
ATM services in the U.S. market will triple from 1996 to 2000, and projects the
U.S. market for these services will exceed $13 billion in 1997 and grow to $19.5
billion in 2000. The non-U.S. market for these services is expected to exceed
$13 billion in 1997.
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<PAGE> 26
WAN NETWORK DEPLOYMENT
A typical WAN deployment to support distributed computing environments
includes various types of customer premise equipment ("CPE") owned by the
subscriber, deployed at the subscriber's sites and interconnected by the WAN
service. The points at which the subscriber CPE connects to the WAN service are
known as service demarcations ("demarcs"). The subscribers are responsible for
network performance on the subscriber side of the demarcs, while providers are
responsible for network performance on the provider side of the demarcs.
TYPICAL WAN DEPLOYMENT
[A GRAPHIC OF A TYPICAL WAN DEPLOYMENT APPEARS HERE]
The equipment used for Frame Relay, ATM and IP/Internet services comprises
both the access equipment located at the subscriber premises and the switches
located at the provider's central office. Access equipment includes devices such
as DSU/CSUs, FRADs (frame relay access devices), frame relay cards for routers
and ATM access multiplexers. Vertical Systems projects that the markets for this
equipment will grow significantly in parallel with the projected growth in the
underlying service markets. The market for Frame Relay, ATM and IP/Internet
access equipment is projected to grow from $353 million in 1996 to $1.4 billion
in 2000.
WAN NETWORK ARCHITECTURES
WAN services are provided through two network architectures, time division
multiplexing ("TDM") and statistical multiplexing. TDM services, such as
leased-line and ISDN, rely on architectures which provide dedicated circuits
between computing facilities and provide fixed bandwidth regardless of traffic
flow. Unless information is continuously transmitted, the dedicated bandwidth is
often idle, resulting in the inefficient use of expensive bandwidth. The use of
dedicated bandwidth does, however, provide guaranteed throughput and fixed
delay, ensuring high quality of service for all network traffic. Consequently,
TDM services are suitable for the large installed base of mainframe computing
environments running mission-critical, host-centric applications where the
variability in traffic volume is low and the traffic volume is relatively
predictable. By contrast, statistical multiplexing technologies and their
derivative services, such as Frame Relay, ATM, IP/Internet, X.25 and Switched
Multimegabit Data Services ("SMDS"), are based on the concept of
24
<PAGE> 27
shared bandwidth which is dynamically allocated in real time according to
prevailing traffic patterns. As a result of this shared bandwidth, WANs based on
these services can be up to 50% less expensive than WANs based on leased-line
services for distributed computing applications. Because bandwidth in the WAN is
shared among multiple subscribers, however, these services are generally
characterized by "best efforts" throughput and variable delay, often resulting
in lower quality of service more suitable for non-mission-critical distributed
computing applications where the traffic is highly variable and unpredictable.
WAN services are undergoing a significant shift from TDM architectures to
statistically multiplexed architectures. Vertical Systems estimates that
worldwide revenues for Frame Relay service, the most widely used service, will
have grown at a compound annual growth rate of 117% between 1995 and 1997 and
will grow at a compound annual growth rate of 41% through the year 2000. The
worldwide number of installed Frame Relay circuits is projected to grow from
approximately 580,000 in 1997 to more than 1.5 million in 2000. ATM services are
less widely offered today but also are projected to experience rapid growth.
Accordingly, the U.S. market for Frame Relay and ATM services is expected to
shift from 12% of WAN bandwidth in 1996 to nearly 40% in 2000 (with the majority
of growth attributed to Frame Relay services) while the U.S. market for
leased-line services is expected to decrease from approximately 88% of WAN
bandwidth to 60% from 1996 to 2000.
The growth of statistically multiplexed services has resulted in increased
focus by subscribers on WAN service levels, defined by parameters such as
service availability, throughput and delay. Subscribers have historically been
able to tolerate the lower reliability and quality of service of statistically
multiplexed services because most of the distributed computing applications
supported by these services, including E-mail and file transfer, were not
mission-critical. Today, however, the importance of distributed computing
applications is increasing as enterprises implement newer mission-critical
applications for enterprise resource planning, transaction processing, work
group collaboration, remote telecommuting, sales force automation and electronic
order entry. Subscribers, therefore, are demanding that their providers offer,
achieve and, increasingly, guarantee higher service levels.
The proliferation of statistically multiplexed services has also resulted
in increased administrative costs for subscribers as more network managers
manage multiple networks consisting of leased-line services supporting
mission-critical legacy applications and Frame Relay services supporting
recently-deployed, distributed computing applications. The high cost of
administering multiple networks coupled with the attractive pricing of Frame
Relay services is driving the need for subscribers to consolidate their
applications onto a single Frame Relay WAN. The migration of mainframe computing
environments running mission-critical host-centric applications onto lower cost
statistically multiplexed services has highlighted the need to provide higher
service levels with such services. This migration and the proliferation of
distributed computing applications have also generated subscriber demand for
providers to offer multiple classes of service levels. Multiple service levels
enable subscribers to deploy statistically multiplexed WANs that have service
characteristics commensurate with the performance requirements of their
differing computing applications, thereby optimizing price and performance.
Subscriber demand for multiple, guaranteed and verified WAN service levels
presents challenges to providers, which must be able to offer profitably these
service levels.
The WAN services segment of deregulated telecommunications markets is
intensely competitive and price sensitive, and cost leadership tends to drive
competitive strategies. Providers can only achieve cost leadership if they can
realize economies of scale. They must also avoid a costly dependence on highly
skilled personnel for service provisioning and maintenance, a dependence that
has historically existed for statistically multiplexed services. Therefore,
providers face the challenge of increasing the manageability of statistically
multiplexed services while simultaneously developing service deployment and
operational models that can satisfy rapid growth requirements and achieve
economies of scale.
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PROBLEMS MANAGING FRAME RELAY, ATM AND IP/INTERNET SERVICES
In leased-line environments, the performance, quality and maintainability
of the service are independent of the volume and type of traffic running over
the service. Accordingly, the diagnostic and measurement capabilities required
to sufficiently maintain these services are fairly simplistic and are focused
largely on physical transmission characteristics such as bit error rates or line
coding violations. These capabilities are widely available within the providers'
facilities and work in conjunction with simple DSU/CSUs deployed by the
subscribers. By contrast, the performance, quality and maintainability of
statistically multiplexed services are highly dependent on the volume and type
of traffic running over the service. This extensive interplay between the
subscriber application traffic and the provider service dictates the need for
sophisticated diagnostic and measurement capabilities which not only analyze
physical transmission characteristics but can also analyze the traffic itself.
Historically, this level of measurement and analysis capability has generally
required the use of expensive portable protocol analyzers, and therefore has not
been cost effective to deploy on a continuous basis at the demarc. This
inability to measure service performance and quality has created difficulties
for both subscribers and providers including the following:
SUSPECT SERVICE LEVELS INHIBIT SUBSCRIBER ACCEPTANCE OF
SERVICE. Subscribers generally view statistically multiplexed services as
offering deficient service levels and are therefore reluctant to run
mission-critical applications across statistically multiplexed WANs. As the
demand for higher service levels and multiple service levels has increased,
subscribers and providers need a mechanism to measure, verify and improve
service levels at the demarc.
OPERATIONAL COST MODELS ARE NOT SCALEABLE. The inability to
cost-effectively measure performance at the demarc, and thereby demonstrate to
subscribers the WAN service level being provided, results in providers requiring
many highly skilled personnel to provision and operate statistically multiplexed
services. This cost is exacerbated by the gap between the demand for and supply
of such personnel. The implication of this model is that operating costs are
driven up and providers' WAN service businesses are not scaleable to the levels
required to generate the economies of scale necessary for cost leadership. The
specific areas of concern are:
- INEFFICIENT SERVICE PROVISIONING. It is difficult for the provider to
ascertain if the WAN service is properly deployed until the subscriber's
network has been connected to the service and the subscriber's
applications are operational. This often results in multiple dispatches
of personnel to the subscriber site and extensive interaction with the
subscriber for its equipment and applications to be configured properly
for the WAN service. At the same time, the provider is typically
restricted from billing the subscriber for the service until the
subscriber's applications are working properly over the WAN service.
- EXTENSIVE TROUBLESHOOTING AND HIGH MAINTENANCE. When the subscriber
applications experience degraded performance, subscribers generally
assume there is a problem with the WAN service supplied by the provider.
It can often take days, weeks or even months to diagnose the causes of
degraded performance and require highly skilled personnel with
sophisticated instrumentation and diagnostic tools. Although these
degraded performance conditions are frequently caused by faulty or
misconfigured subscriber equipment or applications, the provider is
forced to expend significant time and effort without reimbursement to
help the subscriber diagnose the problem.
- INACCURATE NETWORK ENGINEERING AND PLANNING. The shared bandwidth nature
of these WAN services coupled with subscriber demand for many classes of
service levels increases the importance of accurate network planning and
design to ensure that the network architecture is optimized for
performance and cost. If the network is engineered with excess capacity,
it may improve the performance of subscriber applications, but it will
tend to negate the inherent bandwidth efficiencies of statistically
multiplexed technologies. By contrast, if the network is designed with
inadequate capacity, performance will suffer. Successful network
engineering and planning is dependent on accurate historical usage
information which,
26
<PAGE> 29
because of the inability of traditional equipment to measure traffic at
the demarc, is difficult to ascertain for these services.
The Company believes that the potential subscriber demand for statistically
multiplexed services has been constrained by the inability to manage and verify
service levels. Additionally, the Company believes that it will be difficult for
providers to meet the increasing demand for statistically multiplexed services
without systems for managing service levels because the labor-intensity of
provisioning and maintaining the service inhibits the providers' ability to
scale these WAN services profitably. As the providers' focus shifts to
profitability, the growth in Frame Relay, ATM and IP/Internet services will
depend, in part, on the ability of providers to implement systems that can
manage service levels, lower operational costs and increase scaleability.
THE VISUAL NETWORKS SOLUTION
The Company's Visual UpTime offering is a leading Frame Relay and
IP/Internet WAN service level management system that combines WAN access
functionality with planning, monitoring and troubleshooting capabilities and
enables the implementation of required service levels while simultaneously
decreasing the costs and complexity of achieving such levels. Visual UpTime
deploys instrumentation for measurement and analysis at the demarc and provides
innovative software applications that address the historical problems of
managing service levels.
INCREASED CONFIDENCE IN SERVICE LEVELS. By instrumenting the demarc,
Visual UpTime enables providers and subscribers to accurately measure, report on
and improve service levels. These abilities serve to clarify the relationship
between subscriber and provider, resulting in increased subscriber confidence in
running critical computing applications on statistically multiplexed services.
INCREASED SCALEABILITY AND LOWER COSTS OF PROVIDERS' OPERATIONAL
MODEL. Visual UpTime can reduce the labor-intensive nature of deploying
statistically multiplexed services, decreasing providers' costs and increasing
their ability to generate revenues:
- RAPID AND COST-EFFECTIVE SERVICE PROVISIONING. Visual UpTime allows the
provider to verify that its service is properly provisioned without
waiting for the subscriber network or applications to be connected and
configured. This tends to reduce customer support costs during initiation
of service. Additionally, it positions the provider to begin billing for
the service earlier than was previously possible.
- REDUCED NEED FOR TROUBLESHOOTING. Visual UpTime reduces the need for
providers to perform troubleshooting by continuously monitoring the
service performance at the demarc and proactively alerting the provider
and subscriber to anomalous performance characteristics. Such early
warnings allow the network operator to take corrective action before the
performance of any computing application on the network is impaired.
Furthermore, since many of the anomalous characteristics are
subscriber-related, the subscriber is more likely to take corrective
action without involving the provider. The net result of this early
warning system is that fewer maintenance personnel are required to solve
fewer problems, thereby increasing provider efficiency and subscriber
satisfaction.
- MORE RAPID BUT LESS COSTLY TROUBLESHOOTING. Because Visual UpTime
provides information which enables isolation of problems between provider
network and subscriber equipment and applications, the provider can more
quickly diagnose the cause of faulty or degraded performance. With Visual
UpTime, many problems that would otherwise last for days and require
on-site visits of highly skilled personnel can be diagnosed remotely
within minutes. Because Visual UpTime is architected to allow both the
provider and the subscriber to access the same reports and analyses
simultaneously, more problem conditions can be resolved collaboratively.
- MORE ACCURATE NETWORK ENGINEERING AND PLANNING. Visual UpTime
continuously provides an accurate and detailed view of historical WAN
service usage patterns along with automated
27
<PAGE> 30
guidance regarding the need to change circuit capacities. This allows
subscribers and providers to implement a network design optimized for cost and
performance.
VISUAL NETWORKS' STRATEGY
The Company's strategy is to maintain and build upon its market leadership
in the deployment of WAN service level management systems for statistically
multiplexed WAN services. Key elements of the Company's strategy include:
EMBED SERVICE LEVEL MANAGEMENT FUNCTIONALITY INTO NETWORK
INFRASTRUCTURE. Visual UpTime provides an innovative integration of service
level management functionality with WAN access equipment. The Company believes
that this integration substantially enhances the cost effectiveness of deploying
Visual UpTime.
DEPLOY VISUAL UPTIME AS PART OF PROVIDER NETWORKS. The Company believes
providers will become the predominant vehicle for the deployment of service
level management systems such as Visual UpTime. Although these systems can be
deployed by either providers or subscribers, the Company believes the maximum
benefit is achieved when the systems are deployed by the providers and access to
performance data is provided by the providers to their subscribers. In this
deployment model, providers can employ collaborative fault and performance
management techniques that lead to greater network quality. More importantly,
the Company believes the benefits of lower provisioning and maintenance costs
may be most effectively captured if the system is deployed by the provider.
EXTEND TECHNOLOGY LEADERSHIP. The Company believes a combination of
technological competencies have been crucial to its success. These competencies
include network analysis technology and its application to the effective
operation of WANs, the integration of network analysis with WAN access
technology, and collaborative subscriber/provider system architectures. Since
introducing Visual UpTime in mid-1995, the Company has continued to invest in
its core competencies by focusing on feature development, architectural
enhancements and cost reductions. The Company intends to continue to invest in
the development of Visual UpTime, with particular emphasis on features and
architectural improvements designed to accommodate large scale deployment by
providers. This includes leveraging its current Frame Relay and IP/Internet
technologies to address emerging opportunities such as ATM and virtual private
networks ("VPN") over the Internet.
ACHIEVE COST LEADERSHIP. The Company believes its sales levels represent a
volume advantage over any other systems being used to manage statistically
multiplexed WAN services. The Company intends to leverage this volume advantage
with investments in cost reduction to continue to provide the lowest cost WAN
service level management system.
EXPAND SALES AND SUPPORT FUNCTIONS GLOBALLY. Although over 70% of the
worldwide circuits for Frame Relay and ATM are deployed in the U.S., many of the
Company's largest provider and subscriber customers are multinational
corporations. The Company intends to develop a presence outside of the U.S. with
particular focus on the providers which have the largest share of the worldwide
markets for Frame Relay, ATM and IP/Internet services.
LEVERAGE OUTSOURCED MANUFACTURING MODEL. The Company believes scaleable
and flexible manufacturing will be critical to its growth. The Company believes
it can best meet these requirements by outsourcing the majority of its
manufacturing, allowing the Company to focus on its core competencies in product
development and sales and marketing.
VISUAL UPTIME SYSTEM
Visual UpTime is a service level management system consisting of analysis
service elements ("ASEs"), performance archive managers ("PAMs") and platform
applicable clients ("PACs") that perform data collection, data interpretation
and presentation, respectively. By intelligently
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monitoring network-wide performance, Visual UpTime enables users to track and
solve service level problems either on the subscriber or provider side of the
demarc.
THE VISUAL UPTIME SYSTEM
[A GRAPHIC OF THE VISUAL UPTIME SYSTEM APPEARS HERE]
COMPONENTS
ASE. The ASE is a combination of embedded proprietary software and
hardware that performs detailed analysis of network performance at the demarc.
Most versions of the ASE provide the functionality of WAN access equipment, such
as a DSU/CSU. Visual UpTime ASEs use sophisticated proprietary software in
conjunction with networking-specific microprocessors and integrated circuits to
perform detailed analysis of every bit, frame and packet traversing the demarc.
The ASEs generally store the analysis results locally in memory and wait for the
PAM to request the results. When the ASE detects an anomalous condition, it
sends an unsolicited alert to the PAM so that network operators can take prompt
action. The analysis results are organized in accordance with the structure of
standard management information bases ("MIBs") as defined by the Internet
Engineering Task Force ("IETF"). These MIBs are compatible with simple network
management protocol ("SNMP") and include relevant parts of industry standard
MIBs such as MIB I, MIB II and the remote monitoring ("RMON") MIB. Additionally,
the ASEs include proprietary MIB extensions that provide added value for WAN
service level management. Depending on customer requirements, the Company's core
ASE technology can be deployed in a number of configurations based on physical
circuit speed, number of virtual circuits supported, type of access
functionality and subscriber local area network environment.
PAM. The PAM is the system database and request broker between the PACs
and either the database or ASEs. The PAM runs the Company's proprietary software
on Microsoft's WindowsNT Server and SQL Server database. The PAM communicates
with the PACs using a proprietary application programming interface ("API"). The
PAM communicates with the ASEs using either SNMP or trivial file transfer
protocol ("TFTP"). Unlike traditional SNMP management architectures which depend
on continuous polling between the manager (PAM) and agents (ASEs), a bandwidth
consuming process, Visual UpTime distributes most of the processing burden to
the ASE, allowing the PAM-ASE data sharing to take place less frequently,
typically once a day. This feature is critical in WAN environments where costly
bandwidth makes continuous management polling impractical.
PAC. The PAC is Visual UpTime's client software for packaging and
presenting information stored in the PAM and ASE. Multiple PACs may access a
single PAM or ASE. Current versions of the PAC run on Windows95, WindowsNT and
major versions of UNIX.
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The PAC includes three integrated toolsets:
PERFORMANCE MONITORING. This toolset is an early warning system,
alerting operators to impending service degradation, that allows corrective
action to be taken before the subscriber's application performance
degrades. This toolset displays network performance related events and
alarms. The performance monitoring toolset is tightly linked to the
troubleshooting toolset, allowing an operator to evaluate quickly and
precisely the conditions which caused the event or alarm.
TROUBLESHOOTING. This toolset enables an operator to rapidly perform
detailed diagnostics to identify the cause of service level problems. This
toolset displays real-time and historical network performance statistics.
The troubleshooting toolset includes a protocol capture and analysis
capability used by network operators to isolate problems arising from the
interplay between a subscriber's CPE or applications and the WAN service.
PLANNING AND REPORTING. This toolset is a report generation tool that
creates a wide variety of reports from the network performance data stored
in the PAM. This toolset is used primarily for capacity planning and
network engineering, management of service level agreements between
provider and subscriber and executive reporting from the network operations
staff to senior management personnel. The planning and reporting toolset is
accessible through a PAC or a Web-browser.
The Visual UpTime components are sold as a complete system which requires
at least one PAC/PAM per deployment along with one ASE deployed at the demarc of
each circuit on which service level management is required. The system
architecture currently scales to support up to approximately 3,000 managed
circuits per PAM. The Company believes the system is currently deployed in
configurations managing as few as 3 circuits and as many as 1,000 circuits.
System pricing varies by size of deployment and relative mix between circuit
speeds. During the three months ended September 30, 1997, the Company's average
selling price per system approximated $1,700 for each circuit on which the
system was deployed. The Company expects its average selling price to decrease
significantly as its sales to providers increase.
VISUAL'S SELLING STRATEGY AND VISUAL UPTIME SYSTEM DEPLOYMENT MODELS
The Company has deployed a long-term, multi-stage selling strategy.
Initially, the Company sold Visual UpTime to subscribers, with the objective of
creating demand among subscribers for higher service levels for statistically
multiplexed WAN services and stimulating demand among providers for the
infrastructure necessary to provide and maintain such service levels. In 1995
and 1996, the majority of the Company's sales were made to subscribers directly
or through value-added resellers. At the same time, the Company commenced
marketing Visual UpTime to providers for resale or lease as value-added CPE in
conjunction with their service offerings. In furtherance of this stage of the
Company's selling strategy, the Company has executed reseller agreements with
Sprint and MCI. The portion of the Company's revenue derived from these and
other provider relationships has grown from approximately 30% for the three
months ended March 31, 1997, to 51% for the three months ended September 30,
1997.
Substantially all Visual UpTime systems sold to date have been deployed by
subscribers and are configured so that only the subscriber has access to the WAN
service performance data collected and presented by the system ("subscriber
deployment model"). The Company recently has focused on demonstrating to
providers the incremental value of provisioning and operating cost savings
arising from wide scale deployment by the provider. The Company's selling
strategy contemplates an evolution of the deployment model so that sales of
Visual UpTime systems will be made directly to providers and the providers will
deploy the systems as a part of their network infrastructure ("provider
deployment model").
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SUBSCRIBER DEPLOYMENT MODEL
In the subscriber deployment model, a subscriber deploys an ASE instead of
conventional WAN access equipment on each circuit to be managed, thus providing
instrumentation on every circuit. The PAM is deployed at the subscriber's
network operations center. PACs are deployed wherever there are subscriber
network operators who need to access the system.
SUBSCRIBER DEPLOYMENT MODEL
[A GRAPHIC OF THE SUBSCRIBER DEPLOYMENT MODEL APPEARS HERE]
PROVIDER DEPLOYMENT MODEL
In the provider deployment model, the WAN access equipment is similarly
replaced by an ASE. The ASE is then owned by the provider and represents a
critical element of the provider's network infrastructure, thereby extending the
WAN service demarc to include the functionality of the WAN access equipment. By
extending WAN service level management capabilities to the subscriber's site,
the providers will be in a position to offer a new class of "intelligent"
service levels, which can effectively increase revenue, increase quality of
service levels and decrease cost at the same time. The provider can scale the
service by adding additional ASEs. In the provider deployment model, the PAM is
deployed within the provider's network operations center and one PAM typically
supports multiple subscribers, yielding significant economies of scale for the
provider. PACs are deployed at
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<PAGE> 34
the provider network operations center and at the subscriber network operations
centers, enabling simultaneous access for providers and subscribers to the
information generated by Visual UpTime.
PROVIDER DEPLOYMENT MODEL
GRAPHIC: PROVIDER DEPLOYMENT MODEL
CUSTOMERS
Visual UpTime has been shipped to more than 300 subscribers. Subscriber
deployments represent the majority of deployments to date. The following
subscribers each have generated, either directly or through resellers,
cumulative revenue of more than $250,000:
<TABLE>
<S> <C>
Cargill, Inc. Federal Express Corporation
Columbia Gas System Inc. Household International,
Delta Air Lines, Inc. Inc.
EDS Electronic Commerce Division Waste Management, Inc.
</TABLE>
During the second half of 1996 and during 1997, the Company developed
business relationships with a number of providers, including AT&T, MCI, Sprint,
BellAtlantic and Ameritech. These providers supply approximately 50% of
worldwide Frame Relay and ATM services. While these relationships are at
different levels of business maturity, the portion of the Company's revenue
derived from these relationships has grown from approximately 30% in the three
months ended March 31, 1997, to 51% in the three months ended September 30,
1997. During the three months ended September 30, 1997, sales of Visual UpTime
to Sprint and AT&T for resale or lease to subscribers accounted for 35% and 11%,
respectively, of the Company's revenue. The Company expects to expend
substantial additional effort to evolve these business partners to the provider
deployment model. See "Risk Factors -- Implementation of Provider Deployment
Model; Lengthy Sales Cycle" and "-- Dependence on Major Customers".
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AT&T RELATIONSHIP
In December 1997, the Company entered into a procurement agreement with
AT&T. The agreement is for an initial term of three years and automatically
renews until terminated by either party upon 30 days' notice. Prices and
discounts for all equipment purchased by AT&T are fixed for the term, except in
certain limited circumstances. The equipment carries a five-year warranty. If
the Company offers more favorable prices and terms to any other customer during
the term of the agreement, the Company will amend the agreement to provide AT&T
with the same or comparable overall terms. The agreement does not obligate AT&T
to make any minimum purchases from the Company. The Company also provides
certain support services to AT&T.
MCI RELATIONSHIP
In August 1997, the Company entered into a three-year reseller agreement
with MCI, which automatically renews for successive one-year terms unless
terminated by either party at least 60 days prior to expiration. Prices and
discounts for all equipment purchased by MCI are fixed for the term. The
equipment carries a five year warranty. If the Company offers more favorable
prices to any other customer for the same quantity of products purchased over a
similar period of time, the prices charged to MCI will be adjusted to the more
favorable price. The reseller agreement does not obligate MCI to make any
minimum purchases from the Company. The Company also provides certain support
services to MCI.
SPRINT RELATIONSHIP
In August 1996, the Company entered into a three-year reseller agreement
with Sprint. Prices for all equipment purchased by Sprint are fixed for the
term, unless Sprint does not purchase a certain minimum amount of equipment and
services, in which event prices for equipment and services are subject to
increase. The equipment carries a five year warranty. If the Company offers more
favorable prices and terms to any other customer during the term of the
agreement, such terms and prices will be applicable to Sprint's orders. The
reseller agreement does not obligate Sprint to make any minimum purchases from
the Company. The Company also provides certain escrow rights and support
services to Sprint.
SALES, MARKETING AND SUPPORT
The Company's sales, marketing and support operations vary according to the
type of deployment model being targeted:
SUBSCRIBER DEPLOYMENT
The Company has targeted subscriber deployment opportunities through a
combination of direct sales, sales through value-added resellers and integrators
and sales through providers acting in the capacity of resellers. The Company
provides pre-sale technical support to each of its channels. The development of
relationships with the various channels varies from 2 to 12 months for value
added resellers and integrators and from 12 to 24 months in the case of
providers. The sales cycle for subscriber deployment when handled directly or
through resellers is typically 4 to 6 months, and, for this reason,
significantly all sales to date have been subscriber deployments.
PROVIDER DEPLOYMENT
The Company targets provider deployment opportunities on an account by
account basis in descending order of their Frame Relay and ATM market shares.
According to Vertical Systems, AT&T, Sprint and MCI together control more than
60% of the U.S. market and 40% of the worldwide market for Frame Relay and ATM
services. Because of current levels of competition for WAN services, the Company
believes its most significant opportunities for Visual UpTime are with
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U.S.-based long distance providers. The Company believes its relationships with
AT&T, Sprint and MCI will influence other providers to adopt Visual UpTime .
The provider deployment model involves a complex sale with very large
companies. The sales cycle begins with the presentation of Visual UpTime's value
proposition to multiple departments within a provider organization followed by a
lengthy evaluation process. The Company then works with the provider to develop
a service definition and business plan for the integration of Visual UpTime into
the provider's existing services.
The Company has sales and technical support teams assigned to each account.
In addition, the Company's senior management team devotes significant time
furthering the business relationships with these providers and the Company
invests significant marketing resources to stimulate sales to these providers.
The Company expects to increase its sales, marketing and support efforts
addressed to these providers and extend those efforts to international and
IP/Internet providers.
As of November 30, 1997, the Company employed 44 persons in sales,
marketing and technical support. The Company's expenditures on sales, marketing
and support were approximately $0.7 million, $6.4 million and $6.8 million for
the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997, respectively.
RESEARCH AND DEVELOPMENT
The Company has developed core competencies in network analysis technology
and its application to the effective operation of WANs, the integration of
network analysis with WAN access technology and collaborative
subscriber/provider system architectures.
The Company has made significant investments in Visual UpTime architecture
and feature development. The Company's success will depend to a substantial
degree on its ability to bring to market in a timely fashion new products and
enhancements to Visual UpTime that meet changing market requirements. The
Company expects to employ a combined strategy of developing products internally
and acquiring products and technology to meet evolving market requirements. The
Company is focused on the further enhancement and refinement of Visual UpTime,
including the development of the architectural scaleability that will be
required for wide scale implementation through the provider deployment model.
The Company has begun to extend Visual UpTime from Frame Relay networks and IP
over Frame Relay networks to ATM networks and VPNs over the Internet.
Additionally, the Company expects to invest in system refinements which increase
the economic benefit of deployments outside North America.
As of November 30, 1997, there were 41 persons working in the Company's
research and development area, 7 of whom focus on ATM. The Company's research
and development expenditures were approximately $1.0 million, $3.0 million and
$3.0 million for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997, respectively.
COMPETITION
The markets for telecommunications equipment and software are intensely
competitive. Visual UpTime integrates key functionality traditionally found in
three distinct market segments: the WAN access equipment market; the network
test and analysis market; and the market for telecommunications operational
support systems (OSS). The Company believes that Visual UpTime is the only
system which integrates functional attributes from these three market segments
to cost-effectively provide WAN service level management. Because of the size
and growth opportunity associated with the WAN service level management market,
the Company expects to encounter increased competition from current and
potential participants in each of these segments. See "Risk Factors -- Intense
and Evolving Competition".
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WAN ACCESS EQUIPMENT
The WAN access equipment market is highly fragmented. This market includes
DSU/CSUs, low to mid-range time division multiplexers, Frame Relay access
devices and ATM access products. Leading vendors in this segment include ADC,
Paradyne, Adtran, Sync and Digital Link. The Company expects that, in some
cases, these companies may partner with companies offering network test and
analysis products in order to compete in the WAN service level management
market. Furthermore, internetworking providers, such as Cisco Systems, Inc., may
integrate WAN access functionality with routers, which may adversely affect
Visual UpTime's cost justification.
NETWORK TEST AND ANALYSIS
An essential element of a WAN service level management system is technology
and expertise associated with network test and analysis. Products in this market
include portable and distributed protocol analyzers and transmission test
instruments. The major vendors in this market segment are Network General, HP,
Telecommunications Techniques Corp. and NetScout.
TELECOMMUNICATIONS OPERATIONAL SUPPORT SYSTEMS (OSS)
OSSs encompass all of the systems related to service deployment including
provisioning systems, billing systems, trouble-ticketing systems, and fault and
performance management systems. Historically, OSS's have been developed by the
in-house staffs of the providers and have sometimes been a source of competitive
advantage to providers. Visual UpTime provides a significant portion of the
functionality that might otherwise be found in a fault and performance
management system for statistically multiplexed WAN services. Therefore, in some
cases, a provider may consider in-house development as an alternative to
deployment of Visual UpTime.
The Company intends to compete by offering superior features, performance,
reliability and flexibility at competitive prices. The Company also intends to
compete on the strength of its relationships with providers. As competition in
the WAN service level management market increases, the Company believes that the
industry may be characterized by intense price competition similar to that
present in the broader networking market. In response to competitive trends, the
Company expects that it will continue to reduce the cost of its systems to seek
ways to improve upon Visual UpTime's price-to-performance ratio. Increased
competition may result in price reductions, reduced profitability and loss of
market share, any of which would have a material adverse effect on the Company's
business, financial condition and results of operations.
MANUFACTURING
The Company currently uses a combination of subcontracting and internal
manufacturing, but anticipates moving to a predominately outsourced
manufacturing model in order to achieve significant scaleability. In connection
with its outsourcing strategy and increased volumes, the Company is seeking to
secure additional sources of supply, including additional contract
manufacturers. The Company has not experienced any significant delays or
material unanticipated costs resulting from the use of subcontractors; however,
such a strategy involves certain risks, including the potential absence of
adequate capacity and reduced control over delivery schedules, manufacturing
yields, quality and costs. Although the Company attempts to maintain appropriate
back-up suppliers, in the event that any significant subcontractor were to
become unable or unwilling to continue to manufacture and/or test the Company's
products in required volumes, the Company would have to identify and qualify
acceptable replacements. This qualification process could be lengthy and no
assurance could be given that any additional sources would become available to
the Company on a timely basis. A delay or reduction in component shipments, or a
delay or increase in costs in the assembly and testing of products by third
party subcontractors, could materially and adversely affect the Company's
business, financial condition and results of operations.
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Although the Company generally uses standard parts and components for its
products, several key components are currently purchased only from sole, single
or limited sources. Any interruption in the supply of these components, or the
inability of the Company or its subcontractors to procure these components from
alternate sources at acceptable prices and within a reasonable time, could have
a material adverse effect upon the Company's business, financial condition and
results of operations. See "Risk Factors -- Dependence on Sole and Limited
Source Suppliers and Fluctuations in Component Pricing".
The Company is currently seeking to obtain ISO 9001 certification, which it
believes will be a further competitive strength. The Company anticipates
receiving this certification during 1998. To the extent that the Company does
not achieve ISO 9001 certification and its potential competitors do, the
Company's competitive position may be materially and adversely affected.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
The Company presently has one issued patent, one patent pending and one
provisional patent application. No assurance can be given that competitors will
not successfully challenge the validity or scope of the Company's patents or
that such patents will provide a competitive advantage to the Company. As part
of its confidentiality procedures, the Company generally enters into non-
disclosure agreements with its employees and business partners and license
agreements with respect to its software, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. Policing
unauthorized use of the Company's products is difficult. Effective protection of
intellectual property rights is unavailable or limited in certain foreign
countries. There can be no assurance that the Company's protection of its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology, duplicate the Company's products or
design around any patents issued to the Company or other intellectual rights of
the Company.
The Company expects that software and communications product developers
will increasingly be subject to claims of infringement of patents as the number
of products and competitors in the Company's industry segment grows and the
functionality of products in the industry segment overlaps. The Company is not
aware that any of its products infringe the property rights of third parties.
There can be no assurance, however, that third parties will not claim such
infringement by the Company with respect to current or future products. Any such
claims, with or without merit, could result in costly litigation that could
absorb significant management time, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Such
claims might require the Company to enter into license or royalty agreements.
Such license or royalty agreements, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors -- Intellectual Property and Proprietary Rights".
LITIGATION
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. Management believes that none of these legal
proceedings will have a materially adverse effect on the Company's business,
financial condition or results of operations.
FACILITIES
The Company's principal administrative, sales and marketing, research and
development and customer support facility is located in approximately 23,000
square feet of office space in Rockville, Maryland which the Company has leased
through November 2000. The Company is obligated to lease an additional 13,000
square feet at this location at the earlier of November 1999 or the
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departure of the current tenant. While the Company believes that its facilities
are adequate for its immediate needs, it may need additional space in late 1998.
EMPLOYEES
As of November 30, 1997, the Company had 113 full-time employees, including
41 in product development, 33 in sales, 7 in marketing, 10 in manufacturing, 4
in customer service and 18 in finance, centralized services and administration.
The Company's future success will depend in significant part on the
continued service of its key technical, sales and senior management personnel.
Competition for such personnel is intense and there can be no assurance that the
Company can retain its key managerial, sales and technical employees, or that it
can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information concerning each of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Scott E. Stouffer.................... 37 Chairman of the Board of Directors, President and
Chief Executive Officer
Peter J. Minihane.................... 49 Executive Vice President, Chief Financial Officer
and Treasurer
Henry A. Cheli....................... 47 Senior Vice President, Market Operations
Gregory J. Langford.................. 47 Senior Vice President, Product Operations
Robert C. Troutman................... 41 Senior Vice President, Advance Planning
Patricia L. Cotter................... 39 Vice President, Manufacturing Operations
Grant G. Behrman..................... 43 Director
Marc F. Benson(1).................... 48 Director
Theodore R. Joseph(1)(2)............. 58 Director
Ted H. McCourtney(2)................. 59 Director
Thomas A. Smith(1)(2)................ 35 Director
William J. Smith..................... 62 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
SCOTT E. STOUFFER has been Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since its inception in 1993. From
August 1990 to May 1993, Mr. Stouffer was Director of Marketing of
Telecommunications Techniques Corporation, a wholly-owned subsidiary of Dynatech
Corporation, a global communications equipment and network technology company.
PETER J. MINIHANE has been Executive Vice President, Chief Financial
Officer and Treasurer of the Company since October 1997. From June 1997 to
October 1997, Mr. Minihane was Senior Vice President, Chief Financial Officer
and Treasurer of the Company. From August 1985 to May 1997, Mr. Minihane was
Executive Vice President, Chief Financial Officer and Treasurer of Microcom,
Inc., a remote access technology company.
HENRY A. CHELI has been Senior Vice President, Market Operations of the
Company since March 1997. From June 1994 to March 1996, Mr. Cheli was Senior
Vice President America's Product Business of Racal Datacom Inc., USA, a
telecommunications, electronics and technology company. From December 1993 to
June 1994, Mr. Cheli was General Manager and Corporate Vice President Network
Products Division of Andrew Corporation, Inc., a communications hardware
company. From July 1993 to December 1993, Mr. Cheli was Senior Vice President
and General Manager of America's Managed Network Services Division of Racal
Managed Service LTD, UK. From April 1992 to July 1993, Mr. Cheli was Director,
Racal Data Group Sales and Special Products of Racal Data Group LTD, UK.
GREGORY J. LANGFORD has been Senior Vice President, Product Operations of
the Company since October 1997. From November 1996 to October 1997, he was Vice
President, Product Management and Planning of the Company. From February 1995 to
August 1996, Mr. Langford was Vice President, Marketing of IPC Information
Systems, Inc, a provider of telecommunications products and services to the
financial services industry. From January 1991 to January 1995, Mr. Langford
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was Vice President, Marketing, of Integrated Network Corporation, a broadband
networking company.
ROBERT C. TROUTMAN has been Senior Vice President, Advance Planning of the
Company since October 1997. From the Company's inception in 1993 to October
1997, he was Vice President, Engineering and Manufacturing of the Company. From
March 1992 to March 1994, Mr. Troutman was a Vice President of Cardzilla, Inc.,
a retail company. From August 1981 until August 1992, Mr. Troutman was employed
by Telecommunications Techniques Corporation, most recently as Director of
Engineering.
PATRICIA L. COTTER has been Vice President of Manufacturing Operations of
the Company since September 1996. From October 1993 to September 1996, she was
Director of Corporate Programs at Stratus Computer, Inc., a provider of fault
tolerant computers. From 1987 to September 1993, Ms. Cotter was Manufacturing
Engineering Manager at Sun Microsystems, Inc., a provider of UNIX computing
platforms.
GRANT G. BEHRMAN has been a director of the Company since September 1996.
Mr. Behrman has been a Managing Partner of Behrman Capital, a venture capital
fund, since February 1991. Mr. Behrman is also a director of Nimbus CD
International, Inc., a compact disc manufacturing company.
MARC F. BENSON has been a director of the Company since December 1994.
Since July 1992, Mr. Benson has been a principal and partner of Mid-Atlantic
Venture Funds, formerly NEPA Venture Funds, a venture capital fund.
THEODORE R. JOSEPH has been a director of the Company since December 1995.
Mr. Joseph has been the President, Chief Executive Officer and a director of
Relay Technologies, Inc., a provider of mobile and connectivity software, since
December 1994. From March 1993 until August 1994, Mr. Joseph was the Chairman of
the Board, President and Chief Executive Officer of Bridge Builder Technologies,
Inc., a graphical user interface application development company.
TED H. MCCOURTNEY has been a director of the Company since January 1996.
Mr. McCourtney has been a general partner of Venrock Associates, a venture
capital fund, since 1970. Mr. McCourtney is also a director of MedPartners,
Inc., a physician practice management company and NTL, Inc., a
telecommunications company.
THOMAS A. SMITH has been a director of the Company since September 1995.
Mr. Smith has been a general partner of Edison Venture Fund, a venture capital
fund, since June 1993. From October 1990 until May 1993, Mr. Smith was an
employee of Edison Venture Fund. Mr. Smith is a director of Versatility, Inc., a
software company.
WILLIAM J. SMITH has been a director of the Company since March 1997. Since
November 1997, Mr. Smith has been Vice President, Sales of FlowWise Networks,
Inc., an IP switching technology company. From August 1992 to October 1997, Mr.
Smith was Senior Vice President, Sales and Marketing of Premisys Communications,
Inc., an integrated digital access company.
ELECTION OF DIRECTORS
Officers of the Company are elected by the Board of Directors on an annual
basis and serve until their successors have been duly elected and qualified. The
Company's Certificate of Incorporation provides for a classified Board of
Directors consisting of three classes of directors with each class required to
be as nearly equal in number as possible. The number of directors is determined
from time to time by the Board of Directors and is currently fixed at seven
members. A single class of directors is elected each year at the Company's
annual meeting of stockholders. Directors elected at each such meeting will
serve for a term ending on the date of the third annual meeting of stockholders
after election and the election and qualification of their respective
successors. Messrs. Behrman and Thomas Smith are serving for terms expiring on
the date of the Company's
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1998 Annual Meeting of Stockholders, Messrs. Joseph and Benson are serving for
terms expiring on the date of the Company's 1999 Annual Meeting of Stockholders
and Messrs. Stouffer, McCourtney and William Smith are serving for terms
expiring on the date of the Company's 2000 Annual Meeting of Stockholders.
There are no family relationships among any of the Company's directors or
executive officers.
BOARD COMMITTEES
The Company's Board of Directors currently has two committees, the Audit
Committee and the Compensation Committee. The Audit Committee, among other
things, recommends the firm to be appointed as independent accountants to audit
the Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of the Company
and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit Committee are Messrs. Joseph,
McCourtney and Thomas Smith. The Compensation Committee reviews and recommends
the compensation arrangements for management of the Company and administers the
Company's stock option plans. The members of the Compensation Committee are
Messrs. Benson, Joseph and Thomas Smith.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was formed
in December 1994, and the current members of the Compensation Committee are
Messrs. Benson, Joseph and Thomas Smith. None of the members was at any time
during the fiscal year ended December 31, 1996, or at any other time, an officer
or employee of the Company.
DIRECTORS' COMPENSATION
The Company's outside directors have been granted options to purchase the
Company's Common Stock as compensation for their services as Board members. Mr.
Joseph was granted options to purchase 29,400 shares of Common Stock in December
1995, at an exercise price of $.19 per share, of which options to purchase 9,800
shares vested immediately and options to purchase 9,800 shares vested on the
first and second anniversary of the grant date. Mr. William Smith was granted
options to purchase 27,000 shares of Common Stock in March 1997, at an exercise
price of $1.43 per share, of which options to purchase 9,000 shares will vest on
each of the first, second and third anniversaries of the grant date.
Following the completion of this offering, each current, eligible,
non-employee director will receive options under the Company's 1997 Directors'
Stock Option Plan to purchase 6,000 shares of Common Stock at the current fair
market value on the date of each annual meeting of stockholders after the
closing of the offering. See "Directors' Stock Option Plan".
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation paid
by the Company during the fiscal year ended December 31, 1996 to the Company's
chief executive officer and the other most highly compensated executive officer
whose total compensation for services in all capacities exceeded $100,000 during
such year (the "Named Executive Officers").
40
<PAGE> 43
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING
SALARY BONUS OTHER OPTIONS
-------- ------- ------ ------------
<S> <C> <C> <C> <C>
Scott E. Stouffer
Chairman of the Board, President and Chief
Executive Officer.......................... $125,000 $48,756 $3,090(1) 40,600
Robert C. Troutman
Senior Vice President, Advance Planning....... 110,000 39,482 3,090(1) 35,000
</TABLE>
- ---------------
(1) Consists of payment by the Company of legal fees related to estate planning.
OPTION GRANTS
The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended December
31, 1996 to each of the Named Executive Officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
-----------------------------------------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(5)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------
GRANTED(1) FISCAL 1996(2) PER SHARE DATE 5% 10%
---------- -------------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Scott E. Stouffer.......... 40,600 5.5% $0.21(3) 1/26/01 $1,319 $ 3,897
Robert C. Troutman......... 35,000 4.7 0.19(4) 1/26/06 4,182 10,598
</TABLE>
- ---------------
(1) All options were granted under the Company's 1994 Stock Option Plan (the
"1994 Plan"), and become exercisable at a rate of 1.67% monthly over the
five-year period following the date of grant provided that such officer
remains continuously employed by the Company.
(2) Based on options to purchase 742,400 shares of Common Stock granted in
fiscal 1996.
(3) All options were granted at exercise prices equal to 110% of the fair market
value of the Common Stock, as determined by the Board of Directors, on the
grant date.
(4) All options were granted at exercise prices equal to the fair market value
of the Common Stock, as determined by the Board of Directors, on the grant
date.
(5) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with rules of the United States Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock, overall market
conditions and the option holders' continued employment through the vesting
period. This table does not take into account any appreciation in the price
of the Common Stock from the date of grant to date. Assuming the fair market
value of the Common Stock at the date of grant was the assumed initial
public offering price of $10.00, the potential realizable value of these
options (a) at a 5% assumed annual rate of stock price appreciation would be
$509,644 for Mr. Stouffer and $563,463 for Mr. Troutman.
None of the Named Executive Officers exercised any stock options during
fiscal year ended December 31, 1996.
41
<PAGE> 44
YEAR-END OPTION VALUES
The following table provides the specified information concerning
unexercised options held as of December 31, 1996 by the Named Executive
Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Scott E. Stouffer.......................... 24,461 38,788 $32,050 $48,058
Robert C. Troutman......................... 6,923 28,077 8,585 34,815
</TABLE>
- ---------------
(1) Calculated on the basis of $1.43 per share, the fair market value of the
Common Stock at December 31, 1996, as determined by the Company's Board of
Directors, less the exercise price payable for such shares, multiplied by
the number of shares underlying the option.
No compensation intended to serve as incentive for performance to occur
over a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during the last fiscal year to any of the Named Executive
Officers.
EMPLOYMENT ARRANGEMENTS
The Company has entered into employment agreements with Scott E. Stouffer
and Robert C. Troutman (the "Employees"), dated December 15, 1994 (the
"Employment Agreements"). The Employment Agreements provide that Mr. Stouffer
and Mr. Troutman currently receive annual salaries of $165,000 and $140,000,
respectively (to be reviewed annually), an annual bonus and reimbursement of
certain expenses. The Employees are also entitled to participate in any heath,
life or accident insurance plans or programs made available to other similarly
situated employees. The Employees are also entitled to 20 business days
sabbatical following completion of every four years of employment.
The Employment Agreements continue on a year-to-year basis, renewing each
December 15 unless terminated (1) upon 90 days notice from either the applicable
Employee or the Company prior to the end of the then-current term; (2) by death;
(3) due to disability; (4) by the Company without cause upon 45 days' prior
written notice to the Employee; or (5) by the Company for cause upon 30 days'
prior written notice, or in the case of embezzlement or theft, immediately
without notice. Upon termination without cause by the Company, the Company will
pay the Employee severance equal to six months base salary.
The Employment Agreements contain a covenant not to compete which provides
that for a period of 24 months (decreasing to 12 months after the Employee has
been an employee for four years) after the Employee's termination for any
reason, the Employee is subject to a non-solicitation restriction and will not
compete with the Company or accept employment with a competitor of the Company.
The Employment Agreements also contain confidentiality and assignment of
inventions provisions.
In March 1997, Mr. Cheli entered into an employment agreement with the
Company, pursuant to which Mr. Cheli serves as Senior Vice President, Market
Operations. The agreement provides for an initial annual base salary of
$150,000, in addition to certain other benefits. Mr. Cheli's compensation can
increase to up to $230,450 (annualized) based on the Company's 1997 financial
performance. Upon termination of the agreement by the Company without cause, Mr.
Cheli is entitled to receive the compensation and benefits which would otherwise
be payable to him for a maximum of six months following such termination. The
Company granted Mr. Cheli an option to purchase 135,000 shares of Common Stock
at an exercise price of $1.43 per share, vesting 20% at the end of the first
year after grant and in equal monthly increments over the next four years. Upon
a change of control of the Company, Mr. Cheli's options will automatically vest,
depending on the time of the
42
<PAGE> 45
change of control, as follows: (i) 40% if the change of control occurs on or
before the first anniversary of Mr. Cheli's option grant; (ii) 80% if the change
of control occurs after the first anniversary, but prior to the second
anniversary of the option grant; and (iii) 100% after the second anniversary of
the option grant.
In November 1996, Mr. Langford entered into an employment agreement with
the Company, pursuant to which Mr. Langford serves as Vice President, Product
Management and Planning. He subsequently has been promoted to Senior Vice
President, Product Operations. The agreement provides for an initial annual base
salary of $125,000, in addition to certain other benefits. Mr. Langford's
compensation can increase to up to $160,250 based on the Company's 1997
financial performance. Upon termination of the agreement by the Company without
cause, Mr. Langford is entitled to receive the compensation and benefits which
would otherwise be payable to him for a maximum of six months following such
termination. Mr. Langford was granted options to purchase 49,000 shares of
Common Stock in November 1996 at an exercise price of $1.43 per share, vesting
20% at the end of the first year after grant and in equal monthly increments
over the next four years, options to purchase 16,000 shares of Common Stock in
December 1996 at an exercise price of $1.43 per share, vesting in equal monthly
increments over five years, and options to purchase 35,000 shares of Common
Stock in August 1997 at an exercise price of $3.00 per share, vesting 20% at the
end of two years after grant and in equal monthly increments over the next three
years. Fifty percent of Mr. Langford's unvested options vest upon a change of
control of the Company.
In June 1997, Mr. Minihane entered into an employment agreement with the
Company, pursuant to which Mr. Minihane serves as Executive Vice President,
Chief Financial Officer and Treasurer of the Company. The agreement provides for
an initial annual base salary of $120,000, increasing to $160,000 in June 1998,
in addition to certain other benefits. Mr. Minihane's compensation can increase
to up to $180,500 (annualized) based on the Company's 1997 financial
performance. Upon termination of the agreement by the Company without cause, Mr.
Minihane is entitled to receive the compensation and benefits which would
otherwise be payable to him for a maximum of six months following such
termination. Mr. Minihane was granted options to purchase 175,000 shares of
Common Stock in June 1997 at an exercise price of $1.75 per share, vesting 20%
at the end of the first year after grant and in equal monthly increments over
the next four years. All of Mr. Minihane's unvested options vest upon a change
of control of the Company. Upon commencement of his employment with the Company,
Mr. Minihane purchased 25,000 shares of the Company's Common Stock at $1.75 per
share.
The Company's employment agreement with each of Messrs. Cheli, Langford and
Minihane contains general non-solicitation and non-competition provisions
applicable during the period of such employee's employment with the Company and
for two years thereafter (or one year if his employment terminates after January
1, 1999).
All other employees of the Company are required to sign agreements which
prohibit the employee from directly or indirectly competing with the Company
while employed by the Company and generally for a period of two years thereafter
(or one year if their employment terminates after January 1, 1999). All
employees have executed agreements which prohibit the disclosure of the
Company's confidential or proprietary information.
STOCK PLANS
1994 STOCK OPTION PLAN
The Company's 1994 Plan authorizes the issuance of an aggregate of
1,975,000 shares of Common Stock pursuant to the exercise of stock options. As
of September 30, 1997, 93,627 shares had been issued under the 1994 Plan,
options to purchase 1,600,092 shares were outstanding and 281,281 shares
remained available for future grant under the 1994 Plan.
43
<PAGE> 46
The 1994 Plan provides for grants of options to employees, consultants and
directors of the Company. Each stock option granted under the 1994 Plan is
evidenced by a written stock option agreement between the Company and the
optionee. The 1994 Plan provides for the granting of both "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and non-statutory options. The 1994 Plan is administered by the
Compensation Committee, which has sole discretion and authority, consistent with
the provisions of the 1994 Plan, to determine which eligible participants will
receive options, the time when options will be granted, the terms of options
granted and the number of shares that will be subject to options granted under
the 1994 Plan.
For any option intended to qualify as an incentive stock option, the
exercise price must not be less than 100% of the fair market value of the Common
Stock on the date the option is granted (110% of the fair market value of such
Common Stock with respect to any optionee who immediately before any option is
granted, directly or indirectly, possesses more than 10% of the total combined
voting power of all classes of stock of the Company ("10% Owners")). The
Compensation Committee has the authority to determine the time or times at which
options granted under the 1994 Plan become exercisable; provided that, for any
option intended to qualify as an incentive stock option, such option must expire
no later than ten years from the date of grant (five years with respect to 10%
Owners). Options are non-assignable and non-transferable, unless a stock option
agreement provides that such option may be transferred by the optionee upon
death, by will or the laws of descent and distribution. Options generally may be
exercised only while the optionee is either employed by, or rendering services
to, the Company or within a specified period of time thereafter. The
Compensation Committee may accelerate the date of exercise of any option or
waive any condition or restriction pertaining to such option at any time. Unless
terminated sooner by the Board, the 1994 Plan will terminate in December 2004 or
the date on which all shares available for issuance shall have been issued
pursuant to the exercise or cancellation of options granted under the 1994 Plan.
1997 OMNIBUS STOCK PLAN
The Company's 1997 Omnibus Stock Plan (the "Omnibus Plan") authorizes the
issuance of an aggregate of up to 1,000,000 shares of Common Stock with respect
to certain "Awards" made under the Omnibus Plan. As of November 30, 1997, all
such shares remained available for future grant under the Omnibus Plan.
The Omnibus Plan provides for grants of options to employees, officers,
directors and consultants of the Company or any affiliate of the Company;
provided, however, that no individual may receive an award of more than 250,000
shares in any one fiscal year. "Awards" under the Omnibus Plan may take the form
of grants of stock options, stock appreciation rights, restricted or
unrestricted stock, phantom stock, performance awards or any combination
thereof. The Omnibus Plan is administered by the Board of Directors, or by such
committee or committees as may be appointed by the Board of Directors from time
to time (the "Administrator"). The Administrator has sole power and authority,
consistent with the provisions of the Omnibus Plan, to determine which eligible
participants will receive Awards, the form of the Awards and the number of
shares of Common Stock covered by each Award, to impose terms, limits,
restrictions and conditions upon Awards, to modify, amend, extend or renew
Awards (with the consent of the awardee), to accelerate or change the exercise
timing of Awards or to waive any restrictions or conditions to an Award and to
establish objective and conditions for earning Awards.
Unless otherwise determined by the Administrator, and in any event in the
case of an incentive stock option or a stock appreciation right granted with
respect to an incentive stock option, Awards are not transferable other than by
will or the laws of descent and distribution. Unless otherwise determined by the
Administrator in accord with the provisions of the immediately preceding
sentence, an Award may be exercised during the lifetime of the grantee, only by
the grantee or, during the period the grantee is under a legal disability, by
the grantee's guardian or legal
44
<PAGE> 47
representative. Unless terminated sooner by the Board, the Omnibus Plan
terminates in October 2007 or the date on which all shares available for
issuance shall have been issued pursuant to the exercise or cancellation of
Awards under the Omnibus Plan.
1997 DIRECTORS' STOCK OPTION PLAN
The 1997 Directors' Stock Option Plan (the "Director Plan") was adopted in
October 1997. Under the terms of the Director Plan, directors of the Company who
are not employees of the Company and who will receive any options personally
(the "Eligible Directors") are eligible to receive non-statutory options to
purchase shares of Common Stock. A total of 300,000 shares of Common Stock may
be issued upon exercise of options granted under the Director Plan. Unless
terminated sooner by the Board of Directors, the Director Plan will terminate in
October 2007, or the date on which all shares available for issuance under the
Director Plan shall have been issued pursuant to the exercise of options granted
under the Director Plan.
Upon a member's initial election or appointment to the Board of Directors
after the date of this Prospectus, or for other Eligible Directors who did not
receive an option during 1997, such member will be granted options to purchase
24,000 shares of Common Stock, vesting over four years, with options to purchase
6,000 shares vesting at the first anniversary of the grant and options to
purchase the remaining 18,000 shares vesting in 36 equal monthly installments.
Annual options to purchase 6,000 shares of Common Stock (the "Annual Options")
will be granted to each Eligible Director on the date of each annual meeting of
stockholders after the closing of the offering. Annual Options will vest at the
rate of one-twelfth of the total grant per month, and will vest in full at the
earlier of (i) the first anniversary of the date of the grant or (ii) the date
of the next annual meeting of stockholders. The exercise price of options
granted under the Director Plan will equal the fair market value per share of
the Common Stock on the date of grant.
Options granted under the Director Plan are not transferable by the
optionee except by will or by the laws of descent and distribution or pursuant
to a qualified domestic relations order. In the event an optionee ceases to
serve as a director, each option may be exercised by the optionee for the
portion then exercisable at any time within 60 days after the optionee ceases to
serve as a director; provided, however, that in the event that the optionee
ceases to serve as a director due to his death or disability, then the optionee,
or his or her administrator, executor or heirs, may exercise the exercisable
portion of the option for up to 180 days following the date the optionee ceases
to serve as a director. No option is exercisable after the expiration of five
years from the date of grant.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law a director of the Company shall not be liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. Under current Delaware law, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of this provision of the Company's Certificate of
Incorporation is to limit or eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligent or grossly
negligent behavior) except in those circumstances described in clauses (i)
through (iv) above. This provision does not limit or eliminate the rights of the
Company or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. In addition,
the Company's Certificate of Incorporation and Bylaws provide that the Company
shall indemnify its directors, officers, employees and agents to the fullest
extent permitted by Delaware law.
45
<PAGE> 48
The Company's Bylaws provide that the Company shall indemnify its officers
and directors to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
At present, there is no pending litigation or proceeding involving any
officer or director, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
CERTAIN TRANSACTIONS
In December 1994, the Company issued 347,070 shares of its Series A
Convertible Preferred Stock at a price of $0.3477 per share, including 29,069
shares to affiliates of Mr. Stouffer.
In December 1994, the Company issued 2,588,438 shares of its Series B
Convertible Preferred Stock at a price of $0.4636 per share, including 939,207
shares to NEPA Venture Fund II, L.P. ("NEPA"), 256,148 shares to Tritech
Partners, L.P. ("Tritech"), 426,913 shares to William Oakes ("Oakes") and
539,257 shares to the Maryland Department of Business and Economic Development
("DBED"). DBED has the right to require the Company to repurchase all of its
shares at the greater of cost or fair market value if the Company relocates its
principal place of business outside of the State of Maryland prior to December
15, 1999.
In August 1995, the Company issued 1,600,000 shares of its Series C
Convertible Preferred Stock at a price of $1.25 per share, including 800,000
shares to Edison Venture Fund III, L.P. ("Edison"), 366,666 shares to NEPA,
120,501 shares to Tritech and 125,666 shares to Oakes.
In January 1996, the Company issued 2,285,714 shares of its Series D
Convertible Preferred Stock at a price of $1.75 per share, including an
aggregate of 1,428,571 shares to Venrock Associates and Venrock Associates II,
L.P. (collectively, "Venrock"), 261,258 shares to Edison, 225,917 shares to
NEPA, 105,350 shares to Tritech, 25,000 shares to Oakes and 42,857 shares to Mr.
Joseph.
In September 1996, the Company issued 754,321 shares of its Series E
Convertible Preferred Stock at a price of $6.66 per share, including 120,120
shares to Venrock, 120,120 shares to Edison, 18,769 shares to NEPA, 7,508 shares
to Tritech, 12,012 shares to Mr. Joseph and affiliates and an aggregate of
454,021 shares to Behrman Capital L.P., Behrman Capital B L.P. and Strategic
Entrepreneur Fund L.P.
On June 15, 1997, the Company issued 25,000 shares of its Common Stock at a
price of $1.75 per share to Mr. Minihane. See "Management -- Employment
Arrangements."
On September 13, 1997, the Company issued 10,504 shares of its Common Stock
at a price of $4.76 per share to Mr. William Smith.
The Company believes that all transactions set forth above were made on
terms no less favorable to the Company than would have been obtained from
unaffiliated third parties. The Company has adopted a policy whereby all future
transactions between the Company and its officers, directors and affiliates will
be on terms no less favorable to the Company than could be obtained from
unrelated third parties and will be approved by a majority of the disinterested
members of the Board of Directors.
46
<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 30, 1997, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby: (i) by each
person who is known by the Company to own beneficially more than five percent of
the Company's Common Stock, (ii) by each director and Named Executive Officer,
and (iii) by all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENT OF OWNERSHIP
NUMBER OF SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- -------------------------------------------------------- ---------------- ---------- ---------
<S> <C> <C> <C>
NEPA Venture Fund II, L.P.(2)........................... 2,170,780 16.0% 12.7%
c/o Mid-Atlantic Venture Funds
1801 Reston Parkway -- Suite 203
Reston, VA 20190
Venrock Entities(3)..................................... 2,157,685 15.9 12.6
30 Rockefeller Plaza
New York, NY 10112
Edison Venture Fund III, L.P.(4)........................ 1,653,929 12.2 9.7
997 Lenox Drive, Building No. 3
Lawrenceville, NJ 08648
William R.T. and Carol B. Oakes(5)...................... 780,610 5.8 4.6
Maryland Department of Business
and Economic Development(6)........................... 754,959 5.6 4.4
217 E. Redwood Street
Baltimore, MD 21202
Tritech Partners, L.P. ................................. 685,309 5.1 4.0
300 East Joppa Road, Suite 1111
Baltimore, MD 21286
Marc F. Benson(7)....................................... 2,170,780 16.0 12.7
Grant G. Behrman(8)..................................... 635,628 4.7 3.7
Robert C. Troutman(9) (14).............................. 467,972 3.4 2.7
Theodore R. Joseph(10).................................. 120,204 * *
Ted H. McCourtney(11)................................... 2,157,685 15.9 12.6
Thomas A. Smith(12)..................................... 1,653,929 12.2 9.7
William J. Smith........................................ 10,504 * *
Scott E. Stouffer (13) (14)............................. 1,500,609 11.0 8.8
All executive officers and directors as a group (12
persons)(15).......................................... 8,755,043 64.1 51.0
</TABLE>
- ---------------
* Less than 1%.
(1) The persons named in this table have sole voting power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable and except as indicated in the
other footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days after November 30,
1997, are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
person.
(2) Marc A. Benson, a director of the Company, is a principal and partner of
Mid-Atlantic Venture Funds, formerly NEPA Venture Funds ("NEPA"). Mr.
Benson has shared voting and investment power over the shares held by NEPA
but disclaims beneficial ownership thereof except to the extent of his
proportionate partnership interest therein.
47
<PAGE> 50
(3) Represents 1,336,159 shares of Common Stock beneficially owned by Venrock
Associates and 821,526 shares of Common Stock beneficially owned by Venrock
Associates II, L.P. (Venrock Associates and Venrock Associates II, L.P.,
collectively "Venrock"). Ted H. McCourtney, a director of the Company, is a
general partner of both Venrock Associates and Venrock Associates II, L.P.
Mr. McCourtney has shared voting and investment power over the shares held
by Venrock but disclaims beneficial ownership thereof except to the extent
of his proportionate partnership interest therein.
(4) Thomas A. Smith, a director of the Company, is a general partner of Edison
Venture Fund III, L.P. ("Edison"). Mr. Smith has shared voting and
investment power over shares held by Edison but disclaims beneficial
ownership thereof except to the extent of his proportionate partnership
interest therein.
(5) The address of Mr. and Mrs. Oakes is c/o the Company, 2092 Gaither Road,
Rockville, Maryland 20850.
(6) The Maryland Department of Business and Economic Development ("DBED")
provides administrative services for the Maryland Venture Capital Trust
(the "Trust"). The Trust is a body politic and corporate and is constituted
as a public instrumentality of the State of Maryland. The Trust is a
limited partner in both Edison and Tritech Partners, L.P. ("Tritech"), and
as such may be deemed to beneficially own its proportionate partnership
share of the securities owned by Edison and Tritech. Neither DBED nor the
Trust exercises any voting power or investment power over the securities
owned by Edison or Tritech and therefore each disclaims beneficial
ownership of such securities.
(7) Represents 2,170,780 shares of Common Stock beneficially owned by NEPA
which Mr. Benson may be deemed to beneficially own by virtue of his status
as a principal and general partner of NEPA. Mr. Benson has shared voting
and investment power over shares held by NEPA but disclaims beneficial
ownership thereof except to the extent of his proportionate partnership
interest therein.
(8) Represents 251,441 shares of Common Stock held by Behrman Capital L.P.,
379,188 shares held by Behrman Capital B L.P., and 4,999 shares held by
Strategic Entrepreneur Fund, L.P., which Mr. Behrman may be deemed to
beneficially own by virtue of his status as a General Partner of Behrman
Brothers L.P., the general partner of such entities. Mr. Behrman has shared
voting and investment power over shares held by these entities but
disclaims beneficial ownership thereof except to the extent of his
proportionate partnership interest therein.
(9) Includes 397,600 shares of Common Stock held by Mr. Troutman, 49,000 shares
held by the Robert C. Troutman Grantor Retained Annuity Trust ("GRAT"),
3,500 shares held by Mr. Troutman as custodian for each of two children and
14,372 shares of Common Stock issuable upon exercise of stock options.
(10) Represents 68,404 shares of Common Stock held by Mr. Joseph, 22,400 shares
held by Mr. Joseph's IRA and 29,400 shares of Common Stock issuable upon
exercise of stock options.
(11) Represents shares of Common Stock beneficially owned by Venrock which Mr.
McCourtney may be deemed to beneficially own by virtue of his status as a
general partner of Venrock. Mr. McCourtney has shared voting and investment
power over the shares held by Venrock but disclaims beneficial ownership
thereof except to the extent of his proportionate partnership interest
therein.
(12) Represents shares of Common Stock beneficially owned by Edison which Mr.
Smith may be deemed to beneficially own by virtue of his status as a
general partner of Edison. Mr. Smith has shared voting and investment power
over shares held by Edison but disclaims beneficial ownership thereof
except to the extent of his proportionate partnership interest therein.
(13) Includes 861,000 shares held by Mr. Stouffer, 280,000 shares of Common
Stock held by the Scott E. Stouffer GRAT, 320,696 shares of Common Stock
held by Mr. Stouffer's wife and 38,913 shares of Common Stock issuable upon
exercise of options.
(14) The address of Messrs. Troutman and Stouffer is c/o the Company, 2092
Gaither Road, Rockville, Maryland 20850.
(15) Includes an aggregate of 95,417 shares of Common Stock issuable upon
exercise of options. See notes 9, 10 and 13 above.
48
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offering, the Company's authorized capital stock
will consist of 50,000,000 shares of Common Stock, $.01 par value per share, and
5,000,000 shares of Preferred Stock, $.01 par value per share.
COMMON STOCK
At September 30, 1997, the Company had outstanding 2,929,131 shares of
Common Stock held of record by approximately 35 stockholders. Each holder of
Common Stock is entitled to one vote for each share held. Following the
conversion of the Convertible Preferred Stock to Common Stock, the holders of
Common Stock, voting as a single class, will be entitled to elect all of the
directors of the Company.
Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock would be entitled to share in
the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive or other subscription rights. The shares of Common Stock are not
convertible into any other security. The outstanding shares of Common Stock are,
and the shares being offered hereby will be, upon issuance and sale, fully paid
and nonassessable.
PREFERRED STOCK
At September 30, 1997, the Company had outstanding an aggregate of
7,575,543 shares of Convertible Preferred Stock, consisting of 347,070 shares of
Series A Convertible Preferred Stock, 2,588,438 shares of Series B Convertible
Preferred Stock, 1,600,000 shares of Series C Convertible Preferred Stock,
2,285,714 shares of Series D Convertible Preferred Stock and 754,321 shares of
Series E Convertible Preferred Stock. The Series A, B, C, D and E Preferred
Stock are held of record by 16, 5, 7, 12 and 16 stockholders, respectively.
Pursuant to the terms of the Convertible Preferred Stock, upon the closing of
the offering, all the outstanding Convertible Preferred Stock will be converted
into 10,605,735 shares of Common Stock. All shares of the currently outstanding
Convertible Preferred Stock will be canceled upon conversion.
Upon the closing of the offering, the Company will have the authority to
issue up to 5,000,000 shares of Preferred Stock. The Board of Directors has the
authority to issue, without any further action by the stockholders, the
Preferred Stock in one or more series, to establish from time to time the number
of shares to be included in each series, and to fix the designations, powers,
preferences and rights of the shares of each series and the qualifications,
limitations or restrictions thereof. Although the ability of the Board of
Directors to designate and issue Preferred Stock could provide flexibility in
possible acquisitions or other corporate purposes, issuance of Preferred Stock
may have adverse effects on the holders of Common Stock, including restrictions
on dividends on the Common Stock if dividends on the Preferred Stock have not
been paid; dilution of voting power of the Common Stock to the extent the
Preferred Stock has voting rights; or deferral of participation in the Company's
assets upon liquidation until satisfaction of any liquidation preference granted
to holders of the Preferred Stock. In addition, issuance of Preferred Stock
could make it more difficult for a third party to acquire a majority of the
outstanding voting stock and accordingly may be used as an "anti-takeover"
device. The Board of Directors, however, currently does not contemplate the
issuance of any Preferred Stock and is not aware of any pending transactions
that would be affected by such issuance.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Holders of an aggregate of 10,119,845 shares of Common Stock issuable upon
the conversion of the Convertible Preferred Stock (the "Registrable Shares") are
entitled to certain demand rights
49
<PAGE> 52
with respect to the registration of such shares under the Securities Act.
Subject to certain limitations, the Company is required, upon request of the
holders of at least two-thirds of the Registrable Shares outstanding, to file a
registration statement under the Securities Act covering such Registrable Shares
(a "Demand Registration"). The Company is not required to effect more than two
Demand Registrations. In addition to the Demand Registration rights described
above, and subject to certain conditions and limitations, such holders may
require the Company to file an unlimited number of registration statements on
Form S-2 or Form S-3 under the Securities Act, when such form is available for
use by the Company, provided that no more than two such requests may be made per
year.
Holders of an aggregate of 10,605,735 shares of Common Stock also are
entitled to include their shares of Common Stock in a registered offering of
securities by the Company (a "Piggyback Registration") for its own account,
subject to certain conditions and restrictions.
All expenses incurred in connection with Demand or Piggyback Registrations
(excluding underwriters' discounts and commissions but including the reasonable
fees and disbursements of one counsel chosen by the holders requesting a Demand
Registration or a registration on Form S-2 or S-3) shall be borne by the
Company; except, that if a Demand Registration is begun and subsequently
withdrawn by the requesting holders, the requesting holders may elect to either
treat such withdrawn registration as one of their two Demand Registrations or
pay all expenses with respect to the registration.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company's Certificate of Incorporation or Bylaws, as applicable, among
other things, (i) provide that the number of directors shall be determined from
time to time by resolution adopted by a majority of the Board of Directors; and
(ii) provide for a classified Board of Directors consisting of three classes of
directors having staggered terms of three years each, with each of the classes
being as nearly equal in number as possible. The Company's Certificate of
Incorporation provides that, upon the closing of the offering, any action
required or permitted to be taken by the stockholders of the Company may be
taken only at a duly called annual or special meeting of the stockholders, and
may not be effected by any consent in writing of such stockholders. These and
other provisions could have the effect of making it more difficult for a third
party to effect, or of discouraging a third party from trying to effect, a
change in the control of the Board of Directors. Such provisions may also
discourage another person from making a tender offer for the Company's Common
Stock, including offers at a premium over the market price of the Common Stock,
and might result in a delay in changes in control of management.
Section 203 of the Delaware General Corporation Law, as amended ("Section
203"), provides that, subject to certain exceptions specified therein, an
"interested stockholder" of a Delaware corporation shall not engage in any
business combination, including mergers or consolidations or acquisitions of
additional shares of the corporation, with the corporation for a three-year
period following the date at which the stockholder becomes an "interested
stockholder" unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an "interested stockholder," (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time that the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the "interested stockholder." Except as otherwise specified in
Section 203, an "interested stockholder" is defined to include (x) any person
which is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to
50
<PAGE> 53
the relevant date and (y) the affiliates and associates of any such person. The
Company's stockholders, by adopting an amendment to its Certificate of
Incorporation or Bylaws, may elect not to be governed by Section 203, effective
twelve months after adoption. Neither the Certificate of Incorporation nor the
Bylaws presently exclude the Company from the restrictions imposed by Section
203.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Boston Equiserve.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 17,060,119 shares of
Common Stock outstanding. Of this amount, 3,500,000 shares offered hereby will
be available for immediate sale in the public market as of the date of this
Prospectus. Of the remaining 13,560,119 shares, approximately 3,431,864
additional shares will be eligible for immediate sale in the public market
pursuant to Rule 144(k) under the Securities Act, of which 3,424,864 shares are
subject to lock-up agreements. Within 90 days after the date of this Prospectus
approximately 10,100,255 shares will become eligible for sale in the public
market, of which 10,070,630 are subject to lockup agreements. Approximately
13,477,239 shares become eligible for sale in the public market following the
expiration of 180-day lockup agreements with the Representatives of the
Underwriters, subject in some cases to compliance with the volume and other
limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of the Common Stock (approximately
1,706,012 shares immediately after the offering) or (ii) the average weekly
trading volume during the four calendar weeks preceding such sale, subject to
the filing of Form 144 with respect to such sale. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale who has
beneficially owned his or her shares for at least two years is entitled to sell
such shares pursuant to Rule 144(k) without regard to the limitations described
above. Persons deemed to be affiliates must always sell pursuant to Rule 144,
even after the applicable holding periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, since this will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to the offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after the offering. Any future sale or anticipated
future sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.
The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders have agreed pursuant to the
Underwriting Agreement and other agreements that they will not sell any Common
Stock without the prior consent of the Representatives of the Underwriters for a
period of 180 days from the date of this Prospectus (the "180-day Lockup
Period"), except that the Company may, without such consent, grant certain
options to purchase stock pursuant to the Option Plan, Director Plan and Omnibus
Plan. The Representatives of the Underwriters may, at their sole discretion and
at any time without notice, release all or any portion of the securities subject
to the lockup arrangements.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which
51
<PAGE> 54
permits nonaffiliates to sell their Rule 701 shares without having to comply
with the public information, holding period, volume limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with the Rule 144 holding period restrictions, in each
case commencing 90 days after the date of this Prospectus.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register shares of Common Stock issued or reserved for
issuance under the Option Plans, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities Act.
Such registration statement will not be effective prior to the date 90 days
after the date of this Prospectus.
In addition, after the offering, the holders of 10,605,735 shares
(including options exercisable into shares) of Common Stock will be entitled to
certain rights with respect to registration of such shares under the Securities
Act. Registration of such shares under the Securities Act would result in such
shares becoming freely tradable without restriction under the Securities Act
(except for shares purchased by affiliates of the Company) immediately upon the
effectiveness of such registration. See "Description of Capital
Stock -- Registration Rights".
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby and certain
other legal matters regarding the shares of Common Stock will be passed upon for
the Company by Piper & Marbury L.L.P., Washington, D.C., counsel to the Company.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Hale and Dorr LLP, Washington, D.C.
EXPERTS
The financial statements and schedules of the Company as of December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996, included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
OTHER MATTERS
In August 1997, the Company's Board of Directors retained Arthur Andersen
LLP as its independent public accountants and dismissed the Company's former
auditors. From the Company's inception and throughout the time they were
retained by the Company, the former auditors did not disagree with the Company
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure or any reportable events. The former
auditors' reports on the Company's financial statements, contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. Prior to retaining Arthur
Andersen LLP, the Company had not consulted with Arthur Andersen LLP on any
accounting, auditing or reporting matter.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
(including all amendments thereto, the "Registration Statement") under the
Securities Act of 1933, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this prospectus omits
certain information contained in the Registration Statement. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. Statements contained in this Prospectus
52
<PAGE> 55
concerning the contents of any contract or any other document referred to are
not necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the Registration Statement. Each
such statement is qualified in all respects by such reference to such exhibits.
The Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from such office after payment of fees prescribed by the Securities and
Exchange Commission. The Commission also maintains a Web site that contains
reports, proxy statements and other information regarding registrants, including
the Company, that file such information electronically with the Commission. The
address of the Commission's Web site is http://www.sec.gov.
53
<PAGE> 56
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................ F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 and Pro Forma
Balance Sheet as of September 30, 1997............................................ F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996, and
for the nine months ended September 30, 1996 and 1997............................. F-4
Statements of Changes in Stockholders' Equity (Deficit) for the years ended December
31, 1994, 1995 and 1996, and for the nine months ended September 30, 1997......... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996, and
for the nine months ended September 30, 1996 and 1997............................. F-6
Notes to Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Board of Directors and Stockholders of
Visual Networks, Inc.:
We have audited the accompanying balance sheets of Visual Networks, Inc., a
Delaware corporation, as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 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 an 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 Visual Networks, Inc., as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
December 2, 1997
F-2
<PAGE> 58
VISUAL NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<CAPTION>
<S> <C> <C> <C> <C>
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 993 $ 3,404 $ 4,140
Accounts receivable, net of allowance of $0, $250, and
$363, respectively.................................... 166 1,888 2,440
Inventory............................................... 362 933 1,176
Other current assets.................................... 16 211 407
------- -------- -------------
Total current assets.................................. 1,537 6,436 8,163
Property and equipment, net............................... 191 813 1,265
------- -------- -------------
Total assets.......................................... $ 1,728 $ 7,249 $ 9,428
======== ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses................... $ 186 $ 1,059 $ 2,200
Accrued compensation.................................... 160 862 810
Deferred revenue........................................ -- 1,124 3,306
Bank line of credit..................................... -- 848 --
Current portion of capital lease obligation............. 40 49 221
------- -------- -------------
Total current liabilities............................. 386 3,942 6,537
Capital lease obligation, net of current portion.......... 81 28 312
------- -------- -------------
Total liabilities..................................... 467 3,970 6,849
------- -------- -------------
Commitments and contingencies (Note 8)
Redeemable convertible preferred stock (Note 3):
Series B, Series C, Series D and Series E redeemable
convertible cumulative preferred stock, $0.01 par
value, 7,229,438 shares authorized in aggregate,
4,188,438, 7,228,473 and 7,228,473 shares issued and
outstanding in aggregate as of December 31, 1995, 1996
and September 30, 1997, respectively, and no shares
outstanding on a pro forma basis (aggregate
liquidation preference of $13,262 and $14,179 as of
December 31, 1996, and September 30, 1997,
respectively)......................................... 3,385 13,398 14,491 $ --
------- -------- ------------- -------------
Stockholders' equity (deficit) (Note 4):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding.......... -- -- -- --
Series A convertible cumulative preferred stock, $.01
par value, 347,070 shares authorized 347,070 shares
issued and outstanding as of December 31, 1995, 1996
and September 30, 1997 and no shares outstanding on a
pro forma basis (liquidation preference of $130 and
$147 as of December 31, 1996, and September 30, 1997,
respectively)......................................... 3 3 3 --
Common stock, $.01 par value, 50,000,000 shares
authorized, 2,800,000, 2,800,000, and 2,929,131 shares
outstanding as of December 31, 1995 and 1996, and
September 30, 1997, respectively, and 13,534,866 on a
pro forma basis....................................... 28 28 29 135
Deferred compensation................................... -- -- (247) (247)
Additional paid-in capital.............................. 121 121 508 14,896
Accumulated deficit..................................... (2,276) (10,271) (12,205) (12,205)
------- -------- ------------- -------------
Total stockholders' equity (deficit).................. (2,124) (10,119) (11,912) 2,579
------- -------- ------------- -------------
Total liabilities and stockholders' equity
(deficit)........................................... $ 1,728 $ 7,249 $ 9,428 $ 9,428
======== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 59
VISUAL NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------------
1994 1995 1996 1996 1997
----- ------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ -- $ 250 $6,335 $3,944 $15,524
Cost of goods sold....................... -- 44 2,550 1,614 5,059
----- ------ ---------- ---------- ----------
Gross profit........................... -- 206 3,785 2,330 10,465
----- ------ ---------- ---------- ----------
Operating expenses:
Research and development............... 163 994 2,988 2,075 2,950
Selling and marketing.................. -- 700 6,386 4,260 6,751
General and administrative............. 59 343 1,469 840 1,616
----- ------ ---------- ---------- ----------
Total operating expenses............. 222 2,037 10,843 7,175 11,317
----- ------ ---------- ---------- ----------
Loss from operations..................... (222) (1,831) (7,058) (4,845) (852)
Interest income, net..................... -- 40 75 52 11
----- ------ ---------- ---------- ----------
Net loss................................. $(222) $(1,791) $(6,983) $(4,793) $(841)
===== ====== ========== ========== ==========
Pro forma net loss per common share...... $(0.53) $(0.38) $(0.06)
========== ========== ==========
Pro forma weighted average common shares
outstanding............................ 13,103,682 12,774,365 14,133,125
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 60
VISUAL NETWORKS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------
REDEEMABLE
CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- ----------------------- ------------------- DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION
---------- -------- ---------- ---------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1993.................. -- $ -- -- $ -- 1,400 $ -- $ --
Issuance of common stock............... -- -- -- -- 200 -- --
Recapitalization and conversion of
notes payable to common stock........ -- -- -- -- 2,798,400 28 --
Conversion of notes payable and accrued
interest to Series A preferred
stock................................ -- -- 347,070 3 -- -- --
Issuance of Series B preferred stock... 2,588,438 1,170 -- -- -- -- --
Net loss............................... -- -- -- -- -- -- --
---------- -------- -------- --- ---------- ---- ----
BALANCE, DECEMBER 31, 1994................. 2,588,438 1,170 347,070 3 2,800,000 28 --
Issuance of Series C preferred stock... 1,600,000 1,965 -- -- -- -- --
Accretion of Series B and Series C
preferred stock...................... -- 47 -- -- -- -- --
Accrued dividends on Series B and
Series C preferred stock............. -- 203 -- -- -- -- --
Net loss............................... -- -- -- -- -- -- --
---------- -------- -------- --- ---------- ---- ----
BALANCE, DECEMBER 31, 1995................. 4,188,438 3,385 347,070 3 2,800,000 28 --
Issuance of Series D preferred stock... 2,285,714 3,983 -- -- -- -- --
Issuance of Series E preferred stock... 754,321 5,018 -- -- -- -- --
Accretion of Series B, Series C,
Series D, and Series E preferred
stock................................ -- 177 -- -- -- -- --
Accrued dividends on Series B, Series
C, Series D, and Series E preferred
stock................................ -- 835 -- -- -- -- --
Net loss............................... -- -- -- -- -- -- --
---------- -------- -------- --- ---------- ---- ----
BALANCE, DECEMBER 31, 1996................. 7,228,473 13,398 347,070 3 2,800,000 28 --
Issuance of common stock (unaudited)... -- -- -- -- 35,504 -- --
Exercise of stock options
(unaudited).......................... -- -- -- -- 93,627 1 --
Deferred compensation.................. -- -- -- -- -- -- (279)
Amortization of deferred
compensation......................... -- -- -- -- -- -- 32
Accretion of Series B, Series C, Series
D, and Series E preferred stock
(unaudited).......................... -- 176 -- -- -- -- --
Accrued dividends on Series B, Series
C, Series D, and Series E preferred
stock (unaudited).................... -- 917 -- -- -- -- --
Net loss (unaudited)................... -- -- -- -- -- -- --
---------- -------- -------- --- ---------- ---- ----
BALANCE, SEPTEMBER 30, 1997 (UNAUDITED).... 7,228,473 14,491 347,070 3 2,929,131 29 (247)
Pro forma adjustments (unaudited)...... (7,228,473) (14,491) (347,070) (3) 10,605,735 106 --
---------- -------- -------- --- ---------- ---- ----
PRO FORMA BALANCE, SEPTEMBER 30, 1997
(UNAUDITED).............................. -- $ -- -- $ -- 13,534,866 $135 $ (247)
========== ======== ======== === ========== ==== ====
<CAPTION>
ADDITIONAL
PAID-IN- ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- --------
<S> <C> <C> <C>
BALANCE, DECEMBER 31,1993.................. $ -- $ (5) $ (5)
Issuance of common stock............... -- -- --
Recapitalization and conversion of
notes payable to common stock........ 4 (8) 24
Conversion of notes payable and accrued
interest to Series A preferred
stock................................ 117 -- 120
Issuance of Series B preferred stock... -- -- --
Net loss............................... -- (222) (222)
------- ------- --------
BALANCE, DECEMBER 31, 1994................. 121 (235) (83)
Issuance of Series C preferred stock... -- -- --
Accretion of Series B and Series C
preferred stock...................... -- (47) (47)
Accrued dividends on Series B and
Series C preferred stock............. -- (203) (203)
Net loss............................... -- (1,791) (1,791)
------- ------- --------
BALANCE, DECEMBER 31, 1995................. 121 (2,276) (2,124)
Issuance of Series D preferred stock... -- -- --
Issuance of Series E preferred stock... -- -- --
Accretion of Series B, Series C,
Series D, and Series E preferred
stock................................ -- (177) (177)
Accrued dividends on Series B, Series
C, Series D, and Series E preferred
stock................................ -- (835) (835)
Net loss............................... -- (6,983) (6,983)
------- ------- --------
BALANCE, DECEMBER 31, 1996................. 121 (10,271) (10,119)
Issuance of common stock (unaudited)... 94 -- 94
Exercise of stock options
(unaudited).......................... 14 -- 15
Deferred compensation.................. 279 -- --
Amortization of deferred
compensation......................... -- -- 32
Accretion of Series B, Series C, Series
D, and Series E preferred stock
(unaudited).......................... -- (176) (176)
Accrued dividends on Series B, Series
C, Series D, and Series E preferred
stock (unaudited).................... -- (917) (917)
Net loss (unaudited)................... -- (841) (841)
------- ------- --------
BALANCE, SEPTEMBER 30, 1997 (UNAUDITED).... 508 (12,205) (11,912)
Pro forma adjustments (unaudited)...... 14,388 -- 14,491
------- ------- --------
PRO FORMA BALANCE, SEPTEMBER 30, 1997
(UNAUDITED).............................. $ 14,896 $ (12,205) $ 2,579
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 61
VISUAL NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------ ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (222) $(1,791) $(6,983) $(4,793) $ (841)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization............ 1 59 204 122 393
Changes in assets and liabilities --
Accounts receivable...................... -- (166) (1,722) (1,550) (552)
Inventory................................ -- (362) (571) (202) (243)
Other current assets..................... (7) (9) (195) (47) (196)
Accounts payable and accrued expenses.... 79 105 873 1,028 1,141
Accrued compensation..................... -- 160 702 314 (52)
Deferred revenue......................... -- -- 1,124 541 2,182
------ ------- ------- ------- ------
Net cash (used in) provided by
operating activities.............. (149) (2,004) (6,568) (4,587) 1,832
------ ------- ------- ------- ------
Cash flows from investing activities:
Proceeds from sale leaseback
transactions........................... -- 138 -- -- 544
Expenditures for property and
equipment.............................. (22) (227) (826) (520) (810)
------ ------- ------- ------- ------
Net cash used in investing
activities........................ (22) (89) (826) (520) (266)
------ ------- ------- ------- ------
Cash flows from financing activities:
Proceeds from issuance of preferred
stock, net of issuance costs........... 1,170 1,965 9,001 9,001 --
Borrowings (repayments) under credit
agreements............................. -- -- 848 760 (848)
Proceeds from notes payable to
shareholders........................... 137 -- -- -- --
Proceeds from issuance of common stock... -- -- -- -- 94
Proceeds from exercise of stock
options................................ -- -- -- -- 15
Principal payments on capital lease
obligations............................ -- (16) (44) (31) (91)
------ ------- ------- ------- ------
Net cash provided by (used in)
financing activities.............. 1,307 1,949 9,805 9,730 (830)
------ ------- ------- ------- ------
Net increase (decrease) in cash and cash
equivalents................................. 1,136 (144) 2,411 4,623 736
Cash and cash equivalents, beginning of
period...................................... 1 1,137 993 993 3,404
------ ------- ------- ------- ------
Cash and cash equivalents, end of period...... $1,137 $ 993 $ 3,404 $ 5,616 $4,140
====== ======== ======== ======== ======
Supplemental cash flow information:
Cash paid for interest........................ $ -- $ 13 $ 46 $ 27 $ 79
====== ======== ======== ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 62
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Visual Networks, Inc. (the "Company") is engaged in developing,
manufacturing and marketing wide-area-network service level management systems.
The Company's operations are subject to certain risks and uncertainties,
including among others, successful implementation of the Company's sales and
distribution model, dependence on significant customers, rapidly changing
technology, current and potential competitors with greater financial,
technological, production, and marketing resources, dependence on sole and
limited source suppliers, dependence on key management personnel, limited
protection of intellectual property and proprietary rights, uncertainty of
future profitability and possible fluctuations in financial results.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of September 30, 1997, and the
accompanying statements of operations and cash flows for the nine months ended
September 30, 1996 and 1997, are unaudited. The unaudited financial statements
include all adjustments which are, in the opinion of management, necessary for a
fair presentation of such financial statements. The results of operations for
the nine months ended September 30, 1997, are not necessarily indicative of the
results to be expected for the entire fiscal year.
UNAUDITED PRO FORMA INFORMATION
The unaudited pro forma information is being presented to show the
mandatory conversion of the Series B, Series C, Series D and Series E redeemable
convertible preferred stock and Series A convertible preferred stock into common
stock upon a qualified initial public offering. If the initial public offering
is consummated under terms presently anticipated, all of the Company's preferred
stock will automatically convert into shares of common stock at the rate of 1.4
shares of common stock for each share of preferred stock outstanding.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments.
F-7
<PAGE> 63
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
REVENUE RECOGNITION
The Company generally recognizes revenue from sales of its products upon
delivery and passage of title to the customer. Revenue is recognized provided
that no significant obligations remain and that collection of the resulting
receivable is probable. Where agreements provide for evaluation or customer
acceptance, the Company recognizes revenue upon the completion of the evaluation
process and acceptance of the product by the customer. Maintenance contracts
call for the Company to provide technical support and software updates to
customers. The Company recognizes product support and maintenance revenue,
including maintenance revenue that is bundled with product sales, ratably over
the term of the contract period, which ranges from one to three years.
CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains its cash and cash equivalents
with high credit quality financial institutions. The Company sells its hardware
and software products to large telecommunications providers and subscribers
primarily in the United States. The Company grants uncollateralized credit terms
to its customers and has not experienced any significant credit related losses.
Accounts receivable include allowances to record receivables at their estimated
net realizable value.
During 1996, two customers individually represented 13% and 10% of revenue,
respectively. During the nine month period ended September 30, 1997, two
customers individually represented 31% and 10% of revenue (unaudited).
WARRANTY
The Company warrants its hardware products for a period of five years.
Estimated warranty costs are charged to cost of goods sold in the period in
which revenue from the related product sale is recognized.
INVENTORY
Inventory is stated at the lower of average cost or market. Inventory
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................... $ 90 $158 $ 157
Work-in-progress........................................ 117 304 381
Finished goods.......................................... 155 471 638
---- ---- -------------
$362 $933 $ 1,176
===== ===== ===========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost and depreciated over its
estimated useful life, ranging from three to four years, using the straight-line
method. Equipment held under capital leases is
F-8
<PAGE> 64
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
recorded at the present value of the future minimum lease payments and is
amortized on a straight-line basis over the shorter of the assets' useful lives
or the relevant lease term, ranging from three to four years.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
---- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment.............................................. $237 $1,060 $ 1,662
Furniture and fixtures................................. -- 2 37
---- ------ -------------
237 1,062 1,699
Less-Accumulated depreciation.......................... (46) (249) (434)
---- ------ -------------
$191 $ 813 $ 1,265
===== ====== ===========
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". Costs
incurred prior to establishment of technological feasibility are expensed as
incurred and reflected as research and development costs in the accompanying
statements of operations.
For the years ended December 31, 1994, 1995 and 1996, and the nine months
ended September 30, 1997, the Company did not capitalize any costs related to
software development. During these periods, the time between the establishment
of technological feasibility and general release of products was very short.
Consequently, costs otherwise capitalizable after technological feasibility were
expensed as they were immaterial.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted marginal tax
rate. SFAS No. 109 requires that the net deferred tax asset be reduced by a
valuation allowance if, based on the weight of available evidence, it is more
likely than not that some portion or all of the net deferred tax asset will not
be realized.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share is computed using the pro forma
weighted average number of common shares outstanding during each period. Pro
forma weighted average common shares includes the assumed conversion of all
outstanding convertible preferred stock into common stock. Since the conversion
of the preferred stock has a significant effect on the loss per share
calculation, the historical loss per share has not been presented.
F-9
<PAGE> 65
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
Pursuant to the requirements of the Securities and Exchange Commission,
common stock, stock options and convertible preferred stock issued by the
Company during the twelve months immediately preceding the filing of the initial
registration statement have been included in the calculation of the pro forma
weighted average common shares outstanding using the treasury stock method based
upon an assumed initial public offering price of $10.00 per share.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share". SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
requires dual presentation of basic and diluted earnings per share. The Company
will implement SFAS No. 128 for 1997 as required and all prior period earnings
per share data will be restated. Basic earnings per share includes no dilution
and is computed by dividing net income/loss available to common stockholders by
the weighted average number of common shares outstanding for the period. The
Company believes that, on a pro forma basis, the presentation of basic and
diluted loss per share will not differ materially from the earnings per share as
currently presented.
2. CREDIT AGREEMENT:
The Company has entered into a credit agreement with a bank that provides
for borrowings up to $3,500,000. The agreement includes a revolving line of
credit of $3,000,000, that matures in March 1998. This line of credit is
collateralized by the net assets of the Company. The agreement also includes a
revolving line of credit of $500,000 for the purchase of equipment ("equipment
line") that matures in December 1997. Repayments of borrowings against the
equipment line are to be made over a three year period from the date that the
line is utilized, with any remaining balance due in June 2000. The interest
rates on the line of credit and equipment line are based on the prime rate
(8.25% as of December 31, 1996) plus 1.5%. The amount of credit available under
the lines is limited to 75% of the accounts receivable balance, excluding any
amounts greater than ninety days past due at the end of any given month.
The agreement also contains restrictive covenants, including, but not
limited to, restrictions related to profitability, net worth and indebtedness,
as well as restrictions with respect to acquisitions and the sale of assets.
As of December 31, 1996, the Company had approximately $848,000 in
borrowings against the revolving line of credit and no borrowings against the
equipment line. In addition, as of December 31, 1996 and September 30, 1997,
$230,000 had been committed against the lines of credit through the issuance of
a letter of credit (Note 8). The commitment against the letter of credit
decreased to $190,000 effective November 25, 1997.
3. PREFERRED STOCK:
The Company has a total of 12,576,508 shares of authorized preferred stock
of which 7,576,508 have been designated as Series A, B, C, D and E convertible
preferred stock and 5,000,000 of which
F-10
<PAGE> 66
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
has not been designated. The following details the number of shares issued and
the liquidation preference (in thousands) for each series of the convertible
preferred stock.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AMOUNT LIQUIDATION PREFERENCE
AS OF DECEMBER 31, ----------------------------- -----------------------------
1996 AND SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1997 1996 1997
---------------------- ------------ ------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Series A.......... 347,070 $ 3 $ 3 $ 130 $ 147
Series B.......... 2,588,438 1,464 1,574 1,440 1,530
Series C.......... 1,600,000 2,316 2,493 2,283 2,433
Series D.......... 2,285,714 4,433 4,787 4,373 4,673
Series E.......... 754,321 5,185 5,637 5,166 5,543
--------- -------- ------- -------- -------
7,575,543 $ 13,401 $14,494 $ 13,392 $14,326
========= ======== ======= ======== =======
</TABLE>
SERIES A PREFERRED STOCK
In connection with the Series B Preferred Stock ("Series B") offering,
notes payable of $119,500 together with accrued interest of $1,176 were
converted into shares of Series A Preferred Stock ("Series A"). The Series A has
liquidation preferences over the common stock. The Series A has cumulative
dividends equal to 8% per annum. Dividends are not payable for a period of
twenty-four months from the date of issuance (December 1994). The Company has
not declared dividends through December 1996 on Series A shares based on legal
limitations on the declarations of dividends. In the event that by the end of
calendar years 1998 and 1999, the Company's net revenues are greater than
$39,000,000 and net income (after taxes, but excluding extraordinary items) is
greater than $6,000,000, the holders of Series A shall no longer be entitled to
receive those dividends. At December 31, 1995 and 1996 and September 30, 1997,
dividends in arrears on Series A were $9,635, $19,270 and $26,440 (unaudited),
respectively.
The Series A shares have voting rights entitling Series A holders to the
number of votes per share equal to the number of shares of common stock into
which each share of Series A is then convertible. The Series A shares are
convertible at any time at the option of the holder, or automatically upon the
consummation of an underwritten public offering at a selling price per share of
common stock equal to or exceeding $3.57 per share and where aggregate proceeds
are not less than $10,000,000, into an aggregate of 485,890 shares of common
stock. The conversion price is subject to adjustment for certain dilutive
events.
Upon conversion, all accrued and unpaid dividends may also be converted
into common stock at the then current market price of the common stock (as
defined). The Company may, however, elect to pay any accrued but unpaid
dividends in cash in lieu of converting such dividends into shares of common
stock.
SERIES B PREFERRED STOCK
In December 1994, the Company issued 2,588,438 shares of Series B and
received approximately $1,170,000 in proceeds, net of issuance costs of
approximately $30,000. The Series B has liquidation preferences over the Series
A and the common stock. The holders of Series B are entitled to receive
dividends payable equal to 10% of the Series B stated value annually. Such
dividends are cumulative from the date of issuance. Upon the conversion of
Series B shares into
F-11
<PAGE> 67
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
shares of common stock, any accrued but unpaid or undeclared dividends on Series
B shall be waived.
At any time after five years following the Series E Preferred Stock
("Series E") issuance, the Company is required to redeem at the option of the
holder, the outstanding Series B shares at a redemption price equal to 110% of
the Series B stated value plus all accrued and unpaid dividends. The Company
records periodic accretion under the interest method for the excess of the
redemption value over the stated value.
The Series B shares have voting rights entitling Series B holders to the
number of votes per share equal to the number of shares of common stock into
which each share of Series B is then convertible and to vote as a single class.
The Series B is convertible at any time at the option of the holder, or
automatically upon the consummation of an underwritten public offering at a
selling price per share of common stock equal to or exceeding $3.57 per share,
and where aggregate proceeds are not less than $10,000,000, into an aggregate of
3,623,811 shares of common stock. The conversion price is subject to adjustment
for certain dilutive events.
SERIES C PREFERRED STOCK
In August 1995, the Company issued 1,600,000 shares of Series C Preferred
Stock ("Series C") and received approximately $1,965,000 in proceeds, net of
issuance costs of approximately $35,000. The Series C has liquidation
preferences over the Series B and Series A and the common stock and has parity
with the Series D Preferred Stock ("Series D") with respect to liquidation. The
holders of Series C are entitled to receive dividends payable equal to 10% of
the Series C stated value annually. Such dividends are cumulative from the date
of issuance. Upon the conversion of Series C shares into shares of common stock,
any accrued but unpaid or undeclared dividends on Series C shall be waived.
At any time after five years following the issuance of the Series E, the
holders of at least 66 2/3% of the shares of Series C, Series D and Series E,
together as one class, may request that the Company redeem all or a part of the
outstanding Series C, Series D, and Series E. Any redemption is to be made pro
rata among all of the holders of the Series C, Series D, and Series E, in
proportion to their respective stated values. The redemption price for each
series of preferred stock is equal to 110% of the stated value for such series
of preferred stock plus all accrued and unpaid dividends. The Company records
periodic accretion under the interest method of the excess of the redemption
values of each series over the stated value.
The Series C shares have voting rights entitling Series C holders to the
number of votes per share equal to the number of shares of common stock into
which each share of Series C is then convertible and to vote as a single class.
The Series C is convertible at any time at the option of the holder, or
automatically upon the consummation of an underwritten public offering at a
selling price per share of common stock equal to or exceeding $3.57 per share,
and where aggregate proceeds are not less than $10,000,000, into an aggregate of
2,239,998 shares of common stock. The conversion price is subject to adjustment
for certain dilutive events.
SERIES D PREFERRED STOCK
In January 1996, the Company issued 2,285,714 shares of Series D and
received approximately $3,983,000 in proceeds, net of issuance costs of
approximately $17,000. The Series D has
F-12
<PAGE> 68
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
liquidation preferences over the Series B and Series A preferred stock and the
common stock and has parity with the Series C with respect to liquidation. The
holders of Series D are entitled to receive dividends payable equal to 10% of
the Series D stated value annually. Such dividends are cumulative from the date
of issuance. Upon the conversion of Series D shares into shares of common stock,
any accrued but unpaid or undeclared dividends on Series D shall be waived.
At any time after five years following the issuance of the Series E, the
holders of at least 66 2/3% of the shares of Series C, Series D and Series E,
together as one class, may request that the Company redeem all or a part of the
outstanding Series C, Series D and Series E. Any redemption is to be made pro
rata among all of the holders of the Series C, Series D and Series E, in
proportion to their respective stated values. The redemption price for each
series of preferred stock is equal to 110% of the stated value for such series
of preferred stock plus all accrued and unpaid dividends. The Company records
periodic accretion under the interest method of the excess of the redemption
values of each series over the stated value.
The Series D shares have voting rights entitling Series D holders to the
number of votes per share as equal to the number of shares of common stock into
which each share of Series D is then convertible and to vote as a single class.
The Series D is convertible at any time at the option of the holder, or
automatically upon the consummation of an underwritten public offering at a
selling price per share of common stock equal to or exceeding $3.57 per share,
and where aggregate proceeds are not less than $10,000,000, into an aggregate of
3,199,996 shares of common stock. The conversion price is subject to adjustment
for certain dilutive events.
SERIES E PREFERRED STOCK
In September 1996, the Company issued 754,321 shares of Series E and
received approximately $5,018,000 in proceeds, net of issuance costs of
approximately $6,000. The Series E has liquidation preferences over the Series
D, Series C, Series B and Series A preferred stock and the common stock. The
holders of Series E are entitled to receive dividends payable equal to 10% of
the Series E stated value annually. Such dividends are cumulative from the date
of issuance. Upon the conversion of Series E shares into shares of common stock,
any accrued but unpaid or undeclared dividends on Series E shall be waived.
At any time after five years following the issuance of the Series E, the
holders of at least 66 2/3% of the shares of Series C, Series D and Series E,
together as one class, may request that the Company redeem all or a part of the
outstanding Series C, Series D, and Series E. Any redemption is to be made pro
rata among all of the holders of the Series C, Series D and Series E, in
proportion to their respective stated values. The redemption price for each
series of preferred stock is equal to 110% of the stated value for such series
of preferred stock plus all accrued and unpaid dividends. The Company records
periodic accretion under the interest method of the excess of the redemption
values of each series over the stated value.
The Series E shares have voting rights entitling Series E holders to the
number of votes per share as equal to the number of shares of common stock into
which each share of Series E is then convertible and to vote as a single class.
The Series E is convertible at any time at the option of the holder, or
automatically upon the consummation of an underwritten public offering at a
selling price per share of common stock equal to or exceeding $7.86 per share,
and where aggregate proceeds are not less than $10,000,000, into an aggregate of
1,056,040 shares of common stock. The conversion price is subject to adjustment
for certain dilutive events.
F-13
<PAGE> 69
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
4. STOCKHOLDERS' EQUITY (DEFICIT):
COMMON STOCK SPLIT
In December 1996, the Board of Directors declared a 1.4 for one stock split
of the common stock of the Company effected in the form of a stock dividend. All
share and per-share amounts, including stock option information, have been
restated in these notes and the accompanying financial statements to reflect
this stock split.
COMMON STOCK
The Company initially authorized the issuance of 5,000 shares of common
stock at a par value of $1.00. The Company was initially capitalized in 1993 for
$1,000 through the issuance of common stock subscriptions to the founders for
1,000 shares of common stock. During 1994, in connection with a
recapitalization, the Company authorized the issuance of up to 7,000,000 shares
of common stock with a $.01 par value and issued 2,000,000 shares to existing
stockholders in exchange for shares previously held. Each stockholder received
their pro rata share of new shares for old shares tendered. Simultaneously,
notes payable to the shareholders totaling $24,000 were converted to common
stock. As a result of this transaction the Company recorded additional paid-in
capital of $4,000 for the year ended December 31, 1994. The number of shares of
common stock authorized for issuance was increased to 10,000,000 shares upon the
issuance of the Series D in January 1996 and to 20,000,000 in September 1996
upon the issuance of the Series E. At December 31, 1996, the Company has
reserved 10,684,259 shares of common stock for the conversion of the Series A,
Series B, Series C, Series D, and Series E. An additional 800,000 shares of
common stock were issued to existing stockholders on December 21, 1996 resulting
from the 1.4 to one stock split effected in the form of a stock dividend. A
total of 1,975,000 shares of common stock have been reserved for issuance under
the 1994 stock option plan.
In June 1997, the Company sold 25,000 shares of common stock to an officer
of the Company for $1.75 per share. In September 1997, the Company sold 10,504
shares of common stock to a director of the Company for $4.76 per share.
5. STOCK OPTIONS:
1994 STOCK OPTION PLAN
The Company's 1994 stock option plan (the "Option Plan") authorizes the
issuance of an aggregate of 1,975,000 shares of Common Stock pursuant to the
exercise of stock options. The Option Plan provides for grants of options to
employees, consultants, and directors of the Company. The Option Plan provides
for the granting of both incentive stock options and non-statutory option. The
Option Plan is administered by the Compensation Committee of the Board of
Directors, which has sole discretion and authority, consistent with the
provisions of the Option Plan, to determine which eligible participants will
receive options, the time when options will be granted, the terms of options
granted, and the number of shares that will be subject to options granted under
the Option Plan.
For any option intended to qualify as an incentive stock option, the
exercise price must not be less than 100% of the fair market value of the common
stock on the date the option is granted (110% of the fair market value of such
common stock with respect to any optionee who immediately before any option is
granted, directly or indirectly, possesses more than 10% of the total combined
F-14
<PAGE> 70
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
voting power of all classes of stock of the Company ("10% Owners")). In the case
of non-statutory options, the exercise price shall not be less than 20% of the
fair value of the common stock at the time of the grant. The Compensation
Committee has the authority to determine the time or times at which options
granted under the Option Plan become exercisable (typically three to five
years); provided that, for any option intended to qualify as an incentive stock
option, such option must expire no later than ten years from the date of grant
(five years with respect to 10% Owners). Unless terminated sooner by the Board,
the Option Plan terminates in December 2004 or the date on which all shares
available for issuance shall have been issued pursuant to the exercise or
cancellation of options granted under the Option Plan.
1997 OMNIBUS STOCK PLAN
The Company's 1997 Omnibus Stock Plan (the "Omnibus Plan") authorizes the
issuance of an aggregate of up to 1,000,000 shares of common stock with respect
to certain "Awards" made under the Omnibus Plan. The Omnibus Plan provides for
grants of options to employees, officers, directors, and consultants of the
Company or any affiliate of the Company; provided, however, that no individual
may receive an award of more than 250,000 shares in any one fiscal year.
"Awards" under the Omnibus Plan may take the form of grants of stock options,
stock appreciation rights, restricted or unrestricted stock, phantom stock,
performance awards, or any combination thereof. The Omnibus Plan is administered
by the Board of Directors, or by such committee or committees as may be
appointed by the Board of Directors from time to time (the "Administrator"). The
Administrator has sole power and authority, consistent with the provisions of
the Omnibus Plan, to determine which eligible participants will receive Awards,
the form of the Awards and the number of shares of Common Stock covered by each
Award, to impose terms, limits, restrictions, and conditions upon Awards, to
modify, amend, extend, or renew Awards (with the consent of the awardee), to
accelerate or change the exercise timing of Awards or to waive any restrictions
or conditions to an Award and to establish objective and conditions for earning
Awards. Unless terminated sooner by the Board, the Omnibus Plan will terminate
in October 2007 or the date on which all shares available for issuance shall
have been issued pursuant to the exercise or cancellation of Awards under the
Omnibus Plan.
DIRECTORS' STOCK OPTION PLAN
The 1997 Directors' Stock Option Plan (the "Director Plan") was adopted in
October 1997. Under the terms of the Director Plan, directors of the Company who
are not employees of the Company and who will receive any options personally
(the "Eligible Directors") are eligible to receive non-statutory options to
purchase shares of common stock. A total of 300,000 share of common stock may be
issued upon exercise of options granted under the Director Plan. Unless
terminated sooner by the Board of Directors, the Director Plan will terminate in
October 2007, or the date on which all shares available for issuance under the
Director Plan shall have been issued pursuant to the exercise of options granted
under the Director Plan.
Upon a member's initial election or appointment to the Board of Directors
after the date of this Prospectus, or for other Eligible Directors who did not
receive an option during 1997, such member will be granted options to purchase
24,000 shares of common stock, vesting over four years, with options to purchase
6,000 shares vesting at the first anniversary of the grant and options to
purchase the remaining 18,000 shares vesting in 36 equal monthly installments.
Annual options to purchase 6,000 shares of common stock (the "Annual Options")
will be granted to each Eligible
F-15
<PAGE> 71
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
Director on the date of each annual meeting of stockholders after the closing of
the initial public offering. Annual Options will vest at the rate of one-twelfth
of the total grant per month, and will vest in full at the earlier of (i) the
first anniversary of the date of the grant or (ii) the date of the next annual
meeting of stockholders. The exercise price of options granted under the
Director Plan will equal the fair market value per share of the common stock on
the date of grant.
A summary of the Company's stock option activity is presented below:
<TABLE>
<CAPTION>
WEIGHTED
OPTION AVERAGE
PRICE PER EXERCISE
OPTIONS SHARE PRICE
--------- ---------- --------
<S> <C> <C> <C>
Options outstanding at December 31, 1993........... -- -- --
Granted............................................ 155,605 $0.07-0.08 $ 0.07
--------- ---------- --------
Options outstanding at December 31, 1994........... 155,605 0.07-0.08 0.07
Granted............................................ 380,660 0.07-0.19 0.13
Canceled........................................... (56,000) 0.07 0.07
--------- ---------- --------
Options outstanding at December 31, 1995........... 480,265 0.07-0.19 0.12
Granted............................................ 742,400 0.19-1.43 0.76
Canceled........................................... (89,951) 0.19-1.07 0.24
--------- ---------- --------
Options outstanding at December 31, 1996........... 1,132,714 0.07-1.43 0.54
Granted (unaudited)................................ 617,105 1.43-4.76 2.06
Canceled (unaudited)............................... (56,100) 0.07-1.43 0.65
Exercised (unaudited).............................. (93,627) 0.07-1.43 0.16
--------- ---------- --------
Options outstanding at September 30, 1997
(unaudited)...................................... 1,600,092 $0.07-4.76 $ 1.14
========= ========== ========
</TABLE>
As of December 31, 1996 and September 30, 1997, options to purchase 193,906
and 280,293 (unaudited) shares of common stock were exercisable with a weighted
average exercise price of $0.14 and $0.51 (unaudited), respectively. The
weighted average remaining contractual life of options outstanding at December
31, 1996 and September 30, 1997 was 8.87 and 8.74 (unaudited) years,
respectively.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 is effective for awards granted in 1995 and 1996.
SFAS No. 123 defines a "fair value based method" of accounting for stock-based
compensation. Under the fair value based method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period. Prior to the issuance of SFAS No. 123, stock-based
compensation was accounted for under the "intrinsic value method" as defined by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees". Under the intrinsic value method, compensation is the excess, if
any, of the market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value
method. However, entities electing the accounting in APB Opinion No. 25 must
make pro forma disclosures as if the fair value based method of accounting had
been applied. The Company applies APB Opinion No. 25 and the related
interpretations in accounting for its stock-based compensation. Under APB
Opinion No. 25,
F-16
<PAGE> 72
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
no compensation expense has been recognized in the accompanying financial
statements related to stock option grants in 1994, 1995 and 1996. The Company
has recorded deferred compensation of approximately $279,000 related to stock
option grants in 1997, of which, approximately $32,000 has been amortized in the
nine month period ended September 30, 1997 (unaudited).
Had compensation expense been determined based on the fair value of the
options at the grant dates consistent with the method of accounting under SFAS
No. 123, the Company's net loss and net loss per share would have been increased
to the pro forma amounts indicated below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
NET LOSS:
As reported................................................... $(1,791) $(6,983)
Pro forma..................................................... (1,792) (7,006)
PRO FORMA NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE:
As reported................................................... $ (0.53)
Pro forma..................................................... $ (0.53)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants during the years ended December 31, 1995 and 1996: no dividend yield,
expected volatility of zero, risk-free interest rate of 6.62% and expected term
of 5 years.
6. EMPLOYEE 401(K) SAVINGS PLAN:
Effective January 1, 1996, the Company adopted a defined contribution plan
(the "Savings Plan"), available to all full-time employees upon employment. The
Savings Plan qualifies for preferential tax treatment under Section 401(a) of
Internal Revenue Code. Employee contributions are voluntary and are determined
on an individual basis with a maximum annual amount for 1994, 1995 and 1996
equal to 15% of compensation paid during the plan year, not to exceed the annual
Internal Revenue Service contribution limitations. All participants are fully
vested in their contributions. There were no employer contributions under the
Savings Plan.
7. INCOME TAXES:
For the years ended December 31, 1994, 1995 and 1996, the tax provision was
comprised primarily of a deferred tax benefit which was offset by a valuation
allowance of the same amount. The tax provision differed from the expected tax
benefit, computed by applying the U.S. Federal statutory rate of 35% to the loss
before income taxes, principally due to the effect of increases in the valuation
allowance.
F-17
<PAGE> 73
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
The components of the Company's net deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards................................ $ 713 $ 2,250
Depreciation.................................................... -- 15
Allowance for doubtful accounts................................. -- 55
Inventory valuation............................................. -- 253
Warranty reserve................................................ -- 23
Accrued liabilities............................................. -- 631
Other........................................................... 16 --
Valuation allowance............................................. (729) (3,277)
----- ------
Total net deferred tax asset.......................... $ -- $ --
===== ======
</TABLE>
The Company had net operating loss carryforwards to offset future taxable
income of approximately $6,105,000 as of December 31, 1996. These net operating
loss carryforwards expire through 2011. Under the provisions of the Tax Reform
Act of 1986, when there has been a change in an entity's ownership, utilization
of net operating loss carryforwards may be limited. The Company's ability to use
its net operating losses in future periods may be limited in the event of
significant ownership changes. The Company does not believe that the anticipated
initial public offering will result in such a limitation. In addition, the
Company has research and development tax credit carryforwards of approximately
$71,000 to offset future taxable income subject to certain limitations.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office space and office equipment under noncancelable
operating leases expiring through October 2001. The Company recorded rent
expense of approximately $8,000, $38,000 and $146,000 during 1994, 1995 and
1996, respectively.
F-18
<PAGE> 74
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
The Company also leases certain equipment under noncancelable capital lease
agreements which expire through April 2000. Future minimum lease payments under
noncancelable operating and capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997.............................................................. $ 64 $ 302
1998.............................................................. 33 356
1999.............................................................. 3 385
2000.............................................................. -- 598
2001.............................................................. -- 565
---- ------
Total minimum lease payments............................ 100 $ 2,206
======
Interest element of lease payment................................. (23)
----
Present value of future minimum lease payments.................... 77
Current portion................................................... (49)
----
Long-term portion................................................. $ 28
====
</TABLE>
The Company's office lease requires a $230,000 letter of credit through
either the 5-year lease term plus two months or ninety days after the
registration of the Company's stock on a nationally recognized stock exchange.
Effective November 25, 1997, the required letter of credit will be reduced to
$190,000.
The required letter of credit decreases on a straight-line basis over the
period of the lease to a minimum of $50,000. The Company's letter of credit is
collateralized by the line of credit which expires in March 1998 (Note 2). If
the line of credit is not extended beyond its current maturity date, the letter
of credit will become collateralized by a pledged treasury investment or pledged
certificate of deposit for the remaining period in which a letter of credit is
required pursuant to the lease agreement.
During 1995, the Company entered into two sale-leaseback transactions under
which equipment with a net book value of approximately $122,000 was sold and
leased back under noncancelable capital leases. Proceeds generated from the
sale-leaseback transactions totaled approximately $138,000. The gain of $16,000
resulting from the sale has been deferred and is being amortized on a basis
consistent with the amortization of the asset.
During 1997, the Company entered into additional sale-leaseback
transactions in which equipment with a net book value of approximately $544,000
was sold and leased back under noncancelable capital leases. Proceeds from the
transactions totaled approximately $544,000, resulting in no gain or loss on the
transactions.
LITIGATION
The Company is periodically a party to disputes arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect upon the financial position or future
operating results of the Company, and adequate provision for any potential
losses has been made in the accompanying financial statements.
F-19
<PAGE> 75
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1994, 1995 AND 1996, AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
9. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash investing and financing activities are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
------------------------ ------------
1994 1995 1996 1997
---- ---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Note payable converted to common stock............. $ 24 $ -- $ -- $ --
Note payable and accrued interest converted to
Series A preferred stock......................... 120 -- -- --
Property and equipment acquired though capital
lease............................................ -- 138 -- 544
</TABLE>
F-20
<PAGE> 76
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co., Deutsche Morgan Grenfell Inc.
and Wessels, Arnold & Henderson, L.L.C. are acting as representatives
(collectively, the "Representatives"), has severally agreed to purchase from the
Company, the respective number of shares of Common Stock set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
-------------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co. .....................................................
Deutsche Morgan Grenfell Inc. ............................................
Wessels, Arnold & Henderson, L.L.C. ......................................
------------
Total................................................................ 3,500,000
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 525,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 3,500,000 shares of Common
Stock offered.
The Company, its directors and officers and certain of its stockholders
have agreed that, during the period beginning from the date of this Prospectus
and continuing to and including the date 180 days after the date of the
Prospectus, they will not offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any other securities of the Company (other than,
in the case of the Company, pursuant to employee stock option plans existing, or
on the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus) which are substantially similar to
the shares of the Common Stock or which are convertible into or exchangeable for
securities which are substantially similar to the shares of Common Stock without
the prior written consent of the Representatives.
The Representatives have informed the Company that they do not expect sales
to accounts over which the Underwriters exercise discretionary authority to
exceed 5% of the total number of shares of Common Stock offered by them.
Prior to the offering, there has been no public market for the shares. The
initial public offering price was negotiated between the Company and the
Representatives. Among the factors considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market conditions,
were the Company's historical performance, estimates of the business potential
and earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
U-1
<PAGE> 77
In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions created by the Underwriters involve the sale by the Underwriters
of a greater number of shares of Common Stock than they are required to purchase
from the Company in the offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "VNWK".
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE> 78
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 23
Management............................ 38
Certain Transactions.................. 46
Principal Stockholders................ 47
Description of Capital Stock.......... 49
Shares Eligible for Future Sale....... 51
Legal Matters......................... 52
Experts............................... 52
Other Matters......................... 52
Additional Information................ 52
Index to Financial Statements......... F-1
Underwriting.......................... U-1
</TABLE>
------------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,500,000 SHARES
VISUAL NETWORKS, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
VISUAL LOGO
------------------------
GOLDMAN, SACHS & CO.
DEUTSCHE MORGAN GRENFELL
WESSELS, ARNOLD & HENDERSON
REPRESENTATIVES OF THE UNDERWRITERS
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities offered hereby, other than underwriting
discounts and commissions. All of the amounts shown are estimated except the
Securities and Exchange Commission registration fee, the NASD filing fee and the
Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............................ $ 13,061
National Association of Securities Dealers, Inc. filing fee.............. 4,928
Nasdaq listing fee....................................................... 61,400
Transfer agent's and registrar's fees.................................... 25,000
Printing expenses........................................................ 200,000
Legal fees and expenses.................................................. 250,000
Accounting fees and expenses............................................. 150,000
Blue Sky filing fees and expenses........................................ 10,000
Miscellaneous expenses................................................... 35,611
---------
Total............................................................... $ 750,000
=========
</TABLE>
14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Registrant's Bylaws include provisions to require the Registrant to indemnify
its directors and officers to the fullest extent permitted by Section 145,
including circumstances in which indemnification is otherwise discretionary.
Section 145 also empowers the Registrant to purchase and maintain insurance that
protects its officers, directors, employees and agents against any liabilities
incurred in connection with their service in such positions.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its directors and officers, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act of 1933, as amended (the
"Act") or otherwise.
15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 1994, the Registrant has issued unregistered securities in
the transactions described below. Securities issued in such transactions were
offered and sold in reliance upon the exemption from registration under Section
4(2) of the Act, relating to sales by an issuer not involving any public
offering, or under Rule 701 under the Act. The sales of securities were made
without the use of an underwriter and the certificates evidencing the shares
bear a restrictive legend permitting the transfer thereof only upon registration
of the shares or an exemption under the Act.
(1) In December 1994, the Registrant issued 347,070 shares of Series A
Convertible Preferred Stock to a group of accredited investors at a
purchase price of $.35 per share for an aggregate price of $120,676.
II-1
<PAGE> 80
(2) In December 1994, the Registrant issued 2,588,438 shares of Series B
Convertible Preferred Stock to a group of accredited investors at a
purchase price of $.46 per share for an aggregate price of $1,200,000.
(3) In August 1995, the Registrant issued 1,600,000 shares of Series C
Convertible Preferred Stock to a group of accredited investors at a
purchase price of $1.25 per share for an aggregate price of $2,000,000.
(4) In January 1996, the Registrant issued 2,285,714 shares of Series D
Convertible Preferred Stock to a group of accredited investors at a
purchase price of $1.75 per share for an aggregate price of $4,000,000.
(5) In September 1996, the Registrant issued 754,321 shares of Series E
Convertible Preferred Stock to a group of accredited investors at a
purchase price of $6.66 per share for an aggregate price of $5,023,778.
(6) On June 15, 1997, the Registrant issued 25,000 shares of Common Stock to an
executive officer of the Registrant at a purchase price of $1.75 per share
for an aggregate price of $43,750.
(7) On September 13, 1997, the Registrant issued 10,504 shares of Common Stock
to a director of the Registrant at a purchase price of $4.76 per share for
an aggregate price of $50,000.
(8) From January 16, 1995 through November 20, 1997, the Registrant sold an
aggregate of 118,906 shares of Common Stock at purchase price ranging from
$.07 to $1.43 per share, for an aggregate consideration of $20,672 upon
exercise of stock options granted pursuant to the Registrant's 1994 Stock
Option Plan.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2 Restated By-Laws of the Registrant.
4.1 Specimen stock certificate for shares of Common Stock of the Registrant.
5.1 Opinion of Piper & Marbury L.L.P. regarding legality of securities being
registered.
10.1 1994 Stock Option Plan.
10.2 1997 Omnibus Stock Plan.
10.3 1997 Directors' Stock Option Plan.
10.4 Third Amended and Restated Stockholders and Registration Rights Agreement,
dated as of September 19, 1996, by and among the Company and certain
stockholders.
10.5* Reseller/Integration Agreement, dated August 29, 1997, by and between the
Company and MCI Telecommunication Corporation.
10.6* Master Reseller Agreement, dated as of August 23, 1996, between
Sprint/United Management Company and the Company.
10.7* General Agreement for the Procurement of Equipment, Services and Supplies
and the Licensing of Software, dated as of December 3, 1997, between the
Company and AT&T Corp.
10.8 Lease Agreement, dated December 12, 1996, by and between the Company and
The Equitable Fire Assurance Society of The United States.
10.9 Lease Amendment, dated September 2, 1997, by and between the Company and
The Equitable Fire Assurance Society of The United States (relating to
Exhibit 10.8).
</TABLE>
II-2
<PAGE> 81
<TABLE>
<S> <C>
10.10 Loan and Security Agreement dated April 5, 1996, by and between Silicon
Valley Bank and the Company.
10.11 Revolving Promissory Note issued by the Company on April 5, 1996, to
Silicon Valley Bank.
10.11.1 Equipment Term Note No. 1 issued by the Company on April 5, 1996, to
Silicon Valley Bank.
10.11.2 First Amendment to Loan and Security Agreement dated November 8, 1996, by
and between Silicon Valley Bank and the Company (relating to Exhibit
10.10).
10.11.3 Second Amendment to Loan and Security Agreement dated February 27, 1997,
by and between Silicon Valley Bank and the Company (relating to Exhibit
10.10).
10.12 Standby Letter of Credit Agreement, dated December 10, 1996 by and between
the Company and Silicon Valley Bank.
10.12.1 Amendment No. 1 to Standby Letter of Credit Agreement dated September 5,
1997, by and between the Company and Silicon Valley Bank (relating to
Exhibit 10.12).
10.13 Employment Agreement dated December 15, 1994, by and between the Company
and Scott E. Stouffer, as amended.
10.14 Employment Agreement dated December 15, 1994, by and between the Company
and Robert Troutman, as amended.
10.15 Terms of Employment dated June 11, 1997, by and between the Company and
Peter J. Minihane, as amended.
10.16 Terms of Employment dated March 5, 1997, by and between the Company and
Henri A. Cheli, as amended.
10.17 Terms of Employment dated November 12, 1996, by and between the Company
and Gregory J. Langford, as amended.
11.1 Statement of computation of loss per share.
16.1 Letter regarding change in certified accountants.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1
hereto).
24.1 Power of Attorney (included in signature pages).
27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- --------- ------------------------------------------------------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>
17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
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 Delaware General Corporation Law, the Certificate
of Incorporation and the Bylaws, 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
II-3
<PAGE> 82
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 of 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. (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 a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.
(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-4
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Rockville,
Maryland, on the 4th day of December, 1997.
VISUAL NETWORKS, INC.
By: /s/ SCOTT E. STOUFFER
------------------------------------
Scott E. Stouffer
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Scott E. Stouffer, Peter J. Minihane and Edwin M.
Martin, Jr., and each of them, his or her true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, from such person and
in each person's name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to the Registration
Statement, and any Registration Statement relating to this Registration
Statement under Rule 462 under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
II-5
<PAGE> 84
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ ------------------
<S> <C> <C>
/s/ SCOTT E. STOUFFER President, Chief Executive December 2, 1997
- ---------------------------------------- Officer and Director
SCOTT E. STOUFFER (Principal Executive Officer)
/s/ PETER J. MINIHANE Executive Vice President, December 2, 1997
- ---------------------------------------- Chief Financial Officer
PETER J. MINIHANE and Treasurer
(Principal Accounting
and Financial Officer)
/s/ GRANT G. BEHRMAN Director December 3, 1997
- ----------------------------------------
GRANT G. BEHRMAN
/s/ MARC F. BENSON Director December 2, 1997
- ----------------------------------------
MARC F. BENSON
/s/ THEODORE R. JOSEPH Director December 2, 1997
- ----------------------------------------
THEODORE R. JOSEPH
/s/ TED H. MCCOURTNEY Director December 2, 1997
- ----------------------------------------
TED H. MCCOURTNEY
/s/ THOMAS A. SMITH Director December 3, 1997
- ----------------------------------------
THOMAS A. SMITH
/s/ WILLIAM J. SMITH Director December 3, 1997
- ----------------------------------------
WILLIAM J. SMITH
</TABLE>
II-6
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Board of Directors and Stockholders of
Visual Networks, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Visual Networks, Inc. (a Delaware corporation) and
subsidiaries included in this registration statement and have issued our report
thereon dated December 2, 1997. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule
listed in item 16(b) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
December 2, 1997
Washington, D.C.
S-1
<PAGE> 86
SCHEDULE II
VISUAL NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------------------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1994,
Deducted from assets accounts:
Allowance for doubtful accounts.............. $ -- $ -- $ -- $ --
For the year ended December 31, 1995,
Deducted from assets accounts:
Allowance for doubtful accounts.............. -- -- -- --
For the year ended December 31, 1996,
Deducted from assets accounts:
Allowance for doubtful accounts.............. $ -- $ 250 $ -- $250
</TABLE>
S-2
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2 Restated By-Laws of the Registrant.
4.1 Specimen stock certificate for shares of Common Stock of the Registrant.
5.1 Opinion of Piper & Marbury L.L.P. regarding legality of securities being
registered.
10.1 1994 Stock Option Plan.
10.2 1997 Omnibus Stock Plan.
10.3 1997 Directors' Stock Option Plan.
10.4 Third Amended and Restated Stockholders and Registration Rights
Agreement, dated as of September 19, 1996, by and among the Company and
certain stockholders.
10.5* Reseller/Integration Agreement, dated August 29, 1997, by and between the
Company and MCI Telecommunication Corporation.
10.6* Master Reseller Agreement, dated as of August 23, 1996, between
Sprint/United Management Company and the Company.
10.7* General Agreement for the Procurement of Equipment, Services and Supplies
and the Licensing of Software, dated as of December 3, 1997, between the
Company and AT&T Corp.
10.8 Lease Agreement, dated December 12, 1996, by and between the Company and
The Equitable Fire Assurance Society of The United States.
10.9 Lease Amendment, dated September 2, 1997, by and between the Company and
The Equitable Fire Assurance Society of The United States (relating to
Exhibit 10.8).
10.10 Loan and Security Agreement dated April 5, 1996, by and between Silicon
Valley Bank and the Company.
10.11 Revolving Promissory Note issued by the Company on April 5, 1996, to
Silicon Valley Bank.
10.11.1 Equipment Term Note No. 1 issued by the Company on April 5, 1996, to
Silicon Valley Bank.
10.11.2 First Amendment to Loan and Security Agreement dated November 8, 1996, by
and between Silicon Valley Bank and the Company (relating to Exhibit
10.10).
10.11.3 Second Amendment to Loan and Security Agreement dated February 27, 1997,
by and between Silicon Valley Bank and the Company (relating to Exhibit
10.10).
10.12 Standby Letter of Credit Agreement, dated December 10, 1996 by and
between the Company and Silicon Valley Bank.
10.12.1 Amendment No. 1 to Standby Letter of Credit Agreement dated September 5,
1997, by and between the Company and Silicon Valley Bank (relating to
Exhibit 10.12).
10.13 Employment Agreement dated December 15, 1994, by and between the Company
and Scott E. Stouffer, as amended.
10.14 Employment Agreement dated December 15, 1994, by and between the Company
and Robert Troutman, as amended.
10.15 Terms of Employment dated June 11, 1997, by and between the Company and
Peter J. Minihane, as amended.
10.16 Terms of Employment dated March 5, 1997, by and between the Company and
Henri A. Cheli, as amended.
10.17 Terms of Employment dated November 12, 1996, by and between the Company
and Gregory J. Langford, as amended.
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
11.1 Statement of computation of loss per share.
16.1 Letter regarding change in certified accountants.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1
hereto).
24.1 Power of Attorney (included in signature pages).
27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
DRAFT OF 12/2/97
VISUAL NETWORKS, INC.
COMMON STOCK, PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
, 1998
Goldman, Sachs & Co.,
Deutsche Morgan Grenfell, Inc.,
Wessels, Arnold & Henderson, L.L.C.,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Visual Networks, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
........ shares (the "Firm Shares") and, at the election of the Underwriters,
up to ........ additional shares (the "Optional Shares") of Common Stock, par
value $.01 per share ("Stock") of the Company (the Firm Shares and the Optional
Shares that the Underwriters elect to purchase pursuant to Section 2 hereof
being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-......)
(the "Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to
Rule 462(b) under Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Form, if
any, has been issued and no proceeding for that
1
<PAGE> 2
purpose has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act, is hereinafter called a "Preliminary Prospectus"; the
various parts of the Initial Registration Statement and the 462(b) Registration
Statement, if any, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission pursuant to
Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by
virtue of Rule 430A under the Act to be part of the Initial Registration
Statement at the time it was declared effective, each as amended at the time
such part of the registration statement became effective or such part of the
Rule 462(b) Registration Statement, if any, became or hereafter becomes
effective, is hereinafter collectively called the "Registration Statement"; and
such final prospectus, in the form first filed pursuant to Rule 424(b) under
the Act, is hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and 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; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the Registration Statement
and any amendment thereto, and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, 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 not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(d) The Company has not sustained since the date of the latest
audited financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
has not been any change in the capital stock or long-term debt of the Company
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders equity or results of operations of the Company
otherwise than as set forth or contemplated in the Prospectus;
2
<PAGE> 3
(e) The Company does not own any real property and has good and
marketable title to all personal property owned by it, in each case free and
clear of all liens, encumbrances and defects except such as are described in
the Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such property
by the Company; and any real property and buildings held under lease by the
Company are held by it under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company;
(f) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction;
(g) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description of the Stock contained in the
Prospectus;
(h) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or
by which the Company is bound or to which any of the property or assets of the
Company is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue
and sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of the
Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters;
(j) The Company is not in violation of its Certificate of
Incorporation or By-laws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
3
<PAGE> 4
agreement or instrument to which it is a party or by which it or any of its
properties may be bound;
(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, and under the caption "Underwriting", insofar as
they purport to describe the provisions of the laws and documents referred to
therein, are accurate and complete in all material respects;
(l) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company is a party or of which
any property of the Company is the subject which, if determined adversely to
the Company, would individually or in the aggregate have a material adverse
effect on the current or future consolidated financial position, stockholders'
equity or results of operations of the Company; and, to the Company's
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(m) The Company is not and, after giving effect to the offering
and sale of the Shares, 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 (the "Investment Company Act");
(n) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
(o) Arthur Andersen LLP, who have certified certain financial
statements of the Company, are independent public accountants as required by
the Act and the rules and regulations of the Commission thereunder;
(p) Other than as set forth in the Prospectus, the Company has
sufficient interests in all patents, trademarks, servicemarks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
("Intellectual Property") necessary for its business as now conducted and, to
the Company's knowledge, necessary in connection with the products and services
under development and described in the Prospectus without any conflict with or
infringement of the interests of others and have taken all reasonable steps
necessary to secure interests in such Intellectual Property from its
contractors; except as set forth in the Prospectus, the Company is not aware of
material outstanding options, licenses or agreements of any kind relating to
the Intellectual Property, and, except as set forth in the Prospectus, the
Company is not a party to or bound by any options, licenses or agreements with
respect to the Intellectual Property of any other person or entity; none of the
technology employed by the Company has been obtained or is being used by the
Company in violation of any contractual fiduciary obligation binding on the
Company or any of its executive officers or, to the Company's knowledge, any of
its employees or otherwise in violation of the rights of any persons; except as
disclosed in the Prospectus, neither the Company nor any of its employees has
received any written or, to the Company's knowledge, oral communications
alleging that the Company has violated, infringed or conflicted with, or, by
conducting its business as proposed, would violate, infringe or conflict with
any of the Intellectual Property of any other person or entity; neither the
execution nor
4
<PAGE> 5
delivery of this Agreement, nor the operation of the Company's business by the
employees of the Company, nor the conduct of the Company's business as
proposed, will result in any breach or violation of the terms, conditions or
provisions of, constitute a default under, any material contract, covenant or
instrument known to the Company under which any of such employees is now
obligated; and the Company has taken and will maintain reasonable measures to
prevent the unauthorized dissemination or publication of its confidential
information and, to the extent contractually required to do so, the
confidential information of third parties in its possession;
(q) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not limited
to, insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect;
(r) There are no contracts, other documents or other agreements
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement by the Act or by the rules and
regulations thereunder which have not been described or filed as required; the
contracts so described in the Prospectus are in full force and effect on the
date hereof; and neither the Company nor, to the Company's knowledge, any other
party is in breach of or default in any material respect under any of such
contracts;
(s) The Company has not been advised, and has no reason to
believe, that it is not conducting business in compliance with all applicable
laws, rules and regulations of the jurisdictions in which its is conducting
business, including, without limitation, all applicable local, state and
federal environmental laws and regulations; except where failure to be so in
compliance would not materially adversely affect the condition (financial or
otherwise), business, results of operations or prospects of the Company.
(t) The Company has no subsidiaries and does not own or control,
directly or indirectly, shares of capital stock of any other corporation or any
interest in any partnership, joint venture or other non-corporate business
entity or enterprise.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $................, the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto and (b) in
the event and to the extent that the Underwriters shall exercise the election
to purchase Optional Shares as provided below, the Company agrees to issue and
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction, the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the maximum number of Optional Shares
that all of the Underwriters are entitled to purchase hereunder.
5
<PAGE> 6
The Company hereby grants to the Underwriters the right to purchase at
their election up to ................... Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered
in such names as Goldman, Sachs & Co. may request upon at least
forty-eight hours' prior notice to the Company shall be delivered by or
on behalf of the Company to Goldman, Sachs & Co., through the facilities
of the Depository Trust Company ("DTC"), for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer to an account designated by the
Company in same day funds. The Company will cause the certificates
representing the Shares to be made available for checking and packaging
at least twenty-four hours prior to the Time of Delivery (as defined
below) with respect thereto at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of such delivery
and payment shall be, with respect to the Firm Shares, 9:30 a.m., New
York City time, on ............., 1998 or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such
Optional Shares, or such other time and date as Goldman, Sachs & Co. and
the Company may agree upon in writing. Such time and date for delivery
of the Firm Shares is herein called the "First Time of Delivery", such
time and date for delivery of the Optional Shares, if not the First Time
of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including
the cross receipt for the Shares and any additional documents requested
by the Underwriters pursuant to Section 7(l) hereof, will be delivered at
the offices of Piper & Marbury L.L.P., 1200 19th Street, N.W.,
Washington, D.C. 20036 (the "Closing Location"), and the Shares will be
delivered at the Designated Office, all at such Time of Delivery. A
meeting will be held at the Closing Location at 4:00 p.m., New York City
time, on the New York Business Day next preceding such Time of Delivery,
at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business
Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
6
<PAGE> 7
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved
by you and to file such Prospectus pursuant to Rule 424(b) under the Act
not later than the Commission's close of business on the second business
day following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under
the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which shall be disapproved by you
promptly after reasonable notice thereof; to advise you, promptly after
it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and
to furnish you with copies thereof; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or prospectus, of the suspension of the qualification of the
Shares for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by
the Commission for the amending or supplementing of the Registration
Statement or Prospectus or for additional information; and, in the event
of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to
obtain the withdrawal of such order;
(b) Promptly from time to time to take such
action as you may reasonably request to qualify the Shares for offering
and sale under the securities laws of such jurisdictions as you may
request and to comply with such laws so as to permit the continuance of
sales and dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in
any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on
the New York Business Day next succeeding the date of this Agreement and
from time to time, to furnish the Underwriters with copies of the
Prospectus in New York City in such quantities as you may reasonably
request, and, if the delivery of a prospectus is required at any time
prior to the expiration of nine months after the time of issue of the
Prospectus in connection with the offering or sale of the Shares and if
at such time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus in
order to comply with the Act, to notify you and upon your request to
prepare and furnish without charge to each Underwriter and to any dealer
in securities as many copies as you may from time to time reasonably
request of an amended Prospectus or a supplement to the Prospectus which
will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection
with sales of any of the Shares
7
<PAGE> 8
at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter, to
prepare and deliver to such Underwriter as many copies as you may request
of an amended or supplemented Prospectus complying with Section 10(a)(3)
of the Act;
(d) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M. Washington, D.C.
time, on the date of this Agreement, and the Company shall at the time of
filing either pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act;
(e) To make generally available to its securityholders as
soon as practicable, but in any event not later than eighteen months
after the effective date of the Registration Statement (as defined in
Rule 158(c) under the Act), an earnings statement of the Company
(which need not be audited) complying with Section 11(a) of the Act and
the rules and regulations thereunder (including, at the option of the
Company, Rule 158);
(f) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose of,
except as provided hereunder any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially similar
securities (other than pursuant to employee stock option plans existing
on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Agreement), without your
prior written consent;
(g) To furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a balance
sheet and statements of income, stockholders' equity and cash flows of
the Company certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), summary financial information of the
Company for such quarter in reasonable detail;
(h) During a period of five years from the effective date
of the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders, and
to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional information
concerning the business and financial condition of the Company as you may
from time to time reasonably request (such financial statements to be on
a consolidated basis to the extent the accounts of the Company and its
subsidiaries, if any, are consolidated in reports furnished to its
stockholders generally or to the Commission);
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<PAGE> 9
(i) To use the net proceeds received by it from the sale
of the Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(j) To use its best efforts to list for quotation the
Shares on the Nasdaq National Market ("NASDAQ"); and
(k) To file with the Commission such information on Form
10-Q or Form 10-K as may be required by Rule 463 under the Act.
6. The Company covenants and agrees with the several
Underwriters that the Company will pay or cause to be paid the following:
(i) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares under the
Act and all other expenses in connection with the preparation, printing
and filing of the Registration Statement, any Preliminary Prospectus and
the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the
cost of printing or producing any Agreement among Underwriters, this
Agreement, the Blue Sky Memorandum, closing documents (including any
compilations thereof) and any other documents in connection with the
offering, purchase, sale and delivery of the Shares; (iii) all expenses
in connection with the qualification of the Shares for offering and sale
under state securities laws as provided in Section 5(b) hereof, including
the fees and disbursements of counsel for the Underwriters in connection
with such qualification and in connection with the Blue Sky survey (iv)
all fees and expenses in connection with listing the Shares on the
NASDAQ; (v) the filing fees incident to, and the fees and disbursements
of counsel for the Underwriters in connection with, securing any required
review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock
certificates; (vii) the cost and charges of any transfer agent or
registrar; and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise
specifically provided for in this Section. It is understood, however,
that, except as provided in this Section, and Sections 8 and 11 hereof,
the Underwriters will pay all of their own costs and expenses, including
the fees of their counsel, stock transfer taxes on resale of any of the
Shares by them, and any advertising expenses connected with any offers
they may make.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in
their discretion, to the condition that all representations and
warranties and other statements of the Company herein are, at and as of
such Time of Delivery, true and correct, the condition that the Company
shall have performed all of its obligations hereunder theretofore to be
performed, and the following additional conditions:
(a)The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 5(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have become
effective by 10:00 P.M. Washington, D.C. time, on the date of this
Agreement; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have
9
<PAGE> 10
been issued and no proceeding for that purpose shall have been initiated
or threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with
to your reasonable satisfaction;
(b) Hale and Dorr LLP, counsel for the Underwriters,
shall have furnished to you such opinion (a draft of such opinion is
attached as Annex II(a) hereto), dated such Time of Delivery, with
respect to the matters covered in paragraphs (i), (ii), (v), (ix), and
(xi) of subsection (c) below as well as such other related matters as you
may reasonably request, and such counsel shall have received such papers
and information as they may reasonably request to enable them to pass
upon such matters;
(c) Piper & Marbury L.L.P., counsel for the Company,
shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(b) hereto), dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the Shares being delivered at such Time
of Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform to the description
of the Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of the State of Maryland and each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification or is subject to no material
liability or disability by reason of failure to be so qualified in any
such jurisdiction (such counsel being entitled to rely in respect of the
opinion in this clause upon opinions of local counsel and in respect of
matters of fact upon certificates of officers of the Company, provided
that such counsel shall state that they believe that both you and they
are justified in relying upon such opinions and certificates;
(iv) Nothing has come to the attention of such
counsel that causes it to believe that real property and buildings held
under lease by the Company are not held by it under valid leases with
such exceptions as are not material and do not interfere with the use
made and proposed to be made of such property and buildings by the
Company;
(v) This Agreement has been duly authorized,
executed and delivered by the Company;
(vi) The issue and sale of the Shares being
delivered at such Time of Delivery by the Company and the compliance by
the Company with all of the provisions of this Agreement as of such Time
of Delivery and the consummation as of such Time of
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<PAGE> 11
Delivery of the transactions herein contemplated do not conflict with or result
in a breach or violation of any of the terms or provisions of, or constitute a
default under, any agreement or instrument filed as an exhibit to the
Registration Statement, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any of its
properties;
(vii) No consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body having jurisdiction over the Company or any of its
properties is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement as of such Time of Delivery, except the registration under the
Act of the Shares, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(viii) The Company is not in violation of its
Certificate of Incorporation or By-laws or in default in the performance
or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party
or by which it or any of its properties may be bound filed as an exhibit
to the Registration Statement;
(ix) The statements set forth in the Prospectus
under the caption "Description of Capital Stock", insofar as they purport
to constitute a summary of the terms of the Stock, and under the caption
"Underwriting", insofar as they purport to describe the provisions of the
laws and documents referred to therein, are accurate in all material
respects;
(x) The Company is not an "investment company" or
an entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act; and
(xi) The Registration Statement and the Prospectus
and any further amendments and supplements thereto made by the Company
prior to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the requirements
of the Act and the rules and regulations thereunder.
In addition to the matters set forth above, such
counsel shall state to the effect that (A) to such counsel's knowledge
and other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of
which any property of the Company is the subject which, if determined
adversely to the Company would reasonably be expected individually or in
the aggregate have a material adverse effect on the financial condition
or results of operations of the Company; and, to such counsel's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others; (B) while such counsel
are not passing upon and do not assume responsibility for the accuracy,
completeness or fairness of the
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<PAGE> 12
statements contained in the Registration Statement or the Prospectus,
except for those referred to in the opinion in subsection (ix) of this
section 7(c), based upon the procedures referred to in such letter no
facts have come to the attention of such counsel which caused them to
believe that, as of its effective date, the Registration Statement or any
further amendment thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of
such Time of Delivery, the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein, as to
which such counsel need express no opinion) contains an untrue statement
of a material fact or omits to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading; and (C) they do not know of any amendment
to the Registration Statement required to be filed or of any contracts or
other documents 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 which are not filed or described as required;
In rendering such opinion, such counsel may state that they
express the opinion as to the laws of any jurisdiction other than the
Federal laws of the United States, the laws of the State of Maryland, the
contract law of the State of New York and the General Corporation law of
the State of Delaware.
(d) __________________________, special patent counsel
for the Company, shall have furnished its written opinion (a draft of
such opinion is attached as Annex II(c) hereto) dated such Time of
Delivery, with respect to certain patent law matters.
(e) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at each
Time of Delivery, Arthur Andersen LLP shall have furnished to you a
letter or letters, dated the respective dates of delivery thereof, in
form and substance satisfactory to you, to the effect set forth in Annex
I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft
of the form of letter to be delivered on the effective date of any
post-effective amendment to the Registration Statement and as of each
Time and Delivery is attached as Annex I(b) hereto);
(f)(i) The Company shall not have sustained since the date
of the latest audited financial statements included in the Prospectus any
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from
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<PAGE> 13
any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus, and (ii)
since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any change, or any development involving
a prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company, otherwise than as set forth or contemplated in the Prospectus,
the effect of which, in any such case described in Clause (i) or (ii), is
in the judgment of the Representatives so material and adverse as to make
it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on
the terms and in the manner contemplated in the Prospectus;
(g) On or after that date hereof (i) no downgrading shall
have occurred in the rating accorded the Company's debt securities or
preferred stock by any "nationally recognized statistical rating
organization," as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Act, and (ii) no such organization shall have
publicly announced that it has under surveillance or review, with
possible negative implications, its rating of any of the Company's debt
securities or preferred stock;
(h) On or after the date hereof there shall not have
occurred any of the following: (i) a suspension or material limitation in
trading in securities generally on NASDAQ; (ii) a suspension or material
limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either
Federal or New York State or District of Columbia authorities; or (iv)
the outbreak or escalation of hostilities involving the United States or
the declaration by the United States of a national emergency or war, if
the effect of any such event specified in this Clause (iv) in the
judgment of the Representatives makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being
delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(i) The Shares to be sold at such Time of Delivery shall
have been duly listed for quotation on NASDAQ;
(j) The Company shall have obtained and delivered to the
Underwriters executed copies of an agreement from the stockholders and
optionholders listed on Annex III hereto, substantially to the effect set
forth in Subsection 5(e) hereof in form and substance satisfactory to
you;
(k) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on the
New York Business Day next succeeding the date of this Agreement; and
(l) The Company shall have furnished or caused to be
furnished to you at such Time of Delivery certificates of officers of the
Company satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as
to the performance by the Company of all of its obligations hereunder to
be performed at or prior to such Time of Delivery, as to the matters set
forth in
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<PAGE> 14
subsections (a) and (f) of this Section and as to such other matters as
you may reasonably request.
8. (a) The Company will 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, 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 any Preliminary
Prospectus, the Registration Statement or 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 such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, 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 any Preliminary Prospectus, the Registration Statement or 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 any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company for any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such action or
claim as such expenses are incurred.
(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 it from any liability which it may have to
any indemnified party otherwise than under such subsection. 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 therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
14
<PAGE> 15
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company 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 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 on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in 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 any such action or claim. 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 Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay
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<PAGE> 16
by reason of such untrue or alleged untrue statement or omission or alleged
omission. 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 under this Section 8 shall be
in addition to any liability which the Company 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 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company and to
each person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the Company
notifies you that it has so arranged for the purchase of such Shares, you or
the Company shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non-defaulting Underwriter to
purchase the number of shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have
not been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number
of all the Shares to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require
non-defaulting
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<PAGE> 17
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company, except for the expenses to be
borne by the Company and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason,
any Shares are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter except as provided
in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail to the address of the Company set forth in the Registration Statement,
Attention: Secretary; provided, however, that any notice to an Underwriter
pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of
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such purchase.
14. Time shall be of the essence of this Agreement. As used
herein, the term "business day" shall mean any day when the Commission's office
in Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Company and each of the Representatives plus one
for each counsel counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
Visual Networks, Inc.
By:
---------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Deutsche Morgan Grenfell, Inc.
Wessels, Arnold & Henderson, L.L.C.
By:
--------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
18
<PAGE> 19
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- -------------------------
<S> <C> <C>
Goldman, Sachs & Co.
Deutsche Morgan Grenfell, Inc.
Wessels, Arnold & Henderson, L.L.C.
---------------- -----------------------
Total
================ =======================
</TABLE>
19
<PAGE> 20
ANNEX I
COMFORT LETTER
20
<PAGE> 21
FORM OF ANNEX I DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S-1
Pursuant to Section 7(e) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants
with respect to the Company and its subsidiaries within the meaning of
the Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have been
specifically furnished to the representatives of the Underwriters (the
"Representatives") and are attached hereto;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which have
been separately furnished to the Representatives and are attached hereto
and on the basis of specified procedures including inquiries of officials
of the Company who have responsibility for financial and accounting
matters regarding whether the unaudited condensed consolidated financial
statements referred to in paragraph (vi)(A)(i) below comply as to form in
all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations, nothing came to
their attention that cause them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the related published rules and regulations;
(iv) The unaudited selected financial information with
respect to the consolidated results of operations and financial position
of the Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included or incorporated by reference
in the Company's Annual Reports on Form 10-K for such fiscal years;
21
<PAGE> 22
(v) They have compared the information in the Prospectus
under selected captions with the disclosure requirements of Regulation
S-K and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing procedures
that caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302, 402
and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting
an examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of
the minute books of the Company and its subsidiaries since the date of
the latest audited financial statements included in the Prospectus,
inquiries of officials of the Company and its subsidiaries responsible
for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications
should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were
not included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated
condensed financial statements included in the Prospectus do
not comply as to form in all material respects with the
applicable accounting requirements of the Act and the
published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
22
<PAGE> 23
(E) as of a specified date not more than five
days prior to the date of such letter, there have been any
changes in the consolidated capital stock (other than
issuances of capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares and
upon conversions of convertible securities, in each case which
were outstanding on the date of the latest financial
statements included in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by
the Representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating profit or
the total or per share amounts of consolidated net income or
other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to in
paragraphs (iii) and (vi) above, they have carried out certain specified
procedures, not constituting an examination in accordance with generally
accepted auditing standards, with respect to certain amounts, percentages
and financial information specified by the Representatives, which are
derived from the general accounting records of the Company and its
subsidiaries, which appear in the Prospectus, or in Part II of, or in
exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages
and financial information with the accounting records of the Company and
its subsidiaries and have found them to be in agreement.
23
<PAGE> 24
ANNEX II(a)
OPINION OF HALE AND DORR LLP
24
<PAGE> 25
ANNEX II(b)
OPINION OF PIPER & MARBURY L.L.P.
25
<PAGE> 26
ANNEX II(c)
OPINION OF PATENT COUNSEL
26
<PAGE> 27
ANNEX III
LOCK-UP AGREEMENTS
27
<PAGE> 1
EXHIBIT 3.1
VISUAL NETWORKS, INC.
RESTATED CERTIFICATE OF INCORPORATION
Pursuant to Section 242
Of the Corporation Law of the
State of Delaware
Visual Networks, Inc. (hereinafter called the "Corporation"), organized
and existing under and by virtue of the General Corporation Law of the State
of Delaware, does hereby certify as follows:
The date of incorporation of the Corporation is December 13, 1994.
At a meeting of the Board of Directors of the Corporation a resolution
was duly adopted, pursuant to Section 242 of the General Corporation Law of
the State of Delaware, setting forth an amended and restated Certificate of
Incorporation of the Corporation and declaring said amendment and restatement
to be advisable. The stockholders of the Corporation duly approved said
proposed amendment and restatement by written consent in accordance with
Sections 228 and 242 Of the General Corporation Law of the State of Delaware,
and written notice of such consent has been given to all stockholders who
have not consented in writing to said amendment and restatement. The
resolution setting forth the amendment is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation be
and hereby is amended and restated as follows:
1. Name. The name of the corporation is Visual Networks, Inc.
2. Registered Office and Agent. The address of its registered
office in the State of Delaware is Corporation Trust Center, 1209 Orange
Street, in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is Corporation Trust Company.
3. Purpose. The purposes for which the Corporation is formed are to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware, and to possess and exercise
all of the powers and privileges granted by such law and other laws of
Delaware.
4. Authorized Stock, Rights, Designations, Preferences and
Limitations. The aggregate number of shares that the Corporation shall have
authority to issue shall be 62,576,508 of which 50,000,000 shall be shares of
common stock, par value $.01 per share ("Common Stock"), and 12,576,508 shall
be shares of preferred stock, par value $.01 per share ("Preferred Stock"),
of which THREE HUNDRED FORTY SEVEN THOUSAND SEVENTY (347,070) shares shall be
designated Series A Preferred Stock ("Series A Preferred Stock"), with a
stated value of $.3477 per share (the "Series A Stated Value"), TWO MILLION
FIVE HUNDRED
<PAGE> 2
EIGHTY EIGHT THOUSAND FOUR HUNDRED THIRTY EIGHT (2,588,438) shares shall be
designated Series B Preferred Stock ("Series B Preferred Stock"), with a
stated value of $.4636 per share (the "Series B Stated Value"), ONE MILLION
SIX HUNDRED THOUSAND (1,600,000) shares shall be designated Series C
Preferred Stock ("Series C Preferred Stock"), with a stated value of $1.25
per share (the "Series C Stated Value"), TWO MILLION TWO HUNDRED EIGHTY SIX
THOUSAND (2,286,000) shares shall be designated Series D Preferred Stock
("Series D Preferred Stock"), with a stated value of $1.75 per share (the
"Series D Stated Value"), and SEVEN HUNDRED FIFTY FIVE THOUSAND (755,000)
shares shall be designated Series E Preferred Stock ("Series E Preferred
Stock"), with a stated value of $6.66 per share (the "Series E Stated
Value"). The Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock may
be referred to herein, as the context requires, as the "Series A-E
Preferred Stock." The Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock may be referred to
herein, as the context requires, as the "Series B-E Preferred Stock." The
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock may be referred to herein, as the context requires, as the "Series
C-E Preferred Stock."
The rights, designations, preferences and limitations of each class of
shares are as follows:
(A) Common Stock.
(1) Voting. Each holder of Common Stock shall be entitled to
one vote for each share of Common Stock held for the election of directors or
for any other purpose.
(2) Other Rights. Except for and subject to those rights
expressly granted to the holders of any class or series of Preferred Stock,
or except as otherwise specifically provided herein or otherwise provided by
law, each share of Common Stock issued and outstanding shall be identical in
all respects one with the other, and the holders of shares of Common Stock
shall have exclusively all rights of stockholders including, but not by way
of limitation, (1) the right to receive dividends, when and as declared by
the Board of Directors out of assets lawfully available therefor, provided
that no dividend shall be paid on any shares of Common Stock unless the same
dividend is paid on all shares of Common Stock outstanding at the time of
payment, and (2) the right to receive ratably and equally all the assets and
funds of the Corporation in the event of any distribution of assets upon
liquidation, dissolution or winding up of the Corporation or otherwise.
(B) Preferred Stock.
(1) Issuance in Series. Preferred Stock may be issued from
time to time in one or more series, each of such series to have such terms
as stated or expressed herein and in the resolution or resolutions providing
for the issue of such series adopted by the Board of Directors of the
Corporation as hereinafter provided. Any shares of Preferred Stock which
may be redeemed, purchased, or acquired by the Corporation may be reissued
except as otherwise
-2-
<PAGE> 3
provided by law or in the instrument designating the terms of any series.
Different series of Preferred Stock shall not be construed to constitute
different classes of shares for the purposes of voting by classes unless
expressly provided in the instrument designating the terms of any such
series.
(2) Designation of Series. The Board of Directors is
authorized to issue from time to time one or more series of Preferred stock
and, in connection with the creation of any such series, to determine and
fix, by resolution adopted by the Board of Directors, such voting powers,
full or limited, or no voting powers, and such designations, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption
privileges, and liquidation preferences, as shall be stated and expressed in
such resolutions, all to the full extent now or hereafter permitted by the
General Corporation Law of Delaware. The resolutions providing for issuance
of any series of Preferred Stock may provide that such series shall be
superior, or rank equally, or be junior to the Preferred Stock of any other
series to the extent permitted by law. No vote of the holders of the Common
Stock or the Preferred Stock shall be a prerequisite to the issuance of any
shares of any series of the Preferred Stock authorized by and complying with
the conditions of the Certificate of Incorporation, the right to have such
vote being waived by all present and future holders of the capital stock of
the Corporation.
(3) Voting. Unless otherwise provided in the instrument
designating a series of Preferred Stock, each holder of outstanding shares
of Preferred Stock shall be entitled to the number of votes equal to the
number of whole shares of Common Stock into which the shares of Preferred
Stock held by such holder are convertible, at each meeting of stockholders
of the Corporation (and actions of stockholders in lieu of meetings) with
respect to any and all matters presented to the stockholders of the
Corporation for their action or consideration. Except as provided by law,
by the provisions of this Certificate, or by the provisions establishing any
series of Preferred Stock, holders of Preferred Stock shall vote together
with the holders of Common Stock as a single class.
(4) Dividends.
(a) Series A Preferred Stock Dividend.
(1) In each year, subject to the provisions of
paragraph 4(B)(4)(a)(2), the holder of each share of Series A Preferred
Stock shall be entitled to receive, whether or not declared by the Board of
Directors of the Corporation, out of funds legally available for that
purpose, dividends (paid in either cash or, at the Corporation's discretion
(as evidenced by the vote of a majority of the Disinterested Directors (as
defined below), stock) equal to eight percent (8%) per annum
(non-compounded) of the Series A Stated Value. Such dividend shall be
cumulative, but shall not compound, from the Original Issuance Date (as
defined below) of such Series A Preferred Stock until declared and paid.
Dividends shall be payable pro rata for partial year periods. For the
purposes of this paragraph, in the event that
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<PAGE> 4
shares of the Corporation's capital stock are used to pay dividends, such
capital stock shall be valued at its Current Market Price (as defined
below).
(2) From the Original Issuance Date to the date
which is twenty four (24) months following the Original Issuance Date (the
"Payment Commencement Date"), dividends on the Series A Preferred Stock
shall accrue. Such dividends (the "Series A Accrued Dividends") shall be
paid in eight (8) equal quarterly installments commencing on the Payment
Commencement Date. In addition, from and after the Payment Commencement
Date, dividends (the "Series A Current Dividends") shall be paid currently
in arrears to the holder of each share of Series A Preferred Stock
quarterly, commencing on the date which is three (3) months following the
Payment Commencement Date. In the event that the Corporation is unable to
make payments in respect of both the Series A Current Dividends and the
Series A Accrued Dividends, all payments shall be applied first to Series A
Accrued Dividends.
(3) In the event that, by the end of the
Corporation's 1998 or 1999 fiscal year, as the case may be, the
Corporation's net revenues are greater than $39,000,000 and the
Corporation's net income (after taxes but excluding extraordinary items) is
greater than $6,600,000, then, notwithstanding the provisions of
Section 4(B)(4)(a)(1) hereof, shares of Series A Preferred Stock shall, from
and after such date, no longer be entitled to receive those dividends more
particularly described in Section 4(B)(4)(a)(1) hereof, provided, however,
that nothing herein or elsewhere to the contrary shall be construed to
prevent the shares of Series A Preferred Stock from receiving Section
4(B)(4)(a)(1) dividends accrued and unpaid as of such date.
(4) Subject only to the provisions of
Section 4(B)(4)(a)(2), and to the prior rights of the holders of any class or
series of Preferred Stock, no other dividend or other distribution shall be
paid or made on any share of Common Stock unless simultaneously all
dividends accrued and unpaid through the payment date for such dividends are
declared and paid on each share of Series A Preferred Stock.
(5) Immediately prior to the conversion of shares
of Series A Preferred Stock into shares of Common Stock, whether due to an
Event of Conversion (as defined below) or otherwise, a majority of the
members of the Corporation's Board of Directors, including at least one
director elected solely by the holders of the Series B Preferred Stock
pursuant to paragraph 4(B)(6)(b) below, at least one director elected solely
by the holders of the Series C Preferred Stock pursuant to paragraph
4(B)(6)(c) below and at least one director elected solely by the holders of
the Series D Preferred Stock pursuant to paragraph 4(B)(6)(c). below, may
determine to pay, and may pay, any accrued but unpaid Series A Current
Dividends or Series A Accrued Dividends in lieu of converting such dividends
into shares of Common Stock.
(b) Series B Preferred Stock Dividend.
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<PAGE> 5
(1) In each year, subject to the senior dividend
rights of the holders of Series A Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock as set forth herein,
the holders of Series B Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors of the Corporation, out of funds
legally available for that purpose, dividends payable in cash equal to ten
percent (10%) per annum (non-compounded) of the Series B Stated Value. Such
dividends shall be cumulative, but shall not compound, from the Original
Issuance Date (as defined below) of such Series B Preferred Stock until
declared and paid. Dividends shall be payable pro rata for partial year
periods.
(2) Subject only to the senior dividend rights of
the holders of Series A Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock as set forth herein, no other
dividend or other distribution shall be paid or made on any Common Stock, or
on any class or series of Preferred Stock ranking junior to the Series B
Preferred Stock as to dividends, unless all dividends accrued and unpaid
through the payment date for such dividends have been declared and paid on
each share of Series B Preferred Stock.
(3) Upon the conversion of shares of Series B
Preferred Stock into shares of Common Stock, whether due to an Event of
Conversion or otherwise, any accrued but unpaid or undeclared dividends on
Series B Preferred Stock shall be waived.
(c) Series C-E Preferred Stock Dividends.
(1) In each year, subject only to the senior
dividend rights of the holders of Series A Preferred Stock, the holder of
each share of Series C-E Preferred Stock shall be entitled to receive,
before any dividends are declared, paid or set aside on any class of Common
Stock or any other series of Preferred Stock of the Corporation, when and as
declared by the Board of Directors of the Corporation, out of funds legally
available for that purpose, dividends payable in cash equal to ten percent
(10%) per annum (non-compounded) of the Series C Stated Value, the Series D
Stated Value or the Series E Stated Value, as applicable. Such dividends
shall be cumulative, but shall not compound, from the Original Issuance Date
(as defined below) of such Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock, as applicable, until declared and paid.
Dividends shall be payable pro rata for partial year periods.
(2) Subject only to the senior dividend rights of
the holders of Series A Preferred Stock, no other dividend or other
distribution shall be paid or made on any share of Common Stock, or any
class or series of Preferred Stock ranking junior to the Series C-E
Preferred Stock as to dividends, unless simultaneously all dividends accrued
and unpaid through the payment date for such dividends are declared and paid
on each share of Series C-E Preferred Stock.
-5-
<PAGE> 6
(3) Upon the conversion of shares of Series C-E
Preferred Stock into shares of Common Stock, whether due to an Event of
Conversion or otherwise, any accrued but unpaid or undeclared dividends on
Series C-E Preferred Stock shall be waived.
(5) Rights on Liquidation, Dissolution, or Winding Up.
(a) Series E Preferred Stock.
(1) In the event of any liquidation, dissolution
or winding up of the Corporation, the holders of shares of the Series E
Preferred Stock then outstanding shall be entitled to be paid, out of the
assets of the Corporation available for distribution to its stockholders,
whether from capital, surplus or earnings, before any payment shall be made
to the holders of any stock ranking on liquidation junior to the Series E
Preferred Stock, an amount equal to the Series E Stated Value per share,
plus all accrued and unpaid dividends thereon.
(2) If upon any liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders of
Series E Preferred Stock the full preferential amounts to which they shall
be entitled, the holders of Series E Preferred Stock shall share ratably in
any distribution of assets, in proportion to their respective Stated Value
in any distribution in respect of the Series E Preferred Stock.
(b) Series D and Series C Preferred Stock.
(1) After full payment of the liquidation amounts
to the holders of the Series E Preferred Stock pursuant to subsection (a),
the holders of shares of Series D Preferred Stock and Series C Preferred
Stock the outstanding shall be entitled to be paid, out of the assets of the
Corporation available for distribution to its stockholders, whether from
capital, surplus or earnings, before any payment shall be made to the
holders of any stock ranking on liquidation junior to the Series D Preferred
Stock and Series C Preferred Stock, an amount equal to the Series D Stated
Value or Series C Stated Value per share, as applicable, plus all accrued
and unpaid dividends thereon.
(2) If upon any liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders of
Series D Preferred Stock and Series C Preferred Stock the full preferential
amounts to which they shall be entitled, the holders of Series D Preferred
Stock and Series C Preferred Stock shall share ratably in any distribution
of assets, in proportion to their respective Stated Value in any
distribution in respect of the Series D Preferred Stock and Series C
Preferred Stock, as applicable.
(c) Series B Preferred Stock.
(1) After full payment of the liquidation amounts
to the holders of the Series C-E Preferred Stock pursuant to subsections (a)
and (b), the holders of
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<PAGE> 7
shares of Series B Preferred Stock the outstanding shall be entitled to be
paid, out of the assets of the Corporation available for distribution to
its stockholders, whether from capital, surplus or earnings, before any
payment shall be made to the holders of any stock ranking on liquidation
junior to the Series B Preferred Stock, an amount equal to the Series B
Stated Value per share, plus all accrued and unpaid dividends thereon.
(2) If upon any liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders of
Series B Preferred Stock the full preferential amounts to which they shall
be entitled, the holders of Series B Preferred Stock shall share ratably in
any distribution of assets, in proportion to their respective Stated Value
in any distribution in respect of the Series B Preferred Stock.
(d) Series A Preferred Stock.
(1) After full payment of the liquidation amounts
to the holders of the Series B-E Preferred Stock pursuant to subsections
(a), (b) and (c), the holders of shares of Series A Preferred Stock the
outstanding shall be entitled to be paid, out of the assets of the
Corporation available for distribution to its stockholders, whether from
capital, surplus or earnings, before any payment shall be made to the
holders of any stock ranking on liquidation junior to the Series A Preferred
Stock, an amount equal to the Series A Stated Value per share, plus all
accrued and unpaid dividends thereon.
(2) If upon any liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders of
Series A Preferred Stock the full preferential amounts to which they shall
be entitled, the holders of Series A Preferred Stock shall share ratably in
any distribution of assets, in proportion to their respective Stated Value
in any distribution in respect of the Series A Preferred Stock.
(e) Additional Liquidation Payments. In the event of
any liquidation, dissolution or winding up of the Corporation in which the
assets of the Corporation available for distribution to its stockholders
shall not exceed an amount which would be sufficient to pay to each holder
of Series B Preferred Stock, on an as-if-converted and fully diluted basis,
at least 300% of the then current Series B Conversion Price per share, and
to each holder of Series C-E Preferred Stock, on an as-if-converted and
fully-diluted basis, at least 200% of the then current Series C Conversion
Price, Series D Conversion Price or Series E Conversion Price per share, as
applicable, then in addition to and after full payment of the payment of the
preferential amounts to the holders of the Series B-E Preferred Stock as set
forth in subsections (a) through (c) above and full payment to the holders
of the Series A Preferred Stock as set forth in subsection (d) above, the
remainder of the assets of the Corporation available for distribution to its
stockholders shall be distributed on a pro rata basis to the holders of
Common Stock, and to the holders of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, and Series E Preferred Stock,
but, as to any such Series, only in the event that such Series of
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<PAGE> 8
Preferred Stock is entitled to participate in such distribution, with the
amount distributable computed on the basis of the number of shares of
Common Stock which would be held by such holders if immediately prior to
the liquidation, dissolution or winding up of the Corporation all of the
outstanding shares of such Preferred Stock had been converted into shares
of Common Stock; provided, however, that any amounts received by the
holders of the Series B Preferred Stock pursuant to this paragraph shall
not exceed 300% of the Series B Stated Value and any amounts received by
the holders of the Series C-E Preferred Stock pursuant to this paragraph
shall not exceed 200% of the Series C-E Stated Value, as applicable.
(f) Merger, Consolidation, Sale of Assets. The merger
or consolidation of the Corporation into or with another corporation or the
merger or consolidation of any other corporation into or with the
Corporation (in which consolidation or merger the stockholders of the
Corporation receive distributions of cash or securities as a result of such
consolidation or merger), or the sale or other disposition of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation unless any such
event shall also be an Event of Conversion (as defined below), in which case
the Series A-E Preferred Stock shall automatically convert to shares of
Common Stock as set forth below.
(6) Voting.
(a) General. In addition to any class voting rights
specified herein and any other rights provided in the Corporation's bylaws
or by law, each share of Preferred Stock shall entitle the holder thereof to
such number of votes per share as shall equal the number of shares of Common
Stock into which each share of Preferred Stock is then convertible, and each
share of Preferred Stock shall be entitled to vote on all matters as to
which holders of Common Stock shall be entitled to vote, in the same manner
and with the same effect as such holders of Common Stock, voting together as
one class with the holders of Common Stock and other classes or series of
voting Preferred Stock. Notwithstanding the foregoing, fractional votes
shall not be permitted, and any fractional voting rights resulting from the
above formula (after aggregation of all shares of Common Stock into which
shares of Preferred Stock held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half rounded upward to one).
(b) Election of Board Members. In addition to the
rights specified herein with respect to each Series of Preferred Stock, and
any other rights provided in the Corporation's bylaws or by law, the holders
of each of Series of the Series B-E Preferred Stock shall have the special
and exclusive right at all times to elect one director to the Board of
Directors of the Corporation, for a total of four directors. The special
and exclusive voting rights of the holders of each such Series of the Series
B-E Preferred Stock may be exercised either at a special meeting of the
holders of each such Series of the Series B-E Preferred Stock, called as
provided below, or at any annual or special of the stockholders of the
Corporation, or by written consent of such holders in lieu of a meeting.
The director to be elected by the holders of each such Series of the Series
B-E Preferred Stock shall serve for a term extending from the
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<PAGE> 9
date of his election and qualification until the time of the next
succeeding annual meeting of stockholders and until his successor has been
elected and qualified. Any director so elected shall not be subject to
removal except by the vote of the holders of two-thirds of the voting power
of the each such Series of the Series B-E Preferred Stock (or by written
consent of such two-thirds voting power). If at any time any directorship
to be filled by the holders of each such Series of Series B-E Preferred
Stock shall be vacant, the President (or any other officer) of the
Corporation shall, upon the written request of the holders of record of
shares representing at least 25% of the voting power of the shares of the
respective Series of Series B-E Preferred Stock, call a special meeting of
the holders of the shares of each such Series of Series B-E Preferred
Stock, for the purpose of electing a director to fill such vacancy. Such
meeting shall be held at the earliest practicable date at such place as
specified in or determined in accordance with the Bylaws of the
Corporation. If such meeting shall not be called by the President (or any
other officer) of the Corporation within ten days after delivery of said
written request, then the holders of record of shares representing at least
25% of the voting power of the shares of each such Series of Series B-E
Preferred Stock may designate in writing one of their number to call such
meeting at the expense of the Corporation, and such meeting may be called
by such persons so designated upon the notice required for annual meetings
of stockholders and shall be held at such place as specified or determined
above. Any holder of record of shares of such Series of Series B-E
Preferred Stock shall have access to the stock books of the Corporation for
the purpose of calling a meeting of stockholders pursuant to these
provisions.
(c) Series B Preferred Stock Class Voting Rights.
Holders of Series B Preferred Stock shall vote as a separate class on, and
the affirmative vote of a majority of the outstanding shares of Series B
Preferred Stock shall be required to authorize, any action which would:
i. in any manner authorize, create or issue any
class or series of capital stock ranking, either as to payment of dividends,
distribution of assets or redemption, prior to or on parity with the Series
B Preferred Stock, or authorize, create or issue any shares of any class or
series or any bonds, debentures, notes or other obligations convertible into
or exchangeable for, or having optional rights to purchase, any shares
having any such priority or on parity with the Series B Preferred Stock;
ii. in any manner alter or change the designation
or the powers, preferences or rights, or the qualifications, limitations or
restrictions of the Series B Preferred Stock; or
iii. reclassify the shares of Common Stock, or any
other shares of any class or series of capital stock hereafter created
junior to the Series B Preferred Stock into shares of any class or series of
capital stock ranking, either as to payment of dividends, distribution of
assets or redemption, prior to or on a parity with the Series B Preferred
Stock.
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<PAGE> 10
(d) Series C-E Preferred Stock Class Voting Rights.
Holders of Series C-E Preferred Stock shall vote as a separate class on, and
the affirmative vote of holders of at least 66-2/3% of the outstanding
shares of Series C Preferred Stock, and the outstanding shares of Series D
Preferred Stock and the outstanding shares of Series E Preferred Stock,
voting together as a separate class, shall be required to authorize, any
action which would:
i. in any manner authorize, create or issue any
class or series of capital stock ranking, either as to payment of dividends,
distribution of assets or redemption, prior to or on parity with the Series
C Preferred Stock, or authorize, create or issue any shares of any class or
series or any bonds, debentures, notes or other obligations convertible into
or exchangeable for, or having optional rights to purchase, any shares
having any such priority or on parity with the Series C Preferred Stock;
ii. in any manner alter or change the designation
or the powers, preferences or rights, or the qualifications, limitations or
restrictions of the Series C Preferred Stock;
iii. reclassify the shares of Common Stock, or any
other shares of any class or series of capital stock junior to the Series C
Preferred Stock into shares of any class or series of capital stock ranking,
either as to payment of dividends, distribution of assets or redemption,
prior to or on a parity with the Series C Preferred Stock;
iv. in any manner authorize, create or issue any
class or series of capital stock ranking, either as to payment of dividends,
distribution of assets or redemption, prior to or on parity with the Series
D Preferred Stock, or authorize, create or issue any shares of any class or
series or any bonds, debentures, notes or other obligations convertible into
or exchangeable for, or having optional rights to purchase, any shares
having any such priority or on parity with the Series D Preferred Stock;
v. in any manner alter or change the designation
or the powers, preferences or rights, or the qualifications, limitations or
restrictions of the Series D Preferred Stock;
vi. reclassify the shares of Common Stock, or any
other shares of any class or series or capital stock junior to the Series D
Preferred Stock into shares of any class or series of capital stock ranking,
either as to payment of dividends, distribution of assets or redemption,
prior to or on a parity with the Series D Preferred Stock;
vii. in any manner authorize, create or issue any
class or series of capital stock ranking, either as to payment of dividends,
distribution of assets or redemption, prior to or on parity with the Series
E Preferred Stock, or authorize, create or issue any shares of any class or
series or any bonds, debentures, notes or other obligations convertible into
or exchangeable for, or having optional rights to purchase, any shares
having any such priority or on parity with the Series E Preferred Stock;
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<PAGE> 11
viii. in any manner alter or change the designation
or the powers, preferences or rights, or the qualifications, limitations or
restrictions of the Series E Preferred Stock; or
ix. reclassify the shares of Common Stock, or any
other shares of any class or series of capital stock junior to the Series E
Preferred Stock into shares of any class or series of capital stock ranking,
either as to payment of dividends, distribution of assets or redemption,
prior to or on a parity with the Series E Preferred Stock.
(e) Series C Preferred Stock Voting Rights. In addition
to the voting rights set forth above, holders of Series C Preferred Stock
shall vote as a separate class on, and the affirmative vote of holders of at
least 66 2/3% of the outstanding shares of Series C Preferred Stock shall be
required to authorize, any action which would in any manner alter or change
the designation or the powers, preferences or rights or the qualifications,
limitations or restrictions of the Series C Preferred Stock.
(f) Series D Preferred Stock Voting Rights. In addition
to voting rights set forth above, holders of Series D Preferred Stock shall
vote as a separate class on and the affirmative vote of holders of at least
66 2/3% of the outstanding shares of Series D Preferred Stock shall be
required to authorize any action which would in any manner alter or change
the designation or the powers, preference or rights or the qualifications,
limitations or restrictions of the Series D Preferred Stock.
(g) Series E Preferred Stock Voting Rights. In addition
to voting rights set forth above, holders of Series E Preferred Stock shall
vote as a separate class on and the affirmative vote of holders of at least
66 2/3% of the outstanding shares of Series E Preferred Stock shall be
required to authorize any action which would in any manner alter or change
the designation or the powers, preference or rights or the qualifications,
limitations or restrictions of the Series E Preferred Stock.
(h) Special Meeting. If at any time any action is
proposed by the Corporation which requires the affirmative vote of the
holders of a Series of the Series B-E Preferred Stock pursuant to the
foregoing, the President (or any other officer) of the Corporation shall
call a special meeting of the holders of such Series of Series B-E Preferred
Stock, for the purpose of voting on such proposed action. Such meeting
shall be held at the earliest practicable date at such place as specified in
or determined in accordance with the bylaws of the Corporation.
(7) Redemption.
(a) Series B Preferred Stock. At any time after the
date which is five years following the Original Issuance Date of the Series
E Preferred Stock, within ten days after receipt of the written request of
the holders of at least sixty percent (60%) of the shares of Series B
Preferred Stock, the Corporation shall, to the fullest extent permitted by
law, redeem all or a
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<PAGE> 12
part of the outstanding Series B Preferred Stock as specified in the
written request of the holders of shares of Series B Preferred Stock. In
the event the holders of shares of Series B Preferred Stock specify a
portion of the Series B Preferred Stock is to be redeemed, the redemption
shall be made pro rata among all of the holders of shares of Series B
Preferred Stock. The redemption of the Series B Preferred Stock shall be at
a per share redemption price equal to 110% of the Series B Stated Value
plus all accrued and unpaid dividends on the Series B Preferred Stock. The
rights of the holders of Series B Preferred Stock to receive any such
payments shall be subject to the prior rights of the holders of Series C-E
Preferred Stock set forth in subsection (b), that have elected to be
redeemed and have not been paid in full the redemption amounts to which
they are entitled. If one or more holders of Series B-E Preferred Stock
have demanded redemption of their shares, and if the Corporation is unable
for any reason to make payments sufficient to redeem all of the shares as
to which redemption has been demanded, the Corporation shall make no
payments in redemption of the Series B Preferred Stock until it has
satisfied in full its obligations with respect to the redemption of the any
of the Series C-E Preferred Stock, (including any interest requested to be
paid as provided above).
(b) Series C-E Preferred Stock. At any time after the
date which is five years following the Original Issuance Date of the Series
E Preferred Stock, within ten days after receipt of the written request of
the holders of at least 66-2/3 % of the shares of Series C-E Preferred
Stock, together as one class, the Corporation shall, to the fullest extent
permitted by law, redeem all or a part of the outstanding Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock as specified in
the written request of the holders of shares of Series C-E Preferred Stock.
In the event the holders of shares of Series C-E Preferred Stock specify a
portion of the Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock is to be redeemed, the redemption shall be made pro rata
among all of the holders of shares of Series C-E Preferred Stock, in
proportion to their respective Stated Value. The redemption of the Series C
Preferred Stock specified in the written request of the holders of shares of
Series C-E Preferred Stock, shall be at a per share redemption price equal
to 110% of the Series C Stated Value plus all accrued and unpaid dividends
on the Series C Preferred Stock. The redemption of the Series D Preferred
Stock specified in the written request of the holders of shares of Series
C-E Preferred Stock, shall be at a per share redemption price equal to 110%
of the Series D Stated Value plus all accrued and unpaid dividends on the
Series D Preferred Stock. The redemption of the Series E Preferred Stock
specified in the written request of the holders of shares of Series C-E
Preferred Stock, shall be at a per share redemption price equal to 110% of
the Series E stated value plus all accrued and unpaid dividends on the
Series E Preferred Stock.
(c) In the event that for any reason including, without
limitation, a prohibition under applicable law, the Corporation is
prohibited from redeeming or is otherwise unable to redeem any of those
shares indicated in the request of the holders of shares of any Series of
the Series B-E Preferred Stock, the Corporation shall thereafter redeem such
shares on the earliest date(s) on which the Corporation is no longer so
prohibited from redeeming or unable to redeem such shares at a redemption
price determined at the actual date of redemption in accordance with the
formula set forth above.
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<PAGE> 13
(d) Notice of the election of the holders of any Series
of the Series B-E Preferred Stock that shares of Series B-E Preferred Stock
be redeemed shall be sent by holders of the applicable Series to the
Corporation by first class certified mail or by overnight courier. Upon
receipt of payment for its Series B-E Preferred Stock, each redeeming holder
of such security or securities shall deliver to the Corporation or its agent
the certificates representing the shares to be redeemed; provided that, upon
the payment by the Corporation of the applicable redemption price, all
rights in respect of the shares of Series B-E Preferred Stock to be redeemed
shall cease and terminate, and such shares shall no longer be deemed to be
outstanding, whether or not the certificates representing such shares have
been received by the Corporation.
(e) Once redeemed pursuant to the provisions of this
Section 4(B)(7), shares of Series B-E Preferred Stock shall be canceled and
not subject to reissuance.
(f) In the event that any holder of Series B-E Preferred
Stock exercises any of its rights as set forth in this Section 4(B)(7), and
the Corporation fails to redeem the shares of the applicable securities, for
whatever reason except that the Corporation is under a legal prohibition
from so doing (in which case the Corporation shall redeem such shares of
Series B-E Preferred Stock as it shall legally be permitted to redeem), from
the date that such redemption is requested until the date that such
redemption is consummated, the applicable redemption price shall bear
interest at the rate of four percent above the prime rate of interest
published in The Wall Street Journal (Million Dollar Transactions) from time
to time. Such interest shall be payable by the Corporation upon the
consummation of the applicable redemption transaction.
(g) No shares of Series B-E Preferred Stock shall be
entitled to the benefit of a sinking fund or purchase fund.
(h) Upon receiving notice of redemption pursuant to this
Section 4(B)(7), the Corporation shall promptly notify each of the holders
of Series B-E Preferred Stock, of the receipt of such notice.
(8) Conversion into Common Stock.
(a) The holders of any shares of Series A-E Preferred
Stock, shall each have the right, at such holder's option, at any time or
from time to time, to convert any of such shares of Series A-E Preferred
Stock into such number of fully paid and nonassessable shares of Common
Stock as shall be determined by multiplying (x) the Applicable Series A-E
Stated Value, and in the case of the conversion of Series A Preferred Stock
only, plus all accrued and unpaid dividends on the Series A Preferred Stock,
by (y) the number of shares of the applicable Series A-E Preferred Stock
being converted, and divided by (z) the Applicable Series A-E Conversion
Price (as hereinafter defined and as last adjusted and then in effect), by
surrender of the certificates representing the shares of the securities to
be converted in the manner provided in subsection 4(B)(8)(a)(5) hereof. As
of the date hereof, reflecting the
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<PAGE> 14
Corporation's December 1996 1.4 for one stock split, effected as a stock
dividend, the Series A Preferred Stock Conversion Price (the "Series A
Conversion Price") per share at which shares of Common Stock shall be
issuable upon conversion of shares of Series A Preferred Stock shall be
$.2484; the Series B Preferred Stock Conversion Price (the "Series B
Conversion Price") per share at which shares of Common Stock shall be
issuable upon conversion of shares of Series B Preferred Stock shall be
$.3311; the Series C Preferred Stock Conversion Price (the "Series C
Conversion Price") per share at which shares of Common Stock shall be
issuable upon conversion of shares of Series C Preferred Stock shall be
$.8929; the Series D Preferred Stock Conversion Price (the "Series D
Conversion Price") per share at which shares of Common Stock shall be
issuable upon conversion of shares of Series D Preferred Stock shall be
$1.25; the Series E Preferred Stock Conversion Price (the "Series E
Conversion Price") per share at which shares of Common Stock shall be
issuable upon conversion of shares of Series E Preferred Stock shall be
$4.76 (the "Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price and Series E Conversion Price
may be referred to individually as the "Applicable Series A-E Conversion
Price"); provided, however, that in all such cases, such Applicable Series
A-E Conversion Price shall be subject to adjustment as set forth in
paragraph 4(B)(8)(e) hereof.
(b) Upon the occurrence of an Event of Conversion (as
defined below), all shares of each Series of Series A-E Preferred Stock then
outstanding shall, by virtue of, and simultaneously with, the occurrence of
the Event of Conversion, and without any action on the part of the holder
thereof, be deemed automatically converted into such number of fully paid
and nonassessable shares of Common Stock as shall be determined by
multiplying (x) the Applicable Series A-E Stated Value, and in the case of
the conversion of Series A Preferred Stock only, plus all accrued and unpaid
dividends on the Series A Preferred Stock, by (y) the number of shares such
Series of Series A-E Preferred Stock being converted, and dividing by (z)
the Applicable Series A-E Conversion Price (as last adjusted and then in
effect).
(c) The holder of any shares of Series A-E Preferred
Stock may exercise the conversion right pursuant hereto as to any shares
thereof by delivering to the Corporation during regular business hours, at
the office of any transfer agent of the Corporation for the Series A-E
Preferred Stock or at such other place as may be designated by the
Corporation, the certificate or certificates for the shares to be converted,
duly endorsed or assigned in blank to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares and stating the name or names (with address) in which the certificate
or certificates for the shares of Common Stock are to be issued. Conversion
shall be deemed to have been effected (i) with respect to conversion
effected pursuant to subsection 4(B)(8)(a) hereof, on the date when the
aforesaid delivery is made and (ii) with respect to conversion effected
pursuant to subsection 4(b)(8)(b) hereof, on the date of occurrence of the
Event of Conversion, and such date, in either case is referred to herein as
the "Series A Conversion Date," the "Series B Conversion Date," the "Series
C Conversion Date," the "Series D Conversion Date" or the "Series E
Conversion Date," as applicable (any one may be referred to as the
"Applicable Series A-E Conversion Date"). As promptly as practicable
thereafter, the Corporation shall issue and deliver to, or upon the written
order of such holder to
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<PAGE> 15
the place designated by, such holder, a certificate or certificates for the
number of full shares of Common Stock to which such holder is entitled, and
a check or cash in respect of any fractional interest in a share of Common
Stock as provided in paragraph 4(B)(8)(d) hereof. The person in whose names
the certificate or certificates for Common Stock are to be issued shall be
deemed to have become a stockholder of record on the Applicable Series A-E
Conversion Date unless the transfer books of the Corporation are closed on
that date, in which event he shall be deemed to have become a stockholder
of record on the next succeeding date on which the transfer books are open,
but the Applicable Series A-E Conversion Price, shall be that in effect on
the Applicable Series A-E Conversion Date. Upon conversion of only a
portion of the number of shares covered by a certificate representing
shares of Series A-E Preferred Stock surrendered for conversion, the
Corporation shall issue and deliver to, or upon the written order of such
holder to the place designated by, such holder of the certificate so
surrendered for conversion, at the expense of the Corporation, a new
certificate covering the number of shares of Series A-E Preferred Stock
representing the unconverted portion of the certificate so surrendered,
which new certificate shall entitle the holder thereof to dividends on the
shares of Series A-E Preferred Stock represented thereby to the same extent
as if the certificate theretofore covering such unconverted shares had not
been surrendered for conversion.
(d) No fractional shares of Common Stock or scrip shall
be issued upon conversion of shares of any of the Series A-E Preferred
Stock. If more than one share of Series A-E Preferred Stock shall be
surrendered for conversion at any one time by the same holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A-E
Preferred Stock so surrendered. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of the
Series A-E Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to the then Current
Market Price (as defined below) of a share of Common Stock multiplied by
such fractional interest. Fractional interests shall not be entitled to
dividends, and the holders of fractional interests shall not be entitled to
any rights as stockholders of the Corporation in respect of such fractional
interest. The term "Current Market Price" at any date of one share of
Common Stock shall be deemed to be the average of the daily closing prices
for the 30 consecutive business days ending no more than 15 days before the
day in question (as adjusted for any stock dividend, split-up, combination
or reclassification that took effect during such 30 business day period).
The closing price for each day shall be the last reported sales price
regular way or, if sales prices are not reported for the Common Stock, then
the average of the last reported bid and asked prices regular way, in either
case on the principal national securities exchange or the Nasdaq Stock
Market on which the Common Stock is listed or admitted to, or if, on any day
in question, the security shall not be quoted on any such principal national
securities exchange or the Nasdaq Stock Market, then such price shall be
equal to the average of the last reported bid and asked prices on such day
as reported by the National Quotation Bureau, Inc. or any similar reputable
quotation and reporting service, if such quotation is not reported by the
National Quotation Bureau, Inc.; provided, however, that if the Common Stock
is not traded in such manner that the quotations referred to in this
subsection 4(B)(8)(d) hereof, are available
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<PAGE> 16
for the period required hereunder, the Current Market Price shall be
determined in good faith by the Board of Directors of the Corporation, or
if such determination cannot be made, by a nationally recognized
independent investment banking firm selected mutually by the holders of a
majority of the voting power of the Series B-E Preferred Stock then
outstanding, voting together as one class, and the Corporation (or, if such
selection cannot be made, by a nationally recognized independent investment
banking firm selected by the American Arbitration Association in accordance
with its rules).
(e) The Applicable Series A-E Conversion Price, for each
Series of the Series A-E Preferred Stock shall be subject to adjustment from
time to time as follows:
i. If, at any time after the Original Issuance
Date, the number of shares of Common Stock outstanding is increased by a
stock dividend payable in shares of Common Stock or by a subdivision or
split-up of shares of Common Stock, then, following the record date for the
determination of holders of Common Stock entitled to receive such stock
dividend, subdivision or split-up, the Applicable Series A-E Conversion
Price shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of Series of Series A-E
Preferred Stock shall be increased in proportion to such increase in
outstanding shares. The Applicable Series A-E Conversion Prices set forth
in subsection (8)(a) above reflect the Corporation's December 1996 1.4 for
one stock split, effected as a stock dividend and no further adjustment to
the Applicable Series A-E Conversion Price shall be made as a result thereof.
ii. If, at any time after the Original Issuance
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock then, following the
record date for such combination, the Applicable Series A-E Conversion Price
shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion of each share of Series of Series A-E Preferred
Stock shall be decreased in proportion to such decrease in outstanding
shares.
iii. In case, at any time after the Original
Issuance Date, of any capital reorganization, or any reclassification of the
stock of the Corporation (other than a change in par value or from par value
to no par value or from no par value to par value or as a result of a stock
dividend or subdivision, split-up or combination of shares), or the
consolidation or merger of the Corporation with or into another person
(other than a consolidation or merger in which the Corporation is the
continuing corporation and which does not result in any change in the Common
Stock) or the sale or other disposition of all or substantially all the
properties and assets of the Corporation as an entity to any other person,
each share of a Series of the Series A-E Preferred Stock shall after such
reorganization, reclassification, consolidation, merger, sale or other
disposition be (unless, in the case of a consolidation, merger, sale or
other disposition, payment shall have been made to the holders of all shares
of such Series of Series A-E Preferred Stock of the full amount to which
they respectively shall have been entitled pursuant to paragraph 4(B)(5))
convertible into the kind and number of shares of stock or other securities
or property of the Corporation or of the corporation resulting from such
consolidation
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<PAGE> 17
or surviving such merger or to which such properties and assets shall have
been sold or otherwise disposed to which the holder of the number of shares
of Common Stock deliverable (immediately prior to the time of such
reorganization, reclassification, consolidation, merger, sale or other
disposition) upon conversion of such share would have been entitled upon
such reorganization, reclassification, consolidation, merger, sale or other
disposition. The provisions of this subsection 4(B)(8)(e)iii. shall
similarly apply to successive reorganizations, reclassifications,
consolidations, mergers, sales or other dispositions.
iv. (A). If the Corporation shall at any time or
from time to time after the Original Issuance Date, issue any shares of
Common Stock or other securities of the Corporation convertible into or
exchangeable for Common Stock (other than Excluded Stock) without
consideration or for a consideration per share less than the Applicable
Series A-E Conversion Price in effect immediately prior to such issuance,
the Applicable Series A-E Conversion Price in effect immediately prior to
each such issuance shall forthwith (except as provided in this clause d.) be
adjusted to a price equal to
(I) an amount equal to the sum of
(x) The total number of shares of Common
Stock outstanding (including any shares of Common Stock deemed to have been
issued pursuant to subdivision (B). of this clause iv. and to clause v.
below; it being understood that the shares of Common Stock issuable upon
conversion of any outstanding shares of any such Series of Series A-E
Preferred Stock shall be deemed to be outstanding for all purposes of this
and all subsequent computations of outstanding shares of Common Stock
required in this clause iv. immediately prior to such issuance, multiplied by
the Applicable Series A-E Conversion Price in effect immediately prior to the
issuance, plus
(y) the consideration received by the
Corporation upon such issuance, divided by
(II) the total number of shares of Common Stock
outstanding (including any shares of Common Stock deemed to have been issued
pursuant to subdivision (B) of this clause iv. and to clause v. below)
immediately after the issuance of such Common Stock.
(B) For the purposes of any adjustment of
the Applicable Series A-E Conversion Price pursuant to this clause iv., the
following provisions shall in each case be applicable:
I. In the case of the issuance
of Common Stock for cash, the consideration shall be deemed to be the amount
of cash paid therefor after deducting therefrom any discounts, commissions
or other expenses allowed, paid or incurred by the Corporation for any
underwriting or otherwise in connection with the issuance thereof.
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<PAGE> 18
II. In the case of the issuance
of Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market value
thereof (as determined in good faith by the Board of Directors, whose
determination shall be conclusive), irrespective of any accounting treatment.
III. In the case of the issuance,
without consideration or for a consideration per share less than the
Applicable Series A-E Conversion Price in effect immediately prior to each
such issuance, of (x) options to purchase or rights to subscribe for shares
of Common Stock granted subsequent to the Original Issuance Date; (y)
securities by their terms convertible into or exchangeable for Common Stock;
or (z) options to purchase or rights to subscribe for such convertible or
exchangeable securities:
(A) the aggregate maximum
number of shares of Common Stock deliverable upon exercise of such options
to purchase or rights to subscribe for Common Stock shall be deemed to have
been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided
in subdivisions I. and II. above), if any, received by the Corporation upon
the issuance of such options or rights plus the minimum purchase price
provided in such options or rights for the Common Stock covered thereby;
(B) the aggregate maximum
number of shares of Common Stock deliverable upon conversion of or in
exchange for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible
or exchangeable securities and subsequent conversion or exchange thereof
shall be deemed to have been issued at the time such securities were issued
and for a consideration equal to the consideration received by the
Corporation for any such securities and related options or rights (excluding
any cash received on account of accrued interest or accrued dividends), plus
the additional consideration, if any, to be received by the Corporation upon
the conversion or exchange of such securities or the exercise of any related
options or rights (the consideration in each case to be determined in the
manner provided in subdivisions I. and II. above);
(C) on any change in the
number of shares of Common Stock deliverable upon exercise of any such
options or rights or conversions of or exchange for such convertible or
exchangeable securities, other than a change resulting from the
anti-dilution provisions thereof, the Applicable Series A-E Conversion Price
shall forthwith be readjusted to such Applicable Series A-E Conversion Price
as would have been obtained had the adjustments made upon the issuance of
such options, rights or securities not converted prior to such change or
options or rights related to such securities not converted prior to such
change been made initially upon the basis of such change; and
(D) on the expiration of
any such options or rights, the termination of any such rights to convert or
exchange or the expiration of
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<PAGE> 19
any options or rights related to such convertible or exchangeable
securities, the Applicable Series A-E Conversion Price shall forthwith be
readjusted to such Applicable Series A-E Conversion Price as would have
been obtained had the adjustment made upon the issuance of such options,
rights, securities or options or rights related to such securities been
made upon the basis of the issuance of only the number of shares of Common
Stock actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the
options or rights related to such securities and subsequent conversion or
exchange thereof.
v. All calculations under this Section
4(B)(8) shall be made to the one-tenth (1/10) of a cent or to the nearest
one-tenth (1/10) of a share, as the case may be.
vi. In any case in which the provisions of
this Section 4(B)(8) shall require that an adjustment shall become effective
immediately after a record date for an event, the Corporation may defer
until the occurrence of such event (i) issuing to the holder of any share of
Series A-E Preferred Stock, converted after such record date and before the
occurrence of such event the additional shares of capital stock issuable
upon such conversion by reason of the adjustment required by such event over
and above the shares of capital stock issuable upon such conversion before
giving effect to such adjustment and (ii) paying to such holder of any
amount in cash in lieu of a fractional share of capital stock pursuant to
Section 4(B)(8)(e); provided, however, that the Corporation shall deliver to
such holder a due bill or other appropriate instrument evidencing such
holder's right to receive such additional shares, and such cash, upon the
occurrence of the event requiring such adjustment.
vii. Whenever the Applicable Series A-E
Conversion Price shall be adjusted as provided herein, the Corporation shall
forthwith file at the office of the transfer agent for the Series A-E
Preferred Stock, or at such other place as may be designated by the
Corporation, a statement, signed by its independent certified public
accountants, showing in detail the facts requiring such adjustment and the
Applicable Series A-E Conversion Price that shall be in effect after such
adjustment. The Corporation shall also cause a copy of such statement to be
sent by first-class certified mail, return receipt requested, postage
prepaid, to each holder of shares of any Series A-E Preferred Stock at his
address appearing on the Corporation's records.
viii. In the event the Corporation shall
propose to take any action of the types described in paragraphs 4(B)(8)(e)i.
or ii. hereof, the Corporation shall give notice to each holder of shares of
Series A-E Preferred Stock in the manner set forth in paragraph
4(B)(8)(e)vii. hereof, which notice shall specify the record date, if any,
with respect to any such action and the date on which such action is to take
place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the
Applicable Series A-E Conversion Price, and the number, kind or series of
shares or other securities or property which shall be deliverable or
purchasable upon the occurrence of such action or
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<PAGE> 20
deliverable upon conversion of shares of such Series of Series A-E
Preferred Stock. In the case of any action which would require the fixing
of a record date, such notice shall be given at least twenty (20) days
prior to the date so fixed, and in case of all other action, such notice
shall be given at least thirty (30) days prior to the taking of such
proposed action. Failure to give such notice, or any defect therein, shall
not affect the legality or validity of any such action.
ix. The Corporation shall pay all
documentary, stamp or other transactional taxes applicable to the issuance
or delivery of shares of capital stock of the Corporation upon conversion of
any of shares of the Series A-E Preferred Stock; provided, however, that the
Corporation shall not be required to pay any taxes which may be payable in
respect of any transfer involved in the issuance or delivery of any
certificate for such shares in a name other than that of the holder of the
shares of such Series of Series A-E Preferred Stock in respect of which such
shares are being issued.
x. The Corporation shall reserve and at all
times from and after the Original Issuance Date keep reserved free from
preemptive rights, out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of
Series A-E Preferred Stock, sufficient shares to provide for the conversion
of all outstanding shares of Series A-E Preferred Stock.
xi. All shares of Common Stock which may be
issued in connection with the conversion provisions set forth herein will,
upon issuance by the Corporation, be validly issued, fully paid and
nonassessable with no personal liability attaching to the ownership thereof
and free from all taxes, liens or charges with respect thereto.
xii. Once converted pursuant to the
provisions hereof, shares of Series A-E Preferred Stock so converted shall
be canceled and not subject to reissuance, and such converted shares shall,
without any action on the part of the Corporation or the stockholders of the
Corporation, be eliminated from the authorized capital of the Corporation.
(9) Definitions. For the purposes of this Restated Certificate
of Incorporation, the following terms shall have the following respective
meanings:
(A) The term "Event of Conversion" with respect to the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock shall mean the consummation of an underwritten
public offering of shares of Common Stock of the Corporation pursuant to the
Securities Act of 1933, as amended (i) at a selling price (prior to
underwriting commissions and expenses) per share of Common Stock (as
constituted as of the date hereof) equal to or exceeding $3.57 per share (in
each case as appropriately and proportionately adjusted to reflect any stock
dividend, stock split, combination of shares, reclassification,
recapitalization, redemption or other similar event affecting the number or
character of outstanding shares, such amount reflecting a 1.4 to one stock
split effected by the
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<PAGE> 21
Corporation in December 1996), and (ii) which results in aggregate proceeds
(prior to underwriting commissions and expenses) equal to not less than
$10,000,000.
(B) The term "Event of Conversion" with respect to the
Series E Preferred Stock shall mean the consummation of an underwritten
public offering of shares of Common Stock of the Corporation pursuant to the
Securities Act of 1933, as amended (i) at a selling price (prior to
underwriting commissions and expenses) per share of Common Stock (as
constituted as of the date hereof) equal to or exceeding $7.86 per share (in
each case as appropriately and proportionately adjusted to reflect any stock
dividend, stock split, combination of shares, reclassification,
recapitalization, redemption or other similar event affecting the number or
character of outstanding shares, such amount reflecting a 1.4 to one stock
split effected by the Corporation in December 1996), and (ii) which results
in aggregate proceeds (prior to underwriting commissions and expenses) equal
to not less than $10,000,000.
(C) The term "Original Issuance Date" shall mean with
respect to the Series A Preferred Stock and the Series B Preferred Stock
December 15, 1994, with respect to the Series C Preferred Stock, August 11,
1995, with respect to the Series D Preferred Stock, January 26, 1996, and
with respect to the Series E Preferred Stock, September 19, 1996.
(D) "Excluded Stock" shall mean shares of Common Stock
issued by the Corporation: (x) upon conversion of any shares of any class or
series of Preferred Stock at any time outstanding; (y) in connection with
options to purchase or rights to subscribe for shares of Common Stock, or
securities by their terms convertible into or exchangeable for Common Stock
or options to purchase or rights to subscribe for such convertible or
exchangeable securities, issued to officers, employees or directors of or
consultants to the Corporation (i) pursuant to any plan, agreement or other
arrangements approved by the holders of at least 66-2/3 % of the shares of
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock, voting together as a class, or (ii) pursuant
to any plan, agreement or other arrangements existing on or prior to the
Original Issuance Date up to a maximum of 5,125,000 shares of Common Stock
(as appropriately and proportionately adjusted to reflect any stock
dividend, stock split, combination of shares, reclassification,
recapitalization, redemption or other similar event affecting the number or
character of outstanding shares, such amount reflecting a 1.4 to one stock
split effected by the Corporation in December 1996); or (z) in order to
effectuate the acquisition by the Corporation of a business or a line of
business, provided that such acquisition is approved by the majority of the
four directors of the Corporation nominated by the holders of the Series B-E
Preferred Stock, or by the holders of at least 60% of the shares of Series
B-E Preferred Stock, voting together as a class.
5. Term. The Corporation is to have perpetual existence.
6. Bylaws. The bylaws of the corporation may be altered, amended or
repealed by the vote of a majority of all of the directors or by the vote of
holders of a majority of the stock entitled to vote.
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<PAGE> 22
7. Limitation on Liability. No director of the Corporation
shall be personally liable to the Corporation or to any stockholder of the
Corporation for monetary damages for breach of fiduciary duty as a director,
provided that this provision shall not limit the liability of a director (i)
for any breach of the director's duty of loyalty to the Corporation of its
stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of Delaware, or (iv) for any transaction from
which the director derived an improper personal benefit.
If the General Corporation Law of Delaware or any other statute of the
State of Delaware hereafter is amended to authorize the further elimination
or limitation of the liability of directors of the Corporation, then the
liability of a director of the Corporation shall be limited to the fullest
extent permitted by the statutes of the State of Delaware, as so amended, and
such elimination or limitation of liability shall be in addition to, and not
in lieu of, the limitation on the liability of a director provided by the
foregoing provisions of this Article 7.
Any repeal of or amendment to this Article 7 shall be prospective only
and shall not adversely affect any limitation on the liability of a director
of the Corporation existing at the time of such repeal or amendment.
8. Election of Directors.
(A) General. Elections of directors need not be by written
ballot unless the By-laws of the Corporation shall so provide. Except as
otherwise provided in this Certificate of Incorporation or a certificate of
designation relating to the rights of the holders of any class or series of
Preferred Stock, voting separately by class or series, to elect additional
directors under specified circumstances, the number of directors of the
Corporation shall be as fixed from time to time by or pursuant to the By-laws
of the Corporation. No director of the Corporation need be a stockholder of
the Corporation.
(B) Classification. The Board of Directors shall be classified
with respect to the time for which they severally hold office into three
separate classes, Class I, Class II and Class III, which shall be as nearly
equal in number as possible, and shall be adjusted from time to time in the
manner specified in the Bylaws of the Corporation to maintain such
proportionality. Each initial director in Class I shall hold office for a
term expiring at the 2000 annual meeting of stockholders. Each initial
director in Class II shall hold office initially for a term expiring at the
1999 annual meeting of stockholders. Each initial director in Class III
shall hold office for a term expiring at the 1998 annual meeting of
stockholders. Notwithstanding the foregoing provisions of this Article 8,
each director shall serve until such director's successor is duly elected and
qualified or until such director's earlier death, resignation or removal. At
each annual meeting of stockholders, the successors to the class of directors
whose term expires at that meeting shall be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year
following the year of their election and until their successors have been
duly elected and qualified or until any such director's earlier death,
resignation or removal.
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<PAGE> 23
9. Meetings of Stockholders. Meetings of stockholders may be
held within or without the State of Delaware, as the bylaws of the
Corporation may provide. At such time as the Corporation shall be subject to
the reporting requirements of the Securities Exchange Act of 1934, as
amended, any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting
of stockholders, and may not be effected by any consent in writing by such
stockholders, unless such consent is unanimous.
10. Corporate Records. The books of the Corporation may be kept
(subject to any provision contained in applicable statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the board of directors or in the bylaws of the Corporation.
11. Right to Amend. The Corporation reserves the right to amend,
alter, change or repeal any provision contained in this certificate of
incorporation and in any certificate amendatory hereof, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
or others hereunder or thereunder are granted subject to this reservation.
12. Indemnification. The Corporation shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware, as
amended from time to time, indemnify each person who was or is a party or is
threatened to be made a party to 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, or has agreed to
become, a director or officer of the Corporation, or is or was serving, or
has agreed to serve, at the request of the Corporation, as a director,
officer or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (including any employee
benefit plan), or by reason of any action alleged to have been taken or
omitted in such capacity, against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the person indemnified
to repay such payment if it is ultimately determined that such person is not
entitled to indemnification under this Article 12, which undertaking may be
accepted without reference to the financial ability of such person to make
such repayment.
The Corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated
by such person unless the initiation thereof was approved by the board of
directors of the Corporation.
The indemnification rights provided in this Article 12 (i) shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise and (ii) shall inure to the benefit of the heirs,
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<PAGE> 24
executors and administrators of such persons. The Corporation may, to the
extent authorized from time to time by its board of directors, grant
indemnification rights to other employees or agents of the Corporation or
other persons serving the Corporation and such rights may be equivalent to,
or greater or less than, those set forth in this Article 12.
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<PAGE> 25
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Restated Certificate of Incorporation to be signed by
its President this 28th day of October, 1997.
VISUAL NETWORKS, INC.
By: /S Scott Stouffer
------------------
Scott Stouffer, President
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<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
OF
VISUAL NETWORKS, INC.
Dated as of October 22, 1997
<PAGE> 2
AMENDED AND RESTATED BY-LAWS
Table of Contents
<TABLE>
<S> <C>
ARTICLE 1 - Stockholders........................................................
Section 1.1 Place of Meetings.........................................
Section 1.2 Annual Meeting............................................
Section 1.3 Special Meetings..........................................
Section 1.4 Notice of Meetings........................................
Section 1.5 Voting List...............................................
Section 1.6 Quorum....................................................
Section 1.7 Adjournments..............................................
Section 1.8 Voting and Proxies........................................
Section 1.9 Action at Meeting.........................................
Section 1.10 Action without Meeting....................................
ARTICLE 2 - Directors .........................................................
Section 2.1 General Powers............................................
Section 2.2 Number; Election and Qualification........................
Section 2.3 Enlargement of the Board..................................
Section 2.4 Tenure....................................................
Section 2.5 Vacancies.................................................
Section 2.6 Resignation...............................................
Section 2.7 Regular Meetings..........................................
Section 2.8 Special Meetings..........................................
Section 2.9 Notice of Special Meetings................................
Section 2.10 Meetings by Telephone Conference Calls....................
Section 2.11 Quorum....................................................
Section 2.12 Action at Meeting.........................................
Section 2.13 Action by Consent.........................................
Section 2.14 Removal...................................................
Section 2.15 Committees................................................
Section 2.16 Compensation of Directors.................................
ARTICLE 3 - Officers
Section 3.1 Enumeration...............................................
Section 3.2 Election..................................................
Section 3.3 Qualification.............................................
Section 3.4 Tenure....................................................
Section 3.5 Resignation and Removal...................................
Section 3.6 Vacancies.................................................
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 3.7 Chairman of the Board and Vice-Chairman
of the Board.............................................
Section 3.8 President.................................................
Section 3.9 Vice Presidents...........................................
Section 3.10 Secretary and Assistant Secretaries.......................
Section 3.11 Treasurer and Assistant Treasurers........................
Section 3.12 Salaries..................................................
ARTICLE 4 - Capital Stock.......................................................
Section 4.1 Issuance of Stock.........................................
Section 4.2 Certificates of Stock.....................................
Section 4.3 Transfers.................................................
Section 4.4 Lost, Stolen or Destroyed Certificates....................
Section 4.5 Record Date...............................................
ARTICLE 5 - Indemnification.....................................................
Section 5.1 Indemnification in Actions, Suits or Proceedings Other
Than Those by or in the Right of Company..................
Section 5.2 Indemnification in Actions, Suits or Proceedings by or
in the Right of the Company...............................
Section 5.3 Authorization of Indemnification..........................
Section 5.4 Advancement of Expenses...................................
ARTICLE 6 - General Provisions..................................................
Section 6.1 Fiscal Year...............................................
Section 6.2 Corporate Seal............................................
Section 6.3 Waiver of Notice..........................................
Section 6.4 Voting of Securities......................................
Section 6.5 Evidence of Authority.....................................
Section 6.6 Certificate of Incorporation..............................
Section 6.7 Transactions with Interested Parties......................
Section 6.8 Severability..............................................
Section 6.9 Pronouns..................................................
ARTICLE 7 - Amendments..........................................................
Section 7.1 By the Board of Directors.................................
Section 7.2 By the Stockholders.......................................
</TABLE>
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<PAGE> 4
AMENDED AND RESTATED
BY-LAWS
OF
VISUAL NETWORKS, INC.
ARTICLE 1 - Stockholders
1.1 Place of Meeting. All meetings of stockholders shall be held
at such place within or without the State of Delaware as may be designated
from time to time by the Board of Directors or the President or, if not so
designated, at the registered office of the Company.
1.2 Annual Meeting. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as
may properly be brought before the meeting shall be held at such date,
time and place as may be fixed by the Board of Directors or the
President. If this date shall fall upon a legal holiday at the place of
the meeting, then such meeting shall be held on the next succeeding
business day at the same hour. If no annual meeting is held in accordance
with the foregoing provisions, the Board of Directors shall cause the
meeting to be held as soon thereafter as convenient. If no annual meeting
is held in accordance with the foregoing provisions, a special meeting may
be held in lieu of the annual meting, and any action taken at that special
meeting shall have the same effect as if it had been taken at the annual
meeting, and in such case all references in these By-Laws to the annual
meeting of the stockholders shall be deemed to refer to such special
meeting.
1.3 Special Meetings. Special meeting of stockholders may be
called at any time by the President, the Board of Directors, the holders
of a majority of the outstanding shares of the Company's capital stock.
Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the
notice of meeting.
1.4 Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of stockholders, whether annual or special,
shall be given not less than 10 nor more than 60 days before the date of
the meeting to each stockholder entitled to vote at such meeting. The
notices of all meetings shall state the place, date and hour of the
meeting. The notice of a special meeting shall state, in addition, the
purpose or purposes for which the meeting is called. If mailed, notice is
given when deposited in the United States mail, postage prepaid, directed
to the stockholder at his address as it appears on the records of the
Company.
1.5 Voting List. The officer who has charge of the stock ledger
of the Company shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least 10 days prior to the meeting, at
a place within the city where the meeting is to be held. The list shall
also be
<PAGE> 5
produced and kept at the time and place of the meeting during the
whole time of the meeting, and may be inspected by any stockholder who is
present.
1.6 Quorum. Except as otherwise provided by law, the Certificate
of Incorporation or these By-Laws, the holders of a majority of the shares
of the capital stock of the Company issued and outstanding and entitled to
vote at the meeting, present in person or represented by proxy, shall
constitute a quorum for the transaction of business.
1.7 Adjournments. Any meeting of stockholders may be adjourned to
any other time and to any other place at which a meeting of stockholders
may be held under these By-Laws by the stockholders present or represented
at the meeting and entitled to vote, although less than a quorum, or, if
no stockholder is present, by any officer entitled to preside at or to act
as Secretary of such meeting. It shall not be necessary to notify any
stockholder of any adjournment of less than 30 days if the time and place
of the adjourned meeting are announced at the meeting at which adjournment
is taken, unless after the adjournment a new record date is fixed for the
adjourned meeting. At the adjourned meeting, the Company may transact any
business which might have been transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for
each share of stock entitled to vote held of record by such stockholder
and a proportionate vote for each fractional share so held, unless
otherwise provided in the Certificate of Incorporation. Each stockholder
of record entitled to vote at a meeting of stockholders, or to express
consent or dissent to corporate action in writing without a meeting, may
vote or express such consent or dissent in person or may authorize another
person or persons to vote or act for him by written proxy executed by the
stockholder or his authorized agent and delivered to the Secretary of the
Company. No such proxy shall be voted or acted upon after three years
from the date of its execution, unless the proxy expressly provides for a
longer period.
1.9 Action at Meeting. When a quorum is present at any meeting,
the holders of a majority of the stock present or represented and voting
on a matter (or if there are two or more classes of stock entitled to vote
as separate classes, then in the case of each such class, the holders of a
majority of the stock of that class present or represented and voting on a
matter) shall decide any matter to be voted upon by the stockholders at
such meeting, except when a different vote is required by express
provision of law, the Certificate of Incorporation or these By-Laws. Any
election by stockholders shall be determined by a plurality of the votes
cast by the stockholders entitled to vote at the election.
1.10 Action without Meeting. Any action required or permitted to
be taken at any annual or special meeting of stockholders of the Company
may be taken without a meeting, without prior notice and without a vote,
if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding stock having not less than the minimum number
of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote on such action were present
and voted. Prompt notice of the taking of
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<PAGE> 6
corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Upon the closing of an underwritten initial public offering of the
Company's Common Stock pursuant to the effective registration statement
under the Securities Act of 1933, as amended, (an "Underwritten Offering")
any action required or permitted to be taken at any annual or special
meeting of stockholders of the Company may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called in
accordance with the General Company Law of the State of Delaware and may
not be taken by written consent of stockholders without a meeting, unless
such consent is unanimous.
ARTICLE 2 - Directors
2.1 General Powers. The business and affairs of the Company shall
be managed by or under the direction of a Board of Directors, who may
exercise all of the powers of the Company except as otherwise provided by
law, the Certificate of Incorporation or these By-Laws. In the event of a
vacancy in the Board of Directors, the remaining directors, except as
otherwise provided by law, may exercise the powers of the full Board until
the vacancy is filled.
2.2 Number; Election and Qualification. The number of directors
which shall constitute the whole Board of Directors shall be determined by
resolution of the Board of Directors, but in no event shall be less than
one. The number of directors may be decreased at any time and from time
to time by a majority of the directors then in office, but only to
eliminate vacancies existing by reason of the death, resignation, removal
or expiration of the term of one of more directors. Unless otherwise
provided in the Certificate of Incorporation, the Board of Directors shall
divide the directors into three classes, which shall be as equal in number
as possible; and, when the number of directors is changed, shall determine
the class or classes to which the increased or decreased number of
directors shall be apportioned, which shall be done so as to maintain as
equal a number of directors in each class as possible; provided, however,
that no decrease in the number of directors shall affect the term of any
director then in office. Directors need not be stockholders of the
Company.
2.3 Enlargement of the Board. The number of directors may be
increased at any time and from time to time by a majority of the directors
then in office.
2.4 Tenure. The directors shall be elected at the annual meeting
of stockholders by such stockholders as have the right to vote on such
election. At each annual meeting of stockholders, directors elected to
succeed those whose terms are expiring shall be elected for a term of
office expiring at the annual meeting of stockholders held in the third
year following their election and until their respective successors are
elected and qualified, or until such director's earlier death, resignation
or removal.
2.5 Vacancies. Unless and until filled by the stockholders, any
vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may be filled by vote of a
majority of the directors then in office, although less than a quorum, or
by a sole remaining director. A director elected to fill a vacancy shall
be
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<PAGE> 7
elected for the unexpired term of his predecessor in office, and a
director chosen to fill a position resulting from an increase in the
number of directors shall hold office until the next annual meeting of
stockholders and until his successor is elected and qualified, or until
his earlier death, resignation or removal.
2.6 Resignation. Any director may resign by delivering his
written resignation to the Company at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the
happening of some other event.
2.7 Regular Meetings. Provided that meetings are held at least
once during each of the Company's fiscal quarters, regular meetings of the
Board of Directors may be held without notice at such time and place,
either within or without the State of Delaware, as shall be determined
from time to time by the Board of Directors; provided that any director
who is absent when such a determination is made shall be given notice of
the determination. A regular meeting of the Board of Directors may be
held without notice immediately after and at the same place as the annual
meeting of stockholders.
2.8 Special Meetings. Special meetings of the Board of Directors
may be held at any time and place, within or without the State of
Delaware, designated in a call by any member of the Board of Directors,
the President of the Company or, until the closing of an Underwritten
Offering, the holders of 51% of the Company's Series C Convertible
Preferred Stock, Series D Convertible Preferred Stock and Series E
Convertible Preferred Stock, voting as a group.
2.9 Notice of Special Meetings. Notice of any special meeting of
the Board of Directors shall be given to each director by the Secretary or
by the officer or one of the directors calling the meeting. Notice shall
be duly given to each director (i) by giving notice to such director in
person or by telephone at least 24 hours in advance of the meeting, (ii)
by sending a facsimile, telegram or telex, or delivering written notice by
hand, to his last known business or home address at least 24 hours in
advance of the meeting, or (iii) by mailing written notice to his last
known business or home address at least 72 hours in advance of the
meeting. A notice or waiver of notice of a meeting of the Board of
Directors need not specify the purposes of the meeting.
2.10 Meetings by Telephone Conference Calls. Directors or any
members of any committee designated by the directors may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment
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<PAGE> 8
by means of which all persons participating in the meeting can hear each
other, and participation by such means shall constitute presence in person
at such meeting.
2.11 Quorum. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of
Directors. In the event one or more of the directors shall be
disqualified to vote at any meeting, then the required quorum shall be
reduced by one for each such director so disqualified; provided, however,
that in no case shall less than one-third (1/3) of the number so fixed
constitute a quorum. In the absence of a quorum at any such meeting, a
majority of the directors present may adjourn the meeting from time to
time without further notice other than announcement at the meeting, until
a quorum shall be present
2.12 Action at Meeting. At any meeting of the Board of Directors
at which a quorum is present, the vote of a majority of those present
shall be sufficient to take any action, unless a different vote is
specified by law, the Certificate of Incorporation or these By-Laws.
2.13 Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee of the
Board of Directors may be taken without a meeting, if all members of the
Board or committee, as the case may be, consent to the action in writing,
and the written consents are filed with the minutes of proceedings of the
Board or committee.
2.14 Removal. Any one or more or all of the directors may be
removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors, except that the
directors elected by the holders of a particular class or series of stock
may be removed without cause only by vote of the holders of a majority of
the outstanding shares of such class or series.
2.15 Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Company. The
Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member
of a committee, the member or members of the committee present at any
meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors and subject to the provisions of the
General Company Law of the State of Delaware, shall have and may exercise
all the powers and authority of the Board of Directors in the management
of the business and affairs of the Company and may authorize the seal of
the Company to be affixed to all papers which may require it. Each such
committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors
may otherwise determine, any committee may make rules for the conduct of
its business, but unless otherwise provided by the directors or in such
rules, its business shall be conducted as nearly as possible in the same
manner as is provided in these By-Laws for the Board of Directors.
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<PAGE> 9
2.16 Compensation of Directors. Directors may be paid such
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
Company or any of its parent or subsidiary Companies in any other capacity
and receiving compensation for such service.
ARTICLE 3 - Officers
3.1 Enumeration. The officers of the Company shall consist of a
President, a Secretary, a Treasurer and such other officers with such
other titles as the Board of Directors shall determine, including a
Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice
Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be
elected annually by the Board of Directors at its first meeting following
the annual meeting of stockholders. Other officers may be appointed by
the Board of Directors at such meeting or at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or
more offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the
Certificate of Incorporation or by these By-Laws, each officer shall hold
office until his successor is elected and qualified, unless a different
term is specified in the vote choosing or appointing him, or until his
earlier death, resignation or removal.
3.5 Resignation and Removal. Any officer may resign by delivering
his written resignation to the Company at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the
happening of some other event.
Any officer may be removed at any time, with or without cause, by
vote of a majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer
who resigns or is removed shall have any right to any compensation as an
officer for any period following his resignation or removal, or any right
to damages on account of such removal, whether his compensation be by the
month or by the year or otherwise, unless such compensation is expressly
provided in a duly authorized written agreement with the Company.
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<PAGE> 10
3.6 Vacancies. The Board of Directors may fill any vacancy
occurring in any office for any reason and may, in its discretion, leave
unfilled for such period as it may determine any offices other than those
of President, Treasurer and Secretary. Each such successor shall hold
office for the unexpired term of his predecessor and until his successor
is elected and qualified, or until his earlier death, resignation or
removal.
3.7 Chairman of the Board and Vice-Chairman of the Board. The
Board of Directors may appoint a Chairman of the Board and may designate
the Chairman of the Board as Chief Executive Officer. If the Board of
Directors appoints a Chairman of the Board, he shall perform such duties
and possess such powers as are assigned to him by the Board of Directors.
If the Board of Directors appoints a Vice-Chairman of the Board, he shall,
in the absence or disability of the Chairman of the Board, perform the
duties and exercise the powers of the Chairman of the Board and shall
perform such other duties and possess such other powers as may from time
to time be vested in him by the Board of Directors.
3.8 President. Unless the Board of Directors otherwise
determines, the President shall be the Chief Operating Officer of the
Company. Unless the Board of Directors has designated the Chairman of the
Board as Chief Executive Officer, the President shall also be the Chief
Executive Officer of the Company. The President shall, subject to the
direction of the Board of Directors, have general charge and supervision
of the business of the Company. Unless otherwise provided by the Board of
Directors, he shall preside at all meetings of the stockholders, if he is
a director, at all meetings of the Board of Directors. The President
shall perform such other duties and shall have such other powers as the
Board of Directors may from time to time prescribe.
3.9 Vice Presidents. Any Vice President shall perform such duties
and possess such powers as the Board of Directors or the President may
from time to time prescribe. In the event of the absence, inability or
refusal to act of the President, the Vice President (or if there shall be
more than one, the Vice Presidents in the order determined by the Board of
Directors) shall perform the duties of the President and when so
performing shall have all the powers of and be subject to all the
restrictions upon the President. The Board of Directors may assign to any
Vice President the title of Executive Vice President, Senior Vice
President or any other title selected by the Board of Directors.
3.10 Secretary and Assistant Secretaries. The Secretary shall
perform such duties and shall have such powers as the Board of Directors
or the President may from time to time prescribe. In addition, the
Secretary shall perform such duties and have such powers as are incident
to the office of the secretary, including without limitation the duty and
power to give notices of all meetings of stockholders and special meetings
of the Board of Directors, to attend all meetings of stockholders and the
Board of Directors and keep a record of the proceedings, to maintain a
stock ledger and prepare lists of stockholders and their addresses as
required, to be custodian of corporate records and the corporate seal and
to affix and attest to the same on documents.
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<PAGE> 11
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from
time to time prescribe. In the event of the absence, inability or refusal
to act of the Secretary, the Assistant Secretary, (or if there shall be
more than one, the Assistant Secretaries in the order determined by the
Board of Directors) shall perform the duties and exercise the powers of
the Secretary.
In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting
shall designate a temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurers. The Treasurer shall
perform such duties and shall have such powers as may from time to time be
assigned to him by the Board of Directors or the President. In addition,
the Treasurer shall perform such duties and have such powers as are
incident to the office of treasurer, including without limitation the duty
and power to keep and be responsible for all funds and securities of the
Company, to deposit funds of the Company in depositories selected in
accordance with these By-Laws, to disburse such funds as ordered by the
Board of Directors, to make proper accounts of such funds, and to render
as required by the Board of Directors statements of all such transactions
and of the financial condition of the Company.
The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from
time to time prescribe. In the event of the absence, inability, or
refusal to act of the Treasurer, the Assistant Treasurer, (or if there
shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors) shall perform the duties and exercise the
powers of the Treasurer.
3.12 Salaries. Officers of the Company shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from
time to time by the Board of Directors.
ARTICLE 4 - Capital Stock
4.1 Issuance of Stock. Unless otherwise voted by the stockholders
and subject to the provisions of the Certificate of Incorporation, the
whole or any part of any unissued balance of the authorized capital stock
of the Company or the whole or any part of any unissued balance of the
authorized capital stock of the Company held in its treasury may be
issued, sold, transferred or otherwise disposed of by vote of the Board of
Directors in such manner, for such consideration and on such terms as the
Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the Company
shall be entitled to have a certificate, in such form as may be prescribed
by law and by the Board of Directors,
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<PAGE> 12
certifying the number and class of shares owned by him in the Company. Each
such certificate shall be signed by, or in the name of the Company by, the
Chairman or Vice-Chairman, if any, of the Board of Directors, or the
President or a Vice President, and the Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary of the Company. Any or all of
the signatures on the certificate may be a facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
By-Laws, applicable securities laws or any agreement among any number of
shareholders or among such holders and the Company shall have
conspicuously noted on the face or back of the certificate either the full
text of the restriction or a statement of the existence of such
restriction.
4.3 Transfers. Except as otherwise established by rules and
regulations adopted by the Board of Directors, and subject to applicable
law, shares of stock may be transferred on the books of the Company by the
surrender to the Company or its transfer agent of the certificate
representing such shares properly endorsed or accompanied by a written
assignment or power of attorney properly executed, and with such proof of
authority or the authenticity of signature as the Company or its transfer
agent may reasonably require. Except as may be otherwise required by law,
by the Certificate of Incorporation or by these By-Laws, the Company shall
be entitled to treat the record holder of stock as shown on its books as
the owner of such stock for all purposes, including the payment of
dividends and the right to vote with respect to such stock, regardless of
any transfer, pledge or other disposition of such stock until the shares
have been transferred on the books of the Company in accordance with the
requirements of these By-Laws.
4.4 Lost, Stolen or Destroyed Certificates. The Company may issue
a new certificate of stock in place of any previously issued certificate
alleged to have been lost, stolen, or destroyed, upon such terms and
conditions as the Board of Directors may prescribe, including the
presentation of reasonable evidence of such loss, theft or destruction and
the giving of such indemnity as the Board of Directors may require for the
protection of the Company or any transfer agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date
as a record date for the determination of the stockholders entitled to
notice of or to vote at any meeting of stockholders or to express consent
(or dissent) to corporate action in writing without a meeting, or entitled
to receive payment of any dividend or other distribution or allotment of
any rights in respect of any change, conversion or exchange of stock, or
for the purpose of any other lawful action. Such record date shall not be
more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action to which such record date
relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day
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<PAGE> 13
before the day on which notice is given, or, if notice is waived, at the
close of business on the day before the day on which the meeting is held.
The record date for determining stockholders entitled to express consent to
corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which the first
written consent is expressed. The record date for determining stockholders
for any other purpose shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
ARTICLE 5 - Indemnification
5.1 Indemnification in Actions, Suits or Proceedings Other Than
Those by or in the Right of the Company. (a) The Company shall indemnify
any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of the Company, or is or
was serving at the request of the Company as a director or officer of
another Company, partnership, joint venture, trust, employee benefit plan
or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or
proceeding, if such person acted in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe that such conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which such person reasonably
believed to be in or not opposed to the best interests of the Company,
and, with respect to any criminal action or proceeding, had reasonable
cause to believe that such conduct was unlawful.
(b) The Company may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was an
employee or agent of the Company, or is or was serving at the request of
the Company as an employee or agent of another Company, partnership, joint
venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding, if such person acted in good faith
and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that
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<PAGE> 14
such conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
such person reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that such conduct was unlawful.
5.2 Indemnification in Actions, Suits or Proceedings by or in the
Right of the Company. (a) The Company shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by or in the right of the
Company to procure a judgment in its favor by reason of the fact that such
person is or was a director or officer of the Company, or is or was
serving at the request of the Company as a director of officer of another
Company, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and
in a manner which such person reasonably believed to be in or not opposed
to the best interest of the Company. No such indemnification shall be
made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Company unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which such court shall
deem proper.
(b) The Company may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by or in the right of the Company to procure a
judgment in its favor by reason of the fact that such person is or was an
employee or agent of the Company, or is or was serving at the request of
the Company as an employee or agent of another Company, partnership, joint
venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or
suit if such person acted in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
Company. No such indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be
liable to the Company unless and only to the extent that the court in
which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which such court shall deem proper.
5.3 Authorization of Indemnification. Any indemnification under
this Article 5 shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances
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<PAGE> 15
because such person or persons have met the applicable standard of conduct
set forth in Sections 5.1 and 5.2 hereof. Such determination shall be made
(1) by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or (2) if there are no
such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (3) by the stockholders.
5.4 Advancement of Expenses. The Company may advance expenses
(including attorneys' fees) incurred by a director or officer in advance
of the final disposition of such action, suit or proceeding upon the
receipt of an undertaking by or on behalf of the director of officer to
repay such amount if it shall ultimately be determined that such director
or officer is not entitled to indemnification.
The Company may advance expenses (including attorneys' fees)
incurred by an employee or agent in advance of the final disposition of
such action, suit or proceeding upon such terms and conditions, if any, as
the Board of Directors deems appropriate.
ARTICLE 6 - General Provisions
6.1 Fiscal Year. Except as from time to time otherwise
designated by the Board of Directors, the fiscal year of the Company shall
begin on the first day of January in each year and end on the last day of
December in each year.
6.2 Corporate Seal. The corporate seal shall be in such form as
shall be approved by the Board of Directors.
6.3 Waiver of Notice. Whenever any notice whatsoever is required
to be given by law, by the Certificate of Incorporation or by these
By-Laws, a waiver of such notice either in writing signed by the person
entitled to such notice or such person's duly authorized attorney, or by
telegraph, cable or any other available method, whether before, at or
after the time stated in such waiver, or the appearance of such person or
persons at such meeting in person or by proxy, shall be deemed equivalent
to such notice.
6.4 Voting of Securities. Except as the directors may otherwise
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for
this Company (with or without power of substitution) at, any meeting of
stockholders or shareholders of any other Company or organization, the
securities of which may be held by this Company.
6.5 Evidence of Authority. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary as to any action taken by
the stockholders, directors, a committee or any officer or representative
of the Company shall as to all persons who rely on the certificate in good
faith be conclusive evidence of such action.
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<PAGE> 16
6.6 Certificate of Incorporation. All references in these By-Laws
to the Certificate of Incorporation shall be deemed to refer to the
Certificate of Incorporation of the Company, as amended and in effect from
time to time.
6.7 Transactions with Interested Parties. No contract or
transaction between the Company and one or more of the directors or
officers, or between the Company and any other Company, partnership,
association, another organization in which one or more of the directors or
officers are directors or officers, or have a financial interest, shall be
void or voidable solely for this reason, or solely because the director or
officer is present at or participates in the meeting of the Board of
Directors or a committee of the Board of Directors which authorizes the
contract or transaction or solely because his or their votes are counted
for such purpose, if:
(1) The material facts as to his relationship or interest
and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee,
and the Board or committee in good faith authorizes the
contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the
disinterested directors be less than a quorum;
(2) The material facts as to his relationship or interest
and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon,
and the contract or transaction is specifically approved
in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the Company as
of the time it is authorized, approved or, ratified, by
the Board of Directors, a committee of the Board of
Directors, or the stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
6.8 Severability. Any determination that any provision of these
By-Laws is for any reason inapplicable, illegal or ineffective shall not
affect or invalidate any other provision of these By-Laws.
6.9 Pronouns. All pronouns used in these By-Laws shall be deemed
to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person or persons may require.
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<PAGE> 17
ARTICLE 7 - Amendments
7.1 By the Board of Directors. These By-Laws may be altered,
amended or repealed or new by-laws may be adopted by the affirmative vote
of a majority of the directors present at any regular or special meeting
of the Board of Directors at which a quorum is present.
7.2 By the Stockholders. These By-Laws may be altered, amended or
repealed or new by-laws may be adopted by the affirmative vote of the
holders of a majority of the shares of the capital stock of the Company
issued and outstanding and entitled to vote at any regular meeting of
stockholders, or at any special meeting of stockholders, provided notice
of such alteration, amendment, repeal or adoption of new by-laws shall
have been stated in the notice of such special meeting. Notwithstanding
the foregoing, the affirmative vote of the holders of at least 66 2/3% of
the outstanding stock shall be required to alter, amend or repeal Sections
2.2 and 2.3 of Article 2.
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<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER [VISUAL LOGO] SHARES
VNWK
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
VISUAL NETOWRKS, INC.
CUSIP _____________
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
VISUAL NETWORKS, INC.
(hereinafter called the Corporation), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[VISUAL NETWORKS, INC.
DELAWARE
1994 SEAL]
/s/ SCOTT E. STOUFFER /s/ NANCY A. SPANGLER
PRESIDENT AND SECRETARY
CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BOSTON EQUISERVE
(BOSTON, MASSACHUSETTS) TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE> 2
VISUAL NETWORKS, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT Custodian
TEN ENT- as tenants by the entireties ------ ---------
JT TEN- as joint tenants with (Cust) (Minor)
right of survivorship and under Uniform Gifts to Minors Act
not as tenants in common ----------------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value received, _________________________________hereby sell, assign
and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - -----------------------------------
- - -----------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE
- -------------------------------------------------------------------------------
__________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint __________________________________Attorney to
transfer the said stock on the books of the within-named Corporation with full
power of substitution in the premises.
Dated, X
------------------------ -----------------------------------------------
X
-----------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATSOEVER.
SIGNATURE GUARANTEED:
----------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE> 1
[PIPER & MARBURY L.L.P. LETTERHEAD]
December 4, 1997
Visual Networks, Inc.
2092 Gaither Road
Rockville, MD 20850
Gentlemen:
We have assisted in the preparation and filing with the Securities
and Exchange Commission of a Registration Statement on Form S-1, file No.
333-_____ (the "Registration Statement"), relating to 4,025,000 shares of
Common Stock (including 525,000 shares to cover over-allotments, if any),
$.01 par value per share, of Visual Networks, Inc., a Delaware corporation
(the "Company"), to be offered to the public.
We have examined the Restated Certificate of Incorporation and the
Amended and Restated Bylaws of the Company, and all amendments thereto, and
have examined and relied upon the originals, or copies certified to our
satisfaction, of such records of meetings of the directors and stockholders
of the Company, documents and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinions expressed
below.
In examining the foregoing documents, we have assumed the genuineness
of all signatures and the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies, and the authenticity of the
originals of such latter documents.
Based on the foregoing, we are of the opinion that the shares of
Common Stock have been duly authorized for issuance and, after payment
therefor in advance and in accordance with the terms and provisions of the
Underwriting Agreement among the Company, Goldman, Sachs & Co., Deutsche
Morgan Grenfell Inc. and Wessels, Arnold & Henderson, L.L.C. and issuance
of the certificates therefor by the Company, will be duly and validly
issued, fully paid and nonassessable.
We hereby consent to the use of our name in the Registration
Statement and under the caption "Legal Matters" in the related Prospectus
and consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE> 1
EXHIBIT 10.1
VISUAL NETWORKS, INC.
AMENDED 1994 STOCK OPTION PLAN
1. Purpose.
The purpose of this plan (the "Plan") is to secure for Visual Networks,
Inc. (the "Company") and its shareholders the benefits arising from capital
stock ownership by key employees, consultants and directors of the Company
who are expected to contribute to the Company's future growth and success.
Except where the context otherwise requires, the term "Company" shall include
the parent and all subsidiaries of the Company as defined in Section 424(e)
and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code").
2. Type of Options and Administration.
a. Types of Options. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company and may be
either incentive stock options ("Incentive Stock Options") meeting the
requirements of Section 422 of the Code or non-statutory options which are
not intended to meet the requirements of Section 422 of the Code.
b. Administration. The Plan will be administered by the Board of
Directors of the Company, whose construction and interpretation of the terms
and provisions of the Plan shall be final and conclusive. The Board of
Directors may in its sole discretion grant options to purchase shares of the
Company's common stock (the "Common Stock") and issue shares upon exercise of
such options as provided in the Plan. The Board shall have authority,
subject to the express provisions of the Plan, to construe the respective
option agreements and the Plan, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of
the respective option agreements, which need not be identical, and to make
any other determination in the judgment of the Board of Directors necessary
or desirable for the administration of the Plan. The Board of Directors may
correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any option agreement in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and
final judge of such expediency. No director shall be liable for any action
or determination made in good faith. The Board of Directors may, to the full
extent permitted by law, delegate any or all of its powers under the Plan to
a committee (the "Committee") appointed by the Board of Directors, such
committee consisting of not less than three (3) members, and if the Committee
is so appointed all references to the Board of Directors in the Plan shall
mean and relate to such Committee.
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3. Eligibility. Options shall be granted only to persons who are, at the
time of grant, employees (including officers who are employees) or
consultants of the Company. No person shall be granted any Incentive Stock
Option under the Plan who, at the time such option is granted, owns, directly
or indirectly, stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, unless the requirements of
paragraph (b) of Section 11 are satisfied. The attribution of stock
ownership provisions of Section 424(d) of the Code, and any successor
provisions thereto, shall be applied in determining the shares of stock owned
by a person for purposes of applying the foregoing percentage limitation. A
person who has been granted an option may, if he or she is otherwise
eligible, be granted an additional option or options if the Board of
Directors shall so determine.
4. Stock Subject to Plan.
Subject to adjustment as provided in Section 15 below, the maximum
number of shares of Common Stock of the Company which may be issued and sold
under the Plan is 1,975,000 shares. Such shares may be authorized and
unissued shares or may be shares issued and thereafter acquired by the
Company. If an option granted under the Plan shall expire or terminate for
any reason without having been exercised in full, the unpurchased shares
subject to such option shall again be available for subsequent option grants
under the Plan.
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan, each recipient
of an option shall execute an option agreement in such form not inconsistent
with the Plan as may be specified by the Board of Directors. Each option
agreement shall state whether the options granted thereby are Incentive Stock
Options or non-statutory options.
6. Purchase Price.
a. General. The purchase price per share of stock deliverable upon
the exercise of an option shall be determined by the Board of Directors,
provided, however, that (i) in the case of an Incentive Stock Option, the
purchase price shall not be less than 100% of the fair market value of such
stock, as determined by the Board of Directors, at the time of grant of such
option, or less than 110% of such fair market value in the case of options
described in paragraph (b) of Section 11, and (ii) in the case of a
non-statutory option, the purchase price shall not be less than 20% of the
fair market value of such stock, as determined by the Board of Directors, at
the time of grant of such option.
b. Payment of Purchase Price. Options granted under the Plan may
provide for the payment of the purchase price by delivery of cash or a check
to the order of the Company in an amount equal to the purchase price of such
options, or, to the extent provided in the applicable option agreement, by
delivery to the Company of shares of Common Stock of the Company already
owned by the optionee having a fair market value equal in amount to the
purchase price
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of the options being exercised, or by any combination of such methods of
payment. The fair market value of any shares of the Company's Common Stock
which may be delivered upon exercise of an option shall be determined in
accordance with the terms of the applicable option agreement.
7. Option Period.
Each option and all rights thereunder shall expire on such date as the
Board of Directors shall determine, but, in the case of Incentive Stock
Options, in no event after the expiration of ten (10) years from the day on
which the option is granted (or five (5) years in the case of options
described in paragraph (b) of Section 11) and, in the case of non-statutory
options, in no event after the expiration of ten (10) years plus thirty (30)
days from the day on which the option is granted, and in either case, shall
be subject to earlier termination as provided in the Plan.
8. Exercise of Options.
Each option granted under the Plan shall be exercisable either in full
or in installments at such time or times and during such period as shall be
set forth in the agreement evidencing such option, subject to the provisions
of Section 7 above.
9. Nontransferability of Options.
No option granted under the Plan shall be assignable or transferable by
the person to whom it is granted, either voluntarily or by operation of law,
except by will or the laws of descent and distribution. During the life of
the optionee, the option shall be exercisable only by such person.
10. Effect of Termination of Employment.
No option may be exercised unless, at the time of such exercise, the
optionee is, and has been continuously since the date of grant of his or her
option, employed by the Company, except that if and to the extent the option
agreement or instrument so provides:
a. the option may be exercised up to a period of twelve (12) months
after the date the optionee ceases to be an employee of the Company (or
within such lesser period as may be specified in the applicable option
agreement) and in the case of Incentive Stock Options, up to a period of
three (3) months;
b. if the optionee dies while in the employ of the Company, or within
three (3) months after the optionee ceases to be such an employee, the option
may be exercised by the person to whom it is transferred by will or the laws
of descent and distribution within the period of one (1) year after the date
of death (or within such lesser period as may be specified in the applicable
option agreement); and
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c. if the optionee becomes disabled (within the meaning of
Section 22(e)(3) of the Code or any successor provision thereto) while in the
employ of the Company, the option may be exercised within the period of one
(1) year after the date the optionee ceases to be such an employee because of
such disability (or within such lesser period as may be specified in the
applicable option agreement); provided, however, that in no event may any
option be exercised after the expiration date of the option. For all
purposes of the Plan and any option granted hereunder, "employment" shall be
defined in accordance with the provisions of Section 1.421-7(h) of the Income
Tax Regulations (or any successor regulations).
11. Incentive Stock Options.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be specifically designated as Incentive Stock Options and shall
be subject to the following additional terms and conditions:
a. Dollar Limitation. Incentive Stock Options granted to any
employee under the Plan (and any other incentive stock option plans of the
Company) shall not, in the aggregate, become exercisable for the first time
in any one (1) calendar year for shares of Common Stock with an aggregate
fair market value (determined as of the respective date or dates of grant) of
more than $100,000.
b. 10% Shareholder. If any employee to whom an Incentive Stock
Option is to be granted under the Plan is, at the time of the grant of such
option, the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company (after taking into
account the attribution of stock ownership rules of Section 424(d) of the
Code), then the following special provisions shall be applicable to the
Incentive Stock Option granted to such individual:
(i) The purchase price per share of the Common Stock
subject to such Incentive Stock Option shall not be less than 110%
of the fair market value of one (1) share of Common Stock at the
time of grant; and
(ii) The option exercise period shall not exceed five (5)
years from the date of grant.
12. Additional Provisions.
a. Additional Option Provisions. The Board of Directors may, in its
sole discretion, include additional provisions in any option granted under
the Plan, including without limitation restrictions on transfer, repurchase
rights, commitments to pay cash bonuses, make or arrange for loans or
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board of Directors; provided that
such additional provisions shall not be inconsistent with any other term or
condition of the Plan and such additional provisions shall
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not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of
the Code.
b. Acceleration. The Board of Directors may, in its sole discretion,
accelerate the date or dates on which all or any particular option or options
granted under the Plan may be exercised.
13. General Restrictions.
a. Investment Representations. The Company may require any person to
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option
for his or her own account for investment and not with any present intention
of selling or otherwise distributing the same, and to such other effects as
the Company deems necessary or appropriate in order to comply with federal
and applicable state securities laws.
b. Compliance With Securities Laws. Each option shall be subject to
the requirement that if, at any time, counsel to the Company shall determine
that the listing, registration or qualification of the shares subject to such
option upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, is necessary as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless
such listing, registration, qualification, consent or approval shall have
been effected or obtained on conditions acceptable to the Board of
Directors. Nothing herein shall be deemed to require the Company to apply
for or to obtain such listing, registration or qualification.
14. Rights as a Shareholder.
The holder of an option shall have no rights as a shareholder with
respect to any shares covered by the option until the date of issue of a
stock certificate to him or her for such shares. No adjustment shall be made
for dividends or other rights for which the record date is prior to the date
such stock certificate is issued.
15. Adjustments.
a. General. If, as a result of a merger, consolidation, sale of all
or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other distribution with respect to the outstanding shares of
Common Stock or other securities, the outstanding shares of Common Stock are
increased or decreased, or are exchanged for a different number or kind of
shares or other securities, or additional shares or new or different shares
or other securities are distributed with respect to such shares of Common
Stock or other securities, an appropriate and proportionate adjustment may be
made in (i) the maximum number and kind of shares reserved for issuance under
the Plan, (ii) the number and
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kind of shares or other securities subject to then outstanding options
under the Plan, and (iii) the price for each share subject to any then
outstanding options under the Plan, without changing the aggregate purchase
price as to which such options remain exercisable.
b. Board Authority to Make Adjustments. Adjustments under this
Section 15 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan
on account of any such adjustments.
16. Reorganization.
a. General. In the event of a consolidation or merger in which the
Company is not the surviving corporation, or which results in the acquisition
of substantially all of the Company's outstanding Common Stock by a single
person, entity or group of persons or entities acting in concert, or in the
event of the sale or transfer of all or substantially all of the assets of
the Company, or in the event of a reorganization or liquidation of the
Company, the Board of Directors of the Company, or the board of directors of
any corporation assuming the obligations of the Company, shall, as to
outstanding options, either (i) provide that such options shall be assumed,
or equivalent options shall be substituted, by the acquiring or succeeding
corporation (or an affiliate thereof), provided that any such options
substituted for Incentive Stock Options shall meet the requirements of
Section 424(a) of the Code, (ii) upon written notice to the optionees,
provide that all unexercised options will terminate immediately prior to the
consummation of such merger, consolidation, acquisition, reorganization,
liquidation, sale or transfer unless exercised by the optionee within a
specified number of days following the date of such notice, or (iii) in the
event of a merger under the terms of which holders of the Common Stock of the
Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding
options (to the extent exercisable) and (B) the aggregate purchase price of
all such outstanding options in exchange for the termination of such
options. In any such case, the Board of Directors may, in its discretion,
advance the lapse of any waiting or installment periods and exercise dates.
b. Substitute Options. The Company may grant options under the Plan
in substitution for options held by employees of another corporation who
become employees of the Company, or a subsidiary of the Company, as the
result of a merger or consolidation of the employing corporation with the
Company or a subsidiary of the Company, or as a result of the acquisition by
the Company, or one of its subsidiaries, of property or stock of the
employing corporation. The Company may direct that substitute options be
granted on such terms and conditions as the Board of Directors considers
appropriate in the circumstances.
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17. No Special Employment Rights.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment
by the Company or interfere in any way with the right of the Company at any
time to terminate such employment or to increase or decrease the compensation
of the optionee. Whether an authorized leave of absence, or absence in
military or government service, shall constitute termination of employment
shall be determined at the time of such absence in accordance with the
provisions of Section 1.421-7(h) of the Income Tax Regulations (or any
successor regulations).
18. Other Employee Benefits.
The amount of any compensation deemed to be received by an employee as a
result of the exercise of an option or the sale of shares received upon such
exercise will not constitute compensation with respect to which any other
employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance
or salary continuation plan, except as otherwise specifically determined by
the Board of Directors.
19. Amendment of the Plan.
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect, except that without the approval of the
shareholders of the Company the Board of Directors may not (a) materially
increase the benefits accruing to individuals who participate in the Plan,
(b) increase the maximum number of shares which may be issued under the Plan
(except for adjustments specifically provided in the Plan), or (c) materially
modify the requirements as to eligibility for participation in the Plan. The
termination or any modification or amendment of the Plan shall not, without
the consent of an optionee, affect his or her rights under an option
previously granted to him or her. With the consent of the optionee affected,
the Board of Directors may amend outstanding option agreements in a manner
not inconsistent with the Plan. The Board of Directors shall have the right
to amend or modify the terms and provisions of the Plan and of any
outstanding Incentive Stock Options granted under the Plan to the extent
necessary to qualify any or all such options for such favorable federal
income tax treatment (including deferral of taxation upon exercise) as may be
afforded incentive stock options under Section 422 of the Code.
20. Withholding.
a. The Company shall have the right to deduct from payments of any
kind otherwise due to the optionee any federal, state or local taxes of any
kind required by law to be withheld with respect to any shares issued upon
exercise of options under the Plan. Subject to the prior approval of the
Company, which may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company to
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withhold shares of Common Stock otherwise issuable pursuant to the exercise
of an option or (ii) by delivering to the Company shares of Common Stock
already owned by the optionee. The shares so delivered or withheld shall
have a fair market value equal to such withholding obligation. The fair
market value of the shares used to satisfy such withholding obligation
shall be determined by the Company as of the date that the amount of tax to
be withheld is to be determined. In the event that shares of Common Stock
are being delivered to the Company pursuant to Section 20(a)(ii), an
optionee may only satisfy his or her withholding obligation with shares of
Common Stock which are not subject to any repurchase, forfeiture,
unfulfilled vesting or other similar requirements.
b. Notwithstanding the foregoing, in the case of an optionee subject
to the reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934 (the "Exchange Act"), no election to use shares for the payment of
withholding taxes shall be effective unless made in compliance with any
applicable requirements of Rule 16b-3(e) or any successor rule under such
Exchange Act.
21. Cancellation and New Grant of Options.
The Board of Directors shall have the authority to effect, at any time
and from time to time, with the consent of the affected optionees, the
cancellation of any or all outstanding options under the Plan and the grant
in substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock having an option purchase price
per share which may be lower or higher than the purchase price per share of
the canceled options.
22. Effective Date and Duration of the Plan.
a. Effective Date. The Plan shall become effective when adopted by
the Board of Directors, but no Incentive Stock Option granted under the Plan
shall become exercisable unless and until the Plan shall have been approved
by the Company's shareholders. If such shareholder approval is not obtained
within twelve (12) months after the date of the Board's adoption of the Plan,
any Incentive Stock Options previously granted under the Plan shall terminate
and no further Incentive Stock Options shall be granted. Amendments to the
Plan not requiring shareholder approval shall become effective when adopted
by the Board of Directors; amendments requiring shareholder approval (as
provided in Section 19) shall become effective when adopted by the Board of
Directors, but no Incentive Stock Option issued after the date of such
amendment shall become exercisable (to the extent that such amendment to the
Plan was required to enable the Company to grant such Incentive Stock Option
to a particular optionee) unless and until such amendment shall have been
approved by the Company's shareholders. If such shareholder approval is not
obtained within twelve (12) months of the Board's adoption of such
amendment, any Incentive Stock Options granted on or after the date of such
amendment shall terminate to the extent that such amendment to the Plan was
required to enable the Company to grant such option to a particular
optionee. Subject to this limitation, options may be
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granted under the Plan at any time after the effective date and before the
date fixed for termination of the Plan.
b. Termination. The Plan shall terminate upon the earlier of (i) the
close of business on the day next preceding the tenth anniversary of the date
of its adoption by the Board of Directors, or (ii) the date on which all
shares available for issuance under the Plan shall have been issued pursuant
to the exercise or cancellation of options granted under the Plan. If the
date of termination is determined under (i) above, then options outstanding
on such date shall continue to have force and effect in accordance with the
provisions of the instruments evidencing such options.
Adopted by the Board of Directors on December 12, 1994.
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EXHIBIT 10.2
1997 OMNIBUS STOCK PLAN
1. ESTABLISHMENT, PURPOSE AND TYPES OF AWARDS
Visual Networks, Inc. hereby establishes the VISUAL NETWORKS, INC. 1997
OMNIBUS STOCK PLAN (the "Plan"). The purpose of the Plan is to promote the
long-term growth and profitability of Visual Networks, Inc. (the
"Corporation") by (i) providing key people with incentives to improve
stockholder value and to contribute to the growth and financial success of
the Corporation, and (ii) enabling the Corporation to attract, retain and
reward the best-available persons for positions of substantial responsibility.
The Plan permits the granting of stock options (including incentive
stock options qualifying under Code section 422 and nonqualified stock
options), stock appreciation rights, restricted or unrestricted stock awards,
phantom stock, performance awards, or any combination of the foregoing.
2. DEFINITIONS
Under this Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "Affiliate" shall mean any entity, whether now or hereafter
existing, which controls, is controlled by, or is under common control with,
the Corporation (including, but not limited to, joint ventures, limited
liability companies, and partnerships). For this purpose, "control" shall
mean ownership of 50% or more of the total combined voting power or value of
all classes of stock or interests of the entity.
(b) "Award" shall mean any stock option, stock appreciation right,
stock award, phantom stock award, or performance award.
(c) "Board" shall mean the Board of Directors of the Corporation.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended,
and any regulations promulgated thereunder.
(e) "Common Stock" shall mean shares of common stock of the
Corporation, par value of one cent ($0.01) per share.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(g) "Fair Market Value" of a share of the Corporation's Common Stock
for any purpose on a particular date shall mean the last reported sale price
per share of Common Stock, regular way, on such date or, in case no such sale
takes place on such date, the average of the
<PAGE> 2
closing bid and asked prices, regular way, in either case as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on a national securities exchange
or included for quotation on the Nasdaq National Market. If, as the case
may be, the relevant date is not a trading day, the determination shall be
made as of the next preceding trading day. As used herein, the term
"trading day" shall mean a day on which public trading of securities occurs
and is reported in the principal consolidated reporting system referred to
above. In the event that the Corporation's Common Stock is not publicly
traded, the Fair Market Value shall be the price per share determined in
good faith by the Board of Directors.
(h) "Grant Agreement" shall mean a written document memorializing the
terms and conditions of an Award granted pursuant to the Plan and shall
incorporate the terms of the Plan.
(i) "Parent" shall mean a corporation, whether now or hereafter
existing, within the meaning of the definition of "parent corporation"
provided in Code section 424(e), or any successor thereto.
(j) "Rule 16b-3" shall mean Rule 16b-3 as in effect under the
Exchange Act on the effective date of the Plan, or any successor provision
prescribing conditions necessary to exempt the issuance of securities under
the Plan (and further transactions in such securities) from Section 16(b) of
the Exchange Act.
(k) "Subsidiary" and "subsidiaries" shall mean only a corporation or
corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Section 424(f) of the
Code, or any successor thereto.
3. ADMINISTRATION
(a) Administration of the Plan. The Plan shall be administered by
the Board or by such committee or committees as may be appointed by the Board
from time to time (the Board, committee or committees hereinafter referred to
as the "Administrator").
(b) Powers of the Administrator. The Administrator shall have all
the powers vested in it by the terms of the Plan, such powers to include
authority, in its sole and absolute discretion, to grant Awards under the
Plan, prescribe Grant Agreements evidencing such Awards and establish
programs for granting Awards.
The Administrator shall have full power and authority to take all other
actions necessary to carry out the purpose and intent of the Plan, including,
but not limited to, the authority to: (i) determine the eligible persons to
whom, and the time or times at which Awards shall be granted; (ii) determine
the types of Awards to be granted; (iii) determine the number of shares to be
covered by or used for reference purposes for each Award; (iv) impose such
terms, limitations, restrictions and conditions upon any such Award as the
Administrator shall deem appropriate; (v) modify, amend, extend or renew
outstanding Awards, or accept the surrender of
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outstanding Awards and substitute new Awards (provided however, that,
except as provided in the next sentence or in Section 7(d) of the Plan, any
modification that would materially adversely affect any outstanding Award
shall not be made without the consent of the holder); (vi) accelerate or
otherwise change the time in which an Award may be exercised or becomes
payable and to waive or accelerate the lapse, in whole or in part, of any
restriction or condition with respect to such Award, including, but not
limited to, any restriction or condition with respect to the vesting or
exercisability of an Award following termination of any grantee's
employment; and (vii) establish objectives and conditions, if any, for
earning Awards and determining whether Awards will be paid after the end of
a performance period.
The Administrator shall have full power and authority, in its sole and
absolute discretion, to administer and interpret the Plan and to adopt and
interpret such rules, regulations, agreements, guidelines and instruments for
the administration of the Plan and for the conduct of its business as the
Administrator deems necessary or advisable.
(c) Non-Uniform Determinations. The Administrator's determinations
under the Plan (including without limitation, determinations of the persons
to receive Awards, the form, amount and timing of such Awards, the terms and
provisions of such Awards and the Grant Agreements evidencing such Awards)
need not be uniform and may be made by the Administrator selectively among
persons who receive, or are eligible to receive, Awards under the Plan,
whether or not such persons are similarly situated.
(d) Limited Liability. To the maximum extent permitted by law, no
member of the Administrator shall be liable for any action taken or decision
made in good faith relating to the Plan or any Award thereunder.
(e) Indemnification. To the maximum extent permitted by law and by
the Corporation's charter and by-laws, the members of the Administrator shall
be indemnified by the Corporation in respect of all their activities under
the Plan.
(f) Effect of Administrator's Decision. All actions taken and
decisions and determinations made by the Administrator on all matters
relating to the Plan pursuant to the powers vested in it hereunder shall be
in the Administrator's sole and absolute discretion and shall be conclusive
and binding on all parties concerned, including the Corporation, its
stockholders, any participants in the Plan and any other employee of the
Corporation, and their respective successors in interest.
4. SHARES AVAILABLE FOR THE PLAN; MAXIMUM AWARDS
Subject to adjustments as provided in Section 7(d) of the Plan, the
shares of Common Stock that may be issued with respect to Awards granted
under the Plan shall not exceed an aggregate of 1,000,000 shares of Common
Stock. The Corporation shall reserve such number of shares for Awards under
the Plan, subject to adjustments as provided in Section 7(d) of the Plan.
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If any Award, or portion of an Award, under the Plan expires or terminates
unexercised, becomes unexercisable or is forfeited or otherwise terminated,
surrendered or canceled, or if any shares of Common Stock are surrendered
to the Corporation in connection with any Award (whether or not such
surrendered shares were acquired pursuant to any Award), the shares subject
to such Award and the surrendered shares shall thereafter be available for
further Awards under the Plan; provided, however, that any such shares that
are surrendered to the Corporation in connection with any Award or that are
otherwise forfeited after issuance shall not be available for purchase
pursuant to incentive stock options intended to qualify under Code section
422.
Subject to adjustments as provided in Section 7(d) of the Plan, the
maximum number of shares of Common Stock subject to Awards of any combination
that may be granted during any one fiscal year of the Corporation to any one
individual shall be limited to 250,000. Such per-individual limit shall not
be adjusted to effect a restoration of shares of Common Stock with respect to
which the related Award is terminated, surrendered or canceled.
5. PARTICIPATION
Participation in the Plan shall be open to all employees, officers,
directors and consultants of the Corporation, or of any Affiliate of the
Corporation, as may be selected by the Administrator from time to time.
6. AWARDS
The Administrator, in its sole discretion, establishes the terms of all
Awards granted under the Plan. Awards may be granted individually or in
tandem with other types of Awards. All Awards are subject to the terms and
conditions provided in the Grant Agreement.
(a) Stock Options. The Administrator may from time to time grant to
eligible participants Awards of incentive stock options as that term is
defined in Code section 422 or nonqualified stock options; provided, however,
that Awards of incentive stock options shall be limited to employees of the
Corporation or of any Parent or Subsidiary of the Corporation. Options
intended to qualify as incentive stock options under Code section 422 must
have an exercise price at least equal to Fair Market Value on the date of
grant, but nonqualified stock options may be granted with an exercise price
less than Fair Market Value. No stock option shall be an incentive stock
option unless so designated by the Administrator at the time of grant or in
the Grant Agreement evidencing such stock option.
(b) Stock Appreciation Rights. The Administrator may from time to
time grant to eligible participants Awards of Stock Appreciation Rights
("SAR"). An SAR entitles the grantee to receive, subject to the provisions
of the Plan and the Grant Agreement, a payment having an aggregate value
equal to the product of (i) the excess of (A) the Fair Market Value on the
exercise date of one share of Common Stock over (B) the base price per share
specified in the Grant Agreement, times (ii) the number of shares specified
by the SAR, or portion thereof, which
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is exercised. Payment by the Corporation of the amount due upon any
exercise of an SAR may be made by the delivery of Common Stock or cash, or
any combination of Common Stock and cash, as determined in the sole
discretion of the Administrator. If upon settlement of the exercise of an
SAR a grantee is to receive a portion of such payment in shares of Common
Stock, the number of shares shall be determined by dividing such portion by
the Fair Market Value of a share of Common Stock on the exercise date. No
fractional shares shall be used for such payment and the Administrator
shall determine whether cash shall be given in lieu of such fractional
shares or whether such fractional shares shall be eliminated.
(c) Stock Awards. The Administrator may from time to time grant
restricted or unrestricted stock Awards to eligible participants in such
amounts, on such terms and conditions, and for such consideration, including
no consideration or such minimum consideration as may be required by law, as
it shall determine. A stock Award may be paid in Common Stock, in cash, or
in a combination of Common Stock and cash, as determined in the sole
discretion of the Administrator.
(d) Phantom Stock. The Administrator may from time to time grant
Awards to eligible participants denominated in stock-equivalent units
("phantom stock") in such amounts and on such terms and conditions as it
shall determine. Phantom stock units granted to a participant shall be
credited to a bookkeeping reserve account solely for accounting purposes and
shall not require a segregation of any of the Corporation's assets. An Award
of phantom stock may be settled in Common Stock, in cash, or in a combination
of Common Stock and cash, as determined in the sole discretion of the
Administrator. Except as otherwise provided in the applicable Grant
Agreement, the grantee shall not have the rights of a stockholder with
respect to any shares of Common Stock represented by a phantom stock unit
solely as a result of the grant of a phantom stock unit to the grantee.
(e) Performance Awards. The Administrator may, in its discretion,
grant performance awards which become payable on account of attainment of one
or more performance goals established by the Administrator. Performance
awards may be paid by the delivery of Common Stock or cash, or any
combination of Common Stock and cash, as determined in the sole discretion of
the Administrator. Performance goals established by the Administrator may be
based on the Corporation's or an Affiliate's operating income or one or more
other business criteria selected by the Administrator that apply to an
individual or group of individuals, a business unit, or the Corporation or an
Affiliate as a whole, over such performance period as the Administrator may
designate.
7. MISCELLANEOUS
(a) Withholding of Taxes. Grantees and holders of Awards shall pay
to the Corporation, or make provision satisfactory to the Administrator for
payment of, any taxes required to be withheld in respect of Awards under the
Plan no later than the date of the event creating the tax liability. The
Corporation may, to the extent permitted by law, deduct any such
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<PAGE> 6
tax obligations from any payment of any kind otherwise due to the grantee
or holder of an Award. In the event that payment to the Corporation of such
tax obligations is made in shares of Common Stock, such shares shall be
value at Fair Market Value on the applicable date for such purposes.
(b) Loans. The Corporation may make or guarantee loans to grantees
to assist grantees in exercising Awards and satisfying any withholding tax
obligations.
(c) Transferability. Except as otherwise determined by the
Administrator, and in any event in the case of an incentive stock option or a
stock appreciation right granted with respect to an incentive stock option,
no Award granted under the Plan shall be transferable by a grantee otherwise
than by will or the laws of descent and distribution. Unless otherwise
determined by the Administrator in accord with the provisions of the
immediately preceding sentence, an Award may be exercised during the lifetime
of the grantee, only by the grantee or, during the period the grantee is
under a legal disability, by the grantee's guardian or legal representative.
(d) Adjustments; Business Combinations. In the event of changes in
the Common Stock of the Corporation by reason of any stock dividend,
split-up, recapitalization, merger, consolidation, business combination or
exchange of shares and the like, the Administrator shall, in its discretion,
make appropriate adjustments to the maximum number and kind of shares
reserved for issuance or with respect to which Awards may be granted under
the Plan as provided in Section 4 of the Plan and to the number, kind and
price of shares covered by Awards granted, and shall, in its discretion and
without the consent of holders of Awards, make any other adjustments in
Awards, including but not limited to reducing the number of shares subject to
Awards or providing or mandating alternative settlement methods such as
settlement of the Awards in cash or in shares of Common Stock or other
securities of the Corporation or of any other entity, or in any other matters
which relate to Awards as the Administrator shall, in its sole discretion,
determine to be necessary or appropriate.
Notwithstanding anything in the Plan to the contrary and without the
consent of holders of Awards, the Administrator, in its sole discretion, may
make any modifications to any Awards, including but not limited to
cancellation, forfeiture, surrender or other termination of the Awards in
whole or in part regardless of the vested status of the Award, in order to
facilitate any business combination that is authorized by the Board to comply
with requirements for treatment as a pooling of interests transaction for
accounting purposes under generally accepted accounting principles.
The Administrator is authorized to make, in its discretion and without
the consent of holders of Awards, adjustments in the terms and conditions of,
and the criteria included in, Awards in recognition of unusual or
nonrecurring events affecting the Corporation, or the financial statements of
the Corporation or any Subsidiary, or of changes in applicable laws,
regulations, or accounting principles, whenever the Administrator determines
that such
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<PAGE> 7
adjustments are appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the
Plan.
(e) Termination, Amendment and Modification of the Plan. The Board
may terminate, amend or modify the Plan or any portion thereof at any time.
(f) Non-Guarantee of Employment or Service. Nothing in the Plan or
in any Grant Agreement thereunder shall confer any right on an individual to
continue in the service of the Corporation or shall interfere in any way with
the right of the Corporation to terminate such service at any time.
(g) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Corporation and a grantee or any other
person. To the extent that any grantee or other person acquires a right to
receive payments from the Corporation pursuant to an Award, such right shall
be no greater than the right of any unsecured general creditor of the
Corporation.
(h) Governing Law. The validity, construction and effect of the
Plan, of Grant Agreements entered into pursuant to the Plan, and of any
rules, regulations, determinations or decisions made by the Administrator
relating to the Plan or such Grant Agreements, and the rights of any and all
persons having or claiming to have any interest therein or thereunder, shall
be determined exclusively in accordance with applicable federal laws and the
laws of the State of Delaware, without regard to its conflict of laws
principles.
(i) Effective Date; Termination Date. The Plan is effective as of
the date on which the Plan was adopted by the Board, subject to approval of
the stockholders within twelve months before or after such date. No Award
shall be granted under the Plan after the close of business on the day
immediately preceding the tenth anniversary of the effective date of the
Plan. Subject to other applicable provisions of the Plan, all Awards made
under the Plan prior to such termination of the Plan shall remain in effect
until such Awards have been satisfied or terminated in accordance with the
Plan and the terms of such Awards.
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EXHIBIT 10.3
VISUAL NETWORKS, INC.
1997 DIRECTORS' STOCK OPTION PLAN
1. PURPOSE.
The purpose of this 1997 Directors' Stock Option Plan (the
"Plan") of Visual Networks, Inc. (the "Company") is to promote the recruiting
and retention of highly qualified outside Directors and to strengthen the
commonality of interest between Directors and stockholders.
2. ADMINISTRATION.
The Plan will be administered by the Board of Directors of the
Company, whose construction and interpretation of the terms and provisions of
the Plan shall be final and conclusive. Grants of stock options under the Plan
and the amount and nature of the awards to be granted shall be automatic and
non-discretionary in accordance with Section 5. However, all questions of
interpretation of the Plan or of any options issued under it shall be determined
by the Board of Directors and such determination shall be final and binding upon
all persons having an interest in the Plan. No Director shall be liable for any
action or determination under the Plan made in good faith.
3. PARTICIPATION IN THE PLAN.
Directors of the Company who are not employees of the Company
or any subsidiary of the Company and who will receive any options granted
hereunder personally and directly (rather than being for the benefit of a
stockholder which is an institutional investor such as a venture capital fund)
("Eligible Directors") are eligible to receive options under the Plan.
4. STOCK SUBJECT TO THE PLAN.
(a) The maximum number of shares which may be issued under the
Plan shall be 300,000 shares of the Company's Common Stock, $0.01 par value per
share ("Common Stock"), subject to adjustment as provided in Section 9.
(b) If any outstanding option under the Plan for any reason
expires or is terminated without having been exercised in full, the shares
allocable to the unexercised portion of such option shall again become available
for grant pursuant to the Plan.
(c) All options granted under the Plan shall be non-statutory
options which are not intended to meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
<PAGE> 2
5. TERMS, CONDITIONS AND FORM OF OPTIONS.
Each option granted under the Plan shall be evidenced by a
written agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a) Option Grant Dates. Following approval of the Plan by the
holders of a majority of the shares of Common Stock present or represented at a
meeting of the Company's stockholders duly called and held in accordance with
the Company's By-Laws and applicable law, options shall be granted automatically
to all eligible Directors as follows: (i) each person who is an Eligible
Director as of the date of the Company's initial public offering of shares of
its Common Stock (the "Initial Public Offering"), and who did not receive any
other grant of options in 1997, shall be granted an option to purchase 24,000
shares of Common Stock (the "Initial Grant"), to be vested over a four year
period, on the close of business on the date of his or her initial election or
appointment to the Board of Directors or such later date as may be determined by
the Board of Directors prior to the Initial Public Offering; (ii) each person
who becomes an Eligible Director after the date of the Initial Public Offering
shall be granted an option to purchase 24,000 shares of Common Stock, to be
vested over a four year period, on the close of business on the date of his or
her initial election or appointment to the Board of Directors; and (iii)
commencing with the 1999 annual stockholders' meeting through 2002, each
Eligible Director shall be granted an additional option to purchase 6,000 shares
of Common Stock (an "Annual Grant") on the date of each annual stockholders'
meeting, including the meeting at which such Director is initially elected,
provided he or she is serving as a Director immediately after such meeting.
(b) Option Exercise Price. The option exercise price per share
for each option granted under the Plan shall equal the closing price per share
of the Company's Common Stock on the Nasdaq National Market, or the principal
exchange on which the Common Stock is then listed, on the date of grant, and if
no such price is reported on such date, such price as reported on the nearest
preceding date on which such price is reported; if any options are granted on or
prior to the date that the Company's Common Stock is listed on an exchange, the
option exercise price per share shall be the fair market value of the Common
Stock determined by the Board of Directors.
(c) Options Non-Transferable. Each option granted under the
Plan by its terms shall not be transferable by the optionee otherwise than by
will or by the laws of descent and distribution. Notwithstanding the foregoing,
options may be transferred by Directors to family members, to trusts established
for the benefit of family members or to partnerships or corporations owned by
family members.
(d) Exercise Period. Each Initial Grant shall become vested and
exercisable with respect to one-fourth of the shares upon the first anniversary
of his or her initial election or appointment to the Board of Directors and the
remaining three-fourths in 36 equal monthly installments thereafter. Each Annual
Grant shall become vested and exercisable with respect to one-twelfth of the
shares on a monthly basis, or upon the date of the annual meeting of
stockholders in such year, if earlier. Both the Initial Grant and the Annual
Grant may be exercised thereafter from time to time, in whole or in part, prior
to the earlier of (i) 60 days after an optionee ceases to
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<PAGE> 3
serve as a Director (180 days if the optionee ceased to serve because of his or
her death or permanent disability) or (ii) the seventh anniversary of the date
of grant. Each Annual Grant shall become fully vested upon the earlier of (a)
the next annual stockholders' meeting or (b) the first anniversary of the date
of grant and may be exercised thereafter from time to time, in whole or in part,
prior to the earlier of (i) 60 days after an optionee ceases to serve as a
Director (180 days if the optionee ceased to serve because of his or her death
or permanent disability) or (ii) the seventh anniversary of the date of grant.
(e) Exercise Procedure. Options may be exercised only by
written notice (in a form provided by or acceptable to the Company) to the
Company at its principal office accompanied by payment of the full consideration
for the shares as to which they are exercised.
(f) Payment of Purchase Price. Payment of the exercise price
may be made, at the election of the optionee, (i) by delivery of cash or check
to the order of the Company in an amount equal to the exercise price, (ii) by
delivery to the Company of shares of Common Stock of the Company already owned
and held by the optionee for at least twelve months and having a fair market
value equal in amount to the exercise price of the options being exercised, or
(iii) by any combination of such methods of payment. The fair market value of
any shares of Common Stock which may be delivered upon exercise of an option
shall be determined by the Company as of the date that such shares are
delivered.
6. ASSIGNMENTS.
The rights and benefits under the Plan may not be assigned
except as provided in Section 5.
7. TIME FOR GRANTING OPTIONS.
All options for shares subject to the Plan shall be granted, if
at all, not later than ten years after the date of the Board's adoption of the
Plan.
8. LIMITATION OF RIGHTS.
(a) No Right to Continue as a Director. Neither the Plan, nor
the granting of an option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company will retain a Director for any period of time.
(b) No Stockholder Rights for Options. The holder of an option
shall have no rights as a stockholder with respect to the shares covered by the
option until the date that the holder delivers all materials to exercise such
option to the Company in proper form with payment of the exercise price, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date on which such materials and payment are delivered.
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<PAGE> 4
9. ADJUSTMENT PROVISIONS.
(a) Recapitalizations. If, through or as a result of any
merger, consolidation, sale of all or substantially all of the assets of the
Company, reorganization, re capitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar transaction, (i) the
outstanding shares of Common Stock are increased or decreased or are exchanged
for a different number or kind of shares or other securities of the Company, or
(ii) additional shares or new or different shares or other securities of the
Company or other non-cash assets are distributed with respect to such shares of
Common Stock or other securities, an appropriate and proportionate adjustment
may be made in (x) the maximum number and kind of shares reserved for issuance
under the Plan, (y) the number and kind of shares or other securities subject to
then outstanding options under the Plan, and (z) the price for each share
subject to any then outstanding options under the Plan, without changing the
aggregate purchase price as to which such options remain exercisable.
(b) Mergers. In the event of a consolidation or merger or sale
of all or substantially all of the assets of the Company in which outstanding
shares of Common Stock are exchanged for securities, cash or other property of
any other corporation or business entity or in the event of a liquidation of the
Company, the Board of Directors of the Company, or the board of Directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), (ii) upon written notice to the optionees, provide that all
unexercised options will terminate immediately prior to the consummation of such
transaction unless exercised by the optionee within a specified period following
the date of such notice, and (iii) in the event of a merger under the terms of
which holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment for each share surrendered in the merger (the "Merger
Price"), make or provide for a cash payment to the optionees equal to the
difference between (a) the Merger Price times the number of shares of Common
Stock subject to such outstanding options (to the extent then exercisable at
prices not in excess of the Merger Price) and (b) the aggregate exercise price
of all such outstanding options in exchange for the termination of such options.
10. CHANGE IN CONTROL.
Notwithstanding any other provision of the Plan, in the event
of a "Change in Control of the Company" (as defined below), any outstanding
options issued pursuant to the Plan prior to the date of such Change in Control
of the Company shall vest and be exercisable as to 100% of the number of shares
that remain unvested on the date of such Change in Control of the Company. For
purposes of the Plan, a "Change in Control of the Company" shall occur or be
deemed to have occurred only if :
(a) any "person", as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, or
any corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportion as their ownership of stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or
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<PAGE> 5
indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities;
(b) during any period of two consecutive years ending during
the term of the Plan (not including any period prior to the adoption of the
Plan), individuals who at the beginning of such period constitute the Board of
Directors of the Company, and any new director (other than a director designated
by a person who has entered into an agreement with the Company to effect any
transaction described in clause (a), (c) or (d) of this Section 10) whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who were either directors at the beginning of the period or
whose election or whose nomination for election was previously so approved
(collectively, the "Disinterested Directors"), cease for any reason to
constitute a majority of the Board of Directors;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (i) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (ii) a merger or consolidation effected to
implement a re capitalization of the Company (or similar transaction) in which
no "person" (as herein above defined) acquires more than 50% of the combined
voting power of the Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or the sale of all or substantially all of the
Company's assets which, in either case, has not previously been approved by a
majority of the Disinterested Directors.
11. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to
time, modify or amend the Plan in any respect.
(b) The termination or any modification or amendment of the
Plan shall not, without the consent of an optionee, affect his or her rights
under an option previously granted to him or her. With the consent of the
optionees affected (if so required hereby), the Board of Directors may amend
outstanding option agreements in a manner not inconsistent with the Plan.
12. NOTICE.
Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the Chief Financial Officer of the
Company and shall become effective when it is received.
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<PAGE> 6
13. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) Effective Date. The Plan shall become effective when
adopted by the Board of Directors, but no option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's stockholders.
(b) Termination. Unless earlier terminated pursuant to Section
9, the Plan shall terminate upon the earlier of (i) October 22, 2008, or (ii)
the date on which all shares available for issuance under the Plan shall have
been issued pursuant to the exercise of options granted under the Plan. If the
date of termination is determined under (i) above, then options outstanding on
such date shall continue to have force and effect in accordance with the
provisions of the instruments evidencing such options.
14. GENERAL RESTRICTIONS.
(a) Investment Representations. The Company may require any
person to whom an option is granted, as a condition of exercising such option,
to give written assurances in substance and form satisfactory to the Company to
the effect that such person is acquiring the Common Stock subject to the option
for his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws.
(b) Compliance With Securities Laws. Each option shall be
subject to the requirement that if, at any time, counsel to the Company shall
determine that the listing, registration or qualification of the shares subject
to such option upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental or regulatory body, or that the
disclosure of non-public information or the satisfaction of any other condition
is necessary as a condition of, or in connection with, the issuance or purchase
of shares thereunder, such option may not be exercised, in whole or in part,
unless such listing, registration, qualification, consent or approval, or
satisfaction of such conditions is effected in a manner acceptable to the Board
of Directors. Nothing herein shall be deemed to require the Company to apply for
or to obtain such listing, registration or qualification, or to satisfy such
condition.
15. GOVERNING LAW.
The Plan and all determinations made and actions taken pursuant
hereto shall be governed by the laws of the State of Delaware.
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EXHIBIT 10.4
THIRD AMENDED AND RESTATED
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT
AMONG
CERTAIN STOCKHOLDERS OF
VISUAL NETWORKS, INC.
AND
VISUAL NETWORKS, INC.
SEPTEMBER 19, 1996
<PAGE> 2
THIRD AMENDED AND RESTATED
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT
THIS IS AN AGREEMENT dated as of September 19, 1996 by and among VISUAL
NETWORKS, INC., a corporation incorporated under the laws of the State of
Delaware (the "Company"), the stockholders of the Company set forth on
Schedule A-1 attached hereto (the "Series B Stockholders"), the stockholders
of the Company set forth on Schedule A-2 attached hereto (the "Series C
Stockholders"), the stockholders of the Company set forth on Schedule A-3
attached hereto (the "Series D Stockholders"), the stockholders of the
Company set forth on Schedule A-4 attached hereto (the "Series E
Stockholders"), the stockholders of the Company set forth on Schedule B
attached hereto (the "Series A Stockholders"), and the Founders of the
Company set forth on Schedule C attached hereto (the "Founders").
In connection with the sale of shares of Series E Preferred to the
Series E Stockholders, the Stockholders and the Company now desire to amend
and restate the Second Amended Stockholders Agreement, dated as of January
26, 1996, and sets forth the terms and conditions pursuant to which the
Stockholders and the Company will govern their future relations, as well as
to provide for certain matters relating to Stock, including without
limitation, the grant of certain registration rights to the Stockholders.
Capitalized terms are defined below.
NOW, THEREFORE, in consideration of the mutual covenants and promises
set forth herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Definitions. Certain terms have been defined on Schedules A and
C attached hereto. In addition, unless the context otherwise requires, the
following terms shall have the following meanings for purposes of this
Agreement:
(a) "Common Stock" shall mean the common stock of the Company,
par value $.01 per share.
(b) "Equity" shall mean shares of capital stock of the Company,
including without limitation, Stock, any option, warrant, convertible
security/debt or other right to acquire shares of capital stock of the
Company.
(c) "Fully Diluted Common Basis" shall mean, in respect of any
Person's Stock, the number of shares of Common Stock that would be issued and
outstanding if there were added to the number of issued and outstanding
shares of Common Stock as of the date of calculation the number of shares of
Common Stock then issuable upon the exercise or conversion of such Person's
outstanding warrants, options, convertible securities/debt and other rights
to acquire shares of Common Stock.
(d) "Management" shall mean the Founders (other than Puente)
and any other executive officers of the Company as designated by the Board of
Directors of the Company.
<PAGE> 3
(e) "Person" shall include an individual, corporation,
partnership, joint venture, association, trust, or any other entity or
organization.
(f) "Preferred Stockholders" shall mean, collectively, the
Series A Stockholders, the Series B Stockholders, the Series C Stockholders,
the Series D Stockholders, and the Series E Stockholders.
(g) "Series A Preferred" shall mean the Series A Convertible
Preferred Stock of the Company, par value $.01 per share.
(h) "Series B Preferred" shall mean the Series B Convertible
Preferred Stock of the Company, par value $.01 per share.
(i) "Series B Stock Purchase Agreement" shall mean the Stock
Purchase Agreement dated as of December 15, 1994, among the Series B
Stockholders and the Company.
(j) "Series C Preferred" shall mean the Series C Convertible
Preferred Stock of the Company, par value $.01 per share.
(k) "Series D Preferred" shall mean the Series D Convertible
Preferred Stock of the Company, par value $.01 per share.
(l) "Series E Preferred" shall mean the Series E Convertible
Preferred Stock of the Company, par value $.01 per share.
(m) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
(n) "Stock" shall mean collectively the Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred and the Common Stock.
(o) "Stockholders" shall mean collectively, the parties hereto
(other than the Company) and any other Persons who, from time to time, shall
become parties to this Agreement.
(p) "Transfer" as to any shares of Stock, shall mean to sell,
or in any other way directly or indirectly, to transfer, assign, distribute,
encumber, pledge, hypothecate or otherwise dispose of, either voluntarily or
involuntarily (or a sale, or any other direct or indirect transfer,
assignment, distribution, encumbrance or other voluntary or involuntary
disposition) (as the case may be).
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<PAGE> 4
2. Repurchase of Founder's Stock.
(a) As of December 15, 1994, 25% of the shares of Common Stock
owned by each of the Founders (as set forth on Schedule C hereto) were
"Vested." Thereafter, on the last day of each month for each of the following
thirty-six (36) months, one thirty-sixth (1/36th) of the remaining Common
Stock owned by each such Founder (other than Puente) on such date and still
owned on the date hereof shall "Vest"; provided, that, (1) in the event that
a sale of the Company (whether by merger, or asset or stock acquisition) or a
public offering pursuant to the Securities Act is consummated during such
period with the consent of the majority of the holders of the Series B,
Series C, Series D and Series E Preferred, all Common Stock owned by such
Founder on the date hereof shall, immediately upon the consummation of the
appropriate transaction, become Vested, and (2) in the event of the death of
any such Founder all Common Stock owned by such Founder at such time shall
immediately become Vested.
(b) As of the date hereof, all of the shares of Common Stock
owned by Puente shall Vest.
(c) With respect to the Founders other than Puente, in the
event any such Founder's employment with the Company shall cease as a
consequence of such Founder's (1) disability (as such term is defined in the
Founder's of Employment Agreement with the Company) (2) voluntary
resignation, (3) termination for "cause" (as such term is defined below), or
(4) termination without cause, but not in any other event, the Company may at
its election (such election to be exercised by the affirmative vote of a
majority of the Company's directors other than the directors of the Company
designated by the Series B, Series C, Series D and Series E Stockholders),
upon written notice thereof given within sixty (60) days of such cessation of
such Founder's employment with the Company and upon the tender of payment
therefor, redeem all or any portion of the Common Stock owned by such Founder
on the date hereof which has not Vested at the time of such cessation of
employment with the Company (the "Purchasable Stock"). The per share
purchase price for any Stock so redeemed pursuant to the provisions of this
Section 2 (the "Purchased Stock") shall be equal to (x) in the event such
Founder's employment is terminated as a result of voluntary resignation or
cause, the average price per share paid by such Founder shall be deemed equal
to the amounts set forth opposite each such Founder's name on Schedule C
hereto for such Common Stock and (y) in the event such Founder's employment
is terminated as a result of disability or without cause, the per share fair
market value of such Purchased Stock as determined by mutual agreement of the
Company and such Founder (or his executor or guardian, as the case may be),
or if no agreement is reached, as determined by an independent appraiser
mutually agreeable to the Company and such Founder (or his executor or
guardian, as the case may be). The cost of any such appraisal shall be borne
equally by the Company and the Founder in question (or his estate). In the
event that for any reason the Company elects not to redeem, is prohibited
from redeeming or is otherwise unable to redeem any Purchasable Stock, the
Company shall promptly provide written notice of same to
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the Series B, Series C, Series D and Series E Stockholders who shall have
the right exercisable upon written notice thereof given within sixty (60)
days of receipt of the Company's notice to purchase pro rata such
Purchasable Stock pursuant to the terms and subject to the conditions and
at the purchase price set forth in this Section 2. In the event that the
Series B, Series C, Series D and Series E Stockholders do not exercise
their right to purchase such Purchasable Stock as set forth above, in the
event the Company elected not to redeem the Purchasable Stock because it
was prohibited from redeeming or otherwise was unable to redeem (as opposed
to voluntarily choosing not to redeem) the Purchasable Stock, the Company
may thereafter redeem such shares on the earliest date(s) on which the
Company is no longer so prohibited from redeeming or unable to redeem such
shares.
(d) For the purposes of this Section 2, "cause" shall be
defined as (1) conviction in a court of law of any felony, (2) willful
violation of specific and lawful directions from the Board of Directors of
the Company, or excessive absenteeism which shall continue for a period of
thirty (30) days after written notice thereof is given of such violation or
absenteeism, (3) the commission of fraud as determined by a court of law, and
(4) a material breach of a Founder's employment agreement or such Founder's
obligations hereunder, which breach shall continue for a period of thirty
(30) days after written notice thereof is given to such Founder.
3. General Limitations on Transfer of Stock; Right of First Refusal
in Transfer by Series B, Series C, Series D or Series E Stockholder; Right of
First Refusal in Transfer by Stockholder.
(a) Each Stockholder hereby agrees that he or it (as the case
may be) shall not, at any time during the term of this Agreement, Transfer
any Stock except in accordance with the terms and subject to the conditions
set forth in this Agreement. Transfers undertaken pursuant to Section 8 of
the Series B Stock Purchase Agreement and pursuant to the applicable
redemption provisions of the Company's Certificate of Incorporation shall not
be subject to or prohibited by this Section.
(b) No Transfer shall be effective and the Company shall not,
and shall not be compelled to, recognize any transfer or record any transfer
on its books made other than in accordance with the terms of this Agreement,
or issue any certificate representing any Stock to any Person who has
received such Stock other than in accordance with the terms of this Agreement
or to any Person who has not delivered a written undertaking to be bound by
and comply with all applicable provisions of this Agreement.
(c) (i) In the event a Series B, Series C, Series D or Series
E Stockholder desires to Transfer all or any portion of his Stock now owned or
hereafter acquired by him, such Series B, Series C ,Series D or Series E
Stockholder (hereinafter called the "Preferred Transferor") shall first obtain
a bona fide written offer which he desires to accept (hereinafter
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called the "Preferred Offer") to purchase all (and not less than all) of the
Stock which such shareholder desires to transfer for a fixed cash price (which
may be payable over time) (the "Preferred Offered Stock"). The Preferred Offer
shall set forth its date, the proposed price per share of Stock represented by
the Preferred Offered Stock, and the other terms and conditions upon which the
purchase is proposed to be made, as well as the name and address of the
Preferred Prospective Purchaser. The term "Preferred Prospective Purchaser" as
used herein shall mean the prospective record owner or owners of the Preferred
Offered Stock and all other persons and entities proposed to have a beneficial
interest in the Preferred Offered Stock. The Preferred shall transmit copies of
the Preferred Offer to the Company and the Series B, Series C, Series D and
Series E Stockholders within seven (7) days after his receipt of the Preferred
Offer. Transmittal of the Preferred Offer to the Company and the Series B,
Series C, Series D and Series E Stockholders by the Preferred Transferor shall
constitute offers (subject to acceptance in the order set forth below) by the
Preferred Transferor to sell all of the Preferred Offered Stock to the Series
B, Series C, Series D and Series E Stockholders (the "Preferred Offerees") at
the price and upon the terms set forth in the Preferred Offer; provided that,
in the event that any such Preferred Offer would require payment of
consideration other than cash, Preferred Offerees shall be entitled to pay for
each share of Preferred Offered Stock, in lieu of such other consideration, in
cash in an amount to be mutually agreed upon by the Transferor and the
accepting Preferred Offerees in good faith, or if no agreement can be reached,
an amount determined in good faith by the Board of Directors of the Company to
constitute the fair value of such consideration.
(ii) For a period of fifteen (15) days after the
submission of the Preferred Offer to the Company and the Preferred Offerees,
the Preferred Offerees shall collectively have the exclusive option,
exercisable by written notice to the Preferred Transferor with a copy to each
of the Preferred Offerees, to accept the Preferred Transferor's offer
proportionately based on the amount of Stock owned by each of them. If and
to the extent that one or more of the Preferred offerees does not exercise
his right to purchase such Preferred Offered Stock within the applicable
fifteen (15) day period, the other Preferred offerees may elect, by written
notice to the Preferred Transferor within an additional period of five (5)
days, to purchase the Preferred Offered Stock not being purchased by the
other Preferred Offerees.
(iii) If the Preferred Offerees do not exercise their
rights to purchase all of the Preferred Offered Stock within the period set
forth in this Section 3(c), the rights shall terminate; provided, however,
that if the proposed Transfer to the Preferred Prospective Purchaser is not
consummated in accordance with the terms and conditions of the Preferred
Offer, the Preferred Transferor shall not be entitled to Transfer the
Preferred Offered Stock unless it is first reoffered to the Preferred
Offerees on the different terms and conditions in accordance with the
foregoing procedures of this Section 3(c). Moreover, if the Preferred
Offered Stock is not Transferred to the Preferred Prospective Purchaser
pursuant to the terms and conditions of the Preferred Offer within a period
of ninety (90) days after a copy of the Preferred Offer is received by the
Company and the Preferred Offerees, the Preferred Offered Stock may
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not be Transferred pursuant to this Section 3(c) until it has been
reoffered to the Preferred Offerees in accordance with the foregoing
procedures of this Section 3(c).
(iv) Settlement for the purchase of Preferred Offered
Stock by the Preferred Offerees pursuant to this Section 3(c) shall be made
within thirty (30) days following the date of exercise of the last option
exercised. All settlements for the purchase and sale of Preferred Offered
Stock shall, unless otherwise agreed to by the purchaser(s) and Preferred
Transferor, be held at the principal offices of the Company during regular
business hours. The precise date and hour of settlement shall be fixed by
the purchaser(s) (within the time limits allowed by the provisions of this
Agreement) by notice in writing to the Preferred Transferor given at least
five (5) days in advance of the settlement date specified. At settlement,
the Preferred Offered Stock being sold shall be delivered by the Preferred
Transferor to the purchaser(s), duly endorsed for transfer or with executed
stock powers attached, with any necessary documentary and transfer tax stamps
affixed by the Preferred Transferor. In the event of the purchase of
Preferred Offered Stock by one or more Preferred Offerees, the Preferred
Offeree(s) shall pay the purchase price either (i) in cash or by check at
settlement or (ii) pursuant to the payment terms set forth in the Preferred
Offer.
(v) This Section 3(c) shall not apply to a Transfer of
Stock by a Series B, Series C, Series D or Series E Stockholder to such
Series B, Series C, Series D or Series E Stockholder's spouse, parents,
siblings or lineal descendants of any such persons or to a trust for the
benefit of any of the foregoing (including trusts for such Series B, Series
C, Series D or Series E Stockholder's benefit) or to any of its affiliates,
including any general or limited partner of any such stockholder which is a
limited partnership; provided, that any such transferee shall agree in
writing to be bound by, and to comply with, all applicable provisions of this
Agreement and shall be deemed to be a Series B, Series C, Series D or Series
E Stockholder for purposes of this Agreement; provided, further, that any
shares so transferred shall be held by the transferee Series B, Series C,
Series D or Series E Stockholder subject to the rights, obligations,
sale/repurchase rights and other burdens which would be imposed on the
transferor Series B, Series C, Series D or Series E Stockholder with respect
to such shares as if he had not transferred the shares.
(vi) Notwithstanding any provision herein or elsewhere to
the contrary, the rights of the Series B, Series C, Series D and Series E
Stockholders set forth in this Section 3(c) shall be waivable, as to all
Series B, Series C, Series D and Series E Stockholders, by the affirmative
vote of eighty five percent (85%) of the Stock held by the Series B, Series
C, Series D and Series E Stockholders on a Fully Diluted Common Basis.
(d) (i) In the event a Stockholder other than a Series B,
Series C, Series D or Series E Stockholder desires to Transfer all or any
portion of his Stock now owned or hereafter acquired by him, such Stockholder
(hereinafter called the "Transferor") shall first obtain a bona
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<PAGE> 8
fide written offer which he desires to accept (hereinafter called the
"Offer") to purchase all (and not less than all) of the Stock which such
stockholder desires to transfer for a fixed cash price (which may be
payable over time) (the "Offered Stock"). The Offer shall set forth its
date, the proposed price per share of Stock represented by the Offered
Stock, and the other terms and conditions upon which the purchase is
proposed to be made, as well as the name and address of the prospective
purchaser. The term "prospective purchaser" as used herein shall mean the
prospective record owner or owners of the Offered Stock and all other
persons and entities proposed to have a beneficial interest in the Offered
Stock. The Transferor shall transmit copies of the Offer to the Company
within seven (7) days after his receipt of the Offer. The Company shall
transmit copies of the Offer to the Founders and the Series B, Series C,
Series D and Series E Stockholders within five (5) days after its receipt
of the copy from the Transferor. Transmittal of the Offer to the Company by
the Transferor shall constitute offers (subject to acceptance in the order
set forth below) by the Transferor to sell all of the Offered Stock to the
Founders and the Series B, Series C, Series D and Series E Stockholders
(the "Offerees") at the price and upon the terms set forth in the Offer;
provided that, in the event that any such Offer would require payment of
consideration other than cash, Offerees shall be entitled to pay for each
share of Offered Stock, in lieu of such other consideration, in cash in an
amount to be mutually agreed upon by the Transferor and the accepting
Offerees in good faith, or if no agreement can be reached, an amount
determined in good faith by the Board of Directors of the Company to
constitute the fair value of such consideration.
(ii) For a period of fifteen (15) days after the delivery
of the Offer by the Company to the Offerees, the Offerees shall collectively
have the exclusive option, exercisable by written notice to the Transferor
with a copy to each of the other Stockholders, to accept the Transferor's
offer proportionately based on the amount of Stock owned by each of them. If
and to the extent that one or more of the Offerees does not exercise his
right to purchase such Offered Stock within the applicable fifteen (15) day
period, the other Offerees may elect, by written notice to the Transferor
within an additional period of five (5) days, to purchase the Offered Stock
not being purchased by the other Offerees.
(iii) If the Offerees do not exercise their rights to
purchase all of the Offered Stock within the period set forth in this Section
3(d), the rights shall terminate; provided, however, that if the proposed
Transfer to the prospective purchaser is not consummated in accordance with
the terms and conditions of the Offer, the Transferor shall not be entitled
to Transfer the Offered Stock unless it is first reoffered to the Offerees on
the different terms and conditions in accordance with the foregoing
procedures of this Section 3(d). Moreover, if the Offered Stock is not
Transferred to the prospective purchaser pursuant to the terms and conditions
of the Offer within a period of ninety (90) days after a copy of the Offer is
delivered by the Company to the Offerees, the Offered Stock may not be
Transferred pursuant to this Section 3(d) until it has been reoffered to the
Offerees in accordance with the foregoing procedures of this Section 3(d).
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<PAGE> 9
(iv) Settlement for the purchase of Offered Stock by the
Offerees pursuant to this Section 3(d) shall be made within thirty (30) days
following the date of exercise of the last option exercised. All settlements
for the purchase and sale of Offered Stock shall, unless otherwise agreed to
by the purchaser(s) and Transferor, be held at the principal offices of the
Company during regular business hours. The precise date and hour of
settlement shall be fixed by the purchaser(s) (within the time limits allowed
by the provisions of this Agreement) by notice in writing to the Transferor
given at least five (5) days in advance of the settlement date specified. At
settlement, the Offered Stock being sold shall be delivered by the Transferor
to the purchasers), duly endorsed for transfer or with executed stock powers
attached, with any necessary documentary and transfer tax stamps affixed by
the Transferor. In the event of the purchase of Offered Stock by one or more
Offeree, the Offeree(s) shall pay the purchase price either (i) in cash or by
check at settlement or (ii) pursuant to the payment terms set forth in the
Offer.
(v) This Section 3(d) shall not apply to a Transfer of
Stock by a Stockholder to such Stockholder's spouse, parents, siblings or
lineal descendants of such Stockholder or any such persons or to a trust for
the benefit of any of the foregoing (including trusts for such Stockholder's
benefit); provided, that any such transferee shall agree in writing to be
bound by, and to comply with, all applicable provisions of this Agreement and
shall be deemed to be a Stockholder for purposes of this Agreement; provided,
further, that any shares so transferred shall be held by the transferee
Stockholder subject to the rights, obligations, sale/repurchase rights and
other burdens which would be imposed on the transferor Stockholder with
respect to such shares as if he had not transferred the shares.
(vi) Notwithstanding any provision herein or elsewhere to
the contrary, the rights of the Stockholders to purchase Stock set forth in
this Section 3(d) shall be waivable, as to all Stockholders, by the
affirmative vote of eighty five percent (85%) of the Stock held by the
Stockholders on a Fully Diluted Common Basis.
4. Additional Stock to Stockholders.
(a) In the event additional Stock (including shares issuable on
exercise of options granted to employees of the Company pursuant to an
employee stock plan approved by the Board of Directors of the Company) is
issued by the Company to a Stockholder at any time during the term of this
Agreement, either directly or upon the exercise or exchange of securities of
the Company exercisable for or exchangeable into Stock, such additional Stock
shall, as a condition to such issuance, become subject to the terms and
provisions of this Agreement.
(b) The Company shall not issue any shares of Stock (excluding
shares issuable on exercise of options granted to employees of the Company
pursuant to an employee
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stock plan approved by the Board of Directors of the Company) to any person
unless (i) after such issuance the person to whom such shares of Stock are
issued will not own more than one percent (1%) of the Company's Common
Stock (on a Fully Diluted Common Basis), or (ii) the person to whom such
shares of Stock are issued agrees in writing simultaneously therewith to
become a party hereto and to be bound by and to comply with all applicable
terms and provisions of this Agreement.
5. Right of First Refusal in Subsequent Equity Offerings. If at any
time the Company wishes to issue Equity to any Person or Persons, the Company
shall follow the procedures set forth below:
(a) The Company shall promptly deliver a notice of intention to
sell (the "Company's Notice of Intention to Transfer") to each Series B,
Series C, Series D and Series E Stockholder and Management indicating the
amount of Equity and setting forth a description of the Equity to be sold,
the proposed purchase price and terms of sale. Upon receipt of the Company's
Notice of Intention to Transfer, each Series B, Series C, Series D and Series
E Stockholder and Management shall have the right to elect to purchase, at
the price and on the terms stated in the Company's Notice of Intention to
Transfer, an amount of Equity equal to such Stockholder's aggregate
proportionate ownership of the Stock held by all Stockholders multiplied by
the amount of Equity to be issued. Such election is to be made by the
electing Stockholder by written notice to the Company within thirty (30) days
after receipt by such Stockholder of the Company's Notice of Intention to
Transfer (the "Acceptance Period for Equity"). Each Stockholder shall also
have the option, exercisable by so specifying in such written notice, to
purchase, on a pro rata basis similar to that described above, any remaining
Equity not purchased by other Stockholders, in which case the Stockholders
exercising such further option shall be deemed to have elected to purchase
such remaining Equity on such pro rata basis. The Company shall promptly
notify each electing Stockholder in writing of each notice of election
received from other Stockholders pursuant to this Section 5.
(b) If effective acceptances shall not be received pursuant to
paragraph (a) above in respect of all the Equity, then the Company may, at
its election, during a period of one hundred twenty (120) days following the
expiration of the Acceptance Period for Equity, sell and issue the remaining
Equity to another Person or Persons at a price and upon terms not more
favorable to such person(s) than those stated in the Company's Notice of
Intention to Transfer; provided, however, that failure by a Stockholder to
exercise its option to purchase with respect to one offering, sale and
issuance of Equity shall not affect its option to purchase Equity in any
subsequent offering, sale and purchase. In the event the Company has not
sold the Equity, or entered into an agreement to sell the Equity, within such
one hundred twenty (120) day period, the Company shall not thereafter issue
or sell any Equity without first offering it to each Series B, Series C,
Series D and Series E Stockholder and Management in the manner provided in
paragraph (a) above.
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(c) If a Stockholder gives the Company notice, pursuant to the
provisions of this Section 5, that such Stockholder desires to purchase any
of the Equity, payment therefor shall be by check or wire transfer, against
delivery of the securities at the executive offices of the Company within ten
(10) days after giving the Company such notice, or, if later, the closing
date for the sale of such Equity to others. In the event that any such
proposed issuance is for a consideration other than cash, Stockholders will
be entitled to pay for each share or other unit in such other consideration
or, in lieu of such other consideration, in cash in an amount determined in
good faith by the Board of Directors of the Company to constitute the fair
value of such consideration other than cash to be paid per share or other
unit.
(d) The right of first refusal contained in this Section 5
shall not apply to (i) the issuance by the Company of an aggregate number of
shares of Common Stock or options to acquire Common Stock equal to not more
than 2,500,000 shares of Common Stock exclusively to employees, officers,
directors or consultants of the Company under stock option plans or other
purchase arrangements approved by the Company's Board of Directors, (ii) the
issuance by the Company of shares of Common Stock upon conversion of Series
A, Series B, Series C, Series D and Series E Preferred, (iii) the issuance by
the Company of Equity upon conversion of any Convertible Equity issued by the
Company after compliance with the provisions of this Section 5, (iv) the
issuance by the Company of shares of Stock in connection with an acquisition
of a business, the acquisition of which and the issuance of such Stock of
which has been approved by the Series B, Series C, Series D and Series E
Stockholders holding two-thirds of the outstanding shares of Series B, Series
C, Series D and Series E Preferred (voting together as a class) for the
express purpose of determining the applicability of this clause (iv) of this
Section, or (v) the issuance by the Company of Stock in an offering
registered under the Securities Act.
(e) Notwithstanding any provision herein or elsewhere to the
contrary, the rights of the Stockholders set forth in this Section 5 shall be
waivable (1) as to all Stockholders other than Series C, Series D and Series
E Stockholders, by the affirmative vote of holders of at least sixty-six and
two thirds percent (66-2/3%) of the Stock other than Series C, Series D and
Series E Preferred held by the Stockholders, on a Fully Diluted Common Basis,
and (2) as to the Series C, Series D and Series E Stockholders, by the
affirmative vote of holders of at least sixty-six and two thirds percent
(66-2/3%) of the Series C, Series D and Series E Preferred, together as one
class.
6. Right of Co-Sale.
(a) Neither of Stouffer or Troutman (each a "Co-Sale Founder")
shall sell, assign or transfer, in any one or more transactions, any shares
of Stock now or hereafter held by him, other than as provided in this Section
6, until (a) he first complies with Section 3(d), relating to a right of
first refusal inuring to the benefit of the Series B, Series C, Series D and
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Series E Stockholders, and (b) thereafter, he notifies each Series B, Series
C, Series D and Series E Stockholder of the proposed transaction and gives
such Series B, Series C, Series D and Series E Stockholders the opportunity
to include in the sale to the proposed transferee, shares of Stock. The
aggregate number of shares of Stock that the Series B, Series C, Series D and
Series E Stockholders shall be entitled to have included in such sale will be
that number that upon conversion into Common Stock at the applicable
conversion rate would bear the same proportion to the total number of shares
of Stock proposed to be sold by such Co-Sale Founder as the total number of
shares of Stock held by the Series B, Series C, Series D and Series E
Stockholders bears to the aggregate number of shares of the Company's Common
Stock (calculated on a Fully Diluted Common Basis), and each Series B, Series
C, Series D and Series E Stockholder shall be entitled to participate in such
number pro rata on the basis of the number of shares of Stock then held by
him or it. Each Series B, Series C, Series D and Series E Stockholder shall
have a period of fifteen (15) days (the "Offer Period"), from the date notice
of such opportunity is received to give such Co-Sale Founder written notice
of his or its desire to participate in such sale, stating in such notice the
number of shares desired to be sold; and if no such notice is given within
the Offer Period, such Series B, Series C, Series D or Series E Stockholder
shall be deemed to have chosen not to participate. In the event that any
payments (other than the amounts to be paid to a Co-Sale Founder which are
equal to the fair market value of the consideration given by such Co-Sale
Founder pursuant to a non-compete or consulting agreement entered into in
connection with the transaction contemplated by this Section 6) or
distributions are due and owing to one or more Co-Sale Founders in an amount
disproportionate to such Co-Sale Founder's or Co-Sale Founders' percentage
ownership interest(s) in the Company, or other arrangements whereby any
payments are to be received by one or more Co-Sale Founders rather than by
the Stockholders on a pro rata basis, then the Co-Sale Founder(s) receiving
such disproportionate payments shall be obligated to pay over a portion of
such payments received by him (them) to the other Stockholders not receiving
such disproportionate payments, so that the payments received by all such
Stockholders shall be equivalent on a pro rata basis.
(b) Notwithstanding the foregoing, the provisions of Section
6(a) shall be inapplicable to the following transactions:
(i) A transfer of any or all of a Co-Sale Founder's
shares, either during the Co-Sale Founder's lifetime or on death by will or
intestacy, to a member of the Co-Sale Founder's immediate family or to a
trust, the beneficiaries of which are exclusively one or more of the group of
persons consisting of the Co-Sale Founder and members of the Co-Sale
Founder's immediate family. "Immediate family" as used herein shall mean
spouse, lineal descendant, father, mother, brother or sister of the Co-Sale
Founder making such transfer;
(ii) The sale, assignment or transfer by way of bequest or
inheritance upon death of the Co-Sale Founder;
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(iii) The sale of a Co-Sale Founder's shares by a Co-Sale
Founder's estate solely for purposes of paying estate taxes;
(iv) The sale, assignment or transfer to the Company
pursuant to the right of first refusal provisions set forth in this
Agreement, as they may from time to time be amended; or
(v) Following the consummation of an underwritten public
offering pursuant to the Securities Act, sales pursuant to Rule 144 under the
Securities Act;
provided, that, in the case of a transaction described in clauses (i) and
(ii) above, any transferee of a Co-Sale Founder shall agree to be bound by
this Agreement and shall so signify in writing.
7. Management Provisions.
(a) The Board of Directors. The Board of Directors of the
Company shall consist of six (6) persons, one (1) of whom shall be designated
solely by the vote of a majority of the shares of Series B Preferred, one (1)
of whom shall be designated solely by the vote of a majority of the shares of
Series C Preferred, one (1) of whom shall be designated solely by the vote of
a majority of the shares of Series D Preferred, one (1) of whom shall be
designated solely by the vote of a majority of the shares of Series E
Preferred, and two (2) of whom shall be elected by the holders of Common
Stock and Series A Preferred voting together as a class, provided that one
such director shall be the Chief Executive Officer of the Company and the
other such director shall be approved by the holders of a majority of the
Series B, Series C, Series D and Series E Preferred voting together as a
class. The Company shall not expand the size of the Board of Directors of
the Company to add outside industry representatives, representatives from
other financing sources, or otherwise, without the approval of the holders of
at least 66-2/3% of the Series B, Series C, Series D and Series E Preferred
(voting together as a class) and the consent (such consent not to be
unreasonably withheld) of the Board of Directors as to both the expansion of
the size of the Board of Directors, and the appointment of the particular
director to fill the vacancy in question.
So long as any Series B, Series C, Series D or Series E
Stockholder owns Stock of the Company, such Series B, Series C, Series D or
Series E Stockholder shall have the right to appoint one (1) non-voting
observer to the Board of Directors, which observer may participate in any and
all discussions and deliberations, but would not be permitted to vote. No
transferee of Series B, Series C, Series D or Series E Preferred shall have
such right unless such transferee holds at least 5% of the Stock of the
Company on a Fully Diluted Basis. In addition, until such time as Puente
holds less than 25,000 shares of Series A Preferred (as adjusted for stock
splits and similar events), Puente may participate in any and all discussions
and deliberations of the Board of Directors, but would not be permitted to
vote.
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(b) Committees of Directors. The Board of Directors may
establish various committees of the Board of Directors in addition to the
Compensation Committee and Audit Committee (each as defined below). Each
committee shall consist of three (3) members. At least one of the directors
designated by the Series B, Series C, Series D or Series E Stockholders shall
be appointed to serve on each and every committee of the Board of Directors.
In addition, each Series B, Series C, Series D or Series E Stockholder shall
have the right to appoint one (1) non-voting observer to each and every
committee of the Board of Directors, which observer may participate in any
and all discussions and deliberations of any such committee, but would not be
permitted to vote. No transferee of Series B, Series C, Series D or Series E
Preferred shall have such right unless such transferee holds at least 5% of
the Stock of the Company on a Fully Diluted Basis.
(c) Compensation and Audit Committees; Expense Reimbursement.
(i) The Compensation Committee. A compensation committee
of the Board of Directors (the "Compensation Committee"), consisting of three
(3) members (including one (1) to be designated by a majority of the members
of the Board of Directors representing the Series B, Series C, Series D and
Series E Stockholders, and the other two (2) to be elected by the whole Board
of Directors, but not including the non-voting observer to be appointed by
the Series B, Series C, Series D and Series E Stockholders pursuant to
subsection (b) above), shall be established in order to (i) advise the Board
on the granting of options to purchase shares of Common Stock of the Company
and (ii) establish and review the salary, bonuses, employee benefits and
other employee compensation of any nature for Management and any other
employee of the Company whose annual compensation exceeds $100,000 per year,
as well as any increases thereof, provided that the approval of at least one
member of the Compensation Committee who is a representative of the Series B,
Series C, Series D and Series E Stockholders shall be required for any
increase in the base salary of or bonuses or options granted to any employee
whose annual compensation exceeds $100,000.
(ii) The Audit and Finance Committee. The Company's Audit
and Finance Committee of the Board of Directors (the "Audit Committee") shall
comprise three (3) members (including one (1) to be designated by a majority
of the members of the Board of Directors representing the Series B, Series C,
Series D and Series E Stockholders, and the other two (2) to be elected by
the whole Board of Directors, but not including the non-voting observer to be
appointed by the Series B, Series C, Series D and Series E Stockholders
pursuant to subsection (b) above), and shall have at least the following
duties: make recommendations to the Board as a whole on the selection of
outside auditors, meet with the Company's auditors to review audit procedures
and results, consider any matters arising from an audit to be brought to the
attention of the Board as a whole, and address such other matters as are set
forth in the Bylaws or as are normally within the purview of a corporation's
audit committee.
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<PAGE> 15
(iii) Reimbursement of Director's Expenses. From and after
the date that the Company shall have two (2) consecutive quarters in which it
reaches positive cash flow, the Company shall reimburse each member of the
Board of Directors for such director's reasonable expenses incurred in
attending any meetings of the Board of Directors of the Company, or such
expenses incurred in connection with any other activities of any such
director which are required or requested by the Company to be performed on
behalf of the Company (including, for example and without limitation, trade
shows, seminars, or other meetings sponsored by the Company).
(iv) Vesting of Future Options. In the event the Board of
Directors determines that it will grant stock options, any such options shall
vest ratably over a five (5) year period from the date of issuance, unless
the Compensation Committee unanimously approves a different vesting schedule.
(d) Stockholder Election of Directors. Each Stockholder agrees
to vote, in person or by proxy, at any annual or special meeting of
stockholders called for such purpose or by stockholders' consent provided in
lieu thereof, the shares of Stock owned of record or beneficially by him and
entitled to vote thereon, to nominate for, and elect to the Board of
Directors of the Company, the persons designated pursuant to the provisions
of paragraph (a) above.
(e) Responsibilities of Board of Directors. The day-to-day
management and operating decisions of the Company will be made by the
Company's executive officers acting under the general directives established
by, and subject to the overall control of, the Board of Directors. The Board
of Directors will retain primary responsibility for establishing or approving
the business strategy of the Company, and such other matters as are vested by
law in the Board of Directors.
(f) Frequency of Meetings. The Company shall call, and shall
use its best efforts to hold, regular meetings of the Board of Directors of
the Company not less often than quarterly.
(g) Negative Covenants. Without the approval of holders of at
least 66-2/3% of the Series B, Series C, Series D and Series E Preferred,
voting together as one class, the Company shall not:
(i) Distribute, nor shall the Board of Directors of the
Company declare, any dividends on any Common Stock, nor shall the Company
purchase any Stock from the Founders, Management, or any other holder of the
capital stock of the Company (except as required by this Agreement, by
Sections 8 and 9 of the Series B Stock Purchase Agreement, and
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<PAGE> 16
by provisions of the Certificate of Incorporation which provide for the
redemption or repurchase of Series B, Series C, Series D and Series E
Preferred).
(ii) Amend its Certificate of Incorporation or Bylaws,
except as may be necessary to carry out this Agreement or as required by law.
(iii) Merge or consolidate the Company with any other
corporation or allow it to acquire or agree to acquire or be acquired by any
corporation, association, partnership, joint venture, or other entity.
(iv) Sell, transfer, liquidate or otherwise dispose of all
or substantially all of the assets of the Company.
(v) Purchase, acquire or otherwise obtain, any securities
of any Person, or any of the assets of any Person (other than in the ordinary
course of business), or establish or maintain a subsidiary.
(vi) Issue Equity to any Person or Persons.
(vii) Create, incur, assume, or guarantee any indebtedness
for money borrowed, or increase the amount of any indebtedness outstanding
under any loan agreement, mortgage, or other borrowing arrangement in
existence on the date hereof; provided that the Company may do any of the
foregoing so long as the Company's indebtedness is not increased by more than
$50,000 in the aggregate, in any fiscal year.
8. Accounts, Reports and Notices. The Company will maintain a
system of accounts in accordance with generally accepted accounting
principles consistently applied, will keep full and complete financial
records and will furnish to the Series B, Series C, Series D and Series E
Stockholders the following reports:
(a) Within ninety (90) days after the end of each fiscal year,
a copy of the balance sheet of the Company as at the end of such year,
together with statements of income, stockholder's equity and cash flows of
the Company for such year, and an unqualified audit, together with a copy of
the auditors letter to management from a "Big Six" accounting firm (or its
equivalent, such equivalent to be approved by a majority of the members of
the Board of Directors representing the Series B, Series C, Series D and
Series E Stockholders). The Company shall provide copies of such documents
to the Series A Stockholders at the same time it delivers such documents to
the Series B, Series C, Series D and Series E Stockholders.
(b) Within twenty (20) days after the end of each month, a copy
of the balance sheet of the Company as at the end of such month and
statements of income and cash flow of the
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<PAGE> 17
Company for such month and for the portion of the fiscal year ending on the
last day of such month together with a comparison between such year-to-date
figures and the projections for such periods as set forth in the Budget (as
defined below).
(c) Within ten (10) days after an executive officer of the
Company has knowledge of the occurrence of a default under this Agreement or
any material agreement of the Company, including without limitation any loan
or financing agreement, or the occurrence of any event which may (with or
without the passage of time) have a material adverse effect on the Company's
business or its prospects, a statement from the Chief Executive Officer of
the Company describing such occurrence and management's anticipated response.
(d) Copies of all financial statements and reports which the
Company shall file with a governmental agency.
(e) Copies of all financial statements, reports and notices
sent to the Company's lenders.
(f) Such other financial and other information as any of the
Series B, Series C, Series D or Series E Stockholders may reasonably request.
(g) (i) No later than sixty (60) days prior to the end of each
fiscal year, an itemized budget (the "Budget") for the Company for the
succeeding fiscal year (said budgets to include a projected income statement,
cash flow and balance sheet on a monthly basis and to show separately capital
and operating expenses) together with a statement of the assumptions made by
the Company in creating the Budget, as well as a statement by the Chief
Executive officer of the Company in support of the Budget with a description
thereof; and (ii) any reforecast which the Company makes to its itemized
annual budget promptly following the time it makes such reforecast.
(h) Copies of all reports submitted to the Company's Board of
Directors, provided that no transferee of Series B, Series C, Series D or
Series E Preferred shall be entitled to receive such reports unless such
transferee owns at least 5% of the Stock of the Company on a Fully Diluted
Common Basis and has previously requested copies of such reports.
In addition to any reports to be furnished to the Series B, Series C, Series
D and Series E Stockholders as provided above, any Series B, Series C, Series
D or Series E Stockholder shall be entitled to inspect all books and records
of the Company at the Company's office during normal business hours upon 24
hours notice to the Company. In the event that the Company shall fail to
perform any of the foregoing in accordance with the terms thereof, the Series
B, Series C, Series D and Series E Stockholders shall be entitled to fulfill,
at the Company's expense, the terms and conditions set forth in such
covenants to the reasonable satisfaction of the
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<PAGE> 18
Series B, Series C, Series D and Series E Stockholders. In furtherance and
not in limitation of the foregoing, in order to fulfill the terms and
conditions set forth in covenants (a) and (b) above, the Series B, Series
C, Series D and Series E Stockholders shall be entitled to retain (at the
Company's expense) an accounting firm of their choice in order to perform
an audit and prepare the financial statements referenced therein.
9. Preferred Stockholders' Registration Rights.
(a) Definitions. For purposes of this Section 9, the following
terms shall have the following respective meanings:
(i) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Act;
(ii) The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and the declaration or
ordering of effectiveness of such registration statement by the Commission;
(iii) "Registrable Securities" shall mean shares of the
Company's Common Stock issued or issuable upon conversion of the Series A
Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred and/or the Series E Preferred (collectively, the "Convertible
Registrable Securities") as well as any securities issued as a dividend or
other distribution with respect to, or in exchange or in replacement of, the
securities referred to above.
(iv) "Requesting Holder" shall mean any Holder which has
requested registration pursuant to the terms of this Section 9.
(v) "Majority Preferred Holders" shall mean the holders
of at least a majority of the shares of Series B, Series C, Series D and
Series E Preferred. For purposes hereof, shares of Series B, Series C,
Series D and Series E Preferred shall be deemed to be the appropriate number
of shares of Common Stock issuable upon conversion thereof in order to
determine which Series B, Series C, Series D and Series E Stockholders
constitute the Majority Preferred Holders.
(vi) "Holder" shall mean each of the Stockholders if such
Stockholder holds Registrable Securities or other securities of the Company
which are convertible into or exercisable for Registrable Securities
including the Convertible Registrable Securities, and any other person
holding Registrable Securities or such other securities to whom these
registration rights have been transferred pursuant to Section 9(l) hereof;
provided, however, that any person
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<PAGE> 19
who acquires any of the Registrable Securities in a distribution pursuant
to a registration statement filed by the Company under the Act or pursuant
to a sale under Rule 144 under the Act shall not be considered a Holder;
(vii) "1934 Act" shall mean the Securities Exchange Act of
1934, as amended, or any similar federal statute enacted hereafter, and the
rules and regulations of the Commission thereunder, all as the same shall be
in effect from time to time.
(viii) "Two Thirds Preferred Holders" shall mean the
holders of at least 66-2/3% of the shares of Series B, Series C, Series D and
Series E Preferred. For purposes hereof, shares of Series B, Series C,
Series D and Series E Preferred shall be deemed to be the appropriate number
of shares of Common Stock issuable upon conversion thereof in order to
determine which Series B, Series C, Series D and Series E Stockholders
constitute the Two Thirds Preferred Holders.
(b) Demand Registrations.
(i) If the Company shall receive a written request
(specifying that it is being made pursuant to this Section 9(b)) from Two
Thirds Preferred Holders that the Company file a registration statement under
the Securities Act covering the registration for the offer and sale of
Registrable Securities, then as soon as practicable thereafter, the Company
shall cause all such Registrable Securities to be registered under the
Securities Act. The Series B, Series C, Series D and Series E Stockholders
shall not be entitled to require the Company to cause to become effective
more than two (2) registration statements pursuant to which Registrable
Securities are sold pursuant to this Section 9(b).
(ii) If the Holders initiating the registration intend to
distribute the Registrable Securities by means of an underwriting, they shall
so advise the Company in their request. In the event such registration is
underwritten, the right of the other Holders to participate shall be
conditioned on such Holders' participation in such underwriting. Upon
receipt of any such request, the Company shall promptly give written notice
of such proposed registration to all Holders. Such Stockholders shall have
the right, by giving written notice to the Company within thirty (30) days
after the Company provides its notice, to elect to have included in such
registration such of their Registrable Securities as such Holders may request
in such notice of the offering. Thereupon, the Company shall, as
expeditiously as possible, use its best efforts to effect the registration of
all Registrable Securities which the Company has been requested to so
register. In the event the Series B, Series C, Series D and Series E Holders
reasonably determine that the registration of Registrable Securities of the
other Holders would interfere with or be detrimental to such offering, the
Series B, Series C, Series D and Series E Holders shall have the right, upon
written notice to such other Holders to limit such Registrable
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<PAGE> 20
Securities to be registered to the largest number which would not, in the
reasonable opinion of such Series B, Series C, Series D and Series E
Holders, result in such interference or detriment.
(c) Piggyback Registration. The Company agrees that, subject
to Section 9(i) hereof, if at any time the Company proposes to register any
of its securities under the Act, either for its own account or for the
account of others (unless already covered by Section 9(b) hereof) or pursuant
to a request under Section 9(d) hereof, in connection with the public
offering of such securities solely for cash, on a registration form that
would also permit the registration of Registrable Securities and other than a
registration relating solely to employee benefit plans, or a registration
relating solely to a Commission Rule 145 transaction, or a registration on
any registration form which does not permit secondary sales or does not
include substantially the same information as would be required to be
included in a registration statement covering the sale of Registrable
Securities, the Company shall, each such time, promptly give each Holder
written notice of such proposal. Upon the written request of each Holder
given within thirty (30) days after mailing of any such notice by the
Company, subject to Section 9(i) hereof, the Company shall cause to be
included in such registration under the Security Act all the Registrable
Securities that each Holder has requested be registered, provided that the
Company shall have the right to postpone or withdraw any registration
effected pursuant to this Section 9(c) without obligation to any
Stockholder. The Company may reduce or eliminate the number of shares of
Registrable Securities to be registered by such other Holders if the
investment banker engaged by the Company in connection with such offering
determines that registration of such Registrable Securities would interfere
with or be detrimental to such offering, and such investment banker shall
give written notice (the "Banker Determination Notice") of such determination
to such Holders, setting forth in reasonable detail the reasons for such
determination. In such event the Company, upon written notice to such
Holders, shall have the right to limit such Registrable Securities to be
registered, if any, to the largest number which would not, in the opinion of
such investment banker, result in such interference or detriment or, if any
number would result in such interference or detriment, to exclude from such
registration all such Registrable Securities. Such limitation shall be
applied to each such other Holder pro rata in respect of the number of shares
subject to such request or proposed for registration, as the case may be. No
Registrable Securities excluded from the registration by reason of the Banker
Determination Notice shall be included in such registration.
(d) Registrations on Forms S-2 and S-3. After the Company
shall have concluded an initial public offering of its securities (which for
purposes hereof shall include any Registrable Securities sold pursuant to
Section 9(b) above) pursuant to a registration under the Act, at such time as
the Company shall have qualified for the use of Forms S-2 and/or S-3 (as the
case may be), or any similar form or forms promulgated by the Commission, the
Majority Preferred Holders shall have the right to request, at any time and
from time to time, but no more often than twice a year, registration on Form
S-2 and/or Form S-3 (as the case may be) (which request or requests shall be
in writing, shall specify the Registrable Securities intended to be sold
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<PAGE> 21
or disposed of by each Series B, Series C, Series D and Series E
Stockholder, shall state the intended method of disposition of such
Registrable Securities by each Series B, Series C, Series D and Series E
Stockholder, and the Company shall be obligated to effect such registration
or registrations on Form S-2 or Form S-3 (as the case may be)). No
registration pursuant to this Section 9(d) shall count as a demand
registration pursuant to Section 9(b) hereof. Notwithstanding the
foregoing, Holders of Series E Preferred shall have a special one-time S-3
registration right which right may be exercised by the Holders of a
majority of the Common Stock issuable upon conversion of the Series E
Preferred Stock.
(e) Right to Delay. Notwithstanding Sections 9(b) and (d), the
Company shall not be obligated to effect the filing of a registration
pursuant to Sections 9(b) or (d) either (i) during the period starting with
the date ninety (90) days prior to the Company's estimated date of filing of,
and ending on a date one hundred eighty (180) days following the effective
date of, a registration statement pertaining to a public offering of
securities for the account of the Company, provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective and that, in the good faith
judgment of the Company's underwriter for an underwritten offering or the
Company's Board of Directors for a non-underwritten offering, an offering
pursuant to such a registration statement would interfere with the successful
marketing (including pricing) of the securities to he included in the
Company's proposed registration statement or (ii) the Company's Board of
Directors shall determine in good faith that such filing will interfere with
a pending or contemplated financing, merger, sale or assets, recapitalization
or other similar corporate action of the Company. In the event of any such
postponement and if the Majority Preferred Holders desire such registration
statement to be filed, the Company shall file such registration statement as
promptly as practicable following (x) 180 days after the effective date of
the registration statement with respect to the offering referred to in clause
(i) above, or (y) the date on which the transactions referred to in clause
(ii) above shall have been completed or abandoned as the case may be.
(f) Obligation of the Company. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Commission a registration
statement covering such Registrable Securities and use its best efforts to
cause such registration statement to be declared effective by the Commission
and to keep such registration effective until the earlier of (1) the date
when all Registrable Securities covered by the registration statement have
been sold or (2) nine months from the effective date of the registration
statement or prospectus or any amendments or supplements thereto. The
Company will furnish to each Requesting Holder and the underwriters, if any,
copies of all such documents, proposed to be filed (excluding exhibits,
unless any such person shall specifically request exhibits), which documents
will be subject to the review of each Requesting Holder and underwriters, and
the Company will not file
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such registration statement or any amendment thereto or any prospectus or
any supplement thereto (including any documents incorporated by reference
therein) with the Commission if (1) any Requesting Holder or the
underwriters, if any, shall reasonably object to such filing or (2)
information in such registration statement or prospectus concerning any
Requesting Holder has changed and any Requesting Holder or the
underwriters, if any, shall reasonably object.
(ii) Prepare and file with the Commission such amendments
and post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective during the period
referred to in Section 9(e)(i) hereof and to comply with the provisions of
the Securities Act with respect to the disposition of all securities covered
by such registration statement, and cause the prospectus to be supplemented
by any required prospectus supplement, and as so supplemented to be filed
with the Commission pursuant to Rule 424 under the Securities Act.
(iii) Furnish to each Requesting Holder such numbers of
copies of such registration statement, each amendment thereto, the prospectus
included in such registration statement (including each preliminary
prospectus), each supplement thereto and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by it.
(iv) Use its best efforts to register and qualify the
Registrable Securities under such other securities laws of such jurisdictions
as shall be reasonably requested by each Requesting Holder and do any and all
other acts and things which may be reasonably necessary or advisable to
enable each Requesting Holder to consummate the disposition of the
Registrable Securities in such jurisdictions; provided that the Company shall
not be required in connection therewith or as a condition thereto to qualify
generally to transact business in any such states or jurisdictions.
(v) Promptly notify each Requesting Holder at any time
when a prospectus relating to Registrable Securities is required to be
delivered under the Securities Act of the happening of any event as a result
of which the prospectus included in such registration statement contains an
untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading and, at the request of any Requesting
Holder, the Company will prepare a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain an untrue statement of a
material fact or omit to state any fact necessary to make the statements
therein not misleading.
(vi) Make available for inspection by each Requesting
Holder, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained
by any Requesting Holder or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and
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<PAGE> 23
cause the officers, directors, employees and independent accountants of the
Company to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such
registration statement, which information shall be subject to reasonable
restrictions concerning confidentiality and non-disclosure.
(vii) Notify each Requesting Holder and the underwriters,
if any, of the following events and (if requested by any such person) confirm
such notification in writing: (1) the filing of the prospectus or any
prospectus supplement and the registration statement and any amendment or
post-effective amendment thereto and, with respect to the registration
statement and any amendment or post-effective amendment thereto and, with
respect to the registration statement or any post-effective amendment
thereto, the declaration of the effectiveness of such documents, (2) any
requests by the Commission for amendments or supplements to the registration
statement or the prospectus or for additional information, (3) the issuance
or threat of issuance by the Commission of any stop order suspending the
effectiveness of the registration statement or the initiation of any
proceedings for that purpose and (4) the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation or
threat of initiation of any proceeding for such purpose.
(viii) Make every reasonable effort to (1) prevent the
entry of any order suspending the effectiveness of the registration statement
and (2) obtain the withdrawal of any such order, if entered.
(ix) If reasonably requested by any underwriter or any
Requesting Holder in connection with any underwritten offering, incorporate
in a prospectus supplement or post-effective amendment such information as
the underwriters and the Requesting Holders agree should be included therein
relating to the sale of the Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being sold to such underwriters, the purchase price being paid therefor by
such underwriters and any other terms of the underwritten (or best efforts
underwritten) offering of the Registrable Securities to be sold in such
offering, and make all required filings of such prospectus supplement or
post-effective amendment after being notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment.
(x) Cooperate with the Requesting Holders and the
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not bearing
any restrictive legends, and enable such Registrable Securities to be in such
lots and registered in such names as the underwriters may request at least
two (2) business days prior to any delivery of Registrable Securities to the
underwriters.
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<PAGE> 24
(xi) Provide a CUSIP number for all Registrable Securities
not later than the effective date of the registration statement.
(xii) Prior to the effectiveness of the registration
statement and any post-effective amendment thereto and at each closing of an
underwritten offering, (1) make such representations and warranties to each
Requesting Holder and the underwriters, if any, with respect to the
Registrable Securities and the underwriters, if any, with respect to the
Registrable Securities and the registration statement as are customarily made
by issuers to underwriters in primary underwritten offerings; (2) obtain
opinions of counsel to the Company and updates thereof (which opinions shall
be reasonably satisfactory to the underwriters, if any, and to each
Requesting Holder) addressed to each Requesting Holder and the underwriters,
if any, covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested
by each Requesting Holder and underwriters or their counsel; (3) obtain "cold
comfort" letters and updates thereof from the Company's independent certified
public accountants addressed to each Requesting Holder and the underwriters,
if any, such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters by underwriters in connection
with primary underwritten offerings; and (4) deliver such documents and
certificates as may be reasonably requested by each Requesting Holder and by
the underwriters, if any, to evidence compliance with clause (1) above and
with any customary conditions contained in the underwriting agreement or
other agreement entered into by the Company.
(xiii) Otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission, and make generally
available to its security holders earnings statements satisfying the
provisions of Section 11(a) of the Act, no later than forty-five (45) days
after the end of any twelve (12) month period or ninety (90) days, if such
period is a fiscal year (1) commencing at the end of any fiscal quarter in
which Registrable Securities are sold to underwriters in a firm or best
efforts underwritten offering, or (2) if not sold to underwriters in such an
offering, beginning with the first day of the first fiscal quarter of the
Company commencing after the effective date of the registration statement.
(g) Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 9
that each Requesting Holder shall furnish to the Company such information
regarding it, the Registrable Securities held by it, and the intended method
of disposition of such Registrable Securities as the Company shall reasonably
request and as shall be required in connection with the action to be taken by
the Company.
(h) Suspension of Disposition of Registrable Securities. Each
Requesting Holder agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 9(e)(v) hereof,
such Holder will forthwith discontinue
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<PAGE> 25
disposition of Registrable Securities until such Holder's receipt of copies
of a supplemented or amended prospectus contemplated by Section 9(e)(v)
hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the prospectus may be resumed, and has received copies of
any additional or supplemental filings which are incorporated by reference
in the prospectus, and, if so directed by the Company, each Requesting
Holder will deliver to the Company (at the expense of the Company) all
copies, other than permanent file copies then in each Requesting Holder's
possession, of the prospectus covering such Registrable Securities current
at the time of receipt of such notice. In the event the Company shall give
any such notice, the time periods mentioned in Section 9(e)(i) hereof shall
be extended by the number of days during the period from and including the
date of the giving of such notice pursuant to Section 9(e)(v) hereof to and
including the date when each Requesting Holder shall have received the copy
of the supplemented or amended prospectus contemplated by Section 9(e)(v)
hereof or the Advice.
(i) Expenses of Registration. All expenses incurred in
connection with a registration pursuant to Section 9(b), Section 9(c) or
Section 9(d) hereof (excluding underwriters' discounts and commissions),
including, without limitation all registration and qualification fees, fees
and disbursements of counsel for the Company, and, with respect to a
registration pursuant to Section 9(b) hereof or Section 9(d) hereof, the
reasonable fees and disbursements of one counsel chosen by the Requesting
Holders shall be borne by the Company; provided, however, that if a
registration proceeding is begun under Section 9(b) hereof but subsequently
withdrawn at the request of the Requesting Holders, the Requesting Holders,
as a group, shall have the option of either (1) reserving their right to such
demand registration pursuant to Section 9(b) hereof, in which case the
Requesting Holders will pay all expenses of such registration proceeding, or
(2) waiving their right to one demand registration under Section 9(b) hereof,
in which case the Company will pay the expenses of such registration
proceeding; and further provided that the Requesting Holders may withdraw a
request made within forty-five (45) days of the end of the fiscal year if the
audited financial statements of the Company for such year and at such
year-end materially differ from the financial information furnished to each
Requesting Holder by the Company at the time of its request, or may withdraw
a request if, following the request, the Company discloses material adverse
information that was not known to the Requesting Holders when the request was
made, and in either such event the Series B, Series C, Series D and Series E
Stockholders shall retain the right to require the Company to cause to become
effective that number of registration statements pursuant to which
Registrable Securities are sold pursuant to Section 9(b) hereof as the Series
B, Series C, Series D and Series E Stockholders could have prior to
requesting the registration which request was subsequently withdrawn.
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(j) Underwriting Requirements; Priorities.
(i) With respect to a registration under Section 9(b) and
Section 9(d) hereof, the Requesting Holders shall have the right to select
the investment banker(s) and manager(s) to administer such registration. All
such selections shall be subject, in either such event, to the approval of
the Company, which will not be unreasonably withheld. If a registration
under Sections 9(b) hereof and 9(d) hereof is an underwritten offering and
the managing underwriters advise the Company in writing that in their opinion
the number of Registrable Securities requested to be included exceeds the
number of shares which can be sold at the desired price in such offering, the
Company will include in such registration the number of Registrable
Securities requested to be included which in the opinion of such underwriters
can be sold, such Registrable Securities to be included pro rata among the
Requesting Holders in proportion to the number of shares of Registrable
Securities requested to be included by each such Requesting Holder.
(ii) The Company will have the right to select the
investment banker(s) and manager(s) to administer any offering to which
Section 9(c) hereof is applicable. If a registration under Section 9(c)
hereof is an underwritten registration on behalf of the Company, and the
managing underwriter(s) advise the Company in writing that in their opinion
the number of securities requested to be included in such registration
exceeds the number which can be sold at the desired price in such offering,
the Company will include in such registration (i) first, the securities the
Company proposes to sell and (ii) second, the Registrable Securities held by
each Requesting Holder and (iii) third, other securities to be registered
pursuant to other registration rights granted by the Company.
(iii) No Person may participate in any underwritten
registration hereunder unless such person (1) agrees to sell such Person's
securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements and (2) completes
and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the term of such
underwriting arrangements.
(k) Rule 144 Exception. The Company shall not be obligated
under Sections 9(b), (c) or (d) hereof to register or include in any
registration statement Registrable Securities if the Company shall furnish
the Requesting Holders with a written opinion of counsel to the Company
reasonably satisfactory to the Requesting Holders, that all Registrable
Securities may be publicly offered, sold and distributed within a single
ninety (90) day period without registration under the Securities Act pursuant
to Rule 144 promulgated by the Commission under the Securities Act or
otherwise.
-25-
<PAGE> 27
(1) Lockup Agreement.
(i) Each Stockholder agrees in connection with any
registration of the Company's securities upon the request of the
underwriter(s) managing any underwritten offering of the Company's
securities, not to sell, make any short sale of, pledge, grant any option for
the purchase of or otherwise dispose of any Registrable Securities (other
than those included in the registration) without the prior written consent of
the Company or such underwriter(s), as the case may be, during the seven (7)
days prior to and (A) in connection with the initial firm commitment
underwritten public offering of the Company's securities, during the one
hundred eighty (180) day period beginning on the effective date of such
registration as the Company and (B) in connection with any other underwritten
offering, during the ninety (90) day period beginning on the effective date
of such registration or in either event, such shorter period as the
underwriter(s) may specify; provided, that in connection with all such
registrations, the officers and directors of the Company and all employees
(in the case of the Company's initial public offering) and all holders of 1%
or more of the Company's fully-diluted Common Stock equivalents agree to be
bound by such restrictions.
(ii) The Company agrees (1) not to effect any public sale
or distribution of its equity securities, or any securities convertible into
or exchangeable or exercisable for such securities, during the seven (7) days
prior to and during the one hundred eighty (180) day period beginning on the
effective date of any registration statement related to an underwritten
offering pursuant to which Registrable Securities are to be sold (except as
part of such underwritten registration or pursuant to registrations on Form
S-8 or any successor form), unless the underwriter(s) managing the registered
public offering otherwise agree, and (2) to use best efforts to cause each
holder of at least five percent (5%) (on a fully-diluted basis) of its equity
securities, or any securities convertible into or exchangeable or exercisable
for such securities, purchased from the Company at any time after the date of
this Agreement (other than in a registered public offering) to agree not to
effect any sale or distribution of any such securities during such period
(except as part of such underwritten registration, if otherwise permitted),
unless the underwriters managing the registered public offering otherwise
agree.
(m) Transfer of Registration Rights. Subject to the provisions
hereunder, provided that the Company is given written notice by such Holder
at the time of such transfer stating the name and address of the transferee
and identifying the securities with respect to which the rights under this
Section 9 hereof are being assigned, the registration rights under this
Section 9 hereof may be transferred to any affiliate of such Holder, to
another Holder or to any person acquiring at least twenty percent (20%) of
the Registrable Securities or all of such Holder's Registrable Securities.
Any transferee to whom rights under this Section 9 are transferred shall, as
a condition to such transfers, deliver to the Company a written instrument by
which such transferee agrees to be bound to the obligations imposed upon the
Holders under this Section 9.
-26-
<PAGE> 28
(n) Indemnification. In the event any Registrable Securities
are included in a registration statement under Section 9 hereof:
(i) To the full extent permitted by law, the Company
will, and hereby does indemnify and hold harmless each Stockholder, each
director, officer, partner, employee, or agent for each Stockholder, any
underwriter (as defined in the Act) for each Stockholder, and each Person, if
any, who controls each Stockholder or underwriter within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which they may become subject under the Securities Act and
applicable state securities laws insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based on any
untrue or alleged untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements 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 in light of the
circumstances under which they were made or necessary to make the statements
therein not misleading or arise out of any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company and relating to action or inaction required of the Company in
connection with any such registration; and will reimburse each such 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 indemnity agreement contained in this
Section 9(m)(i) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld) nor shall the Company be liable to a Stockholder, underwriter or
controlling Person for any such loss, claim, damage, liability or action to
the extent that it arises out of or is based upon an untrue statement or an
alleged untrue statement or omission or alleged omission made in connection
with such registration statement, preliminary prospectus, final prospectus,
or amendments or supplements thereto, in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by or on behalf of such Stockholder, underwriter or controlling
Person.
(ii) To the full extent permitted by law, each Requesting
Holder will indemnify and hold harmless the Company, each of its directors,
each of its officers who have signed the registration statement, each person,
if any, who controls the Company within the meaning of the Act, and any
underwriter for the Company (within the meaning of the Act), against any
losses, claims, damages or liabilities, joint or several, to which the
Company or any such director, officer, controlling Person or underwriter may
become subject, under the Securities Act and applicable state securities
laws, 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 such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact
-27-
<PAGE> 29
required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances, 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 such registration
statement, preliminary or final prospectus, or amendments or supplements
thereto, in reliance upon aid in conformity with written information
furnished by such Requesting Holder expressly for use in connection with
such registration; and such Requesting Holder will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer, controlling person or underwriter in connection with investigating
or defending any such loss, claim, damage, liability or action.
In no event shall the liability of any Requesting Holder under this
Section 9(n) be greater than the dollar amount of the proceeds received by
such Requesting Holder upon the sale of the Registrable Securities giving
rise to such indemnification obligation.
Notwithstanding any of the foregoing, it is expressly acknowledged
and agreed that, in accordance with the terms of the opinion of the Maryland
Attorney General (No. 86-064), dated December 1, 1986, absent insurance or
already available appropriations to fund indemnification obligations of MDEED
that may arise under this Section 9(m)(ii), any and all such obligations are
conditioned upon the availability of appropriations for use by MDEED at the
time such indemnification obligations arise.
(iii) Promptly after receipt by an indemnified party under
this Section 9(m) of notice of the commencement of any action or knowledge of
a claim that would, if asserted, give rise to a claim for indemnity
hereunder, such indemnified party will, if a claim in respect thereof is to
be made against any indemnifying party under this Section 9(m), notify the
indemnifying party in writing of the commencement thereof or knowledge
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party shall have the right to participate
in, and, to the extent the indemnifying party so desires, jointly with any
other indemnifying party similarly noticed, to assume the defense thereof
with counsel mutually satisfactory to the parties. The failure to notify an
indemnifying party promptly of the commencement of any such action or of the
knowledge of any such claim, if materially prejudicial to his ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 9(m), but the omission so to notify
the indemnifying party will not relieve him of any liability that he may have
to any indemnified party otherwise than under this Section.
(iv) If the indemnification provided for in this Section
9(m) is for any reason, other than pursuant to the terms thereof, held to be
unavailable to an indemnified party in respect of any losses, claims, damages
or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a
result of such losses,
-28-
<PAGE> 30
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by
the Company and each Requesting Holder from the offering of the Registrable
Securities. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company and each
Requesting Holder in connection with the statements or omission which
resulted in such losses, claims, damages, liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company and each Requesting Holder
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company bear to
the total net proceeds from the offering received by each Requesting
Holder. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
relates to information supplied by the Company or each Requesting Holder
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company
and each Requesting Holder agree that it would not be just and equitable if
contribution pursuant to this subsection (iv) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (iv).
The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (iv) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim., but
shall be subject, in the case of a Requesting Holder, to the limitation of
the second paragraph of Section 9(n)(ii) above. No person guilty of
fraudulent misrepresentation within the meaning of Section 11(f) of the
Securities Act shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(o) Remedies. In addition to being entitled to exercise all
rights provided in this Section 9 as well as all rights granted by law,
including recovery of damages, each Holder will be entitled to specific
performance of its rights under this Section 9. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of any of the provisions of this Section 9 and hereby
agrees not to raise the defense in any action for specific performance or
injunctive relief that a remedy at law would be adequate.
(p) Grant of Other Registration Rights. The Company shall not
grant any registration rights to any other holder of any Stock unless such
rights are subordinate and subject to the exercise of any rights granted to
each Series B, Series C and Series D Stockholder pursuant to this Section 9.
-29-
<PAGE> 31
10. Legend on Stock Certificates. Each certificate representing
shares of Stock held by any Stockholder shall bear the following legend until
such time as the shares represented thereby are no longer subject to the
provisions hereof:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS OF AN AMENDED AND RESTATED STOCKHOLDERS AND
REGISTRATION RIGHTS AGREEMENT, DATED SEPTEMBER 19, 1996, AMONG
VISUAL NETWORKS, INC. (THE "COMPANY") AND HOLDERS OF SHARES OF
THE OUTSTANDING CAPITAL STOCK OF THE COMPANY. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE COMPANY."
11. Remedies. In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have been breached by the
Company or the Stockholders, any of the Stockholders or the Company (as the
case may be) may proceed to protect and enforce its rights either by suit in
equity and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific
performance or injunctive relief with respect to any such covenant or
agreement contained in this Agreement.
12. Additional Stockholders to Become Bound. Any person or entity
who becomes a Stockholder by virtue of his acquisition of Stock constituting
more than one percent (1%) of the Company's Common Stock (on a Fully Diluted
Common Basis) shall be bound by all of the terms and provisions of this
Agreement applicable to Stockholders and shall have all of the rights
applicable to Stockholders under this Agreement. Before any such person or
entity shall be entitled to be a holder of Stock constituting more than one
percent (1%) of the Company's Common Stock (on a Fully Diluted Common Basis),
such person or entity shall be required first to execute and deliver an
agreement pursuant to which such person or entity agrees to be bound by all
of the terms and conditions of this Agreement applicable to Stockholders, and
the failure of any such person or entity to do so shall preclude such person
or entity from becoming a holder of Stock constituting more than one percent
(1%) of the Company's Common Stock (on a Fully Diluted Common Basis).
13. Notices. All notices or requests provided for or permitted to be
given pursuant to this Agreement must be in writing and may be given or
served by (i) depositing the same in the United States mail, addressed to the
party to be notified, postage paid, and registered or certified with return
receipt requested, or (ii) by delivering such notice in person to such
party. Notices so deposited in the mail shall be deemed to have been given
or served on the date on which the party actually received or refused such
written notice, as shown by the date or postmark of any return receipt
indicating the date of delivery or attempted delivery to such receiving
party. The addresses of the parties hereto for all purposes of this
Agreement are:
-30-
<PAGE> 32
Company Visual Networks, Inc.
2092 Gaither Road, Suite 220-I
Rockville, Maryland 20850
Series B Stockholders See Schedule A-1 attached hereto
Series C Stockholders See Schedule A-2 attached hereto
Series D Stockholders See Schedule A-3 attached hereto
Series E Stockholders See Schedule A-4 attached hereto
Series A Stockholders See Schedule B attached hereto
Founders See Schedule C attached hereto
By giving to the other parties at least five (5) days written notice thereof,
any party hereto shall have the right from time to time and at any time
during the term of this Agreement to change his respective address and each
party shall have the right to specify as his address any other address within
the United States of America.
14. Binding Agreement. This Agreement and each provision herein
shall be binding upon and applicable to, and shall inure to the benefit of,
the Stockholders, their permitted assigns and legal representatives.
15. Consents and Waivers. No consent or waiver, express or implied,
by any party hereto of the breach, default or violation by any other party
hereto of his obligations hereunder shall be deemed or construed to be a
consent or waiver to or of any other breach, default or violation of the same
or any other obligations of such party hereunder. Failure on the part of any
party hereto to complain of any act of any of the other parties or to declare
any of the other parties hereto in default, irrespective or how long such
failure continues, shall not constitute a waiver by such party of his rights
hereunder.
16. Applicable Law. This Agreement and all questions relating to its
validity, interpretation and performance shall be governed by and construed
in accordance with the laws of the State of Delaware.
17. Prior Agreements; Amendments. This Agreement supersedes any
prior or contemporaneous understanding or agreement among the parties
respecting the subject matter hereof, and is intended specifically to amend
and restate the Second Amended Stockholders
-31-
<PAGE> 33
Agreement entered into on January 26, 1996 in its entirety. There are no
arrangements, understandings or agreements, oral or written, among the
parties hereto relating to the subject matter of this Agreement, except
those fully expressed herein or in documents executed contemporaneously
herewith. No change or modification of this Agreement shall be valid or
binding upon the parties hereto unless such change or modification or
waiver shall be in writing and signed by holders of at least 85% of the
Stock held by the Stockholders on a Fully Diluted Common Basis provided
that such amendments, modifications or changes treat all holders of each
series of Preferred Stock in the same manner.
18. Counting of Days. In computing the number of days for purposes
of this Agreement, all days shall be counted, including Saturdays, Sundays
and holidays; provided, however, that if the final day of any time period
falls on a Saturday, Sunday or holiday, then the final day shall be deemed to
be the next day which is not a Saturday, Sunday or holiday.
19. Captions. The captions used in this Agreement are for
convenience only and shall not be construed in interpreting this Agreement.
Whenever the context so required, the neuter shall include the feminine and
masculine, and the singular shall include the plural, and conversely.
20. Headings. All section headings herein have been inserted for
convenience of reference only and shall in no way modify or restrict any of
the terms or provisions hereof.
21. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original for all purposes, but all of
which taken together shall constitute only one agreement. 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 the signatories.
-32-
<PAGE> 34
22. Confidentiality.
(a) Each Stockholder recognizes and acknowledges that the
Proprietary Information (as hereinafter defined) is a valuable, special and
unique asset of the business of the Company. As a result, both while such
Stockholder owns Stock and thereafter, Stockholder shall not, without the
prior written consent of the Company, for any reason either directly or
indirectly divulge to any third-party or use for his own benefit, or for any
purpose other than the exclusive benefit of the Company, any and all
confidential proprietary, business and technical information or trade secrets
of the Company or of any subsidiary or affiliate of the Company ("Proprietary
Information") revealed, obtained or developed from or on behalf of the
Company while such Stockholder owned Stock. Such Proprietary Information
shall include but shall not be limited to, cost information, pricing
information, marketing methods and plans, identities of customers and
suppliers, the Company's relationship with actual or potential customers and
the needs and requirements of any such actual or potential customers, and any
other confidential information relating to the business of the Company;
provided, that nothing herein contained shall restrict a Stockholder's
ability to make such disclosures as may be necessary or appropriate to the
effective and efficient discharge of his duties as an operating executive
and/or director of the Company or as such disclosures may be required by law;
and further provided, that nothing herein contained shall restrict a
Stockholder from divulging information which is readily available to the
general public so long as such information did not become available to the
general public as a direct or indirect result of such Stockholder's breach of
this Section 22.
(b) The parties hereto recognize and agree that certain of the
Series B, Series C, Series D and Series E Stockholders routinely, in the
ordinary course of such Stockholder's business, provide the financial results
of their portfolio companies to their outside investors, prospective outside
investors or others to which (or whom) they reasonably deem appropriate.
Accordingly, notwithstanding the provisions of Section 22(a) hereof, the
Series B, Series C, Series D and Series E Stockholders shall be permitted to
divulge information, from time to time, to such outside investors,
prospective outside investors or others to which (or whom) they reasonably
deem appropriate; provided that, the Series B, Series C, Series D and Series
E Stockholders hereby agree that each shall exercise reasonable judgment in
divulging such information in order to protect the confidentiality thereof.
23. Property. All Proprietary Information shall be and remain the
sole property of the Company. No Stockholder shall remove from the Company's
office or premises any documents, records, notebooks, files, correspondence,
reports, memoranda or similar materials of or containing information of the
type identified in Section 22 hereof, or other materials or property of any
kind unless necessary or appropriate in accordance with his duties and
responsibilities as an operating executive and/or director of the Company
and, in the event that such materials or property are removed, all of the
foregoing shall be returned to their proper files or places of safekeeping as
promptly as possible after the removal shall serve its specific purpose. A
-33-
<PAGE> 35
Stockholder shall not make, retain, remove and/or distribute any copies of
any of the foregoing for any reason whatsoever except as may be necessary in
the discharge of his assigned duties and shall not divulge to any third
person the nature of and/or contents of any of the foregoing or of any other
oral or written information to which he may have access or with which for any
reason he may become familiar, except as disclosure shall be necessary in the
performance of his duties; and when such Stockholder no longer owns Stock, he
shall leave with or return to the Company all originals and copies of the
foregoing then in his possession, whether prepared by Stockholder or by
others.
24. Termination. Sections 3, 4, 5, 6, 7, 8 and 12 hereof shall
terminate and have no further force or effect upon the occurrence of an Event
of Conversion (as defined in the Company's Certificate of Incorporation).
25. Waiver of Purchase Rights. Each of the Series B, Series C and
Series D Stockholders and Management hereby waive his or its rights to
receive notice of the Company's sale of the shares of Series E Preferred
pursuant to Section 5 of the Second Amended and Restated Stockholders
Agreement and to purchase the Series E Preferred as provided therein.
-34-
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
VISUAL NETWORKS INC.
By: /S Scott E. Stouffer
------------------------------
Scott Stouffer, President
NEPA FUND II, L.P.
By: NEPA II Management Corporation,
General Partner
By: /S Marc Benson
------------------------------
Title: Vice President
----------------------------
TRITECH PARTNERS, L.P.
By: Triad Investors Corporation,
General Partner
By: /S Jeffrey A. Davison
-------------------------------
Title: Vice President
----------------------------
/S Gina M. DeStefano
- ------------------------------
Sabine de Villoutreys by
Denis A. Seynhaeve,
attorney-in-fact,
by Gina M. DeStefano, attorney-in-fact
/S William R.T. Oakes
- ------------------------------
William R.T. Oakes
-35-
<PAGE> 37
/S Carol B. Oakes
- ------------------------------
Carol B. Oakes
MARYLAND DEPARTMENT OF BUSINESS
AND ECONOMIC DEVELOPMENT
(formerly Maryland Department of Economic and
Employment Development)
By: /S
----
Title: Deputy Secretary
----------------------
/S Scott E. Stouffer
- ------------------------------
Scott Stouffer
/S Robert Troutman
- ------------------------------
Robert Troutman
/S J. Ennis
- ------------------------------
J. Ennis
/S T. Nisbet
- ------------------------------
T. Nisbet
VENROCK ASSOCIATES
By: /S Ted McCourtney
------------------------------
Title: General Partner
----------------------
VENROCK ASSOCIATES II, L.P.
By: /S Ted McCourtney
---------------------------
Title: General Partner
------------------------
-36-
<PAGE> 38
- ---------------------------
John Hasselkus
/S Robert Markovich
- ---------------------------
Robert Markovich
BEHRMAN CAPITAL L.P.
By: Behrman Brothers, L.P., its General Partner
By: /S Grant Behrman
----------------------
General Partner
STRATEGIC ENTREPRENEUR FUND L.P.
By: /S Grant Behrman
-----------------------
General Partner
BEHRMAN CAPITAL B L.P.
By: Behrman Brothers, L.P., its General Partner
By: /S Grant Behrman
-----------------------
General Partner
/S Gina M. DeStefano
- ----------------------------
Audrey Seynhaeve Umdutma,
by Gina M. DeStefano, attorney-in-fact
/S Gina M. DeStefano
- ----------------------------
Guillaume Seynhaeve Umdutma,
by Gina M. DeStefano, attorney-in-fact
/S Gina M. DeStefano
- ----------------------------
Maud Seynhaeve Umdutma,
by Gina M. DeStefano, attorney-in-fact
-37-
<PAGE> 39
- ----------------------------
Ted Joseph
EDISON VENTURE FUND III, L.P.
By: /S Thomas Smith
-----------------------
Thomas Smith, General Partner
- ----------------------------
John Puente
-38-
<PAGE> 40
ANDRE G. SEYNHAEVE IRREOVCABLE
TRUST DATED APRIL 4, 1991
By: /S Geoffrey S. Tobias
-----------------------
-39-
<PAGE> 41
/S Paul C. Joseph
- ----------------------------
Paul C. Joseph
/S Louis S. Joseph
- ----------------------------
Louis S. Joseph
/S Peter M. Joseph
- ----------------------------
Peter M. Joseph
/S Michael P. Joseph
- ----------------------------
Michael P. Joseph
-40-
<PAGE> 42
/S Gina M. DeStefano
- ----------------------------
Laure Seynhaeve,
by Gina M. DeStefano, attorney-in-fact
/S Gina M. DeStefano
- ----------------------------
Denis Seynhaeve,
by Gina M. DeStefano, attorney-in-fact
-41-
<PAGE> 1
EXHIBIT 10.8
LEASE AGREEMENT
BETWEEN
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
AND
VISUAL NETWORKS, INC.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. DEFINITIONS.............................................................................
-----------
3. BASIC RENTAL............................................................................
------------
6. LANDLORD'S OBLIGATIONS..................................................................
----------------------
7. IMPROVEMENT OF THE PREMISES.............................................................
---------------------------
8. OPERATING EXPENSES......................................................................
------------------
10. TENANT'S REPAIRS AND ALTERATIONS........................................................
--------------------------------
12. INDEMNITY...............................................................................
---------
14. RULES AND REGULATIONS...................................................................
---------------------
15. INSPECTION..............................................................................
----------
16. CONDEMNATION............................................................................
------------
17. FIRE AND CASUALTY.......................................................................
-----------------
18. HOLDING OVER............................................................................
------------
19. TAXES...................................................................................
-----
20. EVENTS OF DEFAULT.......................................................................
-----------------
21. REMEDIES................................................................................
--------
22. SURRENDER OF PREMISES...................................................................
---------------------
23. ATTORNEYS' FEES.........................................................................
---------------
24. LANDLORD'S LIEN.........................................................................
---------------
</TABLE>
-i-
<PAGE> 2
<TABLE>
<S> <C>
25. MECHANICS' LIENS........................................................................
----------------
26. WAIVER OF SUBROGATION; INSURANCE........................................................
--------------------------------
INTENTIONALLY OMITTED...................................................................
---------------------
28. BROKERAGE...............................................................................
---------
29. ESTOPPEL CERTIFICATES...................................................................
---------------------
30. NOTICES.................................................................................
-------
31. FORCE MAJEURE...........................................................................
-------------
32. SEVERABILITY............................................................................
------------
33. AMENDMENTS; WAIVER; BINDING EFFECT......................................................
----------------------------------
34. QUIET ENJOYMENT.........................................................................
---------------
35. LIABILITY OF TENANT.....................................................................
-------------------
36. LANDLORD LIABILITY......................................................................
------------------
37. CERTAIN RIGHTS RESERVED BY LANDLORD.....................................................
-----------------------------------
38. FINANCIAL STATEMENTS....................................................................
--------------------
39. NOTICE TO LENDER........................................................................
----------------
40. MISCELLANEOUS...........................................................................
-------------
41. ADDITIONAL RENT.........................................................................
---------------
42. ENTIRE AGREEMENT........................................................................
----------------
</TABLE>
-ii-
<PAGE> 3
LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into as of the 12th day of
December 1996, between THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED
STATES, a New York corporation (hereinafter called "Landlord"), whose address
for purposes hereof is 1875 Eye Street, N.W., Suite 900, Washington, D.C. 20006
and VISUAL NETWORKS, INC., a Delaware corporation (hereinafter called "Tenant"),
whose address for purposes hereof is c/o the Premises.
1. DEFINITIONS.
(a) "Basic Cost": The actual costs incurred by the
Landlord in operating and maintaining the Building and the Land during each
calendar year of the Lease Term for which Landlord has not been reimbursed by
insurance proceeds, condemnation awards or otherwise.
Such costs shall include, by way of example rather than of
limitation, (i) charges or fees for, and taxes on, the furnishing of
electricity, water, sewer service, gas, fuel, or other utility services to the
Building and the Land; (ii) costs of providing elevator, janitorial and trash
removal service, restriping, resurfacing, maintaining and repairing all
walkways, roadways and parking areas on the Land, security costs, and coat of
maintaining grounds, common areas and mechanical systems of the Building and the
Land; (iii) all other costs of maintaining and repairing any or all of the
Building or Land; (iv) except as expressly excluded below, all costs reasonably
allocated by Landlord to the common areas of the Building and the Land in a
multi-building development; (v) charges or fees for any necessary governmental
permits and licenses; (vi) except as expressly excluded below, management fees
in an amount not substantially in excess of those for management of other
similar buildings in the Rockville, Maryland market, overhead and expenses
reasonably related to management of the Building (including salaries for
personnel directly responsible for management of the Building); (vii) premiums
for hazard, liability, workmen's compensation or similar insurance upon any or
all of the Building and the Land; (viii) costs arising under service contracts
with independent contractors; and (ix) the cost of any other items which, under
generally accepted accounting principles consistently applied from year to year
with respect to the Building or the Land, constitute operating or maintenance
costs attributable to any or all of the Building or the Land.
Such costs shall not include (i) the expense of principal and
interest payments made by the Landlord pursuant to the provisions of any
mortgage or deed of trust covering the Building or the Land; (ii) any deduction
for depreciation of the Building, or any systems, fixtures or equipment
contained therein, taken on the landlord's income tax returns; or (iii) the cost
of capital improvements made to the Building, other than capital improvements
(excluding those made during the last year of the Lease), modifications or
equipment required by federal, state or local ordinance, rule, regulation or law
or determined by Landlord in good faith to result in savings or reductions in
Basic Cost generally, in which case the cost thereof shall be included in Basic
Cost for the calendar year in which the cost shall have been incurred and in
subsequent calendar years, on a straight line basis, such items will be
amortized over an appropriate period
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(in accordance with generally accepted accounting principles) and with interest
at a rate equal to the Wall Street Journal Prime Rate, plus three percent (3%).
If Landlord shall have leased any such items of capital equipment designed to
result in savings or reductions in Basic Cost, then the rental and other costs
paid pursuant to such leasing shall be included in Basic Cost for each calendar
year in which they shall have been incurred.
The following shall also not be included in Basic Cost:
i. leasing commissions, fees and costs
ii. legal fees
iii. tenant improvement work for any tenant,
including architectural fees
iv. interest or amortization payments on
mortgages
v. rental on ground leases or other underlying
leases on the Building or Land
vi. wages, bonuses and other compensation of
employees above the grade of property manager
vii. any costs or expenses associated with or
incurred in connection with the removal,
enclosure, encapsulation or other handling of
asbestos or other hazardous or toxic
materials or substances
viii. cost of any item for which Landlord is or is
entitled to be paid or reimbursed by
insurance
ix. increased insurance or Real Estate Taxes
assessed specifically to any tenant of the
building or the Land
x. charges for electricity, water, other
utilities and applicable taxes for which
Landlord is entitled to reimbursement from
any tenant
xi. cost of any HVAC, janitorial or other
services provided to tenants on an extra-cost
basis after regular business hours
xii. cost of installing, operating and maintaining
any specialty service, such as an
observatory, broadcasting facilities,
luncheon club, athletic or recreation club or
recreation club
xiii. cost of correcting defects in the design,
construction or equipment of or latent
defects in the Building
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xiv. cost of any work or services performed on an
extra-cost basis for any tenant of the
Building to a materially greater extent or in
a materially more favorable manner than
furnished generally to the Tenant and other
occupants
xv. cost of any work or services performed for
any facility other than the Building or the
Land
xvi. any cost representing an amount paid to a
person, firm, corporation or other entity
related to Landlord which is in materially in
excess of the amount which would have been
paid in the absence of such relationship
xvii. cost of painting, decorating, renovating or
remodeling of any interior parts of the
Building other than common areas
xviii. Landlord's general overhead attributable to
the activities of Landlord's officers and
executives
xix. attorney's fees, accounting fees, and
expenditures incurred in connection with
negotiations, disputes and claims of other
tenants or occupants of the Building, except
as specifically otherwise provides in the
Lease
xx. lease payments for rental equipment (other
than equipment for which depreciation is
properly charged as an Expense) which would
constitute a major capital expenditure if the
equipment were purchased
xxi. cost of acquiring sculptures, paintings and
other objects of art
xxii. cost of repairs, alterations and/or
replacements caused by the exercise of the
rights of eminent domain
xxiii. advertising and promotional expenses,
including the costs of any Landlord provided
functions, events, parties, etc.
xxiv. expenses incurred by Landlord solely in its
capacity as a corporation, partnership or
other business entity
xxv. costs, fines or penalties incurred due to
violation by Landlord of any laws or
governmental rules or regulations, except as
incurred by Landlord in successfully
challenging any such law, rule or regulation
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xxvi. costs and expenses paid to subsidiaries of
Landlord or entities under common control
with Landlord for services on or to the
Building or the Land, but only to the extent
that the cost of such services materially
exceeds normal rates being paid for such
services to unaffiliated providers of such
services by owners of other similar buildings
in the vicinity of the Building
xxvii. expenses for which Landlord is reimbursed
(except for tenants' payment of Operating
Expenses
xxviii. cost to comply with regulatory changes for
fire and life safety which required
compliance prior to the Commencement Date
xxix cost of correction those defects in the
design, construction or equipment of the
Building which existed on the Lease execution
date, regardless of when the same are
discovered
xxx. costs resulting from Landlord's willful
misconduct, and costs resulting from
Landlord's failure to make timely payments of
any tax, assessment, fee, charge or expense
xxxi. costs of any type associated with retail
space.
In determining Basic Cost, where less than 95% of the
Building's rentable square footage is occupied during all or any part of a year,
those items of the Basic Cost which vary according to occupancy, such as
electricity and janitorial services, shall be increased to that amount which
would have been incurred had the Building been 95% occupied during the entire
year.
(b) "Basic Rental": $15.00 per rentable square foot per
year payable in equal monthly installments of $28,782.50, subject to adjustment
as herein provided.
(c) "Base Real Estate Taxes": The Real Estate Taxes for
the Building and the Land payable in the calendar year 1997.
(d) "Base Year Stop": The Basic Cost incurred during the
calendar year 1997 divided by the number of rentable square feet in the
Building.
(e) "Building": The office building which has been
constructed on land located at 2092 Gaither Road, Rockville, Maryland.
(f) "Commencement Date": November 24, 1996.
(g) "Event of Default": As defined in Section 20 of this
Lease.
(h) "Excess": As defined in Section 8 of this Lease.
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(i) "Land": The entire tract of land on which the
Building is located and upon which other buildings are located which have shared
common facilities, and subject from time to time, to (i) increase through the
acquisition of adjoining properties, and (ii) reduction through the sale or
transfer by Landlord or the reservations of any such property from the
development of which the Building is a part.
The term Land shall also include any property that must be
maintained by Landlord due to the existence of any public or private easement.
(j) "Landlord's Contractor": As defined in Section 7(d)
of this Lease.
(k) "Lease Term": The period commencing on the
Commencement Date and continuing for five (5) years and zero (0) months
thereafter; provided, however, if the term of this Lease commences on a date
other than the first day of a calendar month, the Lease Term shall consist of,
in addition to the number of years and months provided above, the remainder of
the calendar month during which this Lease is deemed to have commenced.
(l) "Permitted Use": Any general business office
purposes, assembly and distribution of telecommunications products and systems,
and for no other purpose.
(m) "Premises": Suite No. 110, 120 and 200 in the
Building, generally outlined on the floor plan attached hereto as Exhibits A-1
and A-2 and consisting of approximately 23,026 rentable square feet. The
Premises shall be measured in accordance with the Washington, D.C. Association
of Realtors Standard Method of Measurement for office Buildings, and may be
confirmed by Tenant's architects, at Tenant's expense. In the event Tenant's
measurement and the rentable square footage herein differ, the parties shall
agree on the correct square footage and the Lease shall be amended, if
necessary, to reflect the square footage agreed upon.
(n) "Real Estate Taxes": As defined in Section 19(a).
(o) "Rules and Regulations": The Landlord's rules and
regulations sent to Tenant in writing from time to time, as amended or
substituted for from time to time, the current form of which is attached hereto
as Exhibit C.
(p) "Security Deposit": The total cost of buildout of the
Premises, as outlined in Section 7, and as otherwise provided in Section 5(b).
(q) "Special Tenant Work": As defined in section 7(d) of
this Lease.
(r) "Standard Tenant Work": As defined in Section 7(d) of
this Lease.
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(s) "Substantial Completion: The date when the work to be
performed by Landlord in the Premises in accordance with this Lease shall have
been substantially completed notwithstanding that certain details of
construction, mechanical adjustment or decoration remain to be performed, the
noncompletion of which would not materially interfere with the Tenant's use of
the Premises.
For purposes of determining the date of Substantial
Completion, there shall not be considered the duration of any delay which is
caused by: (i) changes in the work to be completed by Landlord in readying the
Premises for Tenant's occupancy, which changes have been requested by Tenant
after the approval by Landlord and Tenant of the Tenant Plans; (ii) delays, not
caused by Landlord, in furnishing materials or procuring labor required by
Tenant for installations or work in the Premises which are not encompassed
within Standard Tenant Work; (iii) any failure by Tenant, to furnish any
required plan, information, approval or consent, (including, without limitation,
the Tenant Plans) within the required period of time, or any failure to fully
and completely cooperate with Landlord in the preparation of the Tenant Plans;
or (iv) the performance of any work or activity in the Premises by Tenant or any
of its employees, agents or contractors. The decision of Landlord's architect,
shall be finally determinative, in his reasonable discretion, of the date of
Substantial Completion.
(t) "Tenant Plans": As defined in Section 7(a) of this
Lease.
(u) "Tenant's Proportionate Share for Basic Cost": 42.9%.
Such percentage is equal to a fraction, the numerator of which equals the number
of rentable square feet within the Premises and the denominator of which equals
the total number of rentable square feet in the Building.
(v) "Tenant's Proportionate Share for Real Estate Taxes":
42.9%. Such percentage is equal to a fraction, the numerator of which equals the
number of rentable square feet within the Premises and the denominator of which
equals the total number of rentable square feet in the Building.
2. LEASE TERM.
(a) Landlord, in consideration of the rent to be paid and
the other covenants and agreements to be performed by Tenant and upon the terms
hereinafter stated, does hereby lease, demise and let unto Tenant the Premises,
as defined herein and generally outlined on the floor plans attached hereto as
EXHIBITS A-1 and A-2, commencing on the Commencement Date and ending, without
the necessity of notice from either party to the other, such notice being
expressly waived, on the last day of the Lease Term, unless sooner terminated as
herein provided.
(b) If the Landlord shall be unable to tender possession
of the Premises on the anticipated Commencement Date, the Landlord shall not be
liable for any damage caused thereby, nor shall this Lease be void or voidable
by Tenant, but in such event, unless the delay
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results (i) from failure of Tenant to provide plans or otherwise perform in
accordance with the requirements of the Lease or (ii) from any delay in
Landlord's ability to tender possession of the Premises caused by Tenant, no
rental shall be payable by Tenant prior to actual tender to Tenant of possession
of the Premises.
3. BASIC RENTAL.
(a) Tenant promises and agrees to pay Landlord the Basic
Rental (subject to adjustment as hereinafter provided) without demand, notice,
deduction, counterclaim, recoupment or set-off, for each month of the entire
Lease Term (subject to subsection (d) below). The first monthly installment
shall be due and payable upon execution of this Lease. The Basic Rental for each
Subsequent month shall be paid in advance beginning on the first day of the
calendar month following the expiration of the first calendar month of the Lease
Term and continuing thereafter on or before the first day of each succeeding
calendar month during the term hereof; provided, however, that Basic Rental for
the second calendar month shall be prorated based on one-three hundred sixtieth
(1/360th) of the current annual Basic Rental for each day of the first partial
month, if any, this Lease is in effect and shall be due and payable as
aforesaid.
(b) In the event any installment of the Basic Rental, or
any other sums which became owing by Tenant to Landlord under the provisions
hereof, are not received within ten (10) days after the due date thereof
(without in any way implying Landlord's consent to such late payment), Tenant
shall pay, in addition to such installment of the Basic Rental or such other
sums owed, and not as a penalty, additional rent in the form of a late payment
charge equal to five percent (5%) of such monthly installment of the Basic
Rental or such other sums owed for each month or part thereof such payment is
overdue. Notwithstanding the foregoing, the foregoing late charges shall not
apply to any sums which may have been advanced by Landlord to or for the benefit
of Tenant pursuant to the provisions of this Lease, it being understood that
such sums shall bear interest from the date of the advance until paid in full,
which Tenant hereby agrees to pay to Landlord, at the rate of eighteen percent
(18%) per annum or the highest rate permitted by law, whichever is less.
(c) Tenant shall pay all rent to Landlord at the
following address, or at such other address as Landlord notifies Tenant in
writing:
The Equitable Life Assurance Society of the United
States
c/o Compass Management and Leasing, Inc.
P.O. Box 905555
Charlotte, NC 28290-5555
(d) Notwithstanding the foregoing, Landlord agrees to
abate one-half (1/2) of each of the first four (4) months of Basic Rental due
during the Term hereof.
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4. BASIC RENTAL ESCALATION.
The Basic Rental shall be increased annually, effective on
each anniversary of the first full month after the Commencement Date during the
term hereof, by an amount equal to three percent (3%) of the escalated Basic
Rental then in effect, payable as follows:
<TABLE>
<CAPTION>
Year Annualized Rent Monthly Rent
---- --------------- ------------
<S> <C> <C>
2 $355,751.70 $29,645.98
3 $366,424.25 $30,535.35
4 $377,416.98 $31,451.41
5 $388,739.49 $32,394.96
</TABLE>
5. SECURITY DEPOSIT.
(a) The Security Deposit, in the form of a letter of
credit as provided under subsection (b) below, shall be delivered to Landlord
upon execution of this Lease, and shall be held by Landlord without liability
for interest and not in trust or in a separate account, as security for the
performance by Tenant of Tenant's covenants and obligations under this Lease.
The Security Deposit shall not be considered an advance payment of rental or a
measure of Landlord's damages in case of default by Tenant. Upon the occurrence
of any Event of Default by Tenant, Landlord may, from time to time in its sole
discretion, without prejudice to any other remedy, use and apply the Security
Deposit to the extent necessary to make good any arrearages of rent and any
other damage, injury, expense or liability suffered by Landlord by such Event of
Default. Following any such application of the Security Deposit, Tenant shall
pay to Landlord on demand as additional rent the amount so applied in order to
restore the Security Deposit to its original amount. If Tenant is not then in
default hereunder, any remaining balance of the Security Deposit shall be
returned by Landlord to Tenant within a reasonable period of time after the
termination of this Lease and (i) Tenant shall have surrendered the entire
Premises to Landlord, (ii) Landlord shall have inspected the Premises after such
vacation, and (iii) Tenant shall have complied with all of the terms, conditions
and covenants in the Lease. If Landlord transfers its interest in the Premises
during the Lease Term, Landlord may assign the Security Deposit to the
transferee and thereafter shall have no further liability for the return of such
Security Deposit.
(b) Tenant shall deposit with Landlord, upon
execution of this Lease, an Irrevocable Letter of Credit (hereinafter "L.O.C."),
in the initial amount of Two Hundred Thirty Thousand Dollars ($230,000.00),
which amount equals the cost of the improvements to be constructed by Landlord
as provided under Section 7, together with all brokerage commissions and
architectural and engineering fees attributable to this Lease, as reduced by
$34,725.00. The L.O.C. shall be held by Landlord as security for the performance
by Tenant of Tenant's covenants and obligations under this Lease. Except as
expressly permitted herein, such L.O.C. (including any renewals or extensions of
same or any replacement letters of credit) will expire not sooner than five (5)
years and two (2) months from the anticipated Commencement
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Date (and will be extended for an additional reasonable time in the event the
Anticipated Commencement Date is more than thirty (30) days before the
Commencement Date. The L.O.C. must be drawn upon a federally insured banking
institution; shall be transferable to a successor-in-interest of Landlord, and
be in form satisfactory to Landlord.
(i) In addition to the foregoing, the L.O.C.
shall provide and be subject to the following, without limitation:
(A) All or any portion of the principal
amount thereof shall be available against presentation of Landlord's "at eight"
request or requests for payment, accompanied solely by a notarized statement
signed by a partner or officer of Landlord or its agent or any assignee of
either, stating that default has occurred by Tenant under the Lease;
(B) If Landlord consents to the
issuance of the L.O.C. for a shorter duration, then shall L.O.C. will on its
face state that the same shall be renewed automatically, without the need for
any further written notice or amendment, for successive one-year periods, unless
the bank notifies Landlord in writing that such bank has elected not to renew
the L.O.C. at least sixty (60) days prior to the expiration date of the L.O.C.
Tenant shall then replace such L.O.C. not later than thirty (30) days prior to
its expiration. If Tenant fails to replace such L.O.C. within such thirty-day
period, the Landlord may draw under the L.O.C. even if not event of Default has
occurred.
(C) In the event Landlord or its agent
or any successor or assignee of either draw upon part or all of the L.O.C.
during the Lease Term, within fifteen (15) days of the said draw Tenant shall
either restore the L.O.C. to it original amount or deliver to Landlord another
Irrevocable Letter of Credit in an amount equal to the amount drawn. Any
subsequent L.O.C. shall include an be subject to all of the above requirements,
without limitation.
(D) The L.O.C. may provide that it will
decline on a monthly, straight-line basis over the Lease Term; provided,
however, that in no event will the L.O.C. be permitted to decline below Fifty
Thousand Dollars ($50,000.00). Notwithstanding the foregoing, in the event
Tenant becomes a corporation traded on a nationally recognized stock exchange,
and in the event the market capitalization of Tenant's stock exceeds Fifty
Million Dollars ($50,000.00) for more than ninety (90) days, the Tenant shall
have the right to withdraw the L.O.C.
6. LANDLORD'S OBLIGATIONS.
(a) Subject to the limitations hereinafter set forth,
Landlord agrees, while Tenant is occupying the Premises, to furnish to Tenant:
(i) facilities to provide hot and cold running water at those points of supply
both within the Premises and those provided for general use of tenants of the
Building; (ii) facilities to provide a supply of electrical current reasonably
necessary for general business office use and occupancy of the Premises and
electric lighting
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and a supply of electrical current to the common areas of the Building; (iii)
heating and refrigerated air conditioning in season; and (iv) elevator service,
at least one (1) of which shall be operating 24 hours per day; and (v)
janitorial service to the Premises, the specifications for which are attached to
this Lease as Exhibit B, all such services to be provided in scope, quality and
frequency to those services being customarily provided by landlords in
comparable office buildings in the surrounding area. Heating, ventilation and
air conditioning requirements and standards under this Lease shall be subject,
however, to such regulations as the Department of Energy or other local, state
or federal governmental agency, Board or commission shall adopt from time to
time. In addition, Landlord agrees to maintain the public and common areas of
the Building, such as lobbies, stairs, corridors and restrooms, in reasonably
good order and condition; provided, however, that Tenant shall reimburse
Landlord, upon demand, for all repairs and additional maintenance resulting from
damages to such public or common areas caused by Tenant, or its employees,
agents or invitees. Landlord reserves the right, exercisable without notice and
without liability to Tenant for damage or injury to property, persons or
business and without effecting an eviction, constructive or actual, or
disturbance of Tenant's use or possession of the Premises, or giving rise to any
claim by Tenant for setoff or abatement of rent, to decorate and to make
repairs, alterations, additions, modifications, changes or improvements, whether
structural or otherwise, in and about the Building, or any part thereof, and for
such purposes to enter upon the Premises and, during the continuance of any such
work, to temporarily close doors, entryways, public space and corridors in the
Building and to interrupt or temporarily suspend Building services and
facilities. Landlord agrees to give Tenant prior written notice of any proposed
material repairs, alterations, additions, modifications, changes or
improvements, whether structural or otherwise, and agrees to use reasonable
efforts not to affect the operation of Tenant business in the Premises.
(b) If Landlord, to any extent, fails to make
available any of the services to be provided by Landlord expressly set forth
above or if any slowdown, stoppage or interruption of, or any change in the
quantity, character or availability of, the services to be provided by Landlord
expressly set forth above occurs, such failure or occurrence shall not render
Landlord liable in any respect for damages to either person, property or
business, nor be construed as an eviction of Tenant or work an abatement of
rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof.
Should any equipment or machinery furnished by Landlord break down or for any
cause beyond Landlord's reasonable control cease to function properly, Landlord
shall use reasonable diligence to repair same promptly, but Tenant shall have no
claim for abatement of rent or damages on account of any interruptions in
service occasioned thereby or resulting therefrom; provided, however, that if
(i) any such services are not furnished to the Premises for five (5) or more
consecutive days after Landlord receives notice from Tenant, (ii) Tenant is
unable to occupy the Premises for the Permitted Use (or is able to only occupy a
portion of the Premises), and (iii) the Landlord is not diligently pursuing a
cure of such interruption, then commencing with the sixth (6th) day after
Landlord receives such notice, the Basic Rental shall be abated (or a portion
abated if only a portion of the Premises cannot be occupied) until the Premises
can again be occupied by Tenant for the Permitted Use.
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7. IMPROVEMENT OF THE PREMISES
(a) Landlord and Tenant agree to comply with the
following schedule in buildout of the Premises:
(i) Landlord has prepared, and Tenant has
approved a Space Plan for the Premises dated November 6, 1996, as amended by
letter dated November 13, 1996. Any modifications to the Space Plan made after
such date shall be made at Tenant's expense and, if delay in occupancy occurs as
a result of such modifications, Tenant shall be liable to Landlord for Basic
Rental attributable to each day beyond the projected Commencement Date that
delivery of the Premises is delayed.
(ii) Landlord shall prepare and deliver to Tenant
detailed floor plan layouts, together with working drawings and written
instructions sufficiently detailed to enable Landlord to let firm contracts
(herein called "Tenant Plans") with respect to and reflecting the partitions and
improvements in the Premises. Tenant shall fully and completely cooperate with
Landlord in the preparation of the Tenant Plans, shall promptly respond to
Landlord's requests for information and approvals within three (3) business days
after inquiry, and shall use its best efforts to assist a Landlord to complete
the Tenant Plans as soon as possible. If Tenant fails to timely respond to
Landlord's inquiries Landlord for Landlord's cost thereof plus fifteen percent
(15%) for overhead costs.
(b) Notwithstanding anything in the Lease to the
contrary, Tenant will not make or allow to be made any alterations or physical
additions in or on the Premises, including changes in locks on doors, plumbing,
lighting, wiring on partitions, without consent of Landlord, such consent not to
unreasonably withheld or delayed, as long as the alterations or as long as the
alterations or additions do not affect underlying life safety systems or common
Building operating systems. All maintenance, repairs, alterations, additions or
improvements shall be conducted only by contractors or subcontractors approved
in advance in writing by Landlord, it being understood that Tenant shall procure
and maintain, and shall cause contractors and subcontractors engaged by or on
behalf of Tenant to procure and maintain, insurance coverage against such risks,
in such amounts and with such companies as Landlord may require in connection
with any such maintenance, repair, alteration, addition or improvement.
(c) At the end or other termination of this Lease, Tenant
shall deliver up the Premises with all improvements located therein in good
repair and condition, reasonable wear and tear and damage by casualty excepted,
and shall deliver to Landlord all keys to the Premises. All alterations,
additions or improvements (whether temporary or permanent in character) made in
or upon the Premises by Landlord or Tenant shall be Landlord's property upon
termination of this Lease and shall remain on the Premises without compensation
to Tenant; provided, however, that if Landlord elects to have Tenant remove any
alteration, addition, improvement or partition, Landlord shall make such
election upon giving consent to such alteration, addition, improvement or
partition. Tenant shall then remove such alteration,
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addition, improvement or partition whether erected by Landlord or Tenant, and
shall restore the Premises to its original condition by the date of termination
of this Lease or upon earlier vacating of the Premises, except as provided
herein. Landlord hereby elects to have any and all computer and/or telephone
cables installed by Tenant or which may in the future be installed by Tenant,
removed upon the termination of the Lease or upon Tenant's earlier vacating of
the Premises. If Tenant fails to restore the Premises upon Landlord's request,
Landlord shall have the right to perform such restoration and Tenant shall be
liable for all costs and expenses incurred by Landlord therefor.
11. ASSIGNMENT AND SUBLETTING.
(a) Landlord's Prior Consent Required. Neither Tenant nor
Tenant's representatives, successors and assigns nor any subtenant or assignee
will assign, transfer, mortgage or otherwise encumber this Lease or sublet or
rent (or permit the occupancy or use of) the Premises, or any part thereof,
without obtaining the prior written consent of Landlord. Landlord's consent to
assign this Lease or sublet the Premises will not be unreasonably withheld,
provided Tenant satisfies all applicable provisions of subsection (b) below, nor
shall any assignment or transfer of this Lease pr the right of occupancy
hereunder be effectuated by operation of law or otherwise without the prior
written consent of landlord. Any reasonable third-party expenses incurred by
Landlord with respect to the review and consent or denial of consent of the
foregoing shall be paid by Tenant to Landlord as additional rent, and shall be
due and payable with the monthly installment of rent when billed.
(b) Qualification of Assignee or Subtenant. Subject to
the provisions of Section 11(c) hereof, Landlord shall not unreasonably withhold
its consent hereunder to any assignment or sublease by Tenant, provided that (x)
in the event of a sublease Tenant shall satisfy each of the following conditions
prior to any such sublease becoming effective; and (y) in the event of an
assignment, Tenant shall satisfy the conditions of subsections (i), (ii), (iv),
(v) and (vi) prior to any such assignment becoming effective:
(i) Tenant must first notify Landlord, in
writing, of any proposed assignment or sublease, at least thirty (30) days prior
to the effective date of such proposed assignment or sublease. The notice to
Landlord must include a copy of the proposed assignment or sublease and a copy
of the proposed assignee's or subtenant's financial statement for its most
recent fiscal year, prepared in accordance with generally accepted accounting
principles and certified by a public accountant or an executive officer of the
proposed assignee or subtenant.
(ii) The assignee or subtenant must have a credit
rating equal to or better than that of Tenant as of the execution date of the
Lease.
(iii) The sublease must (A) be expressly subject
and subordinate to this Lease, (B) require that any subtenant comply with and
abide by all of the terms of the Lease, and (C) provide that any termination of
this Lease shall extinguish the sublease as well.
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(iv) The assignee or subtenant may not propose to
change the use of the premises for a purpose other than as stated in Section 9
hereof, may not be a place of public accommodation as defined under the
Americans with Disabilities Act (unless Tenant pays for all expenses and costs
incurred by Landlord in modifying the Building, the common areas of the Building
and the Premises in order to comply with any requirements thereunder), nor
conduct its business in a manner which, in Landlord's reasonable judgment, is
not appropriate for comparable office buildings in the metropolitan Washington,
D.C. area.
(v) The assignee or subtenant may not be a
tenants subtenant, or other occupant of any part of the Building, unless
Landlord is unable to offer such occupant comparable space elsewhere in the
Building.
(vi) The Tenant may not be in default under this
Lease, or have committed two events of monetary default hereunder during the
previous twelve (12) months, whether cured or not.
(vii) The sublease shall contain the following
clause, or a similarly worded clause, containing the same intent:
"Underlying Lease Agreement. This Sublease and
Subtenant's rights under this Sublease shall at all times be subject
and subordinated to the underlying Lease identified in Paragraph ____
hereof, and Subtenant shall perform all obligations of Tenant under
said Lease, with respect to the Sublease Premises. Subtenant
acknowledges that any termination of the underlying Lease shall
extinguish this Sublease. Landlord's consent to this Sublease shall not
make Landlord a party to this Sublease, shall not create any privity of
contract between Landlord and Subtenant or other contractual liability
or duty on the part of the Landlord to the Subtenant, shall not
constitute its consent or waiver of consent to any subsequent sublease
or sub-sublease, and shall not in any manner increase, decrease or
otherwise affect the rights and obligations of Landlord and Tenant
under the underlying Lease in respect of the Sublease Premises.
Subtenant shall have no right to assign this Sublease or further sublet
the Premises without the prior written consent of Landlord. Any term of
this Sublease that in any way conflicts with or alters the provisions
of the underlying Lease shall be of no effect as to Landlord and
Landlord shall not assume any obligations as landlord under the
Sublease and Tenant shall not acquire any rights under the Sublease
directly assertable against Landlord under the underlying Lease. Tenant
hereby collaterally assigns to Landlord this Sublease and any and all
payments due to Tenant from Subtenant as additional security for
Tenant's performance of all of its covenants and obligations under the
underlying Lease, and authorizes Landlord to collect the same directly
from Subtenant and otherwise administer the provisions of this
Sublease, at the option of Landlord. Subtenant hereby consents to such
collateral assignment of this Sublease to Landlord and agrees to
observe its obligations created hereby."
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(c) Landlord's Right of First Refusal. Landlord shall
have the right, within twenty (20) days after receipt of the notice from Tenant,
required under Section 11(b)(i) above, to elect: (i) if Tenant proposes to
assign the Lease or sublease all or more than fifty percent (50%) of the
Premises, to terminate this Lease in its entirety, in which event the Lease
shall terminate upon the effective date of the proposed assignment or sublease,
and Tenant shall vacate the Premises as of such effective date in accordance
with the applicable provisions of this Lease; (ii) if Tenant intends to sublet
more than fifty percent (50%) of the Premises, to terminate this Lease only with
respect to such portion of the Premises, in which case Tenant shall vacate such
portion as provided in subsection (i) above; or (iii) to require Tenant to pay
Landlord, within ten (10) days of receipt, one-half (1/2) of the amount of rent
payable under such assignment or sublease in excess of the amount of rent
payable by Tenant hereunder with respect to the Premises or, in the event of a
sublease, that portion of the Premises sublet, offset by any direct expenses
incurred by Tenant actually incurred in assigning the Lease or subleasing such
portion of the Premises (amortized in equal monthly payment a over the remaining
term of the Lease, of assigned, or, if applicable, over the initial term of such
sublease). Upon exercise by Landlord of either of the options set forth in
subsection (i) or (ii) above, Tenant shall surrender the Premises or such
portion of the Premises, as the case may be, to Landlord, and thereafter the
rent to be paid by Tenant pursuant to Section 3 above shall be that portion of
the total rent which the amount of square foot area remaining in the possession
of Tenant bears to the total square foot area of the Premises. In the event that
Landlord does not exercise its right to terminate this Lease, or any applicable
portion thereof, within said thirty (30) day period, Tenant shall have the
right, subject to the provisions of subsection (iii) above, to assign the Lease
or sublet the Premises or a portion thereof after first obtaining the written
consent of Landlord as provided in Section 11(a) above. Upon exercise by
Landlord of the option set forth in subsection, (iii) above, Tenant covenants
and agrees to provide Landlord with semi-annual statements, prepared and
verified by a certified public accountant or executive officer of Tenant,
stating the amount of rent or other consideration received by Tenant from its
assignee or subtenant(s) during such semi-annual period. If such statement shows
Tenant failed to make full payment to Landlord required by subsection (iii)
above, a late charge equal to ten percent (10%) of the amount due shall be paid
by Tenant to Landlord as additional rent, and shall be due and payable by the
assignee or Tenant with the monthly installment of rent next becoming due.
(d) No Waiver or Release. The consent by Landlord to any
assignment or subletting shall not be constructed as a waiver of release of
Tenant from the terms of any covenant or obligation under this Lease, nor shall
the collection or acceptance of rent from any such assignees, subtenant or
occupant constitute a waiver or release of Tenant of any covenant or obligation
contained in this Lease, nor shall any such assignment or subletting be
construed to relieve Tenant from obtaining the consent in writing of Landlord to
any further assignment or subletting. Tenant hereby assigns to Landlord the rent
due from any subtenant of Tenant and here by authorized each such subtenant to
pay said rent directly to Landlord, at Landlord's option, in the event or any
uncured default by Tenant under the terms of this Lease.
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(e) Subsidiary or Affiliate. Provided Tenant delivers
notice to Landlord not less than thirty (30) days prior to any such assignment
or sublease Tenant may assign this Lease, or sublease all or part of the
Premises, without the consent of Landlord and without any right of Landlord to
recapture the Premises, to:
(i) any corporation that has the power to direct
Tenant's management and operation with a net worth comparable to Tenant's, or
corporation whose management and operation is controlled by Tenant with a net
worth comparable to Tenant's; or
(ii) any corporation a majority of whose voting
stock is owned by Tenant or;
(iii) any corporation in which or with which
Tenant, its corporate successors or assigns, is merged or consolidated, in
accordance with applicable statutory provisions for merger or consolidation of
corporations, so long as (A) the liabilities of the corporations participating
in such merger or consolidation are assumed by the corporation surviving such
merger or created by such consolidation and (B) the successor can demonstrate by
balance sheets and other financial documentation submitted to Landlord that it
is capable to servicing all of Tenant's financial obligations under this Lease.
12. INDEMNITY.
(a) Landlord shall not be liable for, and Tenant shall
indemnify and save harmless Landlord, ground lessor, if any, and Landlord's
managing agent, if any, from and against and from all fines, damages, suits,
claims, demands, losses and actions (including reasonable attorneys, fees) for
any injury to person (including death) or damage to or loss of property on or
about the Premises caused by Tenant, its employees, contractors, subtenants,
invitees or by any other person entering the Premises or the Building under the
express or implied invitation of Tenant, or arising out of Tenant's use of the
Premises. Landlord shall not be liable or responsible for any loss or damage to
any property or death or injury to any person occasioned by theft, fire, act of
God, public enemy, criminal conduct of third parties, injunction, riot, strike,
insurrection, war, court order, requisition or other governmental body or
authority, by other tenants of the Building or any other matter beyond the
reasonable control of Landlord, or for any injury or damage or inconvenience
which may arise through repair or alternation of any part of the Building, or
failure to make repairs, or from any cause whatever except Landlord's negligence
or willful misconduct.
(b) Landlord hereby agrees to make no claim against
Tenant, and will indemnify and save Tenant, its agents, employees and invitees
harmless from any claim which shall be made against Tenant by any agent,
employee, licensee or invites of Landlord or by others claiming the right to be
on or about the common areas for any injury, loss or damage to person or
property occurring upon the common areas, unless due to Tenant's negligence or
willful misconduct.
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13. SUBORDINATION.
This Lease and all rights of Tenant hereunder shall
be and are subject and subordinate at all times to any deeds of trust,
mortgages, installment sale agreements and other instruments or encumbrances, as
well as to any ground leases or primary leases, that now or hereafter cover all
or any part of the Building, the Land or an interest of Landlord therein, and to
any and all advances made on the security thereof, and to any and all increases,
renewals, modifications, consolidations, replacements and extensions of any of
such deeds of trust, mortgages, installment sale agreements, instruments,
encumbrances or leases, as well as any substitutions therefor, all automatically
and without the necessity of any further action on the part of Tenant to
effectuate such subordination. Tenant shall, however, upon demand at any time or
times execute, acknowledge and deliver to Landlord any and all instruments and
certificates that in the reasonable judgment of Landlord may be necessary or
proper to confirm or evidence such subordination. Notwithstanding the foregoing,
if any mortgagee, trust beneficiary or ground lessor shall elect to have this
Lease treated as if it became effective and Tenant had taken possession prior to
the lien of its mortgage or deed of trust or prior to its ground lease, and
shall give notice thereof to Tenant, this Lease shall be deemed to have become
effective, and Tenant's right to possession shall be considered prior to such
mortgage, deed of trust, or prior to its ground lease whether this Lease is
dated prior or subsequent to the date of said mortgage, deed to trust or ground
lease or the date of recording thereof. In the event any mortgage or deed of
trust to which this Lease is subordinate is foreclosed or a deed in lieu of
foreclose is given to the mortgagee or beneficiary, Tenant shall attorn to the
purchaser at the foreclosure sale or the grantee under the deed in lieu of
foreclosures; in the event any ground lease to which this Lease is subordinated
is terminated, Tenant shall attorn to the ground lessor. Tenant shall upon
demand at any time execute, acknowledge and deliver the Landlord's mortgagee
(including the beneficiary under any deed of trust) or other holder any and all
instruments and certificates that in the judgment of Landlord's mortgagee may
necessary or proper to confirm or evidence such attornment. Notwithstanding the
foregoing, Landlord shall make reasonable efforts to obtain a non-disturbance
agreement from all mortgagees and beneficiaries of any deeds of trust now or
hereafter placed on the Buildings, provided that the same can be obtained at no
cost, expense, or liability to Landlord. Landlord shall, however, have no
liability to Tenant as a result of its failure to obtain any disturbance
agreement, provide that Landlord endeavored in good faith to obtain such an
agreement.
14. RULES AND REGULATIONS.
Tenant and Tenant's agents, contractors, employees and
invitees will comply fully with all requirements of the Rules and Regulations of
the Building and related facilities, as specified in the Rules and Regulations
now or hereafter sent by Landlord to Tenant. Landlord shall at all times have
the right to change such rules and regulation to promulgate other Rules and
Regulations in such manner as Landlord may deem advisable, in its reasonable
discretion, for safety, care or cleanliness of the Building and related
facilities or the Premises, and for preservation of good order therein, all of
which Rules and Regulations, changes and amendments will be forwarded to Tenant
in writing and shall be carried out and observed by
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Tenant. Tenant shall be responsible for compliance therewith by its employees,
and shall make reasonable efforts to assure compliance by its agents,
contractors, and invitees. Landlord shall use reasonable efforts to enforce all
such Rules and Regulations, including any exceptions thereto, uniformly and in a
manner which does not discriminate against Tenant, although it is understood
that Landlord may grant exceptions to such Rules and Regulations in
circumstances in which it reasonably determines such exceptions are warranted.
15. INSPECTION.
Landlord or its officers, agents and representatives, and any
ground lessor or mortgagee thereof, shall have the right to enter into and upon
any and all parts of the Premises during business hours upon reasonable advance
notice (or, in any emergency or for the purpose of performing routine
maintenance, at any hour and without advance notice) to (a) inspect the Premises
at any time (including the right to perform periodic environmental studies,
audits and reports), (b) clean or make repairs or alterations or additions as
Landlord may deem necessary (but without any obligation to do so, except as
expressly provided for herein), or (c) show the Premises to prospective tenants
(during the last six (6) months of the Lease Term), purchasers or lenders; and
Tenant shall not be entitled to any abatement or reduction of rent by reason
thereof, nor shall such be deemed to be an actual or constructive eviction.
16. CONDEMNATION.
If the whole or, as determined by Landlord in its sole
discretion, any substantial part of the Land or the Building should be taken for
any public or quasi-public use under governmental law, ordinance or regulation,
or by right of eminent domain, or by private purchase in lieu thereof and the
taking would which prevent or materially interfere with the use of the Premises
for the purpose for which they are being used, as determined by Landlord, this
Lease shall terminate and the Basic Rental and additional rent shall be abated
during the unexpired portion of this Lease, effective when the physical taking
of said Land or the Building shall occur. If part of the Land or Building shall
be taken for any public or quasi-public use under any governmental law,
ordinance or regulation, or by right of eminent domain, or by private purchase
in lieu thereof, and this Lease is not terminated as provided in the sentence
above, this Lease shall not terminate but the rent payable hereunder during the
unexpired portion of this Lease shall be reduced to such extent as Landlord
shall determine in good faith is fair and reasonable under all a f the
circumstances. In the event of any such taking or private purchase in lieu
thereof, Landlord and Tenant shall each be entitled to all remedies provided by
law; provided, however, that any award paid to Tenant shall not detract from any
award which Landlord is entitled to receive; and if Landlord's award is reduced
to any extent as a result of any award to Tenant, then Tenant shall assign and
pay over to Landlord the amount by which Landlord's award was so reduced.
17. FIRE OR OTHER CASUALTY.
In the event of damage to or destruction of the Premises or
the Building, or the entrances and other common facilities necessary to provide
normal access to the Premises,
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caused by fire or other casualty, Tenant shall provide immediate notice thereof
to landlord, and Landlord shall make repairs and restorations as hereafter
expressly provided, unless this Lease shall be terminated by Landlord or unless
any mortgagee which is entitled to receive casualty insurance proceeds fails to
make available to Landlord a sufficient amount of such proceeds to cover the
cost of such repairs and restoration.
If (i) the damage is of such nature or extent, in the
reasonable judgment of Landlord's architect, the more than one hundred fifty
(150) consecutive days, after the date of the casualty, would be required (with
normal work crews and hours) to repair and restore the part of the Premises or
Building which has been damage, or (ii) a substantial portion of the Premises or
the Building is so damaged that, in Landlord's sole judgment, it is uneconomic
to restore or repair the premises or the building, as the case may be, Landlord
shall so advise Tenant within thirty (30) days of the date of the casualty; and
Landlord or Tenant, for a period of twenty (20) days thereafter, shall have the
right to terminate this Lease by written notice to the other, as of the date
specified in such notice, which termination date shall be no later than thirty
(30) days after the date of such notice. In the event of such fire or other
casualty, if this Lease is not terminated pursuant to the terms of this Section
17, and if (i) sufficient casualty insurance proceeds are available for use for
such restoration or repair, and (ii) this Lease is then in full effect, landlord
shall proceed promptly and diligently to restore the Premises to its
substantially similar condition prior to the occurrence of the damage, provided
that Landlord shall not be obligated to repair or restore any alterations,
additions or fixtures which Tenant or any other Tenant may have installed unless
Tenant, in a manner satisfactory to Landlord, assures payment in full of all
costs which may be incurred by Landlord in connection therewith. Landlord shall
not insure any improvements or alterations to the Premises in excess of Standard
Tenant Work, or any fixtures, equipment or other property of Tenant. Tenant
shall, at its sole expense, insure the value of its leasehold improvements,
fixtures, equipment or other property located in the Premises, for the purpose
of providing funds to Landlord to repair and restore the Premises to its
substantially similar condition prior to occurrence of the damage. If there be
any such alteration, fixtures or additions and Tenant does not assure or agree
to assure payment of the cost or restoration or repair as aforesaid, Landlord
shall have the right to determined the manner in which the Premises shall be
restored so as to be substantially the same as the Premises existed prior to the
damage occurring, as if such alterations, additions or fixtures had not been
made or installed. The validity and effect of this Lease shall not be impaired
in any way by, the Landlord shall have no liability as a result of, the failure
of Landlord to complete repairs and restoration of the Premises or of the
Building within one hundred fifty (150) consecutive days after commencement of
work, even if Landlord had in good faith notified Tenant that it estimated that
the repair and restoration would be completed within such period, provide that
Landlord proceeds diligently with such repair and restoration and prosecutes the
same diligently to completion. Notwithstanding the foregoing, in the event the
restoration of the Premises is not substantially complete with two hundred ten
(210) days from the date of casualty, Tenant shall have the right to terminate
this Lease, by delivering written notice to Landlord on or before two hundred
twenty (220) days from the date of the casualty.
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In the case of damage to the Premises not caused by the
negligence or willful misconduct of the Tenant or any of its agents, employees
or invitees, and which is of a nature or extent that Tenant's continued
occupancy is substantially abated or adjusted for the duration of such
impairment. In no event, however, shall any damages be payable by Landlord to
Tenant in respect of business interruption resulting from any fire or other
casualty on the Premises or Building. Tenant shall be responsible to insure
and/or repair all of Tenant's leasehold improvements and all equipment, fixtures
and personal property located in the Premises.
18. HOLDING OVER.
Tenant shall, at the termination of this Lease by lapse of
time or otherwise, yield up immediate possession to Landlord. If Tenant holds
over after the expiration or termination of this Lease, all of the other terms
and provisions of this Lease shall be applicable during such period, except that
Tenant shall pay Landlord from time to time upon demand, as partial damages for
the period of any holdover, an amount equal to one hundred fifty percent (150%)
of the Basic Rental in effect on the termination date , computed on a daily
basis for each day of the holdover period. No holding over by Tenant shall
operate to extend this Lease except as otherwise expressly provided in this
Lease. The foregoing notwithstanding, Landlord, in addition to accepting the
daily damages during the period of such holding over, shall be entitled to
pursue all remedies at law or equity, including, without limitation, rights to
ejectment and damages.
19. TAXES.
(a) During each calendar year or portion thereof included
in the Lease Term, and any renewal thereof, Tenant shall pay to Landlord as
additional rent, Tenant's Proportionate Share of Real Estate Taxes which exceed
the Base Real Estate Taxes. Real Estate Taxes shall mean (i) all real estate
taxes, including general and special assessments, if any, which are imposed upon
Landlord or assessed against the Building and/or the Land during any calendar
year, and (ii) any other present or future taxes or governmental charges that
are imposed upon Landlord or assessed against the Building and/or the Land
during any calendar year which are in the nature of, in addition to or in
substitution for real estate taxes, including, without limitation, any license
fees, tax measured by or imposed upon rents, or other tax or charge upon
Landlord's business of leasing the Building, but shall not include any federal,
state or local income tax. Real Estate Taxes shall also include all reasonable
third-party expenses incurred by Landlord in obtaining or attempting to obtain a
reduction of real Estate Taxes, including but not limited to, legal fees.
(b) Commencing with the 1998 calendar year, and in each
calendar year thereafter during the Lease Term, Landlord may deliver to Tenant a
statement of Landlord's estimate of any increase in annual Real Estate Taxes for
the then current calendar year over the Base Real Estate Taxes and Tenant's
percentage thereof, such statement to be delivered on or before April 1st of
said calendar year. Within thirty (30) days after delivery of such statement
(including any statement delivered after the expiration or termination of this
Lease), Tenant
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shall pay to Landlord, as additional rent, Tenant's aforesaid percentage share
of such estimated increase in the annual Real Estate Taxes, except that Tenant's
first payment shall include (1/12th) monthly shares for the months from January
1st through the month in which Landlord submitted the estimate of the increase
in the annual Real Estate Taxes for the then current calendar year.
(c) Commencing with the 1999 calendar year, Landlord
shall deliver to Tenant a statement showing the determination of the increase in
the annual Real Estate Taxes for the preceding calendar year and Tenant's total
percentage thereof, such statement to be delivered on or before April 1st of the
then current calendar year. If such statement shows that Tenant's payments, if
any, of the estimated monthly increase in the annual Real Estate Taxes for said
preceding calendar year exceeded Tenant's actual increases for said year, then
Tenant may deduct such overpayment from its next payment or payments of monthly
rent. If such statement shows that Tenant's percentage share of Landlord's
actual increase in the annual Real Estate Taxes exceeded Tenant's payments, if
any, of the estimated monthly increase in the annual Real Estate Taxes for said
preceding calendar year, then Tenant shall pay the total amount due to Landlord,
which amount shall constitute additional rent hereunder due and payable with the
first monthly installment of rent due after delivery of said statement.
(d) In the event that the expiration date or other date of
termination of this Lease is not December 3lst, the increase to be paid by
Tenant for the calendar year in which the expiration date occurs shall be
determined by multiplying the amount of Tenant's share thereof for the full
calendar year by a fraction with the number of days during such calendar year
prior to the expiration date as the numerator, and with 365 as the denominator.
The termination of this Lease shall not affect the obligations of Landlord and
Tenant pursuant to this Section to be performed after such termination.
(e) Tenant shall be liable for all taxes levied or
assessed against personal property, furniture or fixtures placed by Tenant in
the Premises, and if any such taxes for which Tenant is liable are in any way
levied or assessed against Landlord, Tenant shall pay the Landlord upon demand
that part of such taxes for which Tenant is primarily liable hereunder.
(f) Notwithstanding anything to the contrary contained in
this section, none of the following, shall be considered to be or deemed to be
"Real Estate Taxes" for purposes of this Lease: (a) any gross receipts, capital,
franchise, sales or income tax levied upon Landlord or any of Landlord's
earnings or measured by the income of Landlord from the ownership, management,
leasing or operation of the Building; (b) any item treated as a Basic Cost
hereunder; (c) any amount incurred by Landlord by reason of Landlord's
intentional misconduct; (d) the costs of curing any violations of any federal,
state or local laws, regulations or requirements of any public authorities
having jurisdiction, and any fines or penalties imposed by legal authorities
having jurisdiction by reason of any such violations; (e) any fines or penalties
incurred due to violations by Landlord or any tenant or other occupant of the
Building of any applicable governmental rule or authority; (f) any interest,
fines or penalties incurred as a result of any late payments by Landlord of any
Basic Cost or Real Estate Taxes; and (g) any
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assessments or other amounts payable in installments, to the extent that any
such installments would cover any period of time subsequent to the term of this
Lease.
(g) The net amount of any refund, credit or other
retroactive or prospective savings in Real Estate Taxes obtained by Landlord or
any party on Landlord's behalf as a result of any appeal or contest brought by
Landlord or on Landlord's behalf shall be passed through one hundred percent
(100%) to Tenant and all other tenants, after deduction of all expenses
(including reasonable legal fees) attributable to such refund, credit or other
savings, pro-rata in accordance with their respective proportionate share of
Real Estate Taxes.
20. EVENTS OF DEFAULT.
The occurrence of any of the following events shall be deemed
to be an event of default ("Event of Default") by Tenant under this Lease:
(a) Tenant shall fail to pay when due any rental or other
sums payable by Tenant hereunder (or under any other lease now or hereafter
executed by Tenant in connection with space in the Building), and same is not
cured within five (5) days after Landlord's written notice thereof to Tenant.
(b) Tenant shall fail to comply with or observe Section
46 of this Lease (or a comparable section of any other lease now or hereafter
executed by Tenant in connection with space in the Building).
(c) Tenant shall fail to comply with or observe any other
provision of this Lease (or any other lease now or hereafter executed by Tenant
in connection with space in the Building), and same is not cured within fifteen
(15) days after Landlord's written notice thereof to Tenant. Notwithstanding the
foregoing, if (i) the default is of such a nature that fifteen (15) days is an
unreasonably short period of time in which to cure the default; (ii) Tenant has
commence curing default within the fifteen (15) day period; and (iii) Tenant is
continuing to diligently pursue a cure of such default, then Tenant shall have
and additional thirty (30) days in which to complete the cure of said default.
(d) Tenant abandons the Premises.
(e) Tenant or any partner or guarantor of Tenant, as the
case may be, shall apply for or consent to the appointment of a receiver,
trustee or liquidator of itself or himself or any of its or his property, admit
in writing its or his inability to pay its or his debts as they mature, make a
general assignment for the benefit of creditors, be adjudicated a bankrupt,
insolvent or file a voluntary petition in bankruptcy or a petition or an answer
seeking reorganization or an arrangement with creditors or to take advantage of
any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or
liquidation law or statute, or an answer admitting the material allegations of a
petition filed against it or him in any proceeding
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under any such law, or if action shall be taken by Tenant or any partner or
guarantor of Tenant for the purposes of effecting any of the foregoing.
(f) Any court of competent jurisdiction shall enter an
order, judgment or decree approving a petition seeking reorganization of Tenant
or all or a substantial part of the assets of Tenant or any partner or guarantor
of Tenant, or appointing a receiver, sequestrator, trustee or liquidator of
Tenant or any partner or guarantor of Tenant or any of its or his property, and
such order, judgment or decree shall continue unstayed and in effect for any
period of at least thirty (30) days.
21. REMEDIES.
Upon the occurrence of any Event of Default specified in this
Lease, Landlord shall have the option to pursue any one or more of the following
remedies without any notice or demand whatsoever:
(a) Distrain, collect or bring an action for such rent as
may be in arrears, and request entry of judgment therefor as provided for in
case of rent in arrears, or file a proof of claim in any bankruptcy or
insolvency proceeding for such rent, or institute any other proceedings, whether
similar or dissimilar to the foregoing, to enforce payment thereof.
(b) Following a termination of the Lease, declare due and
payable and sue for and recover, all unpaid rent for the unexpired period of the
Lease Term (and also all additional rent as the amounts thereof can be
determined or reasonably estimated) as if by the terms of this Lease the same
were payable in advance, all of which shall be reduced to present value at the
time of the award at an interest rate of eight percent (8%) per annum, together
with all legal fees and other expenses incurred by Landlord in connection with
the enforcement of any of Landlord's rights and remedies hereunder.
(c) Terminate this Lease, in which event Tenant shall
immediately surrender the Premises to Landlord; and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in rent, enter upon and take possession of the Premises
and expel or remove Tenant and any other person who may be occupying the
Premises or any part thereof, without being liable for trespass or any claim for
damages therefor, and Tenant agrees to pay to Landlord on demand the amount of
all loss and damage which Landlord may suffer by reason of such termination,
whether through inability to relet the Premises on satisfactory terms or
otherwise, including the loss of rental for the remainder of the Lease Term.
(d) Without termination of the Lease; enter upon and take
possession of the Premises and expel or remove Tenant and any other person who
may be occupying the Premises or any part thereof, without being liable for
trespass or any claim or damages therefor; and if Landlord so elects, relet the
Premises on behalf of the Tenant on such terms as Landlord shall
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deem advisable and receive the rent therefor, and Tenant agrees to pay to
Landlord on demand any deficiency that may arise by reason of such reletting for
the remainder of the Lease Term.
(e) Without termination of the Lease, enter upon the
Premises, by force if necessary, without being liable for trespass or any claim
for damages therefor, and do whatever Tenant is obligated to do under the terms
of this Lease; and Tenant agrees to reimburse Landlord on demand for any
expenses which Landlord may incur in thus effecting compliance with Tenant's
obligations under this Lease, and Tenant further agrees that Landlord shall not
be liable for any damages resulting to the Tenant from such action.
(f) If Tenant fails to perform any covenant or observe an
condition to be performed or observed by Tenant hereunder or acts in violation
of covenant or condition hereof, Landlord may, but shall not be required to on
behalf of Tenant, perform such covenant and/or take such steps, including
entering upon the Premises, as may be necessary or appropriate, if Landlord
shall have given at Tenant at least five (5) days prior written notice of
Landlord's intention to do so, unless an emergency situation exists, in which
case Landlord shall have the right to proceed immediately and all costs and
expenses incurred by Landlord in so doing, including reasonable legal fees,
shall be paid by Tenant to Landlord upon demand, plus interest at the overdue
interest rate set forth herein from the date of expenditure(s) by Landlord, as
additional rent. Landlord's proceeding under the rights reserved to Landlord
under this Section shall not in any way prejudice or waive any rights Landlord
might otherwise have against Tenant by reason of Tenant's default.
(g) Exercise any other rights and remedies available to
Landlord at law or in equity. No reentry or taking Possession of the Premises by
Landlord shall be construed as an election on its part to terminate this Lease,
unless a written notice of such intention be given to Tenant. Neither pursuit of
any of the foregoing remedies provided nor any other remedies provided herein or
by law shall constitute a forfeiture or waiver of any rent due to Landlord
hereunder or of any damages accruing to Landlord by reason of the violation of
any of the terms, provisions and covenants herein contained. Landlord's
acceptance of rent following an Event of Default hereunder shall not be
construed as Landlord's waiver of such Event of Default. No waiver by Landlord
of any violation or breach of any of the terms, provisions and covenants herein
contained shall be deemed or construed to constitute a waiver of any other
violation or Event of Default. The loss or damage that Landlord may suffer by
reason of termination of this Lease or the deficiency from any reletting as
provided for above shall include the expense of repossession and any reasonable
repairs or remodeling undertaken by Landlord following possession. Should
Landlord at any time terminate this Lease for any default, Tenant shall not be
relieved of its liabilities and obligations hereunder and, in addition to any
other remedy Landlord may have, Landlord may recover from Tenant all damages
Landlord may incur by reason of such default, including the cost of recovering
the Premises and the loss of rental for the remainder of the Lease Term, the
rental loss to be reduced to present value at the time of the award at an
interest rate of eight percent (8%) per annum. Tenant's obligations and
liabilities under this Lease shall also survive repossession and reletting of
the Premises by Landlord pursuant to the foregoing provisions of this Section
21. Notwithstanding anything to
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the contrary contained in this Section, in computing the amount due Landlord as
a result of any Event of Default by Tenant, Tenant shall not be entitled to
receive any credit, upon reletting by Landlord after Tenant's default, for any
rent or other sums received by Landlord in excess of those for which Tenant is
otherwise obligated herein.
(h) All rights and remedies of Landlord and Tenant herein
enumerated shall be cumulative, and none shall exclude any other right or remedy
allowed by law.
(i) In addition to any other rights and remedies provided
in this Lease, and with or without terminating this Lease, Landlord may with
force of law, re-enter, terminate Tenant's right of possession and take
possession of the Premises, the provision of this section 21 operating as a
notice to quit, any other notice to quit or of Landlord's intention to re-enter
the Premises being hereby expressly waived.
22. SURRENDER OF PREMISES.
No act done and no failure to act by Landlord or its agents
during the term hereby granted shall be deemed an acceptance of a surrender of
the Premises, and no agreement to accept a surrender of the Premises shall be
valid unless the same be made in writing and signed by Landlord.
23. ATTORNEYS' FEES.
In case it should be necessary or proper for Landlord or
Tenant to bring any action under this Lease or to consult or place this Lease,
or any amount payable by Landlord or Tenant hereunder, with an attorney
concerning a default of Landlord or Tenant hereunder, irrespective of whether
such default is later cured, then the non-prevailing party shall pay any and all
reasonable attorney's fees, court costs and expenses of the prevailing party
incurred in connection with such enforcement.
24. LANDLORD'S LIEN.
(a) In addition to any statutory Landlord's lien,
Landlord shall have, at all times, and Tenant hereby grants to Landlord, a valid
security interest to secure payment of all rentals and other sums of money
becoming due hereunder from Tenant, and to secure payment of any damages or loss
which Landlord may suffer by reason of the breach by Tenant of any covenant,
agreement or condition contained herein, upon all goods, wares, equipment,
fixtures, furniture, improvements and other personal property of Tenant
presently or which may hereafter be situated on the Premises, and all proceeds
therefrom; and such property shall not be removed therefrom without the consent
of Landlord until all arrearages in rent as well as any and all other sums of
money then due to Landlord hereunder shall first have been paid and discharged
and all the covenants, agreements and conditions hereof have been fully complied
with and performed by Tenant. Upon the occurrence of any Event of Default,
Landlord may, in addition to any other remedies provided herein, enter upon the
Premises and take possession of any and all
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goods, wares, equipment, fixtures, furniture, improvements and other person
property of Tenant situated on the Premises, without liability for trespass or
conversion, and sell same at public or private sale. Any surplus shall be paid
to Tenant or as otherwise required by law; and Tenant shall pay any deficiencies
therein to Landlord forthwith. Upon request by Landlord, Tenant agrees to
execute and deliver to Landlord a financing statement in form sufficient to
perfect the security interest of Landlord in the aforementioned property and
proceeds thereof under the provisions of the Uniform Commercial Code in force in
the jurisdiction in which the Building is located.
(b) Notwithstanding anything to the contrary contained in
subsection (a) above, Landlord agrees to subordinate such liens to any existing
or future bona fide financing for working capital, equipment loans, and similar
banking financing obtained by Tenant.
25. MECHANICS' LIENS.
Tenant shall not permit any mechanics' lien or other liens to
be placed upon the Premises or the Building or improvements thereon during the
Lease Term, caused by or resulting form any work performed, materials furnished
or obligation incurred by or at the request of Tenant. In the case of the filing
any such lien Tenant will promptly, and in any event within thirty (30) days
after the filing thereof, satisfy or release such lien by means of payment
thereof, bonding Landlord against any loss occasioned thereby (in which case
Tenant shall have the right in due diligence to contest and dispute such lien a
long as such bond remains in place), or take such other action as may be
otherwise acceptable to Landlord.
26. WAIVER OF SUBROGATION; INSURANCE
(a) Landlord and Tenant hereby release the other from any
and all liability or responsibility to the other or anyone claiming through or
under the by way of subrogation or otherwise for any loss or damage to property,
but only to the extent that Such loss or damage is covered by any insurance then
in force even if such fire or other casualty shall have been caused by the fault
or negligence of the other party, or anyone for whom such party may be
responsible; provided, however, that such release shall be applicable and in
force and effect only with respect to any lose or damage occurring during such
time as the policy or policies of insurance covering said loss shall contain a
clause or endorsement to the effect that this release shall not adversely affect
or impair said insurance or prejudice the right of the insured to recover
thereunder.
(b) Tenant shall maintain throughout the Lease Term, at
Tenant's sole cost and expense, insurance against loss or liability in
connection with bodily injury, death, property damage and destruction, in or
upon the Premises of the remainder of the Land, and arising out of the use of
all or any portion of the name by Tenant or its agents, employees, officers,
invitees, visitors and guests, under policies of comprehensive general public
liability insurance having such limits as to each as may be reasonably required
by Landlord from time to time, but in any event of not less than One Million
Dollars ($1,000,000) per occurrence for death or injury and one million Dollars
($1,000,000) per occurrence fur property damage or destruction and
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personal injury. Such policies shall name Landlord and Tenant, (and, at
Landlord's or such mortgagee's or paramount lessor's or installment seller's
request) any mortgagee of all or any portion of the Buildings and any landlord
of, or installment seller to, Landlord as the insured parties, shall provide
that they shall not be modified or cancelled without at least thirty (30) days
prior written notice to Landlord and any other party designated as aforesaid and
shall be issued by insurers of recognized responsibility licensed to do business
in the jurisdiction in which the Building is located and acceptable to Landlord.
Copies of all such policies or insurance certificates, certified by the insurers
to be true and complete, shall be supplied to Landlord and such mortgagees,
paramount lessors and installment sellers at all times.
(c) Landlord shall maintain throughout the Lease Term
insurance coverage in such amounts as that carried by owners of other comparable
office buildings in the same general area of the Building, including, without
limitation, comprehensive general liability insurance and insurance on the
Building and the structural improvements therein.
27. INTENTIONALLY OMITTED.
28. BROKERAGE.
Landlord and Tenant warrant that each has had no dealings with
any Broker or agent other than Compass Management and Leasing, Inc., and Scheer
Partners Inc. in connection with the negotiation or execution of this Lease, and
each agrees to indemnify the other against all costs, expenses, attorneys' fees
or other liability for commissions or other compensation or charges claimed by
any other broker or agent claiming the same by, through or under such party.
Upon final consummation of this Lease, Landlord agrees to pay such brokers
pursuant to a separate agreement and will indemnify Tenant from any claims made
by said brokers for commissions earned due to this Lease.
29. ESTOPPEL CERTIFICATES.
Tenant shall from time to time, within ten (10) days after
Landlord shall have requested the same of Tenant, execute, acknowledge and
deliver to Landlord a written instrument in recordable form and otherwise in
such form as required by Landlord (i) certifying that this Lease is in full
force and effect and has not been modified, supplemented or amended in any way
(or, if there have been modifications, supplements or amendments thereto, that
it is in full force and effect as modified, supplemented or amended and stating
such modifications, supplements and amendments); and (ii) stating any other fact
or certifying any other condition reasonably requested by Landlord or reasonably
requested by any mortgagee or prospective mortgagee or purchaser of the Property
or of any Interest therein. In the even that Tenant shall final to return a
fully executed copy of such certificate to Landlord within the foregoing ten
(10) day period, then Tenant shall be deemed to have approved and confirmed all
of the terms, certifications and representations contained in such certificate,
and Tenant irrevocably authorizes and appoints Landlord as its attorney-in-fact
to execute such certificate on behalf of Tenant.
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30. NOTICES.
Each provision of this Lease or of any applicable governmental
laws, ordinances, regulations and other requirements with reference to the
sending, mailing or delivery of any notice or the making of any payment by
Landlord to Tenant or with reference to the sending, mailing or delivery or the
making of an payment by Tenant to Landlord shall be deemed to be complied with
when and if the following steps are taken;
(a) All rent and other payments required to be made by
Tenant to Landlord hereunder shall be payable to Landlord at the address for
Landlord set forth below or at such other address as Landlord may specify from
time to time b written notice delivered in accordance herewith. Tenant
obligation to pay rent and any other amounts to Landlord under the terms of this
Lease shall not be deemed satisfied until such rent or other amounts have been
actually received by Landlord.
(b) All payments required to be made by Landlord to
Tenant hereunder shall be payable to Tenant at the address set forth below, or
at such other address within the continental United States as Tenant may specify
from time to time by written notice delivered in accordance herewith.
(c) With the exception of subsection (a) above, any
notice or document required or permitted to be delivered hereunder shall be
deemed to be delivered (i) when delivered personally or (ii) whether actually
received or not, when deposited in the United States Mail, postage prepaid,
registered or certified mail, return receipt requested, addressed to the parties
hereto at the respective addressee set out below, or at such other address as
they have previously specified by-written notice delivered in accordance
herewith.
c/o Compass Management and Leasing, Inc
15825 Shady Grove Road, Suite 55
Rockville, MD 20850
If to Tenant, at:
the Premises.
If and when included within the term "Landlord", as used in this instrument,
there are more than one person, firm or corporation, all shall jointly arrange
among themselves for their joint execution of such notice specifying some
individual at the specific address for the receipt of notices and payments to
Landlord; if and when included within the term Tenant, as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payment to Tenant. All parties
included within the terms "Landlord" and "Tenant", respectively, shall be bound
by
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notices given in accordance with the provisions of this paragraph to the same
effect as if each had received such notice.
31. FORCE MAJEURE.
Whenever a period of time is herein prescribed for action to
be taken by Landlord or Tenant or whenever Landlord or Tenant is otherwise
obligated to perform hereunder, neither Landlord nor Tenant shall be liable or
responsible for, and there shall be excluded from the computation for any such
period of time, any delays or failures to perform due to strike, riots, acts of
God, shortages of labor or materials, war, governmental laws , regulations or
restrictions or any other causes of any kind whatsoever which are beyond the
reasonable control of that party; provided, however, that the failure to pay any
rent or additional rent hereunder, for any reason, shall not be considered to be
beyond the reasonable control of Tenant.
32. SEVERABILITY.
If any clause or provision of this Lease is illegal, invalid
or enforceable under present or future law effective during the Lease Term, then
and in that event, the remainder of this Lease shall not be affected thereby.
33. AMENDMENTS; WAIVER; BINDING EFFECT.
The provisions of this Lease may not be waived, altered,
changed or amended, except by instrument in writing signed by both parties
hereto, and, except to the extent otherwise expressly provided herein, such
instrument may be subject to there approval of any mortgagees, and ground
lessors of record. The acceptance of Basic Rental, additional rent or other
payments by Landlord, or the endorsement or statement on any check, any letter
accompanying any check or other tender of Basic Rental, additional recent or
other payment shall not be deemed an accord and satisfaction or a waiver of any
obligation of Tenant, regardless of whether Landlord had knowledge of any breach
of such obligation. The terms and conditions contained in this Lease shall apply
to, insure to the benefit of, and be binding upon the parties hereto, and upon
their respective successors in interest and legal representative, except as
otherwise herein expressly provided.
34. QUIET ENJOYMENT.
Provided Tenant has performed all of the terms and conditions
of the Lease, including the payment of rent, to be performed by Tenant, Tenant
shall peaceably and quietly hold and enjoy the Premises for the Lease Term,
without hindrance from Landlord or others claiming through Landlord, subject to
the terms and conditions of this Lease and to all mortgages, ground leases and
other encumbrances to which this Lease Is subject and subordinate.
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35. LIABILITY OF TENANT.
If there is more than one Tenant, the obligations hereunder
imposed upon Tenant shall be joint and several. If there is a guarantor of
Tenant's obligations hereunder, the obligations hereunder imposed upon Tenant
shall be the joint and several obligations of Tenant and such guarantor, and
Landlord first proceed against Tenant before proceeding against such guarantor
nor shall any such guarantor be released from its guaranty for any reason
whatsoever, including without limitation any extensions or renewals hereof, any
amendments hereto, any waivers hereof or failure to give such guarantor any
notices hereunder.
36. LANDLORD LIABILITY.
The liability of Landlord and all officers, employees,
shareholders, ventures or partners (general or limited) of Landlord to Tenant
for any default by Landlord under the terms of this Lease shall be non-recourse
and limited to the interest of Landlord in the Building, and Landlord or any
officer, employee, shareholder, venturer or partner (general or limited) of
Landlord shall have the right to sell or transfer all or any portion of the Land
or the Building to any third party, and upon any such sale or other transfer of
all of the Building or the Landlord, and the corresponding assignment of this
Lease the previous Landlord shall have no further liability or obligation to
Tenant hereunder or otherwise.
37. CERTAIN RIGHTS RESERVED BY LANDLORD.
Landlord shall have the following rights, exercisable without
notice, except as provided herein, and without liability to Tenant for damage or
injury to property, persons or business and without effecting an eviction,
constructive or actual, or disturbance of Tenant's use or possession or giving
rise to any claim or setoff or abatement of rent or affecting any of Tenant's
obligations hereunder:
(a) To change the name by which the Building is
designated upon four (4) months written notice to Tenant.
(b) To decorate and to make repairs, alterations,
additions, changes or improvements, whether structural or otherwise, in and
about the Building, or any part thereof, and for such purposes to enter upon the
Premises (during business hours, except in the event of an emergency) and,
during the continuance of any such work, to temporarily close doors, entry ways,
public space and corridors in the Building, to interrupt to temporarily suspend
Building services and facilities and to change the arrangement and location of
entrances or passageways, doors and doorways, corridors, elevators, stairs,
toilets, or other public parts of the Building, so long as the Premises are
reasonably accessible, and so long as Tenant's use of the Premises is not
materially, adversely affected.
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(c) To grant to anyone the exclusive right to conduct any business
or render any service in or to the Building, provided such exclusive right shall
not operate to exclude Tenant from the use expressly permitted herein.
(d) To take all such reasonable measures (so long as such measures
do not materially, adversely affect the Permitted Use of the Premises) as
Landlord may deem advisable for the security of the Building and its occupants,
including without limitation, the search of all persons entering or leaving the
Building, the evacuation of the Building for cause, suspected cause, or for
drill purposes, the temporary denial of access to the Building, and closing of
the Building after normal business hours and on Saturdays, Sundays and holidays;
subject, however, to Tenant's right to admittance when the Building is closed
after normal business hours under such reasonable regulations as Landlord may
prescribe from time to time.
38. FINANCIAL STATEMENTS.
Tenant agrees to provide to Landlord within 21 days of request
by Landlord but no more than once per year, the most recent annual financial
statements of Tenant, including balance sheets, income statements, and financial
notes ("Statements"). Tenant consents that Landlord may release the Statements
to Landlord's subsidiaries, affiliates, lenders, advisors, joint venture
partners, or potential purchasers of the property for the purposes of evaluating
Tenant's financial condition with respect to performance under the Lease.
39. NOTICE TO LENDER.
If the Premises or the Building or any part thereof are at any
time subject to a mortgage or a deed of trust or other similar instrument and
the Lease or the rentals are assigned to such mortgagee, trustee or beneficiary
and the Tenant is given written notice thereof, including the post office
address of such assignee, then Tenant shall not terminate this Lease or abate
rentals for any default on the part of Landlord without first giving written
notice by certified or registered mail, return receipt requested, to such
mortgagee, trustee, beneficiary and assignee, specifying the default in
reasonable detail, and affording such mortgagee, trustee, beneficiary and
assignee a reasonable opportunity to make performance, at its election, for and
on behalf of the Landlord.
40. MISCELLANEOUS.
(a) Except for the initial construction of the Premises,
which shall be Landlord's responsibility as outlined in Section 7 herein, any
approval by Landlord and Landlord's architects and/or engineers of any of
Tenant's drawings, plans and specifications which are prepared in connection
with any construction of improvements in the Premises shall not in any way be
construed operate to bind Landlord or to constitute a representation or warranty
of Landlord as to tile adequacy or sufficiency of such drawings, plans and
specifications, or the improvements to which they relate, or any use, purpose,
or condition, but such approval shall merely be the consent of Landlord as may
be required hereunder in
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connection with Tenant's construction of improvements in the Premises in
accordance with such drawings, plans and specifications.
(b) Each and every covenant and agreement contained in
this Lease is, and shall be construed to be, a separate and independent covenant
and agreement.
(c) Neither Landlord nor Landlord's agents or brokers
have made any representations or promises with respect to the Premises, the
Building or the Land except as herein expressly set forth and no rights,
easements or licenses are acquired by Tenant by implication or otherwise except
as expressly set forth in the provisions of this Lease.
(d) Time is of the essence as to all provisions of this
Lease applicable to Tenant's obligations hereunder.
(e) The submission of this Lease to Tenant shall not be
construed as an offer, nor shall Tenant have any rights with respect thereto
unless and until Landlord shall, or shall cause its managing agent to, execute a
copy of this Lease and deliver the same to Tenant.
(f) The terms of this Lease shall be construed in
accordance with the laws of the jurisdiction in which the Building is located.
41. ADDITIONAL RENT.
The Tenant shall pay as additional rent any money required to
be paid pursuant to the provisions of this Lease whether or not the same be
designated "additional rent". If such amounts or charges are not paid at the
time provided in this Lease, they shall nevertheless, if not paid when due, be
collectable as additional rent with the next installment of rent thereafter
falling due hereunder, but nothing herein contained shall be deemed to suspend
or delay the payment of any amount of money or charge at the time the same
becomes due and payable hereunder, or limit any other remedy of the Landlord.
42. ENTIRE AGREEMENT.
The Lease, including all Exhibits referenced herein, contains
all covenants and agreements between Landlord and Tenant relating in any manner
to the rent, use and occupancy of Premises and Tenant's use of the Building and
other matters set forth in this Lease. No prior agreement or understanding
pertaining to the same shall be valid or of any force or effect and the
covenants and agreements of this Lease shall not be altered, modified or added
to except in writing signed by Landlord and Tenant.
43. LEGAL PROCEEDINGS.
Landlord and Tenant hereby waive the right to a jury trial in
any action, proceeding or counterclaim between Tenant and Landlord or their
successors arising out of the Lease of Tenant's occupancy of the Premises or
Tenant's rights to occupy the same.
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44. LAWS AND REGULATIONS.
Tenant agrees at Tenant's expense to comply with all
applicable laws, ordinances, rules, and regulations, whether now in effect or
hereafter enacted or promulgated, of any governmental entity or agency having
jurisdiction of the Premises.
45. AMERICANS WITH DISABILITIES ACT ("ADA").
(a) Tenant hereby represents that it is not a public
accommodation as defined in the RDA.
(b) The Landlord shall take whatever steps are necessary
to cause the common areas of the building to meet the requirements of Title III
of the ADA; provided, however, that all expenses incurred pursuant to the ADA,
which required compliance prior to the execution date of this Lease, shall be
Landlord's sole responsibility.
(c) Except for the work outlined on the Space Plans,
which shall be Landlord's responsibility, the Tenant at its sole cost and
expense shall be solely responsible for taking any and all measures which are
required to comply with the requirements of Title I and/or Title III of the ADA
within the Premises and, if the measures required outside of the Premises are
attributable to Tenant's alterations to "the Premises, outside of the Premises
as well. Any Alterations to the Premises made by Tenant for the purpose of
complying with the ADA or which otherwise require compliance with the ADA shall
be done in accordance with this Lease; provided, however, that Landlord's
consent to such Alterations shall not constitute either Landlord's assumption,
in whole or in part, of Tenant's representation or confirmation by Landlord that
such Alterations comply with the provisions of the ADA.
(d) Tenant shall indemnify the Landlord for all claims,
damages, judgments, penalties, fines, administrative proceedings, costs,
expenses and liability arising from Tenant's failure to comply with any of the
requirements of Title I and/or Title III of the ADA within the Premises.
(e) Landlord shall indemnify the Tenant for all claims,
damages, judgments, penalties, fines, administrative proceedings, cost, expenses
and liability arising from Landlord's failure to comply with Title III of the
ADA within the common areas.
(f) Tenant understands that certain provisions of the
ADA, and other related federal, state and local statutes, ordinances and
regulations (all of the foregoing are hereafter referred to in this subsection
as the "ADA") require that the Building be accessible to persons with
disabilities, and that accessibility for disabled persons to the top floor of
the Building may only be available through the Premises. Accordingly, Tenant
will permit unobstructed access to all persons entering the Building through its
exterior door during normal Building operating hours, as they may be amended
from time to time. In addition to the foregoing, and in the event any person or
entity, including any federal, state or local government, objects to or
complains to Landlord or to any governmental authority due to the alleged
violation of the ADA attributable
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to the lack of accessibility by disabled persons to the top floor of the
Building, Tenant agrees to indemnify, defend (with counsel acceptable to
Landlord) and save Landlord harmless from and against any and all expense,
liability, loss or damage (including any fines or penalties) that Landlord may
suffer or incur as a result of the failure or alleged failure of Tenant, or
those acting through or under Tenant, to comply with the ADA as provided herein.
46. ENVIRONMENTAL PROTECTIONS.
(a) Notwithstanding the generality of Section 9 above,
Tenant shall conduct all activity in compliance with all federal, state, and
local laws, statutes, ordinances, rules regulations, orders and requirements of
common law concerning protection of the environment or human health
("Environmental Laws"). Tenant shall also cause its subtenants (if subtenants
are permitted by this Lease or are hereafter approved by Landlord), licensees,
invitees, agents, contractors, subcontractors and employees to comply with all
Environmental Laws. Tenant and its subcontractors shall obtain, maintain, and
comply with all necessary environmental permits, approvals, registrations and
licenses.
In addition to and not in limitation of the foregoing, Tenant,
its permitted subtenants, licensees, invitees, agents, contractors,
subcontractors and employees shall not generate, refine, produce, transfer,
process or transport Hazardous Material on, above, beneath or near the Premises,
the Building or the Land. As used herein, the term "Hazardous Materials" shall
include, without limitation, all of the following: (1) hazardous substances, as
such term is defined in the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 (14), as amended by the
Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, 100
Stat. 1613 (Oct. 17, 1986) (SARA:); (2) regulated substances, within the meaning
of Title I of the Resource Conversation and Recovery Act, 42 U.S.C. Sections
6991-6991(i), as amended by SARA; (3) any element, compound or material which
can pose a threat to the public health or the environment when released into the
environment; (4) hazardous substance and controlled hazardous substances as
defined in the Maryland Environment Code Ann., Title 7, Subtitle 2, and "oil" as
defined in Section 4-401(c) of the Maryland Environment Code Ann,; (5) petroleum
and petroleum byproducts; (6) an object or material which is contaminated with
any of the foregoing; (7) any other substance designated by any of the
Environmental laws or a federal; state or local agency and detrimental to public
health, safety and the environment.
(b) Tenant shall protect, indemnify and save Landlord
harmless from and against any and all liability, loss, damage, cost or expense
(including reasonable attorneys' fees) that Landlord may suffer or incur as a
result of are claims, demands, damages, losses, liabilities, costs, charges,
suits, orders, judgments or adjudications asserted, assessed, filed, or entered
against Landlord or any of the Building or the Land, by any third party,
including, without limitation, any governmental authority, arising from Tenant's
breach of Environmental Laws or otherwise arising from the alleged generation,
refining, production, storage, handling, use, transfer, processing,
transportation, release, spillage, pumping, pouring, emission, emptying,
dumping, discharge or escape of Hazardous Materials on, from or affecting the
Premises, the
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<PAGE> 36
Building the Land, including, without limitation, liability for costs and
expenses of abatement, correction, clean-up or other remedy, fines, damages,
response (including death) and property damage.
(c) Tenant, its permitted subtenants, licensees,
invitees, agents contractors, subcontractors and employees shall not release,
spill, pump, pour, emit, empty, dump or otherwise discharge or allow to escape
Hazardous Materials onto the Land or Building, and Tenant shall take all action
necessary to remedy the results of any such release, spillage, pumping, pouring,
emission, emptying dumping, discharge, or escape.
(d) Tenant shall within 48 hours of receipt deliver to
Landlord copies of any written communication relating to the Building or the
Land between Tenant and any governmental agency or instrumentality concerning or
relating to Environmental Laws.
(e) Tenant's obligations under this Section shall survive
the termination or other expiration of this Lease.
(f) Landlord shall indemnify and save Tenant harmless
from and against any and all liability, loss, damage, cost or expense (including
reasonable attorney's fees) that Tenant may suffer or incur as a result of any
claims, demands, damages, losses, liabilities, costs, charges, suits, orders,
administrative proceedings, judgments or adjudications asserted, assessed, filed
or entered against Tenant by any third party, including, without limitation, and
governmental authority, arising from or related to Landlord's breach of
Environmental Laws relating to the Premises, unless such breach is caused by an
act or omission of Tenant.
47. PARKING.
Tenant, its permitted subtenants, licensees, invitees, agents,
contractors, subcontractors and employees shall not use parking spaces on the
Land or Building in excess of that number set out on the attached Data Sheet
which has been reasonably determined by Landlord to be Tenant's proportionate
share of the total parking spaces available on the Building and Land.
Notwithstanding anything contained herein, if any governmental regulation or
ordinance is enacted or amended after the effective date of this Lease so as to
require a modification in Tenant's number of parking spaces, Landlord reserves
the right to make such modification without modifying in any way the rent due
hereunder or any other obligations of Tenant.
48. EXTERIOR SIGNAGE.
Landlord agrees that Tenant may Install signage (of similar
size and appearance to that previously installed by McDonnell Douglas) on the
exterior of the Building, at a location mutually agreed between the parties, all
costs for the design, installation and maintenance of which shall be paid by
Tenant. The size, location and appearance of the signage must be approved by
Landlord and all appropriate governmental agencies in writing prior to its
installation. Landlord's approval shall not be unreasonably withheld,
conditioned or delayed.
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<PAGE> 37
Tenant shall remove such signage, at its sole cost and expense, upon the
termination of the Lease.
49. OPTION TO RENEW.
Tenant shall have the right to extend the term of this Lease
for one (1) additional five (5) year lease term (the "Renewal Term"), upon the
following conditions:
(a) Tenant is not in default under this Lease, either at
the time any notice hereunder is given, or at the time the Renewal Term is to
commence;
(b) Landlord has made good faith determination that
Tenant remains creditworthy;
(c) Tenant had not previously assigned the Lease or
sublet more than twenty-five percent (25%) of the Premises;
(d) Tenant has delivered to Landlord written notice of
its intention to exercise this option, not less than 365 days prior to the end
of the Lease Term;
(e) All lease terms for the Renewal Term shall be the
same in this Lease, except the Basic Rental for the Renewal Term shall be the
fair market rental rate the Rockville, Maryland commercial real estate market
existing at the time of delivery of the notice set forth in subsection (d)
above, taking into consideration the age and quality of the building, the square
footage leased, the creditworthiness of the Tenant, any concessions or
inducements being offered tenants in the market, and other relevant factors; and
(f) If Landlord and Tenant, each using good-faith
efforts, fail to agree as to all terms and sign an Addendum to the Lease
extending the Lease term as provided in this Section at least 270 days prior to
the end of the lease term, then Tenant's right to extend the term of this Lease
shall lapse and Tenant's renewal option shall be of no force and effect. The
renewal option is personal to Tenant and is non-transferable.
50. ADDITIONAL SPACE.
Tenant acknowledges that Landlord has entered in n a
lease with Montgomery County, Maryland (the "County") dated, November 25, 1996
(the "County Lease") for approximately 13,451 rentable square feet of space in
the Building (the "Additional Space"). The County Lease is scheduled to expire
on November 23, 1999. Upon the expiration or earlier termination of the county
Lease, Tenant shall lease the Additional Space from Landlord in its then "as is"
condition, upon the same terms and conditions as set forth herein, including the
payment of Basic Rental for the Additional Space at the then escalated rate per
square foot being paid by Tenant for the Premises. The parties shall enter into
an Amendment reflecting the foregoing terms on or before the commencement date
of the lease for the Additional Space.
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<PAGE> 38
51. RENTAL ABATEMENT.
Notwithstanding anything to the contrary contained in
this Lease, and in addition to the Basic Rental abatement provided in Section
3(d), Landlord agrees to abate Basic Rental for two-thirds (2/3) of the Premises
from the Commencement Date until December 15, 1996, on which date the Basic
Rental abatement provided under Section 3(d) will commence. In the event
TeleCheck, a subtenant of a prior tenant which occupies approximately 5,000
rentable square feet of the Premises, has not vacated the Premises by December
15, 1996, Tenant shall also receive a day-for-day partial abatement of Basic
Rental equal to that portion of the space occupied by TeleCheck for each day
that TeleCheck remains in the Premises after December 15, 1996.
52. EXHIBITS.
(i) Exhibit A - Outline of Premises
(ii) Exhibit B - Janitorial Specifications
(iii) Exhibit C - Rules and Regulations
(iv) Exhibit D - Intentionally Omitted
(v) Exhibit E - Tenant Space Plan
IN WITNESS WHEREOF, the parties hereto have executed this
Lease and affixed their seals as of the date first above written.
Tenant:
WITNESS/ATTEST: VISUAL NETWORKS, INC.
/s Scott E. Stouffer By: /s Robert Troutman (SEAL)
- ------------------------------- -------------------------
Name: Robert Troutman
Title: Vice President
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<PAGE> 39
Landlord
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
WITNESS/ATTEST:
By: /s Margaret Cleary (SEAL)
- ------------------------------- -------------------------
Name: Margaret S. Cleary
Title: Investment Officer
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<PAGE> 1
EXHIBIT 10.9
LEASE AMENDMENT
This Lease Amendment (the "Amendment") is made this 2nd day of
September, 1997, between THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED
STATES ("Landlord"), and VISUAL NETWORKS, INC., a Delaware corporation
("Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated
December 12, 1996 (the "Lease"), for premises containing approximately 23,026
rentable square feet of space (the "Initial Premises") in the office building
located at 2092 Gaither Road, Rockville, Maryland (the "Building"); and
WHEREAS, Landlord and Tenant wish, among other matters, to amend the
Lease to expand the Premises leased by Landlord to Tenant in the Building, all
on the terms hereinafter contained.
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which are acknowledged by
the parties, the parties agree as follows:
1. EXPANSION OF PREMISES. Effective as of the Expansion
Premises Commencement Date, Landlord demises and leases to Tenant and Tenant
leases and accepts from Landlord, for a term and upon the conditions hereinafter
provided, an additional two hundred thirty-one (231) rentable square feet of
space on the first (1st) floor of the Building (the "Expansion Premises"),
outlined on Exhibit A attached to this Amendment. The Premises and the Expansion
Premises, comprising approximately 23,257 rentable square feet, are collectively
referred to in this Amendment as the "Premises."
2. EXPANSION PREMISES COMMENCEMENT DATE. The Term of the Lease
for the Expansion Premises shall commence on September 1, 1997 (the "Expansion
Premises Commencement Date"), and expire on the Lease termination date.
3. BASIC RENTAL FOR PREMISES. Tenant shall pay Landlord Basic
Rental for the Expansion Premises at the initial rate of $15.00 per rentable
square foot, in accordance with the terms of Sections 3 and 4 of the Lease, in
legal tender, at Landlord's office, in care of Compass Management and Leasing,
Inc., or as directed form time to time by Landlord's notice, payable at the
initial monthly sum of Two Hundred Eighty-eight and 75/100 Dollars ($288.75), in
advance, promptly on the first day of each calendar month of the Lease Term,
without notice or demand, the same being hereby waived, and without any setoff,
deduction, or recoupment whatsoever. The first installment of Basic Rental for
the Expansion Premises shall be paid upon execution of this Amendment; provided,
however, that Basic Rental for the second calendar month shall be prorated based
on one-three hundred sixtieth (1/360th) of the current annual Basic Rental for
each day of the first partial month, if any, this Amendment is in effect for the
Expansion Premises, and shall be due and payable as aforesaid. The Basic Rental
provided in this paragraph
<PAGE> 2
shall be in addition to any other rent due to the Landlord under the Lease with
respect to the Initial Premises.
4. ESCALATION IN BASIC RENTAL FOR PREMISES. The Basic Rental
for the Expansion Premises shall increase each year, at the same three percent
(3%) annual rate and effective on the same date, as provided in the Lease.
5. OPERATING EXPENSES FOR PREMISES. Commencing on the Expansion
Premises Commencement Date, Subsections 1(u) and 1(v), as well as subparagraph
(l) of the Data Sheet, are hereby modified to reflect that Tenant's
Proportionate Share for Basic Cost, Tenant's Proportionate Share for Real Estate
Taxes, and Tenant's Proportionate Share of Building Space shall be 43.3%.
6. TENANT IMPROVEMENTS. Tenant agrees to accept the Expansion
Premises in their current, "as is" condition.
7. DEFINED TERMS. Except as otherwise expressly provided
herein, all defined terms shall have the same meanings as provided in the Lease.
8. HEADINGS. Headings contained in this Amendment are for
convenience only and are not substantive to the provisions of the Amendment.
9. LEASE TERMS RATIFIED. Except as otherwise expressly provided
herein, and unless inconsistent with the terms hereof, all other terms,
conditions and covenants of the Lease are hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties have executed this Amendment by
affixing their hands and seals as of the date noted above.
Landlord:
ATTEST: THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
/s By: /s Margaret S. Cleary (Seal)
- ------------------------------ -------------------------------
Name: Margaret S. Cleary
Title: Investment Officer
Tenant:
<PAGE> 3
ATTEST: VISUAL NETWORKS, INC.
/s By: /s Robert Troutman (Seal)
- ------------------------------ -------------------------------
Name: Robert Troutman
Title: Vice President
<PAGE> 1
EXHIBIT 10.10
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is entered into as
of April 5, 1996, by and between SILICON VALLEY BANK, a California-chartered
bank ("Bank") with its principal place of business at 3003 Tasman Drive,
Santa Clara, California 95054 and with a loan production office located at
One Central Plaza, 11300 Rockville Pike, Suite 701, Rockville, Maryland
20852, doing business under the name "Silicon Valley East" and VISUAL
NETWORKS, INC., a Delaware corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the
amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following
terms shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing
to Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering
of services by Borrower, whether or not earned by performance, and any and
all credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means an advance under the
Committed Revolving Line.
"Affiliate" means, with respect to any Person, any Person
that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation, negotiation, administration, and enforcement of the
Loan Documents; and Bank's reasonable attorneys' fees
<PAGE> 2
and expenses incurred in amending, enforcing or defending the Loan Documents,
whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and
all computer programs, or tape files, and the equipment, containing such
information.
"Borrowing Base" has the meaning set forth in Section 2.1
hereof
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California or Maryland
are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the Uniform Commercial Code, as the same may,
from time to time, be in effect in the State of Maryland.
"Collateral" means the property described on Exhibit A
attached hereto.
"Committed Revolving Line" means One Million Five Hundred
Thousand Dollars ($1,500,000).
"Committed Equipment Line" means the maximum aggregate
amount not to exceed Two Hundred Fifty Thousand Dollars ($250,000).
"Contingent Obligation" means, as applied to any Person,
any direct or indirect liability, contingent or otherwise, of that Person
with respect to (i) any indebtedness, lease, dividend, letter of credit or
other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted
or sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii)
all obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount equal
to the stated or determined amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof as determined
by such Person in good faith; provided, however, that such amount shall not
in any event exceed the maximum amount of obligations under the guarantee or
other support arrangement.
-2-
<PAGE> 3
"Daily Balance" means the amount of the Obligations owed at
the end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided,
that standards of eligibility may be fixed and revised from time to time by
Bank in Bank's reasonable judgment and upon prior notification thereof to
Borrower in accordance with the provisions hereof. Unless otherwise agreed
to by Bank, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay
within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty
percent (50%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to which the account debtor is
an officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and
hold, or other terms by reason of which the payment by the account debtor may
be conditional;
(e) Accounts with respect to which the account debtor is
an Affiliate (other than by virtue of being directly or indirectly under
common ownership or control with Borrower) of Borrower;
(f) Accounts with respect to which the account debtor
does not have its principal place of business in the United States and
Accounts arising from products shipped to or services provided to branches or
offices located in the United States of any account debtor that does not have
its principal place of business in the United States;
(g) Accounts with respect to which the account debtor is
a federal, state, or local governmental entity or any department, agency, or
instrumentality thereof;
(h) Accounts with respect to which Borrower is liable to
the account debtor for goods sold or services rendered by the account debtor
to Borrower, but only to the extent of any amounts owing to the account
debtor against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations
exceed the aforementioned percentage, except as approved in writing by Bank;
-3-
<PAGE> 4
(j) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Equipment Term Note" means one of the two equipment term
notes now or hereafter delivered by Borrower to Bank in connection with the
Committed Equipment Line in substantially the form of Exhibits F and G and
"Equipment Term Notes" means collectively, the two equipment term notes which
may now or hereafter be delivered by Borrower to Bank in connection with the
Committed Equipment Line, together with all renewals, amendments,
modifications and substitutions therefore.
"ERISA" means the Employment Retirement Income Security Act
of 1974, as amended from time to time, and the regulations promulgated
thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed
money or the deferred purchase price of property or services, including
without limitation reimbursement and other obligations with respect to surety
bonds and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments (excluding stock which in accordance with
GAAP should be classified as "preferred stock" of Borrower), (c) all capital
lease obligations and (d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by
or against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria; compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
or in the custody or possession, actual or constructive, of Borrower,
including such inventory as is temporarily out of its custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition
-4-
<PAGE> 5
of any of the foregoing and any documents of title representing any of the
above, and Borrower's Books relating to any of the foregoing.
"Investment means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended
from time to time, and the regulations promulgated thereunder.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, the
Revolving Promissory Note, the Equipment Term Notes, and any other agreement
entered into between Borrower and Bank in connection with this Agreement, all
as amended or extended from time to time.
"Material Adverse Effect" means a material adverse effect
(i) on the value of the Collateral (taken as a whole) or the perfection or
priority of Bank's security interest on the Collateral (taken as a whole),
(ii) on the ability of Borrower to repay the Obligations or otherwise perform
its obligations under the Loan Documents, (iii) resulting from any
circumstance or event of whatever nature (including any adverse determination
in any litigation) which does, or could reasonably be expected to cause an
Event of Default.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Note" means the Revolving Promissory Note or an Equipment
Term Note, and "Notes" mean collectively the Revolving Promissory Note and
the Equipment Term Notes.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to the Notes,
this Agreement or any other agreement with Bank, whether absolute or
contingent, due or to become due, now existing or hereafter arising,
including any interest that accrues after the commencement of an Insolvency
Proceeding and including any debt, liability, or obligation owing from
Borrower to others that Bank may have obtained by assignment or otherwise.
"Payment Date" means the fifth calendar day of each month.
-5-
<PAGE> 6
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay
to Bank pursuant to the terms and provisions of any instrument, or agreement
now or hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising
under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the
ordinary course of business;
(e) Indebtedness secured by Permitted Liens;
(f) Warranty and product support obligations which arise
in the ordinary course and conduct of Borrower's business;
(g) Indebtedness in respect of taxes permitted under
Section 6.5; and
(h) Other Indebtedness, not otherwise permitted by
Section 7.4 not exceeding Fifty Thousand Dollars ($50,000) in the aggregate
outstanding at any time.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in
the Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or
any State thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from the
date of creation thereof and currently having the highest rating obtainable
from either Standard & Poor's Corporation or Moody's Investors Service, Inc.,
and (iii) certificates of deposit maturing no more than one (1) year from the
date of investment therein issued by Bank;
-6-
<PAGE> 7
(c) Investments pursuant to or arising under currency
agreements or interest rate agreements entered into in the ordinary course of
business; and
(d) Loans or advances to officers and employees approved
by the Board of Directors in an aggregate amount not in excess of Twenty
Thousand Dollars ($20,000) outstanding at any time.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed
in the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in
good faith by appropriate proceedings, provided the same have no priority
over any of Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or held
by Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time
of its acquisition, provided that the Lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by
the existing Lien and the principal amount of the indebtedness being
extended, renewed or refinanced does not increase; and
(e) Liens on Equipment leased by Borrower or any
Subsidiary pursuant to an operating lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such Equipment (including Liens pursuant to
leases permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement).
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not
such announced rate is the lowest rate available from Bank.
-7-
<PAGE> 8
"Responsible Officer" means each of the Chief Executive
Officer, the President, the Treasurer, the Chief Financial Officer, the Vice
President of Finance and the Controller of Borrower.
"Revolving Maturity Date" means April 4, 1997.
"Revolving Promissory Note" means that certain Revolving
Promissory Note of even date herewith in substantially the form of Exhibit E
hereto in the maximum principal amount of $1,500,000 from Borrower in favor
of Bank, together with all renewals, amendments, modifications and
substitutions therefore.
"Schedule" means the schedule of exceptions attached hereto.
"Solvent" with respect to any Person, means that (i) the
fair value of all of such Person's properties and assets exceed the total
amount of its Indebtedness; (ii) it is able to pay its debts as they mature;
(iii) it does not have unreasonably small capital for the business in which
it is engaged or for any business or transaction in which it is about to
engage; and (iv) it is not "insolvent" as such term is defined in Section
101(31) of Title 11 of the United States Code, 11. U.S.C. Section 101, et
seq.
"Subordinated Debt" means any debt incurred by Borrower
that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than fifty percent (50%) of
the stock of which by the terms thereof ordinary voting power to elect the
Board of Directors, managers or trustees of the entity shall, at the time as
of which any determination is being made, be owned by Borrower, either
directly or through an Affiliate.
"Tangible Net Worth" means at any date as of which the
amount thereof shall be determined, the consolidated total assets of Borrower
and its Subsidiaries minus, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, patents, trade and service marks and names, copyrights
and research and development expenses except prepaid expenses, and (c) all
reserves not already deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in
accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all
calculations made hereunder shall be made
-8-
<PAGE> 9
in accordance with GAAP. When used herein, the terms "financial statements"
shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 Advances. Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make Advances to Borrower in an aggregate
amount not to exceed the Committed Revolving Line or the Borrowing Base,
whichever is less, minus (ii) the outstanding amount of all Equipment
Advances. For purposes of this Agreement, "Borrowing Base" shall mean an
amount equal to seventy percent (70%) of Eligible Accounts. Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1 may be repaid and reborrowed at any time during the term of this
Agreement.
On the Closing Date, Borrower shall execute and deliver to Bank the
Revolving Promissory Note.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. Washington, D.C.
time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto sent to Bank by confirmed
facsimile transmission. Bank is authorized to make Advances under this
Agreement, based upon instructions received from a Responsible Officer, or
without instructions if in Bank's discretion such Advances are necessary to
meet Obligations which have become due and remain unpaid. Bank shall be
entitled to rely on any telephonic notice given by a person who Bank
reasonably believes to be a Responsible Officer, and Borrower shall indemnify
and hold Bank harmless for any damages or loss suffered by Bank as a result
of such reliance. Bank will credit the amount of Advances made under this
Section 2.1 to Borrower's deposit account.
The Committed Revolving Line shall terminate on the Revolving Maturity
Date, at which time all Advances under this Section 2.1 and other amounts due
under this Agreement (except as otherwise expressly specified herein) shall
be immediately due and payable.
2.2 Equipment Advances.
(a) At any time from the date hereof through December 31,
1996 (the "Equipment Availability End Date"), Borrower may from time to time
request advances (each an "Equipment Advance" and collectively, the
"Equipment Advances") from Bank in an aggregate amount not to exceed the
Committed Equipment Line. Amounts borrowed pursuant to this Section 2.2 may
not be readvanced.
(b) Equipment Advances shall be made in one of two
tranches. All Equipment Advances made prior to June 30, 1996 (the "Tranche
One End Date") shall be evidenced by an Equipment Term Note ("Equipment Term
Note No. 1") to be executed and delivered by Borrower to Bank at the time of
the first Equipment Advance prior to the Tranche One End Date. All Equipment
Advances made prior to the Tranche
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<PAGE> 10
One End Date shall be governed by and repaid in accordance with the terms of
Equipment Term Note No. 1. All Equipment Advances made after the Tranche One End
Date, but prior to the Equipment Availability End Date shall be evidenced by an
Equipment Term Note ("Equipment Term Note No. 2") to be executed by Borrower and
delivered to Bank at the time of the first Equipment Advance after the Tranche
One End Date. All Equipment Advances made after the Tranche One End Date shall
be governed by and repaid in accordance with the terms of the Equipment Term
Note No. 2.
(c) Borrower shall deliver to Bank at the time of each
Equipment Advance an invoice for the equipment to be purchased or for any
equipment previously purchased by Borrower for which a borrowing under this
Agreement is permitted and has not been made. With respect to advances on
Equipment Term Note No. 1, Bank will only finance equipment purchased prior
to the Tranche One End Date, but on or after November 30, 1995. With respect
to advances on Equipment Term Note No. 2, Bank will only finance equipment
purchased after the Tranche One End Date and on or before the Equipment
Availability End Date. The Equipment Advances shall be used by Borrower only
to purchase equipment and shall not exceed ninety percent (90%) of the
invoice amount of such equipment approved from time to time by Bank,
excluding taxes, shipping, warranty charges, freight discounts and
installation expense. At no time shall Bank make any Equipment Advances if
after giving effect to such request the aggregate account then outstanding
would exceed the Committed Revolving Line or the Borrowing Base, whichever is
less.
(d) Interest shall accrue from the date of each Equipment
Advance at the rate specified in each of the Equipment Term Notes and shall
be payable monthly as provided therein. Any Equipment Advances that are
outstanding under the Equipment Term Note No. 1 on the Tranche One End Date
will be payable in thirty-six (36) equal consecutive monthly installments of
principal, plus all accrued interest, beginning on the Payment Date of each
month following the Tranche One End Date and thereafter on each subsequent
Payment Date. Any Equipment Advances that are outstanding under the
Equipment Term Note No. 2 on the Equipment Availability End Date will be
payable in thirty-six (36) equal consecutive monthly installments of
principal, plus all accrued interest, beginning on the Payment Date of each
month following the Equipment Availability End Date and continuing on each
subsequent Payment Date.
(e) When Borrower desires to obtain an Equipment Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission to be received no later than 1:00 p.m. Washington, D.C. time one
(1) Business Day before the day on which the Equipment Advance is to be
made. Such notice shall be substantially in the form of Exhibit B. The
notice shall be signed by a Responsible Officer and include a copy of the
invoice for the Equipment to be financed.
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<PAGE> 11
2.3 Overadvances. If, at any time or for any reason, the
amount of Obligations owed by Borrower to Bank pursuant to Section 2.1 of
this Agreement is greater than the lesser of (i) the Committed Revolving Line
or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash,
the amount of such excess.
2.4 Interest Rates, Payments, and Calculations.
(a) Interest Rate. All Advances shall bear interest, on
the average Daily Balance, at the rate or rates set forth in the Notes.
(b) Default Rate. All Obligations shall bear interest,
from and after the occurrence of an Event of Default, at a rate equal to five
(5) percentage points above the interest rate applicable immediately prior to
the occurrence of the Event of Default.
(c) Payments. Interest under each Note shall be due and
payable on the Payment Date of each month during the term thereof. Borrower
hereby authorizes Bank to debit, and Bank hereby agrees to debit, Account
Number 3300020208 maintained at Bank without notice for payments of principal
and interest due on the Obligations, but with prior notice for any other
amounts owing by Borrower to Bank, provided, however that after the
occurrence of any Event of Default, Borrower authorizes Bank to debit any
accounts of Borrower maintained with Bank. Bank will notify Borrower of all
debits which Bank makes against Borrower's accounts. Any such debits against
Borrower's accounts m no way shall be deemed a set-off. Any interest not
paid when due shall be compounded by becoming a part of the Obligations, and
such interest shall thereafter accrue interest at the rate then applicable
hereunder.
(d) Computation. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest under the Notes
shall be increased or decreased effective as of 12:01 a.m. on the day the
Prime Rate is changed, by an amount equal to such change in the Prime Rate.
All interest chargeable under the Loan Documents shall be computed on the
basis of a three hundred sixty (360) day year for the actual number of days
elapsed.
2.5 Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After
the occurrence of an Event of Default, the receipt by Bank of any wire
transfer of funds, check, or other item of payment shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment on account unless such payment is of immediately available federal
funds or unless and until such check or other item of payment is honored when
presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 10:00 a.m.
Washington, D.C. time shall be deemed to have been received by Bank as of the
opening of business on the immediately following Business Day. Whenever any
payment to Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not
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<PAGE> 12
a Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable for
the period of such extension.
2.6 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to Seven Thousand
Five Hundred Dollars ($7,500), half of which fee has already been paid and
the balance of which fee ($3,750) shall be due on the Closing Date and once
paid shall be fully earned and nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents,
provided that prior to the occurrence of a Default, Borrower shall only be
obligated to pay the expenses associated with two (2) such appraisal or
examinations, during any twelve (12) month period. Bank will keep the
results of any such appraisal or examination confidential in accordance with
the provisions of Section 12.8 hereof.
(c) Bank Expenses. Upon demand from Bank, including,
without limitation, upon the date hereof, all Bank Expenses incurred through
the date hereof, including reasonable attorneys' fees and expenses, and,
after the date hereof, all Bank Expenses, including reasonable attorneys'
fees and expenses, as and when they become due.
2.7 Additional Costs. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court
or any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the United States of
America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to
its performance under this Agreement; and
the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to
Bank the amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or expense is incurred or
determined, upon presentation by Bank of a statement of the amount and
setting forth Bank's
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<PAGE> 13
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.8 Term. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7,
shall continue in full force and effect for a term ending on the Revolving
Maturity Date. Notwithstanding the foregoing, Bank shall have the right to
terminate its obligation to make Advances under this Agreement immediately
and without notice upon the occurrence and during the continuance of an Event
of Default. Notwithstanding termination, Bank's Lien on the Collateral shall
remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The obligation of
Bank to make the initial Advance is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) the Revolving Promissory Note;
(c) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery
of this Agreement;
(d) an opinion of Borrower's counsel;
(e) financing statements (Forms UCC-1);
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then due
specified in Section 2.6 hereof; and
(h) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of
Bank to make each Advance, including the initial Advance, is further subject
to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and
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<PAGE> 14
on the effective date of each Advance as though made at and as of each such
date, and no Event of Default shall have occurred and be continuing, or would
result from such Advance. The making of each Advance shall be deemed to be a
representation and warranty by Borrower on the date of such Advance as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each
of its covenants and duties under the Loan Documents. Except as set forth in
the Schedule, such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in Collateral acquired after the date
hereof. Borrower acknowledges that Bank may place a "hold" on any Deposit
Account pledged as Collateral to secure the Obligations.
4.2 Delivery of Additional Documentation Required. Borrower
shall from time to time execute and deliver to Bank, at the request of Bank,
all Negotiable Collateral, all financing statements and other documents that
Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order
to fully consummate all of the transactions contemplated under the Loan
Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice,
from time to time during Borrower's usual business hours, to inspect
Borrower's Books and to make copies thereof and to check, test, and appraise
the Collateral in order to verify Borrower's financial condition or the
amount, condition of, or any other matter relating to, the Collateral,
provided that Bank will use reasonable efforts so as not to interfere with
Borrower's business operations.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws
of its state of incorporation and qualified and licensed to do business in,
and is in good standing in, any state in which the conduct of its business or
its ownership of property requires that it be so qualified., except where a
failure to be so qualified could not have a Material Adverse Effect.
5.2 Due Authorization: No Conflict. The execution, delivery,
and performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor
will they constitute an event of default under any
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<PAGE> 15
material agreement to which Borrower is a party or by which Borrower is bound.
Borrower is not in default under any agreement to which it is a party or by
which it is bound, which default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are
bona fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has not received notice of actual or imminent Insolvency
Proceeding of any account debtor that is included in any Borrowing Base
Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name
other than that specified on the signature page hereof. The chief executive
office of Borrower is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are
no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
have a Material Adverse Effect or a material adverse effect on Borrower's
interest or Bank's security interest in the Collateral. Borrower does not
have knowledge of any such pending or threatened actions or proceedings.
5.8 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof
and Borrower's consolidated results of operations for the period then ended.
There has not been a material adverse change in the consolidated financial
condition of Borrower since the date of the most recent of such financial
statements submitted to Bank.
5.9 Solvency. Borrower is Solvent.
5.10 Regulatory Compliance. Borrower and each Subsidiary has
met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from
Borrower's failure to comply with ERISA that is reasonably likely to result
in Borrower's incurring any liability that could have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940. Borrower is not engaged principally, or as one of the important
activities, in the business of extending credit
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<PAGE> 16
for the purpose of purchasing or carrying margin stock (within the meaning of
Regulations G, T and U of the Board of Governors of the Federal Reserve System).
To the best of Borrower's knowledge, Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act. To the best of Borrower's
knowledge, Borrower has not violated any statutes, laws, ordinances or rules
applicable to it, violation of which could have a Material Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release,
or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste
or hazardous substance disposal site, or a candidate for closure pursuant to
any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment
5.12 Taxes. Borrower and each Subsidiary has filed or caused to
be filed all tax returns required to be filed, or has applied for and
received extensions of the deadline for filing, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein, except
those being contested in good faith and by appropriate proceedings.
5.13 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 Government Consents. To the best of its knowledge,
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all
notices to, all governmental authorities that are necessary for the continued
operation of Borrower's business as currently conducted.
5.15 Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished
to Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading in any material respect.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make an Advance hereunder, Borrower shall do all of the following:
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<PAGE> 17
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect.
6.3 Financial Statements, Reports, Certificates. Borrower
shall deliver to Bank: (a) as soon as available, but in any event within
thirty (30) days after the end of each month, a company prepared balance
sheet and income statement covering Borrower's operations during such period,
certified by an officer of Borrower (without any personal liability therefore
other than liability based on fraud or criminal misconduct) reasonably
acceptable to Bank; (b) as soon as available, but in any event within ninety
(90) days after the end of Borrower's fiscal year, audited financial
statements of Borrower prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of
an independent certified public accounting firm reasonably acceptable to
Bank; (c) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000) or more; and (d) such budgets, sales projections,
operating plans or other financial information as Bank may reasonably request
from time to time.
Within thirty (30) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of Exhibit C hereto, together with aged
listings of accounts receivable and accounts payable.
Within thirty (30) days after the last day of each month, Borrower
shall deliver to Bank with the monthly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of
Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every six (6) months unless an Event of Default
has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on
the same basis and in accordance with the usual customary practices of
Borrower, as they exist at the time of the execution and delivery of this
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<PAGE> 18
Agreement. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims, where the return, recovery, dispute or claim
involves more than Fifty Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material
federal, state, and local taxes, assessments, or contributions required of it
by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof; and Borrower will
make, and will cause each Subsidiary to make, timely payment or deposit of
all material tax payments and withholding taxes required of it by applicable
laws, including, but not limited to, those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon request, furnish Bank with proof satisfactory to Bank indicating
that Borrower or a Subsidiary has made such payments or deposits; provided
that Borrower or a Subsidiary need not make any payment if the amount or
validity of such payment is contested in good faith by appropriate
proceedings and is reserved against (to the extent required by GAAP) by
Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against
by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral
in amounts and of a type that are customary to businesses similar to
Borrower's.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as reasonably satisfactory to Bank.
All such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional
loss payee thereof as its interest- may appear and all liability insurance
policies shall show Bank as an additional insured, and shall specify that the
insurer must give at least twenty (20) days notice to Bank before canceling
its policy for any reason. Borrower shall deliver to Bank certified copies
of such policies of insurance and evidence of the payments of all premiums
therefor. All proceeds payable under any such policy shall, at the option of
Bank, be payable to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its
principal depository and operating accounts with Bank.
6.8 Debt-Tangible Net Worth Ratio. Borrower shall maintain, as
of the last day of each calendar month, a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more
than .75 to 1.0. For purposes of this definition, deferred revenues shall
not be included in the calculation of Total Liabilities.
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<PAGE> 19
6.9 Tangible Net Worth. Borrower shall maintain, as of the
last day of each calendar quarter, a Tangible Net Worth of not less than the
following amounts at the following times:
<TABLE>
<CAPTION>
Quarter Ending: Minimum Tangible Net Worth:
--------------- ---------------------------
<S> <C>
December 31, 1995 $1,000,000;
March 31, 1996 $2,500,000;
June 30, 1996 $2,000,000;
September 30, 1996
and at all times thereafter $1,800,000.
</TABLE>
6.10 Profitability. Borrower shall not suffer a loss for any
fiscal quarter in excess of the following amounts at the following times:
<TABLE>
<CAPTION>
Period Ending: Maximum Loss Permitted:
-------------- -----------------------
<S> <C>
December 31,1995 $ 1,000,000;
March 31, 1996 $ 1,250,000;
June 30, 1996 $ 1,000,000;
September 30, 1996 $ 800,000;
December 3 1, 1996 $ 250,000;
and for the Fiscal Year 1996 ending
December 31, 1996 $2,500,000.
</TABLE>
6.11 Minimum Cash. Borrower shall maintain, as of the last day
of each calendar month, cash, readily marketable securities and eligible
accounts, less all sums outstanding under the Obligations of not less than
One Million Dollars ($1,000,000).
6.12 Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes
of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any
Advances, Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i)
Transfers of Inventory in the ordinary course of business; (ii) Transfers of
non-exclusive licenses and similar arrangements for the use of the property
of
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<PAGE> 20
Borrower or its Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment
made in the ordinary course of business; or (iv) other Transfers not to exceed
Fifty Thousand Dollars ($50,000) in the aggregate.
7.2 Change in Business. Engage in any business, or permit any
of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership, management or directors (other than changes due to
death or legal incapacity). Borrower will not, without thirty (30) days
prior written notification to Bank, relocate its chief executive office and
will promptly notify Bank if it receives notice that the lease for its
current location will not be renewed or will be terminated.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other
business organization, and Borrower will not acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, unless, (i) Borrower will be the surviving
entity, (ii) no Event of Default has occurred and is continuing, (iii) no
Material Adverse Effect will be caused by such an occurrence, and (iv)
Borrower and such other business organization deliver to Bank such
instruments, agreements and such other documents as Bank may request.
7.4 Indebtedness. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other
than Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or
purchase of any capital stock in excess of Fifty Thousand Dollars ($50,000)
in the aggregate, provided that at such time no Event of Default has occurred
and is continuing or would exist after giving effect to such payment and no
Material Adverse Effect will be caused by such an occurrence.
7.7 Investments. Directly or indirectly acquire or own, or
make any Investment in or to any Person, or permit any of its Subsidiaries so
to do, other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length transaction
with a nonaffiliated Person.
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<PAGE> 21
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the
Subordinated Debt without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee,
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory only at the location
set forth in Section 10 hereof and such other locations of which Borrower
gives Bank prior written notice and as to which Borrower signs and files a
financing statement where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to
comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on
the Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any
of the Obligations.
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation under
Sections 6.7, 6.8, 6.9, 6.10, or 6.11 or violates any of the covenants
contained in Article 7 of this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can
be cured, has failed to cure such default within ten (10) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof,
provided, however, that if the default cannot by its nature be cured within
the ten (10) day period or cannot after diligent attempts by
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<PAGE> 22
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the failure
to have cured such default shall not be deemed an Event of Default (provided
that no Advances will be required to be made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a material
impairment of the perfection or priority of Bank's security interest in the
Collateral or of the value of such Collateral which is not covered by
adequate insurance, or (ii) Bank determines, based upon information available
to it and in the exercise of its reasonable judgment, that there is a
reasonable likelihood that Borrower will fail to comply with one or more of
the affirmative covenants set forth in Section 6 during the next succeeding
financial reporting period;
8.4 Attachment. If any material portion of Borrower's assets
is attached, seized, subjected to a writ or distress warrant, or is levied
upon, or comes into the possession of any trustee, receiver or person acting
in a similar capacity and such attachment, seizure, writ or distress warrant
or levy has not been removed, discharged, bonded over or rescinded within ten
(10) days, or if Borrower is enjoined, restrained, or in any way prevented by
court order from continuing to conduct all or any material part of its
business affairs, or if a judgment or other claim in excess of $50,000 in the
aggregate becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment for an amount
in excess of $50,000 is filed of record with respect to any of Borrower's
assets by the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or governmental
agency, and the same is not paid within ten (10) days after Borrower receives
notice thereof, provided that none of the foregoing shall constitute an Event
of Default where such action or event is stayed or an adequate bond has been
posted pending a good faith contest by Borrower (provided that no Advances
will be required to be made during such cure period);
8.5 Insolvency. If Borrower is no longer Solvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency
Proceeding is commenced against Borrower and is not dismissed or stayed
within thirty (30) days (provided that no Advances will be made prior to the
dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement
for borrowed money to which Borrower is a party with a third party or parties
resulting in a right by such third party or parties, whether or not
exercised, to accelerate the maturity of any Indebtedness in an amount in
excess of One Hundred Thousand Dollars ($100,000) or that could have a
Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed
under any subordination agreement entered into with Bank;
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<PAGE> 23
8.8 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least Fifty
Thousand Dollars ($50,000) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of ten (10) days (provided that
no Advances will be made prior to the satisfaction or stay of such judgment);
or
8.9 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or
representation set forth herein or in any certificate delivered to Bank by
any Responsible Officer pursuant to this Agreement or to induce Bank to enter
into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice
of its election and without demand, do any one or more of the following, all
of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(d) Without notice to or demand upon Borrower, make such
Payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble
the Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to be
prior or superior to its security interest and to pay all expenses incurred
in connection therewith. With respect to any of Borrower's owned premises,
Borrower hereby grants Bank a license to enter into possession of such premises
and to occupy the same, without charge, for up to one hundred twenty (120) days
in order to exercise any of Bank's rights or remedies provided herein, at law,
in equity, or otherwise;
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<PAGE> 24
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Bank is hereby granted a license or
other right, solely pursuant to the provisions of this Section 9.1, to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling
any Collateral and, in connection with Bank's exercise of its rights under
this Section 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(g) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or
on terms, in such manner and at such places (including Borrower's premises)
as Bank determines is commercially reasonable (but in any event after ten
(10) days prior notice to Borrower of the date and time of any such sale);
(h) Bank may credit bid and purchase at any public sale;
and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the
Accounts; (b) endorse Borrower's name on any checks or other forms of payment
or security that may come into Bank's possession; (c) sign Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts,
and notices to account debtors; (d) make, settle, and adjust all claims under
and decisions with respect to Borrower's policies of insurance; and (e)
settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; provided Bank may exercise such power of attorney to sign the
name of Borrower on any of the documents described in Section 4.2 regardless
of whether an Event of Default has occurred. The appointment of Bank as
Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 Accounts Collection. Effective only upon the occurrence and
during the continuance of an Event of Default, Bank may notify any Person owing
funds to Borrower of
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<PAGE> 25
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and immediately deliver such payments to Bank
in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement after notice from Bank, then Bank
may do any or all of the following: (a) make payment of the same or any part
thereof; (b) set up such reserves under the Committed Revolving Line as Bank
deems necessary to protect Bank from the exposure created by such failure; or
(c) obtain and maintain insurance policies of the type discussed in Section 6.6
of this Agreement, and take any action with respect to such policies as Bank
deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate herein above provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by
Bank to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be
liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall
be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one
right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on Borrower's part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election, or acquiescence by it. No
waiver by Bank shall be effective unless made in a written document signed on
behalf of Bank and then shall be effective only in the specific instance and
for the specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments,
chattel paper, and guarantees at any time held by Bank on which Borrower may
in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement
entered into in connection herewith shall be in
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<PAGE> 26
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by a recognized overnight delivery service, certified mail,
postage prepaid, return receipt requested, or by telefacsimile to Borrower or to
Bank, as the case may be, at its addresses set forth below:
If to Borrower: Visual Networks, Inc.
2092 Gaither Road
Rockville, Maryland 20850
Attn: Richard Wathen, Chief Financial Officer
FAX:(301) 258-5137
With a Copy to: Piper & Marbury, L.L.P.
1200 19th Street, N.W.
Washington, D.C. 20036
Attn: Mitchell S. Marder, Esq.
Fax: (202) 223-2085
If to Bank: Silicon Valley East
One Central Plaza
11300 Rockville Pike, Suite701
Rockville, Maryland 20852
Attn: J. Frank Tower, Assistant Vice President
FAX: (301) 984-6282
With a Copy to: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
Attn: Loan Services
Fax: (408) 496-2421
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of Maryland, without regard to
principles of conflicts of law. BORROWER ACCEPTS FOR ITSELF AND IN
CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE
JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE
STATE OF MARYLAND IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT
WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT
IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF THE COURTS OF MARYLAND,
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<PAGE> 27
BORROWER ACCEPTS JURISDICTION OF THE COURTS AND VENUE IN SANTA CLARA COUNTY,
CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY
OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWING AND VOLUNTARILY WAIVES ITS
JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of
each of the parties; provided, however, that neither this Agreement nor any
rights hereunder may be assigned by Borrower without Bank's prior written
consent, which consent may be granted or withheld in Bank' s sole
discretion. Bank shall have the right without the consent of or notice to
Borrower to sell, transfer, negotiate, or grant participation in all or any
part of, or any interest in Bank's obligations, rights and benefits
hereunder, provided that in the case of a sale or transfer of all or a
portion of the Obligations evidenced by this Agreement and the other Loan
Documents, Bank will furnish Borrower with prior written notice of the name
and address of the intended transferee.
12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any
other party in connection with the transactions contemplated by this
Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred,
or paid by Bank as a result of or in any way arising out of, following, or
consequential to transactions between Bank and Borrower whether under this
Agreement, or otherwise (including without limitation reasonable attorneys
fees and expenses), except for losses caused by Bank's gross negligence or
willful misconduct.
12.3 Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
12.4 Severabilitv of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot
be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and
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<PAGE> 28
negotiations between the parties hereto with respect to the subject matter of
this Agreement, if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7 Survival. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify
Bank with respect to the expenses, damages, losses, costs and liabilities
described in Section 12.2 shall survive until all applicable statute of
limitations periods with respect to actions that may be brought against Bank
have run, provided that so long as the obligations set forth in the first
sentence of this Section 12.7 have been satisfied, and Bank has no commitment
to make any Advances or to make any other loans to Borrower, Bank shall
release all security interests granted hereunder and redeliver all Collateral
held by it in accordance with applicable law.
12.8 Confidentiality. In handling any confidential information
Bank shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they
have entered into a comparable confidentiality agreement in favor of Borrower
and have delivered a copy to Borrower, (iii) as required by law, regulations,
rule or order, subpoena, judicial order or similar order and (iv) as may be
required in connection with the examination, audit or similar investigation
of Bank. Confidential information hereunder shall not include information
that either: (a) is in the public domain or in the knowledge or possession of
Bank when disclosed to Bank or becomes part of the public domain after
disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a
third party, provided Bank does not have actual knowledge that such third
party is prohibited from disclosing such information.
12.9 Countersignature. This Agreement shall become effective
only when it shall have been executed by Borrower and Bank (provided,
however, in on event shall this Agreement become effective until signed by
and officer of Bank in California).
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
VISUAL NETWORKS, INC.
By: /S Scott E. Stouffer
----------------------------
Name: Scott E. Stouffer
Title: President/CEO
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /S J. Frank Tower
----------------------------
J. Frank Tower
Assistant Vice President
SILICON VALLEY BANK
By:
----------------------------
Name:
Title:
(Signed in Santa Clara County, California)
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<PAGE> 1
EXHIBIT 10.11
REVOLVING PROMISSORY NOTE
$1,500,000 Rockville, Maryland
April 5, 1996
FOR VALUE RECEIVED, the undersigned, VISUAL NETWORKS, INC., a Delaware
corporation ("Borrower") promises to pay to the order of SILICON VALLEY BANK,
a California-chartered bank ("Bank"), at such place as the holder hereof may
designate, in lawful money of the United States of America, the aggregate
unpaid principal amount of all advances ("Advances") made by Bank to Borrower
in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank of even date herewith, as amended from
time to time (the "Loan Agreement"), up to a maximum principal amount of One
Million Five Hundred Thousand Dollars ($1,500,000) ("Principal Sum"), or so
much thereof as may be advanced or readvanced and remains unpaid.
Borrower shall pay interest on the outstanding Principal Sum, as follows:
Commencing as of the date hereof and continuing until repayment in full
of all sums due hereunder, the unpaid Principal Sum shall bear interest at
the variable rate of interest, per annum, most recently announced by Bank as
its "prime rate," whether or not such announced rate is the lowest rate
available from Bank (the "Prime Rate") plus one and one half percent (1.5%)
per annum. The rate of interest charged under this Note shall change
immediately and contemporaneously with any change in the Prime Rate. All
interest payable under the terms of this Note shall be calculated on the
basis of a 360-day year and the actual number of days elapsed.
The unpaid Principal Sum, together with interest thereon at the rate or
rates provided above, shall be payable as follows:
(a) Interest only on the unpaid principal amount shall be due
and payable monthly in arrears, commencing May 5, 1996, and continuing on the
same day of each calendar month thereafter to maturity; and
(b) Unless sooner paid, the unpaid Principal Sum, together with
interest accrued and unpaid thereon, shall be due and payable in full on
April 4, 1997.
The fact that the balance hereunder may be reduced to zero from time to
time pursuant to the Loan Agreement will not affect the continuing validity
of this Note or the Loan Agreement, and the balance may be increased to the
Principal Sum after any such reduction to zero.
This Note is the "Revolving Promissory Note" described in the Loan
Agreement, to which reference is hereby made for a more complete statement of
the terms and conditions under which the loans and advances evidenced hereby
are made. This Note is secured as provided in
<PAGE> 2
the Loan Agreement. All capitalized terms used herein and not otherwise defined
shall have the meanings given to such terms in the Loan Agreement.
Borrower irrevocably waives the right to direct the application of any
and all payments at any time hereafter received by Bank from or on behalf of
Borrower and Borrower irrevocably agrees that Bank shall have the continuing
exclusive right to apply any and all such payments against the then due and
owing obligations of Borrower as Bank may deem advisable. In the absence of
a specific determination by Bank with respect thereto, all payments shall be
applied in the following order: (a) then due and payable fees and expenses;
(b) then due and payable interest payments and mandatory prepayments; and (c)
then due and payable principal payments and optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each
payment or prepayment of principal of each such Advance received by Bank; it
being understood, however, that failure to make any such endorsement (or any
error in notation) shall not affect the obligations of Borrower with respect
to Advances made hereunder, and payments of principal by Borrower shall be
credited to Borrower notwithstanding the failure to make a notation (or any
errors in notation) thereof on such books and records.
The occurrence of any one or more of the following events shall
constitute an event of default (individually, an "Event of Default" and
collectively, the "Events of Default") under the terms of this Note:
(a) The failure of Borrower to pay to Bank when due any and all
amounts payable by Borrower to Bank under the terms of this Note; or
(b) The occurrence of an Event of Default (as defined therein)
under the terms and conditions of any of the other Loan Documents.
Upon the occurrence of an Event of Default, at the option of Bank, all
amounts payable by Borrower to Bank under the terms of this Note shall
immediately become due and payable by Borrower to Bank without notice to
Borrower or any other person, and Bank shall have all of the rights, powers,
and remedies available under the terms of this Note, any of the other Loan
Documents and all applicable laws. Borrower and all endorsers, guarantors,
and other parties who may now or in the future be primarily or secondarily
liable for the payment of the indebtedness evidenced by this Note hereby
severally waive presentment, protest and demand, notice of protest, notice of
demand and of dishonor and non-payment of this Note and expressly agree that
this Note or any payment hereunder may be extended from time to time without
in any way affecting the liability of Borrower, guarantors and endorsers.
Borrower promises to pay all costs and expense of collection of this
Note and to pay all reasonable attorneys' fees incurred in such collection,
whether or not there is a suit or action, or in any suit or action to collect
this Note or in any appeal thereof Borrower waives presentment,
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<PAGE> 3
demand, protest, notice of protest, notice of dishonor, notice of nonpayment,
and any and all other notices and demands in connection with the delivery,
acceptance, performance default or enforcement of this Note, as well as any
applicable statutes of limitations. No delay by Bank in exercising any power or
right hereunder shall operate as a waiver of any power or right. Time is of the
essence as to all obligations hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern
the rights and obligations of Borrower with respect to all obligations
hereunder.
Borrower acknowledges and agrees that this Note shall be governed by the
laws of the State of Maryland, excluding conflicts of laws principles, even
though for the convenience and at the request of Borrower, this Note may be
executed elsewhere.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
OF COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION, SUIT, OR
PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF
OF THE COURTS OF MARYLAND, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND
VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES
AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT
TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed under
seal by its duly authorized officers as of the date first written above.
WITNESS OR ATTEST: VISUAL NETWORKS, INC.
/S Richard Wathen By: /S Scott E. Stouffer (SEAL)
- ------------------ ---------------------
Name: Scott E. Stouffer
Title: President/CEO
-3-
<PAGE> 1
EQUIPMENT TERM NOTE NO. 1 OF 2
Not to Exceed $250,000 Rockville, Maryland
April 5, 1996
FOR VALUE RECEIVED, the undersigned, VISUAL NETWORKS, INC., a Delaware
corporation ("Borrower") promises to pay to the order of SILICON VALLEY BANK,
a California-chartered bank ("Bank"), at such place as the holder hereof may
designate, in lawful money of the United States of America, the aggregate
unpaid principal amount of all advances "Equipment Advances") made by Bank to
Borrower in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank of even date herewith, as amended from
time to time (the "Loan Agreement"), up to a maximum principal amount of Two
Hundred Fifty Thousand Dollars ($250,000) ("Principal Sum"), or so much
thereof as may be advanced. Equipment Advances may be made under this Note
on or prior to June 30, 1996 (the "Tranche One End Date").
Borrower shall pay interest on the outstanding Principal Sum, as follows:
Commencing as of the date hereof and continuing until repayment in full
of all sums due hereunder, the unpaid Principal Sum shall bear interest at
the variable rate of interest, per annum, most recently announced by Bank as
its "prime rate," whether or not such announced rate is the lowest rate
available from Bank (the "Prime Rate") plus two percent (2.0%) per annum.
The rate of interest charged under this Note shall change immediately and
contemporaneously with any change in the Prime Rate. All interest payable
under the terms of this Note shall be calculated on the basis of a 360-day
year and the actual number of days elapsed.
The unpaid Principal Sum, together with interest thereon at the rate or
rates provided above, shall be payable as follows:
(a) Interest only on the unpaid principal amount shall be due and
payable monthly in arrears, commencing July 5, 1996, and continuing on the
same day of each calendar month thereafter to maturity; and
(b) In addition to the monthly payments of interest as set forth
above, the unpaid Principal Sum shall be due and payable in equal consecutive
monthly installments in an amount equal to one-thirty six of the unpaid
Principal Sum as of the Tranche One End Date, commencing on July 5, 1996 and
continuing on the same day of each calendar month thereafter to maturity; and
(c) Unless sooner paid, the unpaid Principal Sum, together with
interest accrued and unpaid thereon, shall be due and payable in full on June
5, 1999.
This Note is the "Equipment Term Note No. 1" described in the Loan
Agreement, to which reference is hereby made for a more complete statement of
the terms and conditions under
<PAGE> 2
which the loans and advance evidenced hereby are made. This Note is secured as
provided in the Loan Agreement. All capitalized terms used herein and not
otherwise defined shall have the meanings given to such terms in the Loan
Agreement.
Borrower irrevocably waives the right to direct the application of any
and all payments at any time hereafter received by Bank from or on behalf of
Borrower and Borrower irrevocably agrees that Bank shall have the continuing
exclusive right to apply any and all such payments against the then due and
owing obligations of Borrower as Bank may deem advisable. In the absence of
a specific determination by Bank with respect thereto, all payments shall be
applied in the following order: (a) then due and payable fees and expenses;
(b) then due and payable interest payments and mandatory prepayments; and (c)
then due and payable principal payments and optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each
payment or prepayment of principal of each such Advance received by Bank; it
being understood, however, that failure to make any such endorsement (or any
error in notation) shall not affect the obligations of Borrower with respect
to Equipment Advances made hereunder, and payments of principal by Borrower
shall be credited to Borrower notwithstanding the failure to make a notation
(or any errors in notation) thereof on such books and records.
The occurrence of any one or more of the following events shall
constitute an event of default (individually, an "Event of Default" and
collectively, the "Events of Default") under the terms of this Note:
(a) The failure of Borrower to pay to Bank when due any and all
amounts payable by Borrower to Bank under the terms of this Note; or
(b) The occurrence of an Event of Default (as defined therein) under
the terms and conditions of any of the other Loan Documents.
Upon the occurrence of an Event of Default, at the option of Bank, all
amounts payable by Borrower to Bank under the terms of this Note shall
immediately become due and payable by Borrower to Bank without notice to
Borrower or any other person, and Bank shall have all of the rights, powers,
and remedies available under the terms of this Note, any of the other Loan
Documents and all applicable laws. Borrower and all endorsers, guarantors,
and other parties who may now or in the future be primarily or secondarily
liable for the payment of the indebtedness evidenced by this Note hereby
severally waive presentment, protest and demand, notice of protest, notice of
demand and of dishonor and non-payment of this Note and expressy agree that
this Note or any payment hereunder may be extended from time to time without
in any way affecting the liability of Borrower, guarantors and endorsers.
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<PAGE> 3
Borrower promises to pay all costs and expense of collection of this
Note and to pay all reasonable attorneys' fees incurred in such collection,
whether or not there is a suit or action, or in any suit or action to collect
this Note or in any appeal thereof. Borrower waives presentment, demand,
protest, notice of protest, notice of dishonor, notice of nonpayment, and any
and all other notices and demands in connection with the delivery,
acceptance, performance default or enforcement of this Note, as well as any
applicable statutes of limitations. No delay by Bank in exercising any power
or right hereunder shall operate as a waiver of any power or right. Time is
of the essence as to all obligations hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern
the rights and obligations of Borrower with respect to all obligations
hereunder.
Borrower acknowledges and agrees that this Note shall be governed by
the laws of the State of Maryland, excluding conflicts of laws principles,
even though for the convenience and at the request of Borrower, this Note may
be executed elsewhere.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
OF COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION, SUIT, OR
PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF
OF THE COURTS OF MARYLAND, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND
VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES
AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT
TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed under
seal by its duly authorized officers as of the date first written above.
WITNESS OR ATTEST: VISUAL NETWORKS, INC.
/S Richard Wathen By: /S Scott E. Stouffer (SEAL)
- ------------------ ---------------------
Name: Scott E. Stouffer
Title: President/CEO
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<PAGE> 1
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Agreement")
is entered into as of November __, 1996, by and between SILICON VALLEY BANK, a
California-chartered bank ("Bank") with its principal place of business at 3003
Tasman Drive, Santa Clara, California 95054 and with a loan production office
located at One Central Plaza, 11300 Rockville Pike, Suite 701, Rockville,
Maryland 20852, doing business under the name "Silicon Valley East" and VISUAL
NETWORKS, INC., a Delaware corporation ("Borrower").
RECITALS.
A. Borrower and Bank have entered into that certain Loan and
Security Agreement dated April 5, 1996 (the "Loan Agreement"), pursuant to
which Bank has agreed to establish a revolving credit facility (the "Line of
Credit") in favor of Borrower in the maximum principal amount of $1,500,000.
B. Borrower has requested that Bank increase the maximum
principal amount available under the Line of Credit from One Million Five
Hundred Thousand and No/100 Dollars ($1,500,000) to Three Million and No/100
Dollars ($3,000,000) and modify certain terms and conditions of the Loan
Agreement to, among other things, permit the issuance of one or more letters of
credit for the account of Borrower and Bank has agreed on the condition, among
others, that this Agreement be executed and delivered by Borrower to Bank.
C. Unless otherwise defined herein, capitalized terms used herein
shall have the respective meanings set forth in the Loan Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrower and Bank do hereby agree as follows:
1. Recitals. The parties hereto acknowledge and agree that the
above Recitals are true and correct in all material respects and that the same
are incorporated herein and made a part hereof by reference.
2. Definitions. From and after the date hereof,. the definitions
of "Committed Revolving Loan" and the "Revolving Promissory Note" set forth in
Section 1.1 of the Loan Agreement are hereby amended and restated in their
entirety as follows:
"Committed Revolving Line" shall mean the Committed Revolving Line
in the amount of Three Million Dollars ($3,000,000).
<PAGE> 2
"Revolving Promissory Note" means that certain Revolving
Promissory Note of even date herewith in substantially the form of
Exhibit E hereto in the maximum principal amount of $3,000,000 from
Borrower in favor of Bank, together with all renewals, amendments,
modifications and substitutions therefore.
From and after the date hereof, all references in the Loan Agreement to the
"Committed Revolving Loan" and the "Revolving Promissory Note" shall have the
meanings set forth herein.
3. Advances. Section 2.1 of the Loan Agreement is hereby deleted
in its entirety and the following is inserted in substitution thereof:
2.1 Advances. Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make Advances to Borrower in an
aggregate amount not to exceed the Committed Revolving Line or the
Borrowing Base, whichever is less minus (ii) the face amount of all
outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit). For purposes of this Agreement, "Borrowing Base"
shall mean an amount equal to seventy five percent (75%) of Eligible
Accounts, provided, that the definition of Borrowing Base may be fixed
and revised from time to time by Bank in Bank's reasonable judgment
and upon notification thereof to Borrower in accordance with the
provisions hereof. Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid
and reborrowed at any time during the term of this Agreement.
On the Closing Date, Borrower shall execute and deliver to Bank
the Revolving Promissory Note.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m.
Washington, D.C. time, on the Business Day that the Advance is to be
made. Each such notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of Exhibit B hereto.
Bank is authorized to make Advances under this Agreement, based upon
instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to
meet Obligations which have become due and remain unpaid. Bank shall
be entitled to rely on any telephonic notice given by a person who
Bank reasonably believes to be a Responsible Officer, and Borrower
shall indemnify and hold Bank harmless for any damages or loss
suffered by Bank as a result of such reliance. Bank will credit the
amount of Advances made under this Section 2.1 to Borrower's deposit
account.
The Committed Revolving Line shall terminate on the Revolving
Maturity Date, at which time all Advances under this Section 2.1 and
other amounts due under this Agreement (except as otherwise expressly
specified herein) shall be immediately due and payable.
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<PAGE> 3
4. Equipment Advances. Section 2.2(a) of the Loan Agreement is
hereby amended and restated in its entirety to read as follows:
(a) At any time from the date hereof through April 7, 1997
(the "Equipment Availability End Date"), Borrower may from time to
time request advances (each and "Equipment Advance" and collectively,
the "Equipment Advances") from Bank in an aggregate amount not to
exceed the Committed Equipment Line. Amounts borrowed pursuant to
this Section 2.2 may not be readvanced.
5. Letters of Credit. The following Sections are added to the
Loan Agreement immediately following Section 2.8, as Sections 2.9 and 2.10 of
the Loan Agreement:
2.9 Letters of Credit.
(a) Subject to the terms and conditions of this Agreement,
Bank agrees to issue or cause to be issued letters of credit (each a
"Letter of Credit" and collectively, the "Letters of Credit") for the
account of Borrower in an aggregate face amount not to exceed (i) the
lesser of the Committed Revolving Line or the Borrowing Base minus
(ii) the then outstanding principal balance of the Advances provided
that the face amount of outstanding Letters of Credit (including drawn
but unreimbursed Letters of Credit) shall not in any case exceed Five
Hundred Thousand Dollars ($500,000). Each such letter of credit shall
have an expiry date no later than ninety (90) days after the Revolving
Maturity Date provided that Borrower's letter of credit reimbursement
obligation shall be secured by cash on terms acceptable to Bank at any
time after the Revolving Maturity Date if the term of this Agreement
is not extended by Bank. All such Letters of Credit shall be, in form
and substance, acceptable to Bank in its sole discretion and shall be
subject to the terms and conditions of Bank's form of application and
letter of credit agreement which shall be executed and delivered to
Bank not less than two (2) Business Days prior to the date on which a
Letter of Credit is requested to be opened. In the event of any
conflict between the provisions of this Agreement and the provisions
of any form of application and letter of credit agreement, the
provisions of this Agreement shall prevail and control unless
otherwise expressly provided in the such application and letter of
credit agreement. The application and letter of credit agreement
shall specify, among other things: (i) the name and address of the
beneficiary of the Letter of Credit (ii) the amount of the Letter of
Credit, (iii) whether the Letter of Credit is to be revocable or
irrevocable, (iv) the Business Day on which the Letter of Credit is to
be opened and the date on which the Letter of Credit is to expire, (v)
the terms of payment of any draft or drafts which may be drawn under
the Letter of Credit and (vi) any other terms or provisions Borrower
desires to be contained in the Letter of Credit.
(b) The Obligation of Borrower to immediately reimburse Bank
for drawings made under Letters of Credit shall be absolute,
unconditional and irrevocable, and shall
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<PAGE> 4
be performed strictly in accordance with the terms of this Agreement
and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable
attorneys' fees, arising out of or in connection with any letters of
credit.
(c) Prior to or simultaneously with the opening of each
Letter of Credit, Borrower shall pay to Bank a letter of credit fee in
such an amount as Bank customarily charges in connection with the
opening, negotiation, processing and administration of a letter of
credit on the date such Letter of Credit is opened.
2.10 Letter of Credit Reimbursement; Reserve.
(a) Borrower may request that Bank issue a letter of credit
payable in a currency other than United States Dollars. If a demand
for payment is made under any such letter of credit, Bank shall treat
such demand as an advance to Borrower of the equivalent of the amount
thereof (plus cable charges) in United States currency at the then
prevailing rate of exchange in San Francisco, California, for sales of
that other currency for cable transfer to the country of which it is
the currency.
(b) Upon the issuance of any letter of credit payable in a
currency other than United States Dollars, Bank shall create a reserve
under the Committed Revolving Line for letters of credit against
fluctuations in currency exchange rates, in an amount equal to twenty
percent (20%) of the face amount of such letter of credit. The amount
of such reserve may be amended by Bank from time to time to account
for fluctuations in the exchange rate. The availability of funds
under the Committed Revolving Line shall be reduced by the amount of
such reserve for so long as such letter of credit remains outstanding.
6. Financial Statements. Sections 6.9 and 6.10 of the Loan
Agreement are hereby amended and restated in its entirety to read as follows:
6.9 Tangible Net Worth. Borrower shall maintain, as of the
last day of each calendar quarter, a Tangible Net Worth of not less
than the following amounts at the following times:
<TABLE>
<CAPTION>
Quarter Ending: Minimum Tangible Net Worth:
-------------- --------------------------
<S> <C>
December 31, 1995 $1,000,000
March 31, 1996 $2,500,000
June 30, 1996 $2,000,000
September 30, 1996 $6,000,000
December 31, 1996
and at all times thereafter $6,000,000
</TABLE>
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<PAGE> 5
6.10 Profitability. Borrower shall not suffer a loss for any
fiscal quarter in excess of the following amounts at the following
times:
<TABLE>
<CAPTION>
Period Ending: Maximum (Loss) Permitted/Minimum Gain:
------------- -------------------------------------
<S> <C>
December 31, 1995 ($1,000,000)
March 31, 1996 ($1,250,000)
June 30, 1996 ($1,000,000)
September 30, 1996 ($1,500,000)
December 31, 1996
and for the Fiscal Year 1996 ending
December 31, 1996 ($3,900,000)
March 31, 1997 $ 1.
</TABLE>
7. Events of Default. The following is added to Section 9.1 of
the Loan Agreement immediately after subsection (i) as subsection (j):
(j) Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any Letters of Credit remaining undrawn,
as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower shall forthwith deposit and pay
such amounts, and (ii) pay in advance all Letters of Credit fees
scheduled to be paid or payable over the remaining term of the Letters
of Credit.
8. Exhibits. From and after the effective date of this
Agreement, Exhibits C, D, E and G to the Loan Agreement are replaced in their
entirety with Exhibits C, D, E and G attached hereto. Borrower shall execute
and deliver to Bank on the date hereof that certain Amended and Restated
Revolving Promissory Note in the form of Exhibit E attached hereto and
incorporated herein by reference (the "Replacement Line of Credit Note") in
substitution for and not satisfaction of, the issued and outstanding Line of
Credit Note, and the Replacement Line of Credit Note shall be the "Line of
Credit Note" for all purposes of the Loan Documents. In addition, Borrower
shall execute and deliver to Bank on the date hereof that certain Replacement
Equipment Term Note 2 of 2 in the form of Exhibit G attached hereto and
incorporated herein by reference (the "Replacement Equipment Term Note No. 2")
in substitution for and not satisfaction of, the issued and outstanding
Equipment Term Note No. 2, and the Replacement Equipment Term Note No. 2, shall
be the "Equipment Term Note No. 2" for purposes of the Loan Documents. Neither
the Replacement Line of Credit Note nor the Replacement Equipment Term Note No.
2 shall not operate as a novation of any of the Obligations or nullify,
discharge, or release any such obligations or the continuing contractual
relationship of Borrower in accordance with the provisions of the Loan
Documents.
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<PAGE> 6
9. Conditions Precedent. This Agreement shall become effective
on the date Bank receives the following documents, each of which shall be
satisfactory in form and substance to Bank:
(a) The Replacement Line of Credit Note;
(b) The Replacement Equipment Term Note No. 2;
(c) Proof that Borrower has paid all costs and expenses
to Bank in connection with this Agreement, including but not limited to Bank's
reasonable attorneys fees; and
(d) Such other information, instruments, opinions,
documents, certificates and reports as Bank may deem necessary.
10. Representations. Borrower hereby confirms that the covenants
set forth in Section 5 of the Loan Agreement as hereby amended, are true and
correct as of the date hereof, and that no Event of Default has occurred or is
continuing immediately prior to or upon the execution of this Agreement.
11. Counterparts. This Agreement may be executed in any number of
duplicate originals or counterparts, each of which duplicate original or
counterpart shall be deemed to be an original and all taken together shall
constitute one and the same instrument.
12. Loan Documents; Governing Law; Etc. This Agreement is one of
the Loan Documents defined in the Loan Agreement and shall be governed and
construed in accordance with the laws of the State of Maryland. The headings
and captions in this Agreement are for the convenience of the parties only and
are not a part of this Agreement.
13. Acknowledgments. Borrower hereby confirms to Bank the
enforceability and validity of each of the Loan Documents. In addition,
Borrower hereby agrees to the execution and delivery of this Agreement and the
terms and provisions, covenants or agreements contained in this Agreement shall
not in any manner release, impair, lessen, modify, waive or otherwise limit the
liability and obligations of Borrower under the terms of any of the Loan
Documents, except as otherwise specifically set forth in this Agreement.
Borrower issues, ratifies and confirms the representations, warranties and
covenants contained in the Loan Documents.
14. Modifications. This Agreement may not be supplemented,
changed, waived, discharged, terminated, modified or amended, except by written
instrument executed by the parties.
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<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
VISUAL NETWORKS, INC.
By:
--------------------------
Name:
Title:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By:
--------------------------
Frank Tower
Vice President
SILICON VALLEY BANK
By:
--------------------------
Name:
Title:
(Signed in Santa Clara County, California)
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<PAGE> 1
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Agreement") is entered into as of February 27, 1997, by and between SILICON
VALLEY BANK, a California-chartered bank ("Bank") with its principal place of
business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan
production office located at One Central Plaza, 11300 Rockville Pike, Suite
701, Rockville, Maryland 20852, doing business under the name "Silicon Valley
East" and VISUAL NETWORKS, INC., a Delaware corporation ("Borrower").
RECITALS.
A. Borrower and Bank have entered into that certain Loan and
Security Agreement dated April 5, 1996 (the "Original Loan Agreement"),
pursuant to which Bank has agreed to establish a revolving credit facility (as
the same by be increased from time to time, the "Line of Credit") in favor of
Borrower in the maximum principal amount of One Million Five Hundred Thousand
and No/100 Dollars ($1,500,000.00), which Line of Credit also provided for a
sublimit for equipment advances in an amount not to exceed Two Hundred Fifty
Thousand and No/100 Dollars ($250,000.00) in the aggregate (as the same may be
increased from time to time, the "Committed Equipment Line"). Borrower and
Bank amended the Original Loan Agreement pursuant to the provisions of that
certain First Amendment to Loan and Security Agreement dated as of November 4,
1996 (the "First Amendment"), which First Amendment, among other things,
increased the Line of Credit from the maximum principal amount of One Million
Five Hundred Thousand and No/100 Dollars ($1,500,000.00) to the maximum
principal amount of Three Million and No/100 Dollars ($3,000,000.00) (the
Original Loan Agreement as amended by the First Amendment is hereinafter called
the "Loan Agreement").
B. Borrower has requested that Bank increase the maximum
principal amount available under the Line of Credit from Three Million and
No/100 Dollars ($3,000,000.00) to Three Million Five Hundred Thousand and
No/100 Dollars ($3,500,000.00), extend the maturity date of the Line of Credit,
and modify certain terms and conditions of the Loan Agreement to, among other
things, increase the amount of the Committed Equipment Line from Two Hundred
Fifty Thousand and No/100 Dollars ($250,000.00) to Five Hundred Thousand and
No/100 Dollars ($500,000.00) and Bank has agreed on the condition, among
others, that this Agreement be executed and delivered by Borrower to Bank.
C. Unless otherwise defined herein, capitalized terms used herein
shall have the respective meanings set forth in the Loan Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrower and Bank do hereby agree as follows:
<PAGE> 2
1. Recitals. The parties hereto acknowledge and agree that the
above Recitals are true and correct in all material respects and that the same
are incorporated herein and made a part hereof by reference.
2. Definitions. From and after the date hereof, the definitions
of "Committed Equipment Line," "Committed Revolving Loan," "Eligible Accounts,"
Revolving Maturity Date" and the "Revolving Promissory Note" set forth in
Section 1.1 of the Loan Agreement are hereby amended and restated in their
entirety as follows:
"Committed Equipment Line" means the maximum aggregate amount
not to exceed Five Hundred Thousand and No/100 Dollars ($5,00,000).
"Committed Revolving Line" shall mean the Committed Revolving
Line in the maximum principal amount of Three Million Five Hundred
Thousand and No/100 Dollars ($3,500,000.00).
"Eligible Accounts" means those accounts that arise in the
ordinary course of Borrower's business that comply with all of
Borrower's representations and warranties to Bank set forth in Section
5.4; provided, that standards of eligibility may be fixed and revised
from time to time by Bank in Bank's reasonable judgment and upon prior
notification thereof to Borrower in accordance with the provisions
hereof. Unless otherwise agreed to by Bank Eligible Accounts shall
not include the following:
(a) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor,
fifty percent (50%) of whose Accounts the account debtor has
failed to pay within ninety (90) days of invoice date;
(c) Accounts with respect to which the account
debtor is an officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale
on approval, bill and hold, or other terms by reason of which
the payment by the account debtor may be conditional;
(e) Accounts with respect to which the account
debtor is an Affiliate (other than by virtue of being directly
or indirectly under common ownership or control with Borrower)
of Borrower;
(f) Accounts with respect to which the account
debtor does not have its principal place of business in the
United States and Accounts arising from
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<PAGE> 3
products shipped to or services provided to branches or
offices located in the United States of any account debtor
that does not have its principal place of business in the
United States;
(g) Accounts with respect to which the account
debtor is a federal, state, or local government entity or any
department, agency, or instrumentality thereof;
(h) Accounts with respect to which Borrower is
liable to the account debtor for goods sold or services
rendered by the account debtor to Borrower, but only to the
extent of any amounts owing to the account debtor against
amounts owed to Borrower;
(i) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations
to Borrower exceed twenty-five percent (25%) of all Accounts,
except with respect to Spring, AT&T and MCI, as to which the
percentage shall be thirty five percent (35%), to the extent
such obligations exceed the aforementioned percentage, except
as approved in writing by Bank;
(j) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect
thereto as to which Bank believes, in its sole discretion,
that there may be a basis for dispute (but only to the extent
of the amount subject to such dispute or claim), or is subject
to any Insolvency Proceeding, or becomes insolvent, or goes
out of business; and
(k) Accounts the collection of which Bank
reasonably determines to be doubtful.
"Revolving Maturity Date" means March 6, 1998.
"Revolving Promissory Note" means that certain Second Amended
and Restated Revolving Promissory Note dated as of February __, 1997
in substantially the form of Exhibit E hereto in the maximum principal
amount of Three Million Five Hundred Thousand and No/100 Dollars
($3,500,000.00) from Borrower in favor of Bank, together with all
renewals, amendments, modifications and substitutions therefore.
From and after the date hereof, all references in the Loan Agreement to the
"Committed Equipment Line," "Eligible Accounts," "Committed Revolving Loan,"
"Revolving Maturity Date," and the "Revolving Promissory Note" shall have the
meanings set forth herein.
From and after the date hereof, the following definitions are
added to Section 1.1 of the Loan Agreement:
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<PAGE> 4
"Current Liabilities" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included
as current liabilities on the balance sheet of Borrower, as at
such date, plus, to the extent not already included therein,
all outstanding Credit Extensions made under this Agreement,
including all Indebtedness that is payable upon demand or
within one year from the date of determination thereof unless
such Indebtedness is renewable or extendible at the option of
Borrower to a date more than one year from the date of
determination, but excluding Subordinated Debt and deferred
revenues.
"Quick Assets" means, as of any applicable date, the
cash, cash equivalents, accounts receivable and investments
with maturities of fewer than ninety (90) days of Borrower all
determined in accordance with GAAP.
Except as previously modified and as modified hereby, Section 1.1 of the Loan
Agreement shall remain unchanged.
3. Advances. Section 2.1 of the Loan Agreement is hereby
amended and restated in its entirety to read as follows:
2.1 Advances. Subject to and upon the terms and
conditions of this Agreement, Bank agrees to make Advances to
Borrower in an aggregate amount not to exceed the Committed
Revolving Line or the Borrowing Base, whichever is less, minus
(ii) the outstanding amount of all Equipment Advances. For
purposes of this Agreement, "Borrowing Base" shall mean an
amount equal to seventy five percent (75%) of Eligible
Accounts. Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1 may
be repaid and re borrowed at any time during the term of this
Agreement.
On the Closing Date, Borrower shall execute and deliver to
Bank the Revolving Promissory Note.
Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00
p.m. Washington, D.C. time, on the Business Day that the
Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially
the form of Exhibit B hereto. Bank is authorized to make
Advances under this Agreement, based upon instructions
received from a Responsible Officer, or without instructions
if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank
shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible
Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such
reliance. Bank will
- 4 -
<PAGE> 5
credit the amount of Advances made under this Section 2.1 to
Borrower's deposit account.
The Committed Revolving Line shall terminate on the
Revolving Maturity Date, at which time all Advances under this
Section 2.1 and other amounts due under this Agreement (except
as otherwise expressly specified herein) shall be immediately
due and payable.
From and after the date hereof, all references in the Loan
Agreement to the "Borrowing Base" shall have the meaning set forth herein.
4. Equipment Advances. Section 2.2(a), (b) and (c) of the
Loan Agreement are hereby amended and restated in its entirety to read as
follows:
(a) At any time from the date hereof through December
31, 1997 (the "Equipment Availability End Date"), Borrower may
from time to time request advances (each and "Equipment
Advance" and collectively, the "Equipment Advances") from Bank
in an aggregate amount not to exceed the Committed Equipment
Line. Amounts borrowed pursuant to this Section 2.2 may not
be re advanced.
(b) Equipment Advances shall be made in one of
two tranches. All Equipment Advances made prior to June 30,
1997 (the "Tranche One End Date") shall be evidenced by an
Equipment Term Note (as amended from time to time, "Equipment
Term Note No. 1") to be executed and delivered by Borrower to
Bank in the form of Exhibit F attached hereto. All Equipment
Advances made prior to the Tranche One end Date shall be
governed by and repaid in accordance with the terms of
Equipment Term Note No. 1. All Equipment Advances made after
the Tranche One End Date, but prior to the Equipment
Availability End Date shall be evidenced by an Equipment Term
Note (as amended from time to time, "Equipment Term Note No.
2") to be executed by Borrower and delivered to Bank at the
time of the first Equipment Advance after the Tranche One End
Date in the form of Exhibit G attached hereto. All Equipment
Advances made after the Tranche One End Date shall be governed
by and repaid in accordance with the terms of the Equipment
Term Note No. 2.
(c) Borrower shall deliver to Bank at the time of
each Equipment Advance an invoice for the equipment to be
purchased or for any equipment previously purchased by
Borrower for which a borrowing under this Agreement is
permitted and has not been made. With respect to advances on
Equipment Term Note No. 1, Bank will only finance equipment
purchased on or after December 31, 1996. With respect to
advances on Equipment Term Note No. 2, Bank will only finance
Equipment purchased after June 30, 1997 and on or before the
Equipment Availability End Date. The Equipment Advances shall
be used by Borrower only to purchase equipment and shall not
exceed one hundred percent (100%) of the invoice amount of
such equipment approved from time to time by
- 5 -
<PAGE> 6
Bank, excluding taxes, shipping, warranty charges, freight
discounts and installation expense. At no time shall Bank
make any Equipment Advances if after giving effect to such
request the aggregate account then outstanding would exceed
the Committed Revolving Line or the Borrowing Base, whichever
is less.
6. Events of Default. In Addition to the Events of
Default set forth in the Loan Agreement, the fault of the Borrower to perform
under this Agreement shall constitute an Event of Default thereunder.From and
after the date hereof, all references in the Loan Agreement to the "Equipment
7. Exhibits. From and after the effective date of this
Agreement Exhibits C, D, E, F and G to the Loan Agreement are replaced in their
entirety with Exhibits C, D, E, F and G attached hereto. Borrower shall
execute and deliver to Bank on the date hereof that certain Second Amended and
Restated Revolving Promissory Note in the form of Exhibit E attached hereto and
incorporated herein by reference (the "Replacement Line of Credit Note") in
substitution for and not satisfaction of, the issued and outstanding Line of
Credit Note, and the Replacemetn Line of Credit Note shall be the "Line of
Credit" for all purposes of the Loan Documents. In addition, Borrower shall
execute and deliver to Bank on the date hereof that certain Replacement
Equipment Term Note 1 of 2 in the form of Exhibit F attached hereto and
incorporated herein by reference (the "Replacement Equipment Term Note No.1")
in substitution for and not satisfaction of, the issued and outstanding
Equipment Term Note No. 1 of 2, and the Replacement Equipment Term Note No. 1,
shall be the "Equipment Term Note No. 1" for all purposes of the Loan
Documents. Neither the Replacement Line of Credit Note nor the Replacement
Equipment Term Note No. 1 shall operate as a novation of any of the Obligations
or nullify, discharge, or release any such obligation or the continuing
contractual relationship of Borrower in accordance with the provisions of the
Loan Documents.Availability End Date" shall have the meaning set forth herein.
8. Conditions Precedent. This Agreement shall
become effective on the date Bank receives the following
documents, each of which shall be satisfactory in form and
substance to Bank.
(a) The Replacement Line of Credit Note:
(b) The Replacement Equipment Term Note
No. 1;
(c) Proof that Borrower has paid costs
and expenses to Bank in connection with this Agreement,
including but not limited to Bank's reasonable attorneys fees,
and
(d) Such other information, instruments,
opinions, documents, certificates and reports as Bank may deem
necessary.
9. Representations. Borrower hereby confirms
that the covenants set forth in Section 5 of the Loan
Agreement as hereby amended, are true and correct as of the
date
- 6 -
<PAGE> 7
hereof, and that no Event of Default has occurred or is
continuing immediately prior to or upon the execution of this
Agreement.
10. Counterparts. This Agreement may be executed
in any number of duplicate originals or counterparts, each of
which duplicate original or counterpart shall be deemed to be
an original and all taken together shall constitute one and
the same instrument.
11. Loan Documents Governing Law, Etc. This
Agreement is one of the Loan Documents defined in the Loan
Agreement and shall be governed and construed in accordance
with the laws of the State of Maryland. The headings and
captions in this Agreement are for the convenience of the
parties only and are not a part of this Agreement.
12. Acknowledgments. Borrower hereby confirms to
Bank the enforceability and validity of each of the Loan
Documents. In addition, Borrower hereby agrees to the
execution and delivery of this Agreement and the terms and
provisions, covenants or agreements contained in this
Agreement shall not in any manner release, impair, lessen,
modify, waive or otherwise limit the liability and obligations
of Borrower under the terms of any of the Loan Documents,
except as otherwise specifically set forth in this Agreement.
Borrower issues, ratifies and confirms the representations,
warranties and covenants contained in the Loan Documents.
13. Modifications. This Agreement may be not be
supplemented, changed, waived discharge, terminated, modified
or amended, except by written instrument executed by the
parties.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
VISUAL NETWORKS, INC.
By: s/ Scott Stouffer
-------------------------
Name: Scott Stouffer
Title: President and CEO
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: s/ Frank Tower
-------------------------
Frank Tower
Vice President
SILICON VALLEY BANK
By:
---------------------------
Name:
Title:
(Signed in Santa Clara County, California)
- 8 -
<PAGE> 1
EXHIBIT 10.12
SILICON VALLEY BANK
STANDBY L/C NO. SVB96IS0468 DATE: DECEMBER 10, 1996
BENEFICIARY: EQUITABLE LIFE ASSURANCE SOCIETY OF
THE UNITED STATES
1875 EYE STREET NW
WASHINGTON, DC 20006
APPLICANT: VISUAL NETWORKS, INC.
2092 GAITHER ROAD
ROCKVILLE, MD 20850
AMOUNT: USD 230,000.00
(TWO HUNDRED THIRTY THOUSAND U.S. DOLLARS)
EXPIRY DATE: NOVEMBER 25, 1997
LOCATION: AT OUR COUNTER IN SANTA CLARA
DEAR SIR/MADAM:
WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. SVB96IS0468 IN
YOUR FAVOR.
AVAILABLE BY PAYMENT WITH SILICON VALLEY BANK, 3003 TASMAN DRIVE, SANTA CLARA,
CA 95054, ATTN: INTERNATIONAL DEPT. OF BENEFICIARY'S DRAFT AT SIGHT DRAWN ON US,
AND ACCOMPANIED BY THE FOLLOWING:
1. THE ORIGINAL OF THIS LETTER OF CREDIT AND AMENDMENT IF ANY.
2. BENEFICIARY'S NOTARIZED STATEMENT BY ITS AUTHORIZED REPRESENTATIVE
STATING:
(I) BENEFICIARY HAS THE RIGHT TO DRAW ON THE LETTER OF CREDIT UNDER
THE TERMS OF THE LEASE AGREEMENT BETWEEN EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES AND VISUAL NETWORKS, INC., DATED
NOVEMBER 25, 1996 AND
(II) A DESCRIPTION OF THE EVENT OR CIRCUMSTANCE PURSUANT TO WHICH IT IS
ENTITLED TO DRAW ON THE LETTER OF CREDIT.
SPECIAL INSTRUCTIONS:
1. IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT WILL BE AUTOMATICALLY
EXTENDED WITHOUT AMENDMENT FOR A PERIOD OF ONE YEAR FROM THE PRESENT OR
EACH FUTURE EXPIRATION DATE UNLESS AT LEAST SIXTY (60) DAYS PRIOR TO SUCH
EXPIRY DATE WE
<PAGE> 2
NOTIFY YOU IN WRITING AT THE ABOVE ADDRESS BY OVERNIGHT/EXPRESS MAIL THAT
WE ELECT NOT TO RENEW THIS LETTER OF CREDIT FOR SUCH ADDITIONAL PERIOD.
HOWEVER, IN NO EVENT THIS LETTER OF CREDIT WILL BE AUTOMATICALLY EXTENDED
BEYOND ITS FINAL EXPIRY DATE OF JANUARY 25, 2002.
ALL DOCUMENTS INCLUDING DRAFT(S) MUST INDICATE THE NUMBER AND DATE OF THIS
CREDIT.
EACH DRAFT PRESENTED HEREUNDER MUST BE ACCOMPANIED BY THIS ORIGINAL LETTER OF
CREDIT FOR OUR ENDORSEMENT THEREON OF THE AMOUNT OF SUCH DRAFT(S).
DOCUMENTS MUST BE SENT TO US VIA OVERNIGHT COURIER (I.E. FEDERAL EXPRESS, UPS,
DHL OR ANY OTHER EXPRESS COURIER) AT OUR ADDRESS: SILICON VALLEY BANK, 3003
TASMAN DRIVE, SANTA CLARA, CA 95054 ATTN: INTERNATIONAL DIVISION.
WE HEREBY ENGAGE WITH DRAWERS AND/OR BONAFIDE HOLDERS THAT DRAFT(S) DRAWN UNDER
AND NEGOTIATED IN CONFORMANCE WITH THE TERMS AND CONDITIONS OF THE SUBJECT
CREDIT WILL BE DULY HONORED ON PRESENTATION.
THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY
CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION 500.
/s /s
- -------------------- --------------------
AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE
<PAGE> 1
EXHIBIT 10.12.1
SILICON VALLEY BANK
Date: December 5, 1997
OUR REFERENCE NO. SVB96ISO468
ADVICE OF AMENDMENT NUMBER 1
Amount: US$ 230,000.00
Expiration Date/Location:
NOVEMBER 25, 1997/AT OUR COUNTER
AT THE ABOVE ADDRESS
Beneficiary: For Account of:
EQUITABLE LIFE ASSURANCE SOCIETY OF VISUAL NETWORKS, INC.
THE UNITED STATES 2092 GAITHER ROAD
1875 EYE STREET NW ROCKVILLE, MD 20850
Washington, DC 20006
Gentlemen:
We have been requested to amend the above referenced Letter of Credit as
follows:
1- Effective November 25, 1997, the amount is decreased by US$ 40,000.00 to
a new credit value of US$ 190,000.00 in words (One Hundred Ninety
Thousand & 00/100 USDollars).
2- Under Special Instructions, period of automatic renewal now to read Six
(6) months instead of one year.
All other terms and conditions remain unchanged.
The advice of amendment is to be considered part of the original Letter of
Credit and must be attached thereto.
Sincerely,
/s /s
- -------------------- --------------------
Authorized Signature Authorized Signature
Except as otherwise stated herein, this credit is subject to the Uniform Customs
and Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500.
This advice of amendment is subject to your approval, if you agree/disagree
please sign the attached copy where applicable and return to us.
<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 15th day of December ,1994, by and
between VISUAL NETWORKS, INC., a Delaware corporation (the "Company") and
SCOTT STOUFFER, an individual residing in the State of Maryland
("Employee").
BACKGROUND
The Company and Employee are parties to an agreement in
principle relating to his employment with the Company (the "Agreement in
Principle"); which Agreement in Principle the Company and Employee desire
to terminate by execution hereof. The Company wishes to continue to employ
Employee, and Employee wishes to continue to be employed by the Company,
all on the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the facts, mutual promises
and covenants contained herein and intending to be legally bound hereby,
the Company and Employee agree as follows:
1. Employment. The Company hereby employs Employee and
Employee hereby accepts employment by the Company for the term set forth
herein and upon the terms and conditions contained in this Agreement.
2. Office and Duties.
(a) Employee shall serve the Company as its President and
Chief Executive Officer and shall have such authority and such
responsibilities as is consistent with such position and as the Company's
Board of Directors may determine from time to time. Employee shall serve as
a member of the Company's Board of Directors without additional compensation.
(b) Throughout the term of this Agreement, except as
provided in Section 2(c) below, Employee shall devote his entire working
time, energy, skill and best efforts to the performance of his duties
hereunder in a manner which will faithfully and diligently further the
business and interests of the Company.
(c) Notwithstanding the provisions of Section 2(b)
hereof, Employee may engage in activities in connection with any charitable
or civic activities, personal investments and serving as an executor, trustee
or in other similar fiduciary capacity; provided, however, that such
activities do not interfere with his performance of his responsibilities and
obligations pursuant to this Agreement.
3. Term. This Agreement shall be for a term of two (2) years,
commencing on the date of this Agreement, unless sooner terminated as
hereinafter provided. Unless either party elects to terminate this Agreement
at the end of the original or any renewal term by giving the other party
notice of such election at least ninety (90) days before the expiration of
the then
<PAGE> 2
current term, this Agreement shall be deemed to have been renewed
for an additional term of one (1) year commencing on the day after the
expiration of the then current term.
4. Compensation.
(a) For all of the service rendered by Employee to the
Company, Employee shall receive an annual base salary (inclusive of all
applicable income, Social Security and other taxes and charged) of Ninety
Thousand dollars ($90,000), payable in reasonable periodic installments in
accordance with the Company's regular payroll practices in effect from time
to time. Annual increases to base salary, if any, shall be approved by the
Compensation Committee of the Company's Board of Directors; provided that
the unanimous approval of the Compensation Committee shall be required for
any increase(s) in the base salary of Employee which exceed an aggregate
amount equal to ten percent (10%) of Employee's base salary for the
previous year.
(b) In addition to Employee's base salary, the Company
from time to time may pay Employee such bonuses or other additional
compensation as the Compensation Committee of the Board of Directors of the
Company may determine; provided that the unanimous approval of the
Compensation Committee shall be required for any increase(s) in bonuses (or
stock options) granted to Employee which exceeds an aggregate amount equal
to ten percent (10%) of Employee's bonus(es) (or stock options) (as the
case may be) the previous year other than for bonuses pursuant to the
Company's management bonus pool arrangement.
(c) Throughout the term of this Agreement and as long as
they are kept in force by the Company, Employee shall be entitled to
participate in and receive the benefits of any health, life or accident
insurance plans or programs made available to other similarly situated
employees of the Company.
(d) Employee shall be entitled to fifteen (15) business
days paid leave in accordance with the Company's leave plan as in effect
from time to time, if any (for vacation, illness, personal or otherwise)
during each year of the term of this Agreement.
(e) Employee shall be entitled to twenty (20) business
days "sabbatical" following the completion of each four (4) years of
employment with the Company. Such "sabbatical" must be taken within a finite
period of being earned, such period to be in accordance with the Company's
leave plan as in effect from time to time, if any, or if no such policy shall
be in effect, as shall be determined by the Board of Directors of the Company.
5. Expenses. The Company will reimburse Employee for all
reasonable expenses incurred by Employee in connection with the performance
of Employee's duties hereunder upon presentation of expense statements or
vouchers and such other supporting
-2-
<PAGE> 3
information as it may from time to time request; provided that Employee
complies with all applicable Company procedures and practices relating to
reimbursement of expenses in effect from time to time.
6. Disability.
(a) If Employee is unable to perform his duties hereunder
due to partial or total disability or incapacity resulting from a mental or
physical illness or any similar cause, Employee shall be considered
"Disabled". In the event Employee shall become Disabled, the Company will
continue the payment of Employee's base salary at its then current rate for a
period equal to the period of time that Employee continues to be Disabled;
provided that, in no event shall the Company be required to continue the
payment of Employee's base salary for more than one hundred eighty (180) days
following the date Employee first becomes Disabled. Upon becoming Disabled,
Employee shall also be entitled to receive those benefits to which Employee
may be entitled as a result of Employee's participation under a death or
disability plan in which Employee is a participant as an employee of the
Company, if any.
(b) In the event Employee shall be Disabled for a period
of more than one hundred eighty (180) consecutive days or for a cumulative
period of more than one hundred eighty (180) days during any twelve month
period, Employee shall be considered "Long Term Disabled", the Company shall
have the right to terminate Employee's employment under this Agreement upon
written notice thereof to the Employee, in which event the Company shall have
no further liability or obligation to Employee for compensation or benefits
hereunder by reason of such termination. In the event that the Company does
not exercise such right of termination, the Company shall have no liability
or obligation to Employee for compensation or benefits hereunder during the
period of time that Employee is considered to be Long Term Disabled.
7. Death. If Employee dies, Employee's employment under this
Agreement shall automatically terminate and, all payments hereunder shall
cease on the date of Employee's death, except for those payments which were
due at such time, including any unpaid salary, expense reimbursements, or
bonuses that are owed and Company shall have no further obligations or
liabilities hereunder to Employee's estate or legal representative or
otherwise, except under any death or disability plan in which Employee is a
participant as an employee of the Company, if any. Any management pool bonus
that otherwise would have been due to Employee at year end shall be prorated
up to the time of Employee's death.
8. Termination of the Company's Business. If the Company
shall discontinue its business, the Company may terminate Employee's employment
under this Agreement on thirty (30) days prior written notice, and in such
event the Company shall have no further obligations or liabilities hereunder
and Employee shall be released from the restrictions continued in Sections
12(a) and 12(b) hereof.
-3-
<PAGE> 4
9. Discharge for Cause. The Company may terminate Employee's
employment under this Agreement at any time for "cause." For purposes of this
Agreement, "cause" shall be defined as:
(a) conviction in a court of law of any felony;
(b) willful violation of specific and lawful directions
from the Board of Directors of the Company or excessive absenteeism which
shall continue for a period of thirty (30) days after written notice thereof
is given of such violation or absenteeism;
(c) embezzlement or theft of Company assets, or other
fraud or dishonesty as determined in a court of law;
(d) material breach by Employee of the provisions of this
Agreement, which breach shall continue for a period of thirty (30) days
after a written notice thereof is given to Employee; or
(e) material breach of any of the covenants or
obligations set forth in that certain Stockholders and Registration Rights
Agreement, dated the date hereof, among the Company and the holders of its
capital stock, which breach continues for a period of thirty (30) days
after a written notice thereof is given to Employee.
10. Termination Without Cause.
(a) The Company may terminate Employee's employment
hereunder at any time, for any reason, with or without cause, effective upon
the date designated by the Company upon not less than 45 days prior written
notice to Employee.
(b) In the event of a termination of Employee's
employment hereunder pursuant to Section 10(a) hereof, Employee shall be
entitled to receive all accrued but unpaid (as of the effective date of such
termination) base salary and bonuses, plus a liquidated termination fee equal
to six (6) months base salary. All other liabilities or obligations of the
Company to Employee, including without limitation, base salary, benefits and
bonuses shall cease at the time of such termination, subject to the terms of
any benefit or compensation plan then in force and applicable law and
applicable to Employee. Except as specifically set forth in this Section 10,
the Company shall have no liability or obligation hereunder by reason of such
termination.
11. Company Property. All computer software and documentation,
advertising, sales, manufacturer's and other materials or articles of
information, or other proprietary information of the Company, including
without limitation, data processing reports,
-4-
<PAGE> 5
customer sales analyses, invoices, price lists or information, samples, or
any other materials or data of any kind furnished to Employee by the
Company or developed by Employee on behalf of the Company or at the
Company's direction or for the Company's use or otherwise in connection
with Employee's employment hereunder, are and shall remain the property of
the Company. If the Company requests the return of such materials at any
time during Employee's employment, Employee shall immediately deliver the
same, and Employee shall also deliver the same immediately upon termination
of Employee's employment hereunder.
12. Nonsolicitation, Trade Secrets, Etc.
(a) During the term of this Agreement and for a period of
twenty-four (24) months after the termination of his employment with the
Company for any reason whatsoever (such twenty-four (24) month period being
reduced to twelve (12) months in the event Employee remains an employee of
the Company for four (4) years following the date hereof), Employee (i) shall
not directly or indirectly induce or attempt to influence any employee,
consultant, supplier, customer or prospective customer of the Company to
terminate his, her or its relationship with the Company, or employ any
employee, or retain, in competition with the Company, consultant, supplier,
customer or prospective customer of the Company, and shall not solicit or do
business in competition with the Company with anyone that is a customer,
prospective customer or supplier of the Company on the date that Employee's
employment is terminated hereunder, and (ii) shall not engage in (as
principal, partner, director, officer, agent, employee, consultant or
otherwise) or be financially interested in any business activities which are
in competition with business activities carried on by the Company, or being
definitely contemplated by the Company, at the time of the termination of
Employee's employment. For purposes hereof, a "prospective customer" shall
mean a sales lead with whom the Company has made contact by means of personal
visits, demonstrations, telephone calls or personally directed mail. For
purposes hereof, business activities shall be deemed to be "in competition"
with the Company if they are activities related to software and/or hardware
products to be embedded in a network infrastructure whose primary purpose is
to aid in the maintenance and support of wide-area data communications
networks based on Frame Relay or Asynchronous Transfer Mode technologies, or
technologies developed by, or being definitely contemplated by, the Company.
(b) During the term of this Agreement and for a period of
three (3) years thereafter, Employee shall not disclose, communicate or
divulge to, to use for the direct or indirect benefit of any person, firm,
association or company other than the Company, any material referred to in
Paragraph 11 above or any information regarding the business methods,
business policies, procedures, techniques, research or development projects
or results, trade secrets, or other knowledge or processes of or developed by
the Company or any names and addresses of customers or clients or any other
confidential information relating to or dealing with prospective customers or
clients or any other confidential information relating to or dealing with the
business operations or activities of the Company, made known to Employee or
learned or
-5-
<PAGE> 6
acquired by Employee while in the employ of the Company or acting as an
officer, director or principal of the Company.
(c) Any and all writing, inventions, improvements,
processes, computer software and/or techniques which Employee may make,
conceive, discover or develop, either solely or jointly with any other person
or persons, at any time during the term of this Agreement, whether during
working hours or at any other time and whether at the request or upon the
suggestion of the Company or otherwise, which relate to or are useful in
connection with any business now or hereafter carried on or definitively
contemplated by the Company, including developments or expansions of its
present fields of operations, shall be the sole and exclusive property of the
Company. Employee shall make full disclosure to the Company of all such
writings, inventions, improvements, processes, computer software, procedures
and techniques, and shall do everything necessary or desirable to vest the
absolute title thereto in the Company. Employee shall write and prepare all
specifications and procedures regarding such inventions, improvement,
processes, computer software, procedures and techniques and otherwise aid and
assist the Company so that the Company can prepare and present applications
for copyright or Letters Patent therefor and can secure such copyright or
Letters Patent wherever possible, as well as reissues, renewals and
extensions thereof, and can obtain the record title to such copyright or
patents so that the Company shall be the sole and absolute owner thereof in
all countries in which it may desire to have copyright or patent protection.
Employee shall not be entitled to any additional or special compensation or
reimbursement regarding any and all such writings, inventions, improvements,
processes, procedures and techniques.
(d) Employee acknowledges that the restrictions contained
in the foregoing subparagraphs (a), (b), and (c), in view of the nature of
the business in which the Company is engaged, are reasonable and necessary
in order to protect the legitimate interests of the Company, and that the
Company would not have entered into this Agreement in the absence of such
restrictions. Employee also acknowledges that any violation thereof would
result in irreparable injuries to the Company for which monetary damages
would not be an adequate remedy. Employee therefore acknowledges that, in
the event that Employee shall violate any of these restrictions, the
Company shall be entitled to obtain from any court of competent
jurisdiction preliminary and permanent injunctive relief as well as damages
and an equitable accounting of all earnings, profits and other rights or
remedies to which the Company may be entitled.
(e) If the period of time or the area specified in
subparagraph (a) or (b) above should be adjudged unreasonable in any
proceeding, then the period of time shall be reduced by such number of
months or the area shall be reduced by the elimination of such portion
thereof, or both, so that such restrictions may be enforced in such area
and for such time as is adjudged to be reasonable. If Employee violates
any of the restrictions contained in the foregoing subparagraph (a) or (b)
the applicable restrictive period shall not run in favor of
-6-
<PAGE> 7
Employee from the time of the commencement of any such violation until such
violation shall be cured by Employee to the satisfaction of the Company.
(f) The provisions of this Section 12 hereof shall survive
termination of Employee's employment hereunder.
13. Prior Agreements. Employee represents to the Company (a)
that there are no restrictions, agreements or understandings whatsoever, to
which Employee is a party which would prevent or make unlawful his
execution of this Agreement or his employment hereunder, (b) that his
execution of this Agreement and his employment hereunder shall not
constitute a breach of any contract, agreement or understanding, oral or
written to which he is a party or by which he is bound, and (c) that he is
free to execute this Agreement and to enter into employment by the Company.
14. Miscellaneous.
(a) Indulgences, Etc. Neither the failure nor any delay
on the part of either party to exercise any right, remedy, power or privilege
(collectively "Rights") under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any Right preclude any
other or further exercise of the same or of any other Right nor shall any
waiver of any Right with respect to any occurrence be construed as a waiver
of such Right with respect to any other occurrence. No waiver shall be
effective unless it is in writing and is signed by the party asserted to have
granted such waiver.
(b) Controlling Law. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement
(including, without limitation, provisions concerning limitations of
actions), shall be governed by and construed in accordance with the laws of
the State of Maryland, notwithstanding any conflict-of-laws doctrines of such
state or other jurisdiction to the contrary, and without the aid of any
canon, custom or rule of law requiring construction against the draftsman.
The parties consent to the exclusive jurisdiction of the Federal and state
courts located in Maryland.
(c) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received only when
personally delivered or when deposited in the United States mails, first
class postage prepaid, addressed as set forth below:
-7-
<PAGE> 8
(i) If to the Employee:
Mr. Scott Stouffer
14209 Floral Park Drive
North Potomac, Maryland 20878
(ii) If to the Company:
Visual Networks, Inc.
2092 Gaither Road
Suite 220 - I
Rockville, MD 20850
Attention: Board of Directors
Fax: (301) 208-8227
With a copy to:
Edwin M. Martin, Jr.
Piper & Marbury
1200 19th Street, N.W.
Washington, D.C. 20036
Any party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with
the provisions of this paragraph for the giving of notice.
(d) Binding Nature of Agreement. This Agreement shall be
binding upon and inure to the benefit of the Company and its successors and
assigns and shall be binding upon Employee, his heirs and legal
representatives.
(e) Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be
an original as against any party whose signature appears thereon, and all of
which shall together 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 the signatories. Any photocopy or facsimile of this Agreement,
with all signatures reproduced on one or more of its signature pages, shall
be considered for all purposes as if it were executed counterpart of this
Agreement.
-8-
<PAGE> 9
(f) Provisions Separable. The provisions of this
Agreement are independent of and separable from each other, and no provision
shall be affected or rendered invalid or unenforceable by virtue of the fact
that for any reason any other or others of the may be invalid or
unenforceable in whole or in part.
(g) Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or
written, including without limitation, the Agreement in Principle, which is
hereby terminated in its entirety. The express terms hereof control and
supersede any course of performance and/or usage of the trade inconsistent
with any of the terms hereof. This Agreement may not be modified or amended
other than by an agreement in writing.
(h) Section Heading. The section headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) Gender, Etc. Words used herein, regardless of the
number and gender specifically used, shall be deemed and construed to include
any other number, singular or plural, and any other gender, masculine,
feminine or neuter, as the context indicates is appropriate.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the date first above written.
WITNESS:
/S Nancy A. Spangler /S Scott E. Stouffer
- --------------------- ---------------------
Scott Stouffer
ATTEST: VISUAL NETWORKS, INC.
By: /S Nancy A. Spangler By: /S Robert Troutman
--------------------- -------------------
Title: Assistant Secretary Title: VP/Secretary
-10-
<PAGE> 11
VISUAL NETWORKS, INC.
1997 EXECUTIVE COMPENSATION PLAN (Revised)
This revision to the 1997 compensation plan reflects changes to the Company's
financial goals for 1997. This revised plan supersedes all previous plans.
This document does not constitute an employment contract. Visual Networks is
an "at will" employer and can terminate any employment relationship at any time
with or without cause.
EMPLOYEE: Scott Stouffer
TITLE: President / CEO
COMPANY 1997 FINANCIAL METRICS
<TABLE>
<CAPTION>
Original Plan Revised External Plan Revised Internal Plan
- ------------- --------------------- ---------------------
<S> <C> <C>
Revenues: $36 M Revenues: $23M Revenues: $25M
GM%: 63% GM%: 64% GM% : 64%
Optg. Income: $4.8 M Optg. Income: ($0.1M) Optg. Income: $0.95M
</TABLE>
COMPENSATION:
Annual Base Salary: $165,000
No bonus will be earned if company fails to achieve all three financial metrics
identified as the Revised External Plan.
If company achieves all three financial metrics identified as the Revised
External Plan then bonus will be earned according to the following formula:
$20,000 + (0.5% times revenues in excess of $23M) + (1% times operating income
in excess of a $100K operating loss)
Total Compensation at Revised External Plan: $185,000
Total Compensation at Revised Internal Plan: $205,500
Notes:
1. Revenue numbers are inclusive of actual recognized revenues, deferred VAR
revenues, and revenue reserves other than for "questionable" transactions.
2. Payment of bonuses will be made following the availability of audited year
end numbers.
3. As a participant in the 1997 Executive Compensation Plan, employee is not
entitled to "traditional" raises to base salary on employment anniversary.
Approved by: /s/ SCOTT STOUFFER /s/ PETER MINIHANE
------------------------------- ------------------------------
Scott Stouffer Date Peter Minihane Date
Accepted by: /s/ SCOTT STOUFFER
-------------------------------
Employee Date
<PAGE> 12
VISUAL NETWORKS, INC.
1997 EXECUTIVE COMPENSATION PLAN (Revised)
This revision to the 1997 compensation plan reflects changes to the Company's
financial goals for 1997. This revised plan supersedes all previous plans.
This document does not constitute an employment contract. Visual Networks is
an "at will" employer and can terminate any employment relationship at any time
with or without cause.
EMPLOYEE: Robert Troutman
TITLE: VP Product Operations
COMPANY 1997 FINANCIAL METRICS
<TABLE>
<CAPTION>
Original Plan Revised External Plan Revised Internal Plan
- ------------- --------------------- ---------------------
<S> <C> <C>
Revenues: $36 M Revenues: $23M Revenues: $25M
GM%: 63% GM%: 64% GM%: 64%
Optg. Income: $4.8 M Optg. Income: ($0.1M) Optg. Income: $0.95M
</TABLE>
COMPENSATION:
Annual Base Salary: $140,000
No bonus will be earned if company fails to achieve all three financial metrics
identified as the Revised External Plan.
If company achieves all three financial metrics identified as the Revised
External Plan then bonus will be earned according to the following formula:
$20,000 + (0.25% times revenues in excess of $23M) + (1% times operating income
in excess of a $100K operating loss)
Total Compensation at Revised External Plan: $160,000
Total Compensation at Revised Internal Plan: $175,500
Notes:
1. Revenue numbers are inclusive of actual recognized revenues, deferred VAR
revenues, and revenue reserves other than for "questionable" transactions.
2. Payment of bonuses will be made following the availability of audited year
end numbers.
3. As a participant in the 1997 Executive Compensation Plan, employee is not
entitled to "traditional" raises to base salary on employment anniversary.
Approved by: /s/ SCOTT STOUFFER /s/ PETER MINIHANE
------------------------------- ------------------------------
Scott Stouffer Date Peter Minihane Date
Accepted by: /s/ ROBERT TROUTMAN
-------------------------------
Employee Date
<PAGE> 1
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 15th day of December ,1994, by and
between VISUAL NETWORKS, INC., a Delaware corporation (the "Company") and
ROBERT TROUTMAN, an individual residing in the State of Maryland
("Employee").
BACKGROUND
The Company and Employee are parties to an agreement in
principle relating to his employment with the Company (the "Agreement in
Principle"); which Agreement in Principle the Company and Employee desire
to terminate by execution hereof. The Company wishes to continue to employ
Employee, and Employee wishes to continue to be employed by the Company,
all on the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the facts, mutual promises
and covenants contained herein and intending to be legally bound hereby,
the Company and Employee agree as follows:
1. Employment. The Company hereby employs Employee and
Employee hereby accepts employment by the Company for the term set forth
herein and upon the terms and conditions contained in this Agreement.
2. Office and Duties.
(a) Employee shall serve the Company as its Vice
President Engineering and Operations and shall have such authority and such
responsibilities as is consistent with such position and as the Company's
President and Chief Executive Officer may determine from time to time.
(b) Throughout the term of this Agreement, except as
provided in Section 2(c) below, Employee shall devote his entire working
time, energy, skill and best efforts to the performance of his duties
hereunder in a manner which will faithfully and diligently further the
business and interests of the Company.
(c) Notwithstanding the provisions of Section 2(b)
hereof, Employee may engage in activities in connection with any charitable
or civic activities, personal investments and serving as an executor, trustee
or in other similar fiduciary capacity; provided, however, that such
activities do not interfere with his performance of his responsibilities and
obligations pursuant to this Agreement.
3. Term. This Agreement shall be for a term of two (2) years,
commencing on the date of this Agreement, unless sooner terminated as
hereinafter provided. Unless either party elects to terminate this Agreement
at the end of the original or any renewal term by giving the other party
notice of such election at least ninety (90) days before the expiration of
the then
<PAGE> 2
current term, this Agreement shall be deemed to have been renewed for an
additional term of one (1) year commencing on the day after the expiration
of the then current term.
4. Compensation.
(a) For all of the service rendered by Employee to the
Company, Employee shall receive an annual base salary (inclusive of all
applicable income, Social Security and other taxes and charged) of Eighty
Four Thousand Dollars ($84,000), payable in reasonable periodic
installments in accordance with the Company's regular payroll practices in
effect from time to time. Annual increases to base salary, if any, shall
be approved by the Compensation Committee of the Company's Board of
Directors; provided that the unanimous approval of the Compensation
Committee shall be required for any increase(s) in the base salary of
Employee which exceed an aggregate amount equal to ten percent (10%) of
Employee's base salary for the previous year.
(b) In addition to Employee's base salary, the Company
from time to time may pay Employee such bonuses or other additional
compensation as the Compensation Committee of the Board of Directors of the
Company may determine; provided that the unanimous approval of the
Compensation Committee shall be required for any increase(s) in bonuses (or
stock options) granted to Employee which exceeds an aggregate amount equal
to ten percent (10%) of Employee's bonus(es) (or stock options) (as the
case may be) the previous year other than for bonuses pursuant to the
Company's management bonus pool arrangement.
(c) Throughout the term of this Agreement and as long as
they are kept in force by the Company, Employee shall be entitled to
participate in and receive the benefits of any health, life or accident
insurance plans or programs made available to other similarly situated
employees of the Company.
(d) Employee shall be entitled to fifteen (15) business
days paid leave in accordance with the Company's leave plan as in effect
from time to time, if any (for vacation, illness, personal or otherwise)
during each year of the term of this Agreement.
(e) Employee shall be entitled to twenty (20) business
days "sabbatical" following the completion of each four (4) years of
employment with the Company. Such "sabbatical" must be taken within a finite
period of being earned, such period to be in accordance with the Company's
leave plan as in effect from time to time, if any, or if no such policy shall
be in effect, as shall be determined by the Board of Directors of the Company.
5. Expenses. The Company will reimburse Employee for all
reasonable expenses incurred by Employee in connection with the performance
of Employee's duties hereunder upon presentation of expense statements or
vouchers and such other supporting
-2-
<PAGE> 3
information as it may from time to time request; provided that Employee
complies with all applicable Company procedures and practices relating to
reimbursement of expenses in effect from time to time.
6. Disability.
(a) If Employee is unable to perform his duties hereunder
due to partial or total disability or incapacity resulting from a mental or
physical illness or any similar cause, Employee shall be considered
"Disabled". In the event Employee shall become Disabled, the Company will
continue the payment of Employee's base salary at its then current rate for a
period equal to the period of time that Employee continues to be Disabled;
provided that, in no event shall the Company be required to continue the
payment of Employee's base salary for more than one hundred eighty (180) days
following the date Employee first becomes Disabled. Upon becoming Disabled,
Employee shall also be entitled to receive those benefits to which Employee
may be entitled as a result of Employee's participation under a death or
disability plan in which Employee is a participant as an employee of the
Company, if any.
(b) In the event Employee shall be Disabled for a period
of more than one hundred eighty (180) consecutive days or for a cumulative
period of more than one hundred eighty (180) days during any twelve month
period, Employee shall be considered "Long Term Disabled", the Company shall
have the right to terminate Employee's employment under this Agreement upon
written notice thereof to the Employee, in which event the Company shall have
no further liability or obligation to Employee for compensation or benefits
hereunder by reason of such termination. In the event that the Company does
not exercise such right of termination, the Company shall have no liability
or obligation to Employee for compensation or benefits hereunder during the
period of time that Employee is considered to be Long Term Disabled.
7. Death. If Employee dies, Employee's employment under this
Agreement shall automatically terminate and, all payments hereunder shall
cease on the date of Employee's death, except for those payments which were
due at such time, including any unpaid salary, expense reimbursements, or
bonuses that are owed and Company shall have no further obligations or
liabilities hereunder to Employee's estate or legal representative or
otherwise, except under any death or disability plan in which Employee is a
participant as an employee of the Company, if any. Any management pool bonus
that otherwise would have been due to Employee at year end shall be prorated
up to the time of Employee's death.
8. Termination of the Company's Business. If the Company
shall discontinue its business, the Company may terminate Employee's
employment under this Agreement on thirty (30) days prior written notice,
and in such event the Company shall have no further obligations or
liabilities hereunder and Employee shall be released from the restrictions
continued in Sections 12(a) and 12(b) hereof.
-3-
<PAGE> 4
9. Discharge for Cause. The Company may terminate Employee's
employment under this Agreement at any time for "cause." For purposes of
this Agreement, "cause" shall be defined as:
(a) conviction in a court of law of any felony;
(b) willful violation of specific and lawful directions
from the Board of Directors of the Company or excessive absenteeism which
shall continue for a period of thirty (30) days after written notice thereof
is given of such violation or absenteeism;
(c) embezzlement or theft of Company assets, or other
fraud or dishonesty as determined in a court of law;
(d) material breach by Employee of the provisions of this
Agreement, which breach shall continue for a period of thirty (30) days
after a written notice thereof is given to Employee; or
(e) material breach of any of the covenants or
obligations set forth in that certain Stockholders and Registration Rights
Agreement, dated the date hereof, among the Company and the holders of its
capital stock, which breach continues for a period of thirty (30) days
after a written notice thereof is given to Employee.
10. Termination Without Cause.
(a) The Company may terminate Employee's employment
hereunder at any time, for any reason, with or without cause, effective upon
the date designated by the Company upon not less than 45 days prior written
notice to Employee.
(b) In the event of a termination of Employee's
employment hereunder pursuant to Section 10(a) hereof, Employee shall be
entitled to receive all accrued but unpaid (as of the effective date of such
termination) base salary and bonuses, plus a liquidated termination fee equal
to six (6) months base salary. All other liabilities or obligations of the
Company to Employee, including without limitation, base salary, benefits and
bonuses shall cease at the time of such termination, subject to the terms of
any benefit or compensation plan then in force and applicable law and
applicable to Employee. Except as specifically set forth in this Section 10,
the Company shall have no liability or obligation hereunder by reason of such
termination.
11. Company Property. All computer software and documentation,
advertising, sales, manufacturer's and other materials or articles of
information, or other proprietary information of the Company, including
without limitation, data processing reports,
-4-
<PAGE> 5
customer sales analyses, invoices, price lists or information, samples, or
any other materials or data of any kind furnished to Employee by the
Company or developed by Employee on behalf of the Company or at the
Company's direction or for the Company's use or otherwise in connection
with Employee's employment hereunder, are and shall remain the property of
the Company. If the Company requests the return of such materials at any
time during Employee's employment, Employee shall immediately deliver the
same, and Employee shall also deliver the same immediately upon termination
of Employee's employment hereunder.
12. Nonsolicitation, Trade Secrets, Etc.
(a) During the term of this Agreement and for a period of
twenty-four (24) months after the termination of his employment with the
Company for any reason whatsoever (such twenty-four (24) month period being
reduced to twelve (12) months in the event Employee remains an employee of
the Company for four (4) years following the date hereof), Employee (i) shall
not directly or indirectly induce or attempt to influence any employee,
consultant, supplier, customer or prospective customer of the Company to
terminate his, her or its relationship with the Company, or employ any
employee, or retain, in competition with the Company, consultant, supplier,
customer or prospective customer of the Company, and shall not solicit or do
business in competition with the Company with anyone that is a customer,
prospective customer or supplier of the Company on the date that Employee's
employment is terminated hereunder, and (ii) shall not engage in (as
principal, partner, director, officer, agent, employee, consultant or
otherwise) or be financially interested in any business activities which are
in competition with business activities carried on by the Company, or being
definitely contemplated by the Company, at the time of the termination of
Employee's employment. For purposes hereof, a "prospective customer" shall
mean a sales lead with whom the Company has made contact by means of personal
visits, demonstrations, telephone calls or personally directed mail. For
purposes hereof, business activities shall be deemed to be "in competition"
with the Company if they are activities related to software and/or hardware
products to be embedded in a network infrastructure whose primary purpose is
to aid in the maintenance and support of wide-area data communications
networks based on Frame Relay or Asynchronous Transfer Mode technologies, or
technologies developed by, or being definitely contemplated by, the Company.
(b) During the term of this Agreement and for a period of
three (3) years thereafter, Employee shall not disclose, communicate or
divulge to, to use for the direct or indirect benefit of any person, firm,
association or company other than the Company, any material referred to in
Paragraph 11 above or any information regarding the business methods,
business policies, procedures, techniques, research or development projects
or results, trade secrets, or other knowledge or processes of or developed by
the Company or any names and addresses of customers or clients or any other
confidential information relating to or dealing with prospective customers or
clients or any other confidential information relating to or dealing with the
business operations or activities of the Company, made known to Employee or
learned or
-5-
<PAGE> 6
acquired by Employee while in the employ of the Company or acting as an
officer, director or principal of the Company.
(c) Any and all writing, inventions, improvements,
processes, computer software and/or techniques which Employee may make,
conceive, discover or develop, either solely or jointly with any other person
or persons, at any time during the term of this Agreement, whether during
working hours or at any other time and whether at the request or upon the
suggestion of the Company or otherwise, which relate to or are useful in
connection with any business now or hereafter carried on or definitively
contemplated by the Company, including developments or expansions of its
present fields of operations, shall be the sole and exclusive property of the
Company. Employee shall make full disclosure to the Company of all such
writings, inventions, improvements, processes, computer software, procedures
and techniques, and shall do everything necessary or desirable to vest the
absolute title thereto in the Company. Employee shall write and prepare all
specifications and procedures regarding such inventions, improvement,
processes, computer software, procedures and techniques and otherwise aid and
assist the Company so that the Company can prepare and present applications
for copyright or Letters Patent therefor and can secure such copyright or
Letters Patent wherever possible, as well as reissues, renewals and
extensions thereof, and can obtain the record title to such copyright or
patents so that the Company shall be the sole and absolute owner thereof in
all countries in which it may desire to have copyright or patent protection.
Employee shall not be entitled to any additional or special compensation or
reimbursement regarding any and all such writings, inventions, improvements,
processes, procedures and techniques.
(d) Employee acknowledges that the restrictions contained
in the foregoing subparagraphs (a), (b), and (c), in view of the nature of
the business in which the Company is engaged, are reasonable and necessary
in order to protect the legitimate interests of the Company, and that the
Company would not have entered into this Agreement in the absence of such
restrictions. Employee also acknowledges that any violation thereof would
result in irreparable injuries to the Company for which monetary damages
would not be an adequate remedy. Employee therefore acknowledges that, in
the event that Employee shall violate any of these restrictions, the
Company shall be entitled to obtain from any court of competent
jurisdiction preliminary and permanent injunctive relief as well as damages
and an equitable accounting of all earnings, profits and other rights or
remedies to which the Company may be entitled.
(e) If the period of time or the area specified in
subparagraph (a) or (b) above should be adjudged unreasonable in any
proceeding, then the period of time shall be reduced by such number of
months or the area shall be reduced by the elimination of such portion
thereof, or both, so that such restrictions may be enforced in such area
and for such time as is adjudged to be reasonable. If Employee violates
any of the restrictions contained in the foregoing subparagraph (a) or (b)
the applicable restrictive period shall not run in favor of
-6-
<PAGE> 7
Employee from the time of the commencement of any such violation until such
violation shall be cured by Employee to the satisfaction of the Company.
(f) The provisions of this Section 12 hereof shall survive
termination of Employee's employment hereunder.
13. Prior Agreements. Employee represents to the Company (a)
that there are no restrictions, agreements or understandings whatsoever, to
which Employee is a party which would prevent or make unlawful his
execution of this Agreement or his employment hereunder, (b) that his
execution of this Agreement and his employment hereunder shall not
constitute a breach of any contract, agreement or understanding, oral or
written to which he is a party or by which he is bound, and (c) that he is
free to execute this Agreement and to enter into employment by the Company.
14. Miscellaneous.
(a) Indulgences, Etc. Neither the failure nor any delay
on the part of either party to exercise any right, remedy, power or privilege
(collectively "Rights") under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any Right preclude any
other or further exercise of the same or of any other Right nor shall any
waiver of any Right with respect to any occurrence be construed as a waiver
of such Right with respect to any other occurrence. No waiver shall be
effective unless it is in writing and is signed by the party asserted to have
granted such waiver.
(b) Controlling Law. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement
(including, without limitation, provisions concerning limitations of
actions), shall be governed by and construed in accordance with the laws of
the State of Maryland, notwithstanding any conflict-of-laws doctrines of such
state or other jurisdiction to the contrary, and without the aid of any
canon, custom or rule of law requiring construction against the draftsman.
The parties consent to the exclusive jurisdiction of the Federal and state
courts located in Maryland.
(c) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received only when
personally delivered or when deposited in the United States mails, first
class postage prepaid, addressed as set forth below:
-7-
<PAGE> 8
(i) If to the Employee:
Robert Troutman
5 Peach Leaf Court
Gaithersburg, Maryland 20878
(ii) If to the Company:
Visual Networks, Inc.
2092 Gaither Road
Suite 220 - I
Rockville, MD 20850
Attention: President
Fax: (301) 208-8227
With a copy to:
Edwin M. Martin, Jr.
Piper & Marbury
1200 19th Street, N.W.
Washington, D.C. 20036
Any party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with
the provisions of this paragraph for the giving of notice.
(d) Binding Nature of Agreement. This Agreement shall be
binding upon and inure to the benefit of the Company and its successors and
assigns and shall be binding upon Employee, his heirs and legal
representatives.
(e) Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be
an original as against any party whose signature appears thereon, and all of
which shall together 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 the signatories. Any photocopy or facsimile of this Agreement,
with all signatures reproduced on one or more of its signature pages, shall
be considered for all purposes as if it were executed counterpart of this
Agreement.
-8-
<PAGE> 9
(f) Provisions Separable. The provisions of this
Agreement are independent of and separable from each other, and no provision
shall be affected or rendered invalid or unenforceable by virtue of the fact
that for any reason any other or others of the may be invalid or
unenforceable in whole or in part.
(g) Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or
written, including without limitation, the Agreement in Principle, which is
hereby terminated in its entirety. The express terms hereof control and
supersede any course of performance and/or usage of the trade inconsistent
with any of the terms hereof. This Agreement may not be modified or amended
other than by an agreement in writing.
(h) Section Heading. The section headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) Gender, Etc. Words used herein, regardless of the
number and gender specifically used, shall be deemed and construed to include
any other number, singular or plural, and any other gender, masculine,
feminine or neuter, as the context indicates is appropriate.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the date first above written.
WITNESS:
/S Nancy A. Spangler /S Robert Troutman
- --------------------- -------------------
Robert Troutman
ATTEST: VISUAL NETWORKS, INC.
By: /S Nancy A. Spangler By: /S Scott E. Stouffer
--------------------- ---------------------
Title: Assistant Secretary Title: President & CEO
-10-
<PAGE> 1
EXHIBIT 10.15
TERMS OF EMPLOYMENT
EMPLOYEE: Peter Minihane
EMPLOYER: Visual Networks, Inc.
POSITION: Executive Vice President, Chief Financial Officer, and
Treasurer
SUPERVISOR: President
FUNCTIONAL RESPONSIBILITIES: Accounting, Finance, Human
Resources, Information Systems, Facilities
START DATE: June 18, 1997
This document does not constitute an employment contract. Visual Networks is
an "at will" employer and can terminate any employment relationship with or
without cause.
CASH COMPENSATION
June 18, 1997-July 14, 1997: $400 per half day worked
July 15, 1997-July 14, 1998 Base Salary: $120,000 annual rate (to be paid as
monthly gross wages of $10,000)
Beyond July 14, 1998 Base Salary: Note less than $160,000 annual rate
Annual Target Bonus: $60,000 at plan (1997 plan to be determined between Peter
Minihane and Scott Stouffer not later than August 31,
1997). For 1997 this bonus will be prorated for 6 months.
<PAGE> 2
STOCK COMPENSATION
1. Employee will be issued 25,000 shares of Visual Networks common stock
as of July 15, 1997. This stock will vest in 12 equal monthly
installments so that it is completely vested after 12 months from
issue date. In the event that Employee's employment is terminated for
any reason other than change of control during the vesting period, the
unvested shares will be returned to the Company.
2. Employee will be granted options to purchase 175,000 shares of the
Company's common stock at an exercise price equal to the fair market
value of the Company's common stock as determined by the Board of
Directors at the time of grant (it is expected that the exercise price
will be at or near $1.75 based on a grant date of June 19, 1997).
These options will vest as follows: 35,032 as of June 19, 1998, and
2,916 at the end of each month thereafter for 48 months so that the
options are completely vested in 5 years.
In the event of change of control as a result of acquisition, merger,
consolidation, transfer of all or substantially all of the assets of the
Company or similar event, then the options would vest in full coincident with
such event.
RELOCATION REIMBURSEMENT
The company will reimburse employee for actual costs associated with moving up
to a maximum of $60,000. These costs can include costs to sell existing home,
temporary living expenses, cost to move household goods, and closing costs
associated with the purchase of a new home. Up to $20,000 of this money can be
used for "commuting" between Massachusetts and Maryland for not more than 14
months after start of employment.
BENEFITS
After a two-month waiting period, Visual Networks will provide comprehensive
medical insurance, dental insurance, and disability protection. During the
two-month waiting period, Visual Networks will reimburse employee for 80% of
any COBRA costs incurred. The company also provides a $50,000 term life
insurance policy.
Visual Networks' leave policy allows for 15 days of leave annually for
sickness, vacation, or other personal matters. Additionally, four weeks of
"sabbatical" will be earned every four years and must be taken within a finite
period of being earned. All leave must be approved by employee's supervisor.
Visual Networks has 10 paid holidays per year.
<PAGE> 3
SEVERANCE
Contingent upon your signing a release against further obligations by the
Company, the Company will provide you with a severance package to cover you in
the event that Visual Networks, Inc. terminates your employment without cause.
Without cause shall mean for any reason other than:
a. Illegal acts (other than minor traffic violations) including theft
or embezzlement.
b. Material violation of written policies of the company.
c. Irresponsible acts in the performance of duties.
This package will provide you with base salary and benefit continuance from
time of your involuntary termination for up to six months thereafter or until
such time as you become employed, whichever is the lesser of the two at which
time all payments will cease. Additionally, if such termination were to occur
during the period between 120 days and 365 days following Employee's start
date, then stock options will vest as if Employee were employed for 1 year
(i.e. 35,032 shares).
<PAGE> 4
CONFIDENTIALITY, NON-DISCLOSURE, AND NON-SOLICITATION
In consideration of employment and/or contractual relationship with Visual
Networks, Inc. (the "Company"):
1. Employee hereby agrees to disclose and assign to the Company, its
successor and assigns, all discoveries, inventions, and improvements made by
employee alone or jointly with others, during the period of employee's
employment/contract with the Company, which relate to the historical or planned
business of the Company and result from tasks employee performed in the regular
course of employee's employment/contract with the Company.
2. Employee further agrees that upon request of the Company, employee
will join and render assistance in any proceedings, and execute any papers
necessary to vest title to, and to maintain and enforce, in any and all
countries, patents, trademarks, registrations and/or copyrights with respect to
any discoveries, inventions, or improvements assigned by employee to the
Company.
3. Employee further agrees that employee will not, while in the employ of
the Company or anytime thereafter, disclose any information not in the public
domain relating to the Company's business, except as may be consistent with
employee's duties as an employee/contractor of the Company. Employee further
agrees that upon termination of employee's employment /contract with the
Company, employee will deliver to the Company all property and documents of the
Company and all information (computerized or hard copy) relating to the
Company's business, then in employee's possession, which has not been made
available to the public, and employee will not take any documents or
reproductions of confidential or proprietary information without the written
consent of any authorized officer of the Company.
4. In the case that Employee's employment/contract with the Company is
terminated prior to January 1, 1999, then:
- - Employee agrees that during the period of employee's employment/contract
with the Company and for a period of two (2) years after the termination of
employee's employment/contract with the Company, employee will not engage
in or be financially interested in (with the exception of ownership of
publicly traded stock) any business activities which are competitive with
the Company. For the purposes of this agreement, competitive activities
are defined as any activities related to hardware and/or software products
to be embedded in a network infrastructure whose primary purpose is to aid
in the maintenance and support of wide-area data communications networks
based on Frame Relay, SMDS, Asynchronous Transfer Mode, or Internet access
technologies. This definition can be modified or interpreted from time to
time in such a way as necessary to reflect the core business of the
Company.
- - Employee agrees that during the period of employee's employment/contract
with the Company and for a period of two (2) years after the termination of
employee's employment/contract with the Company, employee will not directly
or indirectly solicit, entice or otherwise influence any employee or
contractor employed or engaged by the Company to terminate their employment
or contractual relationship with the Company.
5. In the case that Employee's employment/contract with the Company is
terminated on or after January 1, 1999 then:
- - Employee agrees that during the period of employee's employment/contract
with the Company and for a period of one (1) year after the termination of
employee's employment/contract with the Company, employee will not engage
in or be financially interested in (with the exception of ownership of
publicly traded stock) any business activities which are competitive with
the Company. For the purposes of this agreement, competitive activities
are defined as any activities related to hardware
<PAGE> 5
and/or software products to be embedded in a network infrastructure whose
primary purpose is to aid in the maintenance and support of wide-area data
communications networks based on Frame Relay, SMDS, Asynchronous Transfer
Mode, or Internet access technologies. This definition can be modified or
interpreted from time to time in such a way as necessary to reflect the
core business of the Company.
- - Employee further agrees that during the period of employee's
employment/contract with the Company and for a period of one (1) year after
the termination of employee's employment/contract with the Company,
employee will not directly or indirectly solicit, entice or otherwise
influence any employee or contractor employed or engaged by the Company to
terminate their employment or contractual relationship with the Company.
THE TERMS OF THIS AGREEMENT SUPERSEDE AND NEGATE ALL PRIOR AGREEMENTS BETWEEN
THE EMPLOYEE AND THE COMPANY.
<TABLE>
<CAPTION>
Acceptance by Employee: Approved by Visual Networks, Inc.:
<S> <C> <C>
/S Peter Minihane 6/27/97 /S Scott Stouffer 11 June 1997
----------------------------------------------- --------------------------------------------------
Signature Date Signature of OfficerDate
Peter Minihane Scott Stouffer
----------------------------------------------- --------------------------------------------------
Printed Name Printed Name
President/CEO
--------------------------------------------------
Title
</TABLE>
<PAGE> 6
VISUAL NETWORKS, INC.
1997 EXECUTIVE COMPENSATION PLAN (Revised)
This revision to the 1997 compensation plan reflects changes to the Company's
financial goals for 1997. This revised plan supersedes all previous plans.
This document does not constitute an employment contract. Visual Networks is
an "at will" employer and can terminate any employment relationship at any time
with or without cause.
EMPLOYEE: Peter Minihane
TITLE: SVP, CFO, and Treasurer
<TABLE>
<CAPTION>
COMPANY 1997 FINANCIAL METRICS
Original Plan Revised External Plan Revised Internal Plan
- ------------- --------------------- ---------------------
<S> <C> <C>
Revenues: $36 M Revenues: $23M Revenues: $25M
GM%: 63% GM%: 64% GM% : 64%
Optg. Income: $4.8 M Optg. Income: ($0.1M) Optg. Income: $0.95M
</TABLE>
COMPENSATION:
Annual Base Salary: $120,000
No bonus will be earned if company fails to achieve all three financial metrics
identified as the Revised External Plan.
If company achieves all three financial metrics identified as the Revised
External Plan then bonus will be earned according to the following formula:
$40,000 + (0.5% times revenues in excess of $23M) + (1% times operating income
in excess of a $100K operating loss) (PRORATED FOR 6 FULL MONTHS WORKED IN
1997)
Total (Annualized) Compensation at Revised External Plan: $160,000
Total (Annualized) Compensation at Revised Internal Plan: $180,500
Notes:
1. Revenue numbers are inclusive of actual recognized revenues, deferred VAR
revenues, and revenue reserves other than for "questionable" transactions.
2. Payment of bonuses will be made following the availability of audited year
end numbers.
3. As a participant in the 1997 Executive Compensation Plan, employee is not
entitled to "traditional" raises to base salary on employment anniversary.
<TABLE>
<S> <C>
Approved by: /s Scott E.. Stouffer 9-15-97 /s Peter Minihane 9/15/97
------------------------------------------------ ----------------------------------
Scott Stouffer Date Peter Minihane Date
Accepted by: /s Peter Minihane 9/15/97
----------------------------------------------
Employee Date
</TABLE>
<PAGE> 1
EXHIBIT 10.16
TERMS OF EMPLOYMENT
EMPLOYEE: Henry Cheli
EMPLOYER: Visual Networks, Inc.
POSITION: Senior Vice President, Market Operations
SUPERVISOR: President
SUBORDINATES: VP Sales, VP Marketing, VP Carrier Programs, VP Indirect
Channels
START DATE: On or around March 17, 1997
This document does not constitute an employment contract. Visual Networks is
an "at will" employer and can terminate any employment relationship with or
without cause.
1997 COMPENSATION
Base Salary: $150,000 per year (to be paid as monthly gross wages of
$12,500)
Draw: Non-recoverable draw of $4,000 per month for the first 12
months. Subsequent draws will be evaluated at the end of the
first year of employment. Draws are in essence pre-payment
against future commission and/or bonus earnings.
Commissions: 0.1% of recognized revenues beginning with the month that
employment begins.
Bonus: $44,000 at plan per the attached bonus worksheet except that
the Q1 bonus payment will be guaranteed. Maximum bonus payout
of $140,000.
<PAGE> 2
STOCK OPTIONS
Visual Networks will grant employee options to purchase 135,000 shares of
Visual Networks common stock. The stock options will generally conform to
the 1994 Stock Option Plan and will vest as follows: 27,000 options will
vest on the first anniversary of employment and 2,250 options will vest on
the last day of each month thereafter so that all options are vested in five
years. Each option, once vested, will allow the employee to purchase one
share of Common Stock at a price equal to the fair market value of the
company's common stock at the time of grant (expected to be $1.50 to $2.50).
Twenty percent of the options will vest at the end of the first year of
employment. The balance will vest in equal monthly installments over the
next 48 months.
If your employment is terminated as a result of acquisition, merger,
consolidation, transfer of all or substantially all of the assets of the
Company or similar event beyond the control of the Employee, then the options
would vest as follows:
Employment Months 1-12 40% Vesting
Employment Months 13-24 80% Vesting
Employment Months 25+ 100% Vesting
RELOCATION REIMBURSEMENT
The company will reimburse employee for actual costs associated with moving
up to a maximum of $40,000. These costs can include costs to sell existing
home, temporary living expenses, cost to move household goods, and closing
costs associated with the purchase of a new home.
BENEFITS
After a two-month waiting period, Visual Networks will provide comprehensive
medical insurance, dental insurance, and disability protection. During the
two-month waiting period, Visual Networks will reimburse employee for 80% of
any COBRA costs incurred. The company also provides a $50,000 term life
insurance policy.
Visual Networks' leave policy allows for 15 days of leave annually for
sickness, vacation, or other personal matters. Additionally, four weeks of
"sabbatical" will be earned every four years and must be taken within a
finite period of being earned. All leave must be approved by employee's
supervisor.
Visual Networks has 10 paid holidays per year.
<PAGE> 3
SEVERANCE
The company will provide you with a severance package to cover you in the
event that Visual Networks, Inc. terminates your employment without cause.
Without cause shall mean for any reason other than:
a. Illegal acts (other than minor traffic violations) including
theft or embezzlement.
b. Material violation of written policies of the company.
c. Irresponsible acts in the performance of duties.
This package will provide you with base salary, draw, and benefit continuance
from time of your involuntary termination for up to six months thereafter or
until such time as you become employed, whichever is the lesser of the two at
which time all payments will cease.
<PAGE> 4
1997 BONUS PLAN
EMPLOYEE: Henry Cheli
TITLE: Senior Vice President, Market Operations
Q1 BONUS PLAN:
Revenues: $4.66 Million
GM%: 64%
EBIT: ($0.83 Million)
Payout: $2,200.00
Q2 BONUS PLAN:
Revenues: $7.04 Million
GM%: 65%
EBIT: $0.28 Million
Payout: $6,600.00
Q3 BONUS PLAN:
Revenues: $9.94 Million
GM%: 65%
EBIT: $1.56 Million
Payout: $6,600.00
Q4 BONUS PLAN:
Revenues: $14.33 Million
GM%: 65%
EBIT: $3.77 Million
Payout: $6,600.00
<TABLE>
<CAPTION>
TOTAL YEAR PLAN: 1ST ACCELERATOR: 2ND ACCELERATOR:
<S> <C> <C>
Revenues: $35.98 M Revenues: $43.18 M Revenues: $50.37 M
GM%: 65% GM%: 65% GM%: 65%
EBIT: $4.79 M EBIT: $7.19 M EBIT: $9.58 M
Payout: $22,000.00 Payout: $44,000.00 Payout: $52,000.00
</TABLE>
- -------------------------------------------------------------------------------
NOTES:
1. All revenues, gross margins, and EBITs will be as reported and accounted
for using GAAP.
2. Payouts for Q1, Q2, and Q3 will be made within six weeks of the end of
the quarter.
3. Payouts for Q4 and Total Year will be made following the availability of
audited year-end numbers and could correct for prior quarterly payouts
if audit adjustments are required.
4. As a participant in the 1997 Executive Compensation Plan, employee is
not entitled to "traditional" raises to base salary on employment
anniversary.
5. All payouts are cumulative.
<PAGE> 5
CONFIDENTIALITY, NON-DISCLOSURE, AND NON-SOLICITATION
In consideration of employment and/or contractual relationship with Visual
Networks, Inc. (the "Company"):
1. Employee hereby agrees to disclose and assign to the Company, its
successor and assigns, all discoveries, inventions, and improvements made by
employee alone or jointly with others, during the period of employee's
employment/contract with the Company, which relate to the historical or planned
business of the Company and result from tasks employee performed in the regular
course of employee's employment/contract with the Company.
2. Employee further agrees that upon request of the Company, employee will
join and render assistance in any proceedings, and execute any papers necessary
to vest title to, and to maintain and enforce, in any and all countries,
patents, trademarks, registrations and/or copyrights with respect to any
discoveries, inventions, or improvements assigned by employee to the Company.
3. Employee further agrees that employee will not, while in the employ of the
Company or anytime thereafter, disclose any information not in the public domain
relating to the Company's business, except as may be consistent with employee's
duties as an employee/contractor of the Company. Employee further agrees that
upon termination of employee's employment /contract with the Company, employee
will deliver to the Company all property and documents of the Company and all
information (computerized or hard copy) relating to the Company's business, then
in employee's possession, which has not been made available to the public, and
employee will not take any documents or reproductions of confidential or
proprietary information without the written consent of any authorized officer of
the Company.
4. In the case that Employee's employment/contract with the Company is
terminated prior to January 1, 1999, then:
- - Employee agrees that during the period of employee's employment/contract with
the Company and for a period of two (2) years after the termination of
employee's employment/contract with the Company, employee will not engage in
or be financially interested in (with the exception of ownership of publicly
traded stock) any business activities which are competitive with the Company.
For the purposes of this agreement, competitive activities are defined as any
activities related to hardware and/or software products to be embedded in a
network infrastructure whose primary purpose is to aid in the maintenance and
support of wide-area data communications networks based on Frame Relay, SMDS,
Asynchronous Transfer Mode, or Internet access technologies. This definition
can be modified or interpreted from time to time in such a way as necessary
to reflect the core business of the Company.
- - Employee agrees that during the period of employee's employment/contract with
the Company and for a period of two (2) years after the termination of
employee's employment/contract with the Company, employee will not directly
or indirectly solicit, entice or otherwise influence any employee or
contractor employed or engaged by the Company to terminate their employment
or contractual relationship with the Company.
5. In the case that Employee's employment/contract with the Company is
terminated on or after January 1, 1999 then:
- - Employee agrees that during the period of employee's employment/contract with
the Company and for a period of one (1) year after the termination of
employee's employment/contract with the Company, employee will not engage in
or be financially interested in (with the exception of ownership of publicly
traded stock) any business activities which are competitive with the Company.
For the purposes of this agreement, competitive activities are defined as any
activities related to hardware
<PAGE> 6
and/or software products to be embedded in a network infrastructure whose
primary purpose is to aid in the maintenance and support of wide-area data
communications networks based on Frame Relay, SMDS, Asynchronous Transfer
Mode, or Internet access technologies. This definition can be modified or
interpreted from time to time in such a way as necessary to reflect the core
business of the Company.
- - Employee further agrees that during the period of employee's
employment/contract with the Company and for a period of one (1) year after
the termination of employee's employment/contract with the Company, employee
will not directly or indirectly solicit, entice or otherwise influence any
employee or contractor employed or engaged by the Company to terminate their
employment or contractual relationship with the Company.
THE TERMS OF THIS AGREEMENT SUPERSEDE AND NEGATE ALL PRIOR AGREEMENTS BETWEEN
THE EMPLOYEE AND THE COMPANY.
Acceptance by Employee: Approved by Visual Networks, Inc.:
/S Henri Cheli 3/1/97 /S Robert Troutman 5 March 1997
---------------------------- ------------------------------------------
Signature Date Signature of Officer Date
Henry Cheli Robert Troutman
---------------------------- ------------------------------------------
Printed Name Printed Name
Vice President, Engineering and Operations
------------------------------------------
Title
<PAGE> 7
VISUAL NETWORKS, INC.
1997 EXECUTIVE COMPENSATION PLAN (Revised)
This revision to the 1997 compensation plan reflects changes to the Company's
financial goals for 1997. This revised plan supersedes all previous plans. This
document does not constitute an employment contract. Visual Networks is an "at
will" employer and can terminate any employment relationship at any time with or
without cause.
EMPLOYEE: Henry Cheli
TITLE: Senior VP, Market Operations
<TABLE>
<CAPTION>
COMPANY 1997 FINANCIAL METRICS
<S> <C> <C>
Original Plan Revised External Plan Revised Internal Plan
- ------------- --------------------- ---------------------
Revenues: $36 M Revenues: $23M Revenues: $25M
GM%: 63% GM%: 64% GM% : 64%
Optg. Income: $4.8 M Optg. Income: ($0.1M) Optg. Income: $0.95M
</TABLE>
COMPENSATION:
Annual Base Salary: $150,000
Draw: Non-recoverable draw of $4,000 per month. Draws are in essence a
pre-payment against future commission and/or bonus earnings.
Commissions: 0.144% of revenues recognized from March 1, 1997 through
December 31, 1997.
If company fails to achieve all three financial metrics identified as the
Revised External Plan, a guaranteed bonus of $2,200 will be paid.
If company achieves all three financial metrics identified as the Revised
External Plan then bonus will be earned according to the following formula:
$17,000 + (0.9% times revenues in excess of $23M) + (0.9% times operating
income in excess of a $100K operating loss)
Total (Annualized) Compensation at Revised External Plan: $200,000
Total (Annualized) Compensation at Revised Internal Plan: $230,450
Notes:
1. Revenue numbers are inclusive of actual recognized revenues, deferred VAR
revenues, and revenue reserves other than for "questionable"
transactions.
2. Payment of bonuses will be made following the availability of audited year
end numbers.
3. As a participant in the 1997 Executive Compensation Plan, employee is not
entitled to "traditional" raises to base salary on employment anniversary.
Approved by: /s Scott E.. Stouffer 9-15-97 /s Peter Minihane 9/15/97
--------------------------------- -----------------------------
Scott Stouffer Date Peter Minihane Date
Accepted by:
---------------------------------
Employee Date
<PAGE> 1
EXHIBIT 10.17
TERMS OF EMPLOYMENT
EMPLOYEE: Greg Langford
EMPLOYER: Visual Networks, Inc.
POSITION: Vice President, Product Management & Planning
SUPERVISOR: President
START DATE: November 18, 1996
This document does not constitute an employment contract. Visual Networks is an
"at will" employer and can terminate any employment relationship at any time
with or without cause.
COMPENSATION
Annual Base Salary: $115,000 (to be paid as monthly gross wages
of $9583.33)
1996 Bonus: $4166.67 (calculated as $50,000 prorated for 1 month.) To be
paid not later than January 31, 1997.
1997 Bonus Target: $50,000. Bonus will be based on performance against
specific individual and company goals to be defined. Target bonus is the
expected level derived from most likely performance. Actual bonus may
exceed or be less than the targeted amount, depending on individual and
company performance. Bonus to be paid not later than January 31, 1998.
Stock Options: 35,000 shares (see below)
The stock options will generally conform to a formal Stock Option Plan approved
by the Board of Directors except that 25% of the options (8756 options) will
vest after two (2) years of continuous employment and 2.08% (729 options) of the
shares will vest each month thereafter, so that at the end of five (5) years of
continuous employment the options shall be fully vested. Each option once vested
will allow the employee to purchase one share of Common Stock at a price equal
to fair market value of the company's common stock as determined by the Board of
Directors as of the employee's start date.
Relocation: The company will reimburse the employee for actual relocation
expenses up to a maximum of $40,000. This includes, but is not limited to
movement of household goods and real estate closing costs. Receipts must be
provided.
<PAGE> 2
BENEFITS
After a 2-month waiting period, Visual Networks will provide comprehensive
medical insurance, dental insurance, and long-term disability protection. Should
employee choose not to use the company's medical/dental plan and satisfactory
evidence of coverage under another plan is provided, the company will pay
employee an additional $75.00 monthly as a gain-sharing measure. The company
also provides a $50,000 term life insurance policy.
Visual Networks' leave policy allows for 15 days of leave annually for
sickness, vacation, or other personal matters. Additionally, four weeks of
"sabbatical" will be earned every four years and must be taken within a finite
period of being earned. All leave must be approved by employee's supervisor.
Visual Networks has 10 paid holidays per year.
<PAGE> 3
CONFIDENTIALITY, NON-DISCLOSURE, AND NON-SOLICITATION
In consideration of employment and/or contractual relationship with Visual
Networks, Inc. (the "Company"):
1. Employee hereby agrees to disclose and assign to the Company, its
successor and assigns, all discoveries, inventions, and improvements made by
employee alone or jointly with others, during the period of employee's
employment/contract with the Company, which relate to the historical or planned
business of the Company and result from tasks employee performed in the regular
course of employee's employment/contract with the Company.
2. Employee further agrees that upon request of the Company, employee will
join and render assistance in any proceedings, and execute any papers necessary
to vest title to, and to maintain and enforce, in any and all countries,
patents, trademarks, registrations and/or copyrights with respect to any
discoveries, inventions, or improvements assigned by employee to the Company.
3. Employee further agrees that employee will not, while in the employ of the
Company or anytime thereafter, disclose any information not in the public domain
relating to the Company's business, except as may be consistent with employee's
duties as an employee/contractor of the Company. Employee further agrees that
upon termination of employee's employment /contract with the Company, employee
will deliver to the Company all property and documents of the Company and all
information (computerized or hard copy) relating to the Company's business, then
in employee's possession, which has not been made available to the public, and
employee will not take any documents or reproductions of confidential or
proprietary information without the written consent of any authorized officer of
the Company.
4. In the case that Employee's employment/contract with the Company is
terminated prior to January 1, 1999, then:
- - Employee agrees that during the period of employee's employment/contract with
the Company and for a period of two (2) years after the termination of
employee's employment/contract with the Company, employee will not engage in
or be financially interested in any business activities which are competitive
with the Company. For the purposes of this agreement, competitive activities
are defined as any activities related to hardware and/or software products to
be embedded in a network infrastructure whose primary purpose is to aid in
the maintenance and support of wide-area data communications networks based
on Frame Relay, SMDS, Asynchronous Transfer Mode, or Internet access
technologies. This definition can be modified or interpreted from time to
time in such a way as necessary to reflect the core business of the Company.
Employee is exempted from this clause if the company terminates the employee
without cause.
- - Employee agrees that during the period of employee's employment/contract with
the Company and for a period of two (2) years after the termination of
employee's employment/contract with the Company, employee will not directly
or indirectly solicit, entice or otherwise influence any employee or
contractor employed or engaged by the Company to terminate their employment
or contractual relationship with the Company.
5. In the case that Employee's employment/contract with the Company is
terminated on or after January 1, 1999 then:
- - Employee agrees that during the period of employee's employment/contract with
the Company and for a period of one (1) year after the termination of
employee's employment/contract with the Company, employee will not engage in
or be financially interested in any business activities which are competitive
with the Company. For the purposes of this agreement, competitive activities
are defined as any activities related to hardware and/or software products to
be embedded in a network
<PAGE> 4
infrastructure whose primary purpose is to aid in the maintenance and support
of wide-area data communications networks based on Frame Relay, SMDS,
Asynchronous Transfer Mode, or Internet access technologies. This definition
can be modified or interpreted from time to time in such a way as necessary
to reflect the core business of the Company. Employee is exempted from this
clause if the company terminates the employee without cause.
- - Employee further agrees that during the period of employee's
employment/contract with the Company and for a period of one (1) year after
the termination of employee's employment/contract with the Company, employee
will not directly or indirectly solicit, entice or otherwise influence any
employee or contractor employed or engaged by the Company to terminate their
employment or contractual relationship with the Company.
THE TERMS OF THIS AGREEMENT SUPERSEDE AND NEGATE ALL PRIOR AGREEMENTS BETWEEN
THE EMPLOYEE AND THE COMPANY.
Acceptance by Employee: Approved by Visual Networks, Inc.:
/s Gregory J. Langford 11/18/96 /s Scott E. Stouffer 11/12/96
----------------------------------- -----------------------------------
Signature Date Signature of Officer Date
Gregory J. Langford Scott E. Stouffer
----------------------------------- -----------------------------------
Printed Name Printed Name
President / CEO
-----------------------------------
Title
<PAGE> 5
VISUAL NETWORKS, INC.
1997 EXECUTIVE COMPENSATION PLAN (Revised)
This revision to the 1997 compensation plan reflects changes to the Company's
financial goals for 1997. This revised plan supersedes all previous plans. This
document does not constitute an employment contract. Visual Networks is an "at
will" employer and can terminate any employment relationship at any time with or
without cause.
EMPLOYEE: Greg Langford
TITLE: VP Product Management and Planning
<TABLE>
<CAPTION>
COMPANY 1997 FINANCIAL METRICS
<S> <C> <C>
Original Plan Revised External Plan Revised Internal Plan
- ------------- --------------------- ---------------------
Revenues: $36 M Revenues: $23M Revenues: $25M
GM%: 63% GM%: 64% GM% : 64%
Optg. Income: $4.8 M Optg. Income: ($0.1M) Optg. Income: $0.95M
</TABLE>
COMPENSATION:
Annual Base Salary: $125,000
No bonus will be earned if company fails to achieve all three financial
metrics identified as the Revised External Plan.
If company achieves all three financial metrics identified as the Revised
External Plan then bonus will be earned according to the following formula:
$25,000 + (0.25% times revenues in excess of $23M) + (0.5% times operating
income in excess of a $100K operating loss)
Total Compensation at Revised External Plan: $150,000
Total Compensation at Revised Internal Plan: $160,250
Notes:
1. Revenue numbers are inclusive of actual recognized revenues, deferred VAR
revenues, and revenue reserves other than for "questionable"
transactions.
2. Payment of bonuses will be made following the availability of audited year
end numbers.
3. As a participant in the 1997 Executive Compensation Plan, employee is not
entitled to "traditional" raises to base salary on employment anniversary.
Approved by: /s Scott Stouffer 9-15-97 /s Peter Minihane 9-16-97
--------------------------- ------------------------------
Scott Stouffer Date Peter Minihane Date
Accepted by:
---------------------------
Employee Date
<PAGE> 1
EXHIBIT 11.1
VISUAL NETWORKS, INC.
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
PRO FORMA FOR PRO FORMA FOR
PRO FORMA FOR THE NINE MONTHS THE NINE MONTHS
THE YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Weighted average common shares outstanding...... 2,800,000 2,800,000 2,852,231
Treasury stock effect of 35,504 shares of common
stock issued in the last twelve months........ 26,129 26,129 26,129
Common stock equivalents:
Preferred stock............................ 9,628,523 9,299,206 10,605,735
Treasury stock effect of 963,555 options to
acquire common stock granted in the last
twelve months............................ 649,030 649,030 649,030
-------------- --------------- ---------------
Pro forma weighted average common and common
equivalent shares outstanding................. 13,103,682 12,774,365 14,133,125
============ ============= =============
</TABLE>
<PAGE> 1
EXHIBIT 16.1
[COOPERS & LYBRAND L.L.P. LETTERHEAD]
December 3, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Visual Networks, Inc. (copy attached)
in response to Item 11(i) of Form S-1 contained under the caption of "Other
Matters" which we understand will be filed with the Commission. We agree with
the statements concerning our Firm in such Form S-1.
Very truly yours,
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
December 3, 1997
Washington, D.C.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 4,140 3,404
<SECURITIES> 0 0
<RECEIVABLES> 2,803 2,138
<ALLOWANCES> 363 250
<INVENTORY> 1,176 933
<CURRENT-ASSETS> 8,163 6,436
<PP&E> 1,699 1,062
<DEPRECIATION> 434 249
<TOTAL-ASSETS> 9,428 7,249
<CURRENT-LIABILITIES> 6,537 3,942
<BONDS> 312 28
14,491 13,398
3 3
<COMMON> 29 28
<OTHER-SE> (11,944) (10,150)
<TOTAL-LIABILITY-AND-EQUITY> 9,428 7,249
<SALES> 15,524 6,335
<TOTAL-REVENUES> 15,524 6,335
<CGS> 5,059 2,550
<TOTAL-COSTS> 5,059 2,550
<OTHER-EXPENSES> 11,317 10,843
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (11) (75)
<INCOME-PRETAX> (841) (6,983)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (841) (6,983)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (841) (6,983)
<EPS-PRIMARY> (0.06) (0.53)
<EPS-DILUTED> (0.06) (0.53)
</TABLE>
