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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1998
REGISTRATION NO. 333-41517
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4 TO
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(3)
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Shares of Common Stock, par value $.01...................... 4,025,000 shares $11.00 $44,275,000 $0
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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.
(3) A registration fee of $13,061 was paid at the time of the initial filing of
this registration statement.
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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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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 FEBRUARY 4, 1998
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)
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<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.
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[Communications Antenna.] [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 optical cables.]
[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.
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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."
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Visual Networks and Visual UpTime are registered 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. These capabilities enable
WAN service providers to achieve the service levels required by their customers
and to lower the costs associated with statistically multiplexed services. The
system supports Frame Relay and IP/Internet 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.
- - Increased scaleability of service provider deployment models and achievable
economies of scale for the business (when the system is used as part of
network infrastructure).
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[Photo of ACE]
Instrumented WAN Access for
[Visual Networks logo.] [Photo of Troubleshooting every circuit.
[Photo of Monitoring screen.] screen.] [Photo of Planning screen.]
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Monitoring: Troubleshooting: Planning:
Gain early insight into Rapidly and cost-effectively Accurately plan and engineer
performance degradation. provision WAN services and the network.
solve service level problems.
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[Graphic of globe depicting a Frame Relay and IP network across North America,
Europe, Asia and with Visual UpTime system comprised of "instrumented" WAN
access equipment and centralized system manager.]
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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. Certain terms used in this Prospectus are defined in the
Glossary. 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 currently 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
17,000 WAN circuits in over 300 subscriber Frame Relay networks, including those
of ABN-AMRO Bank, Cargill, Inc., Delta Air Lines, Inc., EDS Electronic Commerce
Division ("EDS"), Federal Express Corporation ("FedEx"), Household
International, Inc., Marriott International, Inc. ("Marriott"), Reynolds Metals,
Inc. ("Reynolds")and Waste Management, Inc. For the year ended December 31,
1997, the Company had revenue of approximately $23.7 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 from approximately 30% in the first quarter of 1997, to approximately
52% in the fourth quarter of 1997, with Sprint and AT&T accounting for 31% and
7%, respectively, of revenue for the year ended December 31, 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.
3
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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.............. 17,061,439 shares(1)
Use of proceeds................................................ General corporate purposes.
See "Use of Proceeds".
Proposed Nasdaq National Market symbol......................... VNWK
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(1) Excludes 1,840,501 shares of Common Stock issuable upon exercise of options
outstanding at December 31, 1997, at a weighted average exercise price of
$2.18 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
(AUGUST 12, 1993) YEAR ENDED DECEMBER 31,
THROUGH --------------------------------------
DECEMBER 31, 1993 1994 1995 1996 1997
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STATEMENT OF OPERATIONS DATA:
Revenue............................... $ -- $ -- $ 250 $ 6,335 $23,651
Gross profit.......................... -- -- 206 3,785 16,035
Loss from operations.................. (5) (222) (1,831) (7,058) (200)
Net loss.............................. $ (5) $(222) $(1,791) $(6,983) $ (152)
===== ===== ======= ======= =======
Pro forma basic and diluted net loss
per common share(1)................. $ (0.01)
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Pro forma weighted average common
shares outstanding(1)............... 14,148
=======
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DECEMBER 31, 1997
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PRO FORMA
ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 8,693 $ 40,493
Working capital................................................... 2,037 33,837
Total assets...................................................... 16,366 48,166
Redeemable convertible preferred stock............................ 14,855 --
Total stockholders' equity........................................ (11,567) 35,088
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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.
4
<PAGE> 7
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 year ended December 31, 1996, sales of products
or services to Hewlett-Packard Company ("HP") and Sprint accounted for 13% and
10%, respectively, of the Company's revenue.
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For the year ended December 31, 1997, sales of products or services to Sprint,
FedEx and AT&T accounted for 31%, 11% and 7%, respectively, of the Company's
revenue, substantially all of which was attributable to sales to subscribers. 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. 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 changing customer needs and
technologies may result in a loss of market share to competitors or
6
<PAGE> 9
may require the Company to substantially increase development expenditures. Such
an increase in research and development expenditures may have a material effect
on the Company's business, financial condition and results of operations. 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 Associates,
Inc. ("Network Associates"), 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
7
<PAGE> 10
offered by the Company or its competitors and the size, timing, cancellation or
delay of customer 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 mid-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
December 31, 1997, the Company had an accumulated deficit of approximately $11.9
million. The Company incurred losses from operations for the years ended
December 31, 1995, 1996 and 1997, of approximately $1.8 million, $7.1 million
and $0.2 million, respectively. 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, September 30, 1997 and December 31, 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. In
addition, although the Company's sole or limited source suppliers are all based
in the United States, some of them may manufacture components, or acquire
components from, outside of the United States. If events in a country where a
key component is produced reduce or eliminate the supply of such component, and
the Company's supplier is unable to obtain the component from another country,
the Company would have to identify and qualify acceptable replacements. Any
interruption in the supply of required or key 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 maintains, and is the
beneficiary under, $2.0 million of key person life insurance on Mr. Stouffer.
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
9
<PAGE> 12
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 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 51.0% 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
10
<PAGE> 13
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 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 $7.94 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 December 31, 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. As of December 31, 1997, the stockholders held an
aggregate of 13.6 million shares of Common Stock having an aggregate original
purchase price of $12.5 million and a market value, based on an assumed initial
public offering price of $10.00 per share, of $135.6 million. See "Dilution,"
"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
11
<PAGE> 14
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, 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 3,437,864 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"), all of which are
subject to lock-up agreements. Within 90 days after the date of this Prospectus,
approximately 10,095,575 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, 10,065,950 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
14,073,454 shares, which includes options exercisable for approximately 541,640
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 December 31, 1997,
there were outstanding options for the purchase of 1,840,501 shares, of which
options for approximately 334,814 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
December 31, 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>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt....................................................... $ 256 $ 256
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)...................................................... 14,855 --
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,
2,955,704 shares issued and outstanding (actual); 17,061,439
shares issued and outstanding (as adjusted) (2)................ 29 170
Deferred compensation........................................... (247) (247)
Additional paid-in capital...................................... 528 47,045
Accumulated deficit............................................. (11,880) (11,880)
-------- ---------
Total stockholders' equity (deficit)................................. (11,567) 35,088
-------- ---------
Total capitalization................................................. $ 3,544 $ 35,344
======== =========
</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 1,840,501
shares at a weighted average exercise price of $2.18 were outstanding as of
December 31, 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 December 31,
1997, was approximately $3.3 million, or approximately $0.24 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
13,561,439 pro forma shares of Common Stock outstanding as of December 31, 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 December 31, 1997 would have been
approximately $35.1 million or $2.06 per share. This represents an immediate
increase in such net tangible book value of $1.82 per share to existing
stockholders and an immediate dilution of $7.94 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 December 31, 1997... $ 0.24
Increase per share of Common Stock attributable to the offering....... 1.82
------
Pro forma net tangible book value per share after the offering.......... 2.06
-------
Net tangible book value dilution per share to new investors............. $ 7.94
=======
</TABLE>
The following table summarizes on a pro forma basis as of December 31,
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)........ 13,561,439 79.5% $12,484,143 26.3% $ 0.92
New investors................... 3,500,000 20.5 35,000,000 73.7 10.00
---------- ----- ----------- -----
Total........................... 17,061,439 100.0% $47,484,143 100.0% $ 2.78
========== ===== =========== =====
</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 1,840,501
shares at a weighted average exercise price of $2.18 were outstanding as of
December 31, 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, 1995, 1996 and 1997, 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 and for the year ended
December 31, 1994, are derived from audited financial statements not included in
this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
INCEPTION
(AUGUST 12, 1993) YEAR ENDED DECEMBER 31,
THROUGH -------------------------------------------
DECEMBER 31, 1993 1994 1995 1996 1997
----------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $ -- $ -- $ 250 $ 6,335 $23,651
Cost of goods sold............................ -- -- 44 2,550 7,616
------- ------- ------- ------- -------
Gross profit................................ -- -- 206 3,785 16,035
------- ------- ------- ------- -------
Operating expenses:
Research and development.................... -- 163 994 2,988 4,253
Sales and marketing......................... -- -- 700 6,386 9,696
General and administrative.................. (5) 59 343 1,469 2,286
------- ------- ------- ------- -------
Total operating expenses.................. (5) 222 2,037 10,843 16,235
------- ------- ------- ------- -------
Loss from operations.......................... (5) (222) (1,831) (7,058) (200)
Interest income, net.......................... -- -- 40 75 48
------- ------- ------- ------- -------
Net loss...................................... $ (5) $ (222) $(1,791) $(6,983) $ (152)
======= ======= ======= ======= =======
Pro forma basic and diluted net loss per
common share (1)............................ $ (0.01)
=======
Pro forma weighted average common shares
outstanding (1)............................. 14,148
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
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 $ 8,693
Working capital............................... -- 1,063 1,151 2,494 2,037
Total assets.................................. 1 1,167 1,728 7,249 16,366
Long-term debt, net of current portion........ 6 -- 81 28 256
Redeemable convertible preferred stock........ -- 1,170 3,385 13,398 14,855
Stockholders' equity (deficit)................ (5) (83) (2,124) (10,119) (11,567)
</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 realizes revenue from sales of hardware, from the licensing of
related software and from maintenance contracts. 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>
YEAR ENDED
DECEMBER 31,
---------------------------
1995 1996 1997
------ ------ -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................. 100.0% 100.0% 100.0%
Cost of goods sold...................................... 17.6 40.3 32.2
------ ------ ------
Gross profit.......................................... 82.4 59.7 67.8
------ ------ ------
Operating expenses:
Research and development.............................. 397.6 47.1 18.0
Sales and marketing................................... 280.0 100.8 41.0
General and administrative............................ 137.2 23.2 9.6
------ ------ ------
Total operating expenses........................... 814.8 171.1 68.6
------ ------ ------
Loss from operations.................................... (732.4) (111.4) (0.8)
Interest income, net.................................... 16.0 1.2 0.2
------ ------ ------
Net loss................................................ (716.4)% (110.2)% (0.6)%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUE. The Company recognized $6.3 million in revenue for the year ended
December 31, 1996, as compared to $0.3 million for the year ended December 31,
1995, an increase of $6.0 million. The increase was due primarily to the initial
acceptance of Visual UpTime by subscribers.
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 manufacturing operations. Gross
profit was $3.8 million for the year ended December 31, 1996, as compared to
$0.2 million for the year ended December 31, 1995, an increase of $3.6 million.
Gross margin was 59.7% for the year ended December 31, 1996.
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 costs of
prototype materials. The Company expenses research and development costs as
incurred. Research and development expense was $3.0 million for the year ended
December 31, 1996, as compared to $1.0 million for the year ended December 31,
1995, an increase of $2.0 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 47.1% of revenue for the year ended
December 31, 1996.
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 $6.4 million for the year ended December 31,
1996, as compared to $0.7 million for the year ended December 31, 1995, an
increase of $5.7 million. The increase in sales and marketing expense was due
primarily to increased staffing levels. Sales and marketing expense was 100.8%
of revenue for the year ended December 31, 1996.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists of finance, administration and general management activities. General
and administrative expense was $1.5 million for the year ended December 31,
1996, as compared to $0.3 million for the year ended
18
<PAGE> 21
December 31, 1995, an increase of $1.2 million. The increase in general and
administrative expense was due primarily to increased staffing levels and the
development of infrastructure to support the anticipated revenue growth. General
and administrative expense was 23.2% of revenue for the year ended December 31,
1996.
OPERATING LOSS. The Company's operating loss was $7.1 million for the year
ended December 31, 1996, as compared to an operating loss of $1.8 million for
the year ended December 31, 1995, an increase of $5.3 million. This increase was
due primarily to increased operating expenses which offset the revenue and gross
profit increases described above.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUE. The Company recognized $23.7 million in revenue for the year
ended December 31, 1997, as compared to $6.3 million for the year ended December
31, 1996, an increase of $17.4 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 year ended
December 31, 1997.
GROSS PROFIT. Gross profit was $16.0 million for the year ended December
31, 1997, as compared to $3.8 million for the year ended December 31, 1996, an
increase of $12.2 million. Gross margin was 67.8% for the year ended December
31, 1997, as compared to 59.7% for the year ended December 31, 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 was
$4.3 million for the year ended December 31, 1997, as compared to $3.0 million
for the year ended December 31, 1996, an increase of $1.3 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 18.0% of
revenue for the year ended December 31, 1997. The Company expects that research
and development expenditures will increase in absolute dollars, and may decrease
as a percentage of revenue, during 1998 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 was $9.7 million
for the year ended December 31, 1997, as compared to $6.4 million for the year
ended December 31, 1996, an increase of $3.3 million. The increase in sales and
marketing expense was due primarily to increased staffing levels. Sales and
marketing expense was 41.0% of revenue for the year ended December 31, 1997. The
Company expects that sales and marketing expenditures will increase in absolute
dollars, and may decrease as a percentage of revenue, during 1998 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 was
$2.3 million for the year ended December 31, 1997, as compared to $1.5 million
for the year ended December 31, 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 9.6% of revenue for the year
ended December 31, 1997. The Company expects that general and administrative
expenditures will increase in absolute dollars, and may decrease as a percentage
of revenue, during 1998 and thereafter. This increase in absolute dollars is
expected to be required for the expansion
19
<PAGE> 22
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 $0.2 million for the year
ended December 31, 1997, as compared to an operating loss of $7.1 million for
the year ended December 31, 1996, a decrease of $6.9 million. This decrease was
due primarily to the revenue and gross profit increases described above.
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").
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 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, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <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 $ 8,127
Cost of goods
sold............. 182 643 789 936 1,051 1,797 2,211 2,557
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit..... 251 913 1,166 1,455 2,028 3,631 4,806 5,570
--------- --------- --------- --------- --------- --------- --------- ---------
Operating
expenses:
Research and
development.... 564 617 894 913 880 937 1,133 1,303
Sales and
marketing...... 744 1,452 2,064 2,126 2,063 2,137 2,551 2,945
General and
administrative... 238 246 356 629 483 545 588 670
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses..... 1,546 2,315 3,314 3,668 3,426 3,619 4,272 4,918
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from
operations....... (1,295) (1,402) (2,148) (2,213) (1,398) 12 534 652
Interest income,
net.............. 27 20 5 23 8 1 2 37
--------- --------- --------- --------- --------- --------- --------- ---------
Net income
(loss)........... $(1,268) $(1,382) $(2,143) $(2,190) $(1,390) $ 13 $ 536 $ 689
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <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% 100.0%
Cost of good
sold............. 42.0 41.3 40.4 39.1 34.1 33.1 31.5 31.5
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit..... 58.0 58.7 59.6 60.9 65.9 66.9 68.5 68.5
--------- --------- --------- --------- --------- --------- --------- ---------
Operating
expenses:
Research and
development.... 130.2 39.7 45.7 38.2 28.6 17.3 16.1 16.0
Sales and
marketing...... 171.8 93.3 105.6 88.9 67.0 39.4 36.4 36.2
General and
administrative... 55.0 15.8 18.2 26.4 15.7 10.0 8.4 8.3
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses..... 357.0 148.8 169.5 153.5 111.3 66.7 60.9 60.5
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from
operations....... (299.0) (90.1) (109.9) (92.6) (45.4) 0.2 7.6 8.0
Interest income,
net.............. 6.2 1.3 0.3 1.0 0.3 0.0 0.0 0.5
--------- --------- --------- --------- --------- --------- --------- ---------
Net income
(loss)........... (292.8)% (88.8)% (109.6)% (91.6)% (45.1)% 0.2% 7.6% 8.5%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
20
<PAGE> 23
THREE MONTHS ENDED MARCH 31, 1997, JUNE 30, 1997, SEPTEMBER 30, 1997 AND
DECEMBER 31, 1997
Revenue has increased in each of the last four quarters from $3.1 million
for the three months ended March 31, 1997 to $5.4 million, $7.0 million and $8.1
million for the three months ended June 30, 1997, September 30, 1997 and
December 31, 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 increased in the first three quarters of 1997 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 and continued at 68.5%
during the three months ended December 31, 1997. The increases were 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.
The Company's operating expenses have increased in each of the last four
quarters, from $3.4 million in the three month period ended March 31, 1997 to
$3.6 million, $4.3 million and $4.9 million in the three month periods ended
June 30, 1997, September 30, 1997, and December 31, 1997, respectively. The
increases were due primarily to increased staffing in sales and marketing and to
a lesser extent increases in research and 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%, 60.9% and 60.5% of revenues for the three month
periods ended June 30, 1997, September 30, 1997, and December 31, 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 approxi-
21
<PAGE> 24
mately $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 1997, the Company's operating activities provided net
cash of approximately $6.8 million, primarily due to improved collections from
customers. Capital expenditures were approximately $0.2 million in 1995, $0.8
million in 1996 and $1.2 million for 1997. 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, accounts receivable, research and
development and capital expenditures. The Company currently has no commitments
for capital expenditures and capital expenditures for 1998 are not expected to
exceed $2.5 million. 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 consists of $8.7 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
$7.0 million or 75% of eligible accounts receivable (as defined in the credit
facility). The agreement entitles Silicon Valley Bank to a security interest in
the Company's assets. The agreement contains restrictive financial covenants,
including, but not limited to, restrictions related to liquidity, profitability,
net worth, and indebtedness, as well as restrictions related to acquisitions,
dispositions of assets, distributions and investments. Interest is payable
monthly at the prime rate plus 0.5%. As of December 31, 1997, there were no
borrowings outstanding under the bank credit facility.
Although all of the Company's product sales to date have been made to
customers in the United States and Canada, the Company intends to increase its
sales efforts in foreign markets. The Company plans to sell its products to
foreign customers at prices denominated in U.S. dollars. However, if the Company
commences selling material volumes of product to such customers at prices not
denominated in U.S. dollars, the Company intends to adopt a strategy to hedge
against fluctuations in foreign currency.
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 currently 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
17,000 WAN circuits in over 300 subscriber Frame Relay networks, including those
of ABN-AMRO Bank, Cargill, Inc., Delta Air Lines, Inc., EDS, FedEx, Household
International, Inc., Marriott, Reynolds and Waste Management, Inc. For the year
ended December 31, 1997, the Company had revenue of approximately $23.7 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
from approximately 30% in the first quarter of 1997, to approximately 52% in the
fourth quarter of 1997, with Sprint and AT&T accounting for 31% and 7%,
respectively, of revenue for the year ended December 31, 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, a leading independent WAN industry analyst, 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
23
<PAGE> 26
2000. Vertical Systems estimates that the non-U.S. market for these services is
expected to exceed $13 billion in 1997.
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
[GRAPHIC]
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
24
<PAGE> 27
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 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
25
<PAGE> 28
developing service deployment and operational models that can satisfy rapid
growth requirements and achieve economies of scale.
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
26
<PAGE> 29
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,
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
27
<PAGE> 30
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 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.
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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 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
[GRAPHIC]
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
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<PAGE> 32
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.
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. For the year ended December 31, 1997, the Company's average selling
price per system approximated $1,500 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 approximately 52% for the three months ended
December 31, 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
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<PAGE> 33
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").
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
[GRAPHIC]
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]
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>
ABN-AMRO Bank Federal Express Corporation
Cargill, Inc. Household International,
Columbia Gas System Inc. Inc.
Delta Air Lines, Inc. Marriott International, Inc.
EDS Electronic Commerce Division Waste Management, Inc.
</TABLE>
The Company is dependent on a small number of customers for a substantial
portion of its revenue. For the year ended December 31, 1996, sales of products
or services to HP and Sprint accounted for 13% and 10%, respectively, of the
Company's revenue. For the year ended December 31, 1997, sales of products or
services to Sprint, FedEx and AT&T accounted for 31%, 11% and 7%, respectively,
of the Company's revenue, substantially all of which was attributable to sales
to subscribers. See "Risk Factors -- Dependence on Major Customers".
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 approximately 52% in the three months ended
December 31, 1997. The Company expects to expend substantial additional effort
to evolve these business partners to the provider
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deployment model. See "Risk Factors -- Implementation of Provider Deployment
Model; Lengthy Sales Cycle".
AT&T RELATIONSHIP
In December 1997, the Company entered into a non-exclusive 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 non-exclusive 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 non-exclusive 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
55% of the U.S. market and 40% of the worldwide
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<PAGE> 36
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 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 December 31, 1997, the Company employed 46 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 $9.7 million for
the years ended December 31, 1995, 1996 and 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 December 31, 1997, there were 43 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
$4.3 million for the years ended December 31, 1995, 1996 and 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. The Company is aware of such an arrangement between Digital Link and
NetScout. 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 Associates,
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 on the "Measurement of Round
Trip Delay", which expires in April 2015. It also has 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 December 31, 1997, the Company had 120 full-time employees, including
43 in product development, 35 in sales, 7 in marketing, 10 in manufacturing, 4
in customer service and 21 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..................... 44 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, in various capacities, including
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
39
<PAGE> 42
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, during 1997,
an officer or employee of the Company at any time.
DIRECTORS' COMPENSATION
Messrs. Joseph and William Smith 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 Eligible Director will
receive options under the Company's 1997 Directors' Stock Option Plan. 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, 1997 to the Company's
chief executive officer and the other most highly compensated executive officers
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(1) OTHER OPTIONS
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Scott E. Stouffer
Chairman of the Board, President and
Chief Executive Officer............... $165,000 $71,880 $ -- --
Peter J. Minihane
Executive Vice President, Chief Financial
Officer and Treasurer................. 100,550(2) 45,939 92,951(3) 175,000
Henry A. Cheli
Senior Vice President, Market
Operations............................ 119,048(2) 82,618 96,697(4) 135,000
Gregory J. Langford
Senior Vice President, Product
Operations............................ 125,000 50,940 61,662(3) 35,000
Robert C. Troutman
Senior Vice President, Advance
Planning.............................. 140,000 61,366 -- --
</TABLE>
- ---------------
(1) These bonuses are payable in 1998.
(2) The salaries paid Messrs. Minihane and Cheli are for the periods from their
respective dates of employment, June 15, 1997 and March 20, 1997.
(3) Consists of relocation payments.
(4) Consists of commissions of $40,000 and relocation payments of $56,697.
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, 1997 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(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
GRANTED(1) FISCAL 1997(2) PER SHARE(3) DATE 5% 10%
---------- -------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Scott E.
Stouffer......... -- --% $ -- -- $ -- $ --
Peter J.
Minihane......... 175,000 18.8 1.75(3) 6/18/07 192,599 488,084
Henry A. Cheli..... 135,000 14.5 1.43(3) 3/17/07 121,408 307,672
Gregory J.
Langford......... 35,000 3.8 3.00(3) 8/20/07 66,034 167,343
Robert C.
Troutman......... -- -- -- -- -- --
</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 928,955 shares of Common Stock granted in 1997.
(3) 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, based upon the price at which the Company's Preferred Stock had been
issued, an independent valuation of the Company's
41
<PAGE> 44
Common Stock in November 1996, arms-length transactions in the Company's
Preferred Stock, valuations of comparable companies and the financial
condition and results of operations of the Company at each of the dates of
grant. The Company's Common Stock was not traded publicly at the time the
options were granted to the Named Executive Officers.
(4) 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
$2,544,308 for Mr. Minihane, $2,005,952 for Mr. Cheli and $465,112 for Mr.
Langford.
None of the Named Executive Officers exercised any stock options during
1997.
YEAR-END OPTION VALUES
The following table provides the specified information concerning
unexercised options held as of December 31, 1997 by the Named Executive
Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Scott E. Stouffer.......................... 38,237 25,012 $ 377,119 $ 244,892
Peter J. Minihane.......................... -- 175,000 -- 1,443,750
Henry A. Cheli............................. -- 135,000 -- 1,156,950
Gregory J. Langford........................ 5,584 94,416 44,162 757,888
Robert C. Troutman......................... 13,799 21,201 135,368 207,982
</TABLE>
- ---------------
(1) Calculated on the basis of $10.00 per share, the fair market value of the
Common Stock at December 31, 1997, 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 year was paid pursuant to a long-term incentive
plan during the last 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.
42
<PAGE> 45
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 arrangement with the
Company, pursuant to which Mr. Cheli serves as Senior Vice President, Market
Operations. The arrangement provides for an initial annual base salary of
$150,000, in addition to certain other benefits. Mr. Cheli's compensation can
increase based on the Company's 1997 financial performance. Upon termination of
employment 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 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 arrangement 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 arrangement provides for an initial annual
base salary of $125,000, in addition to certain other benefits. Mr. Langford's
compensation can increase based on the Company's 1997 financial performance.
Upon termination of employment 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 arrangement with the
Company, pursuant to which Mr. Minihane serves as Executive Vice President,
Chief Financial Officer and Treasurer of the Company. The arrangement 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 based on the Company's 1997 financial performance. Upon termination of
employment 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
43
<PAGE> 46
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 December 31, 1997, 120,200 shares had been issued under the 1994 Plan,
options to purchase 1,840,501 shares were outstanding and 14,299 shares remained
available for future grant under the 1994 Plan.
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.
44
<PAGE> 47
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 December 31, 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 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 (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 current Eligible Directors at the date
of the closing of this offering, such member will be granted options to purchase
up to 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 be calculated as follows: (x) for
options issued at the closing of this offering, the exercise price will equal
the initial public offering price; and (y) for all other grants, the exercise
price will equal the fair market value per share of the Common Stock on the date
of grant.
45
<PAGE> 48
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.
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.
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<PAGE> 49
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's Board of
Directors, excluding Mr. Smith, determined the sale price based on a recently
completed arms-length sale of securities by William R.T. and Carol B. Oakes to
the Individual Retirement Account of Theodore R. Joseph, a director of the
Company.
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.
47
<PAGE> 50
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 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)..................................... 2,160,680 15.9 12.7
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.(7)............................... 685,309 5.1 4.0
300 East Joppa Road, Suite 1111
Baltimore, MD 21286
Marc F. Benson(8)....................................... 2,170,780 16.0 12.7
Grant G. Behrman(9)..................................... 635,628 4.7 3.7
Henry A. Cheli(16)...................................... 0 0 0
Theodore R. Joseph(10).................................. 120,204 * *
Gregory J. Langford(11)(16)............................. 7,282 * *
Ted H. McCourtney(12)................................... 2,160,680 15.9 12.7
Peter J. Minihane(16)................................... 25,000 * *
Thomas A. Smith(13)..................................... 1,653,929 12.2 9.7
William J. Smith........................................ 10,504 * *
Scott E. Stouffer (14) (16)............................. 1,494,285 11.0 8.7
Robert C. Troutman(15) (16)............................. 468,545 3.5 2.7
All executive officers and directors as a group (12
persons)(17).......................................... 8,753,136 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 December 31,
1997, are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Marc F. 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.
(3) Represents 1,338,475 shares of Common Stock beneficially owned by Venrock
Associates and 822,205 shares of Common Stock beneficially owned by Venrock
Associates II, L.P.
48
<PAGE> 51
(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) Jeffrey A. Davison and Barbara A. Melera, officers of First Technology,
Inc., the general partner of the general partner of Tritech Partners, L.P.,
have shared voting and investment power with respect to the shares held by
Tritech Partners, L.P., but disclaim beneficial ownership thereof except to
the extent of their proportionate partnership interest therein.
(8) 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.
(9) 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.
(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 7,282 shares of Common Stock issuable upon exercise of options.
(12) 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.
(13) 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.
(14) Includes 854,000 shares of Common Stock 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 39,589 shares of Common
Stock issuable upon exercise of options.
(15) 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
14,945 shares of Common Stock issuable upon exercise of stock options.
(16) The address of Messrs. Cheli, Langford, Minihane, Stouffer and Troutman is
c/o the Company, 2092 Gaither Road, Rockville, Maryland 20850.
(17) Includes an aggregate of 95,417 shares of Common Stock issuable upon
exercise of options. See notes 10, 11, 14 and 15 above.
49
<PAGE> 52
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 December 31, 1997, the Company had outstanding 2,955,704 shares of
Common Stock held of record by approximately 37 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 December 31, 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
50
<PAGE> 53
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
51
<PAGE> 54
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 17,061,439 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 13,561,439 shares, approximately 3,437,864
additional shares will be eligible for immediate sale in the public market
pursuant to Rule 144(k) under the Securities Act, all of which are subject to
lock-up agreements. Within 90 days after the date of this Prospectus
approximately 10,095,575 shares will become eligible for sale in the public
market, of which 10,065,950 are subject to lockup agreements. Approximately
14,073,454 shares, which includes options exercisable for approximately 541,640
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.
52
<PAGE> 55
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 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,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, 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
53
<PAGE> 56
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 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.
54
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................ F-2
Balance Sheets as of December 31, 1996 and 1997 and Pro Forma Balance Sheet as of
December 31, 1997................................................................. F-3
Statements of Operations for the years ended December 31, 1995, 1996 and 1997....... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the years ended December
31, 1995, 1996 and 1997........................................................... F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997....... F-6
Notes to Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the 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, 1996 and 1997, and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 9, 1998
F-2
<PAGE> 59
VISUAL NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------- DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 3,404 $ 8,693
Accounts receivable, net of allowance of $250 and $392,
respectively........................................................ 1,888 2,918
Inventory............................................................. 933 2,681
Other current assets.................................................. 211 567
-------- --------
Total current assets................................................ 6,436 14,859
Property and equipment, net............................................. 813 1,507
-------- --------
Total assets........................................................ $ 7,249 $ 16,366
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses................................. $ 1,059 $ 3,171
Customer deposits..................................................... -- 3,068
Accrued compensation.................................................. 862 1,448
Deferred revenue...................................................... 1,124 4,913
Bank line of credit................................................... 848 --
Current portion of capital lease obligation........................... 49 222
-------- --------
Total current liabilities........................................... 3,942 12,822
Capital lease obligation, net of current portion........................ 28 256
-------- --------
Total liabilities................................................... 3,970 13,078
-------- --------
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, $.01 par value, 7,229,438 shares
authorized in aggregate, 7,228,473 shares issued and outstanding in
aggregate as of December 31, 1996 and 1997, respectively, and no
shares outstanding on a pro forma basis (aggregate liquidation
preference of $13,262 and $14,484 as of December 31, 1996 and 1997,
respectively)....................................................... $ 13,398 $ 14,855 $ --
-------- -------- ------------
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, 1996 and 1997 and no shares outstanding on a pro
forma basis (liquidation preference of $130 and $149 as of December
31, 1996 and 1997, respectively).................................... 3 3 --
Common stock, $.01 par value, 50,000,000 shares authorized, 2,800,000
and 2,955,704 shares outstanding as of December 31, 1996 and 1997,
respectively, and 13,561,439 on a pro forma basis................... 28 29 135
Deferred compensation................................................. -- (247) (247)
Additional paid-in capital............................................ 121 528 15,280
Accumulated deficit................................................... (10,271) (11,880) (11,880)
-------- -------- ------------
Total stockholders' equity (deficit)................................ (10,119) (11,567) 3,288
-------- -------- ------------
Total liabilities and stockholders' equity (deficit)................ $ 7,249 $ 16,366 $ 16,366
========= ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 60
VISUAL NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------
1995 1996 1997
------- ------- ----------
<S> <C> <C> <C>
Revenue..................................................... $ 250 $6,335 $23,651
Cost of goods sold.......................................... 44 2,550 7,616
---- ------- ----------
Gross profit.............................................. 206 3,785 16,035
---- ------- ----------
Operating expenses:
Research and development.................................. 994 2,988 4,253
Sales and marketing....................................... 700 6,386 9,696
General and administrative................................ 343 1,469 2,286
---- ------- ----------
Total operating expenses............................... 2,037 10,843 16,235
---- ------- ----------
Loss from operations........................................ (1,831) (7,058) (200)
Interest income, net........................................ 40 75 48
---- ------- ----------
Net loss.................................................... $(1,791) $(6,983) $(152)
==== ======= ==========
Pro forma basic and diluted net loss per common share....... $(0.01)
==========
Pro forma weighted average common shares outstanding........ 14,147,626
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 61
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, 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............... -- -- -- -- 35,504 -- --
Exercise of stock options.............. -- -- -- -- 120,200 1 --
Deferred compensation.................. -- -- -- -- -- -- (292)
Amortization of deferred
compensation......................... -- -- -- -- -- -- 45
Accretion of Series B, Series C, Series
D and Series E preferred stock....... -- 235 -- -- -- -- --
Accrued dividends on Series B, Series
C, Series D and Series E preferred
stock................................ -- 1,222 -- -- -- -- --
Net loss............................... -- -- -- -- -- -- --
---------- -------- -------- --- ---------- ---- ----
BALANCE, DECEMBER 31, 1997................. 7,228,473 14,855 347,070 3 2,955,704 29 (247)
Pro forma adjustments.................. (7,228,473) (14,855) (347,070) (3) 10,605,735 106 --
---------- -------- -------- --- ---------- ---- ----
PRO FORMA BALANCE, DECEMBER 31, 1997....... -- $ -- -- $ -- 13,561,439 $135 $ (247)
========== ======== ======== === ========== ==== ====
<CAPTION>
ADDITIONAL
PAID-IN- ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- --------
<S> <C> <C> <C>
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............... 94 -- 94
Exercise of stock options.............. 21 -- 22
Deferred compensation.................. 292 -- --
Amortization of deferred
compensation......................... -- -- 45
Accretion of Series B, Series C, Series
D and Series E preferred stock....... -- (235) (235)
Accrued dividends on Series B, Series
C, Series D and Series E preferred
stock................................ -- (1,222) (1,222)
Net loss............................... -- (152) (152)
------- ------- --------
BALANCE, DECEMBER 31, 1997................. 528 (11,880) (11,567)
Pro forma adjustments.................. 14,752 -- 14,855
------- ------- --------
PRO FORMA BALANCE, DECEMBER 31, 1997....... $ 15,280 $ (11,880) $ 3,288
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 62
VISUAL NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $(1,791) $(6,983) $ (152)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities --
Depreciation and amortization............................. 59 204 574
Changes in assets and liabilities --
Accounts receivable....................................... (166) (1,722) (1,030)
Inventory................................................. (362) (571) (1,748)
Other current assets...................................... (9) (195) (356)
Accounts payable and accrued expenses..................... 105 873 2,112
Customer deposits......................................... -- -- 3,068
Accrued compensation...................................... 160 702 586
Deferred revenue.......................................... -- 1,124 3,789
------- ------- -------
Net cash (used in) provided by operating
activities......................................... (2,004) (6,568) 6,843
------- ------- -------
Cash flows from investing activities:
Proceeds from sale leaseback transactions................. 138 -- 544
Expenditures for property and equipment................... (227) (826) (1,223)
------- ------- -------
Net cash used in investing activities................ (89) (826) (679)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance
costs .................................................. 1,965 9,001 --
Borrowings (repayments) under credit agreements........... -- 848 (848)
Proceeds from issuance of common stock.................... -- -- 116
Principal payments on capital lease obligations........... (16) (44) (143)
------- ------- -------
Net cash provided by (used in) financing
activities......................................... 1,949 9,805 (875)
------- ------- -------
Net (decrease) increase in cash and cash equivalents........... (144) 2,411 5,289
Cash and cash equivalents, beginning of period................. 1,137 993 3,404
------- ------- -------
Cash and cash equivalents, end of period....................... $ 993 $ 3,404 $ 8,693
======== ======== ========
Supplemental cash flow information:
Cash paid for interest......................................... $ 13 $ 46 $ 104
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 63
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995, 1996 AND 1997
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 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.
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.
F-7
<PAGE> 64
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
The Company has an agreement with one reseller that provides price
protection for units that remain in that reseller's inventory. Reserves for
estimated inventory credits are established by the Company concurrently with the
recognition of revenue. The Company monitors the factors that influence the
pricing of its products and reseller inventory levels and makes adjustments to
these reserves when management believes that actual inventory credits may differ
from established estimates.
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's cash equivalents
consist primarily of investments in a money market fund that invests in U.S.
Treasury obligations and may also invest in repurchase agreements collateralized
by U.S. Treasury securities. As of December 31, 1996 and 1997, the Company had
approximately $2,637,000 and $8,650,000, respectively, invested in this money
market fund.
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 1997, two customers individually represented 31% and 11% of
revenue, respectively.
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,
----------------
1996 1997
---- ------
<S> <C> <C>
Raw materials..................................................... $158 $ 221
Work-in-progress.................................................. 304 471
Finished goods.................................................... 471 1,989
---- ------
$933 $2,681
==== ======
</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 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.
F-8
<PAGE> 65
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Equipment.......................................................... $1,060 $2,090
Furniture and fixtures............................................. 2 50
------ ------
1,062 2,140
Less-Accumulated depreciation...................................... (249) (633)
------ ------
$ 813 $1,507
====== ======
</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, 1995, 1996 and 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 BASIC AND DILUTED 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.
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
F-9
<PAGE> 66
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
after December 15, 1997. The Company has implemented SFAS No. 128 for 1997. SFAS
No. 128 requires dual presentation of basic and diluted earnings per share.
Basic loss per share includes no dilution and is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted loss per share includes the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Options to purchase 1,016,254
shares of common stock with exercise prices ranging from $1.43 to $10.00 that
were granted or issued during the twelve months preceding the filing of the
initial registration statement and 35,504 shares of common stock issued during
1997 have been included in the calculation of both basic and diluted loss per
share pursuant to the requirements of the Securities and Exchange Commission
using the treasury stock method. Options to purchase 825,833 shares of common
stock with exercise prices ranging from $0.07 to $1.43 per share that were
outstanding at December 31, 1997 were not included in the computation of diluted
loss per share as their effect would be anti-dilutive. As a result the basic and
diluted loss per share amounts are identical.
2. CREDIT AGREEMENT:
As of January 8, 1998, the Company entered into a new credit agreement with
its bank replacing the existing credit agreement. This revolving line of credit
(the "Revolving Line") provides for borrowings up to the lesser of $7,000,000 or
75% of eligible accounts receivable. The Revolving Line matures on January 5,
1999 and borrowings under the Revolving Line bear interest at the prime rate +
0.5%. Borrowings are collateralized by the assets of the Company. The loan and
security agreement also contains restrictive covenants, including, but not
limited to, restrictions related to liquidity, profitability, net worth, and
indebtedness, as well as restrictions related to acquisitions, dispositions of
assets, distributions and investments. As of December 31, 1997, the Company had
no borrowings against the Revolving Line. In addition, as of December 31, 1997,
$190,000 had been committed against the Revolving Line through the issuance of a
letter of credit (Note 8).
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 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>
AMOUNT LIQUIDATION PREFERENCE
SHARES OUTSTANDING ---------------------------- ----------------------------
AS OF DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 AND 1997 1996 1997 1996 1997
------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Series A.............. 347,070 $ 3 $ 3 $ 130 $ 149
Series B.............. 2,588,438 1,464 1,611 1,440 1,560
Series C.............. 1,600,000 2,316 2,551 2,283 2,483
Series D.............. 2,285,714 4,433 4,904 4,373 4,773
Series E.............. 754,321 5,185 5,789 5,166 5,668
--------- ------- ------- ------- -------
7,575,543 $13,401 $14,858 $13,392 $14,633
========= ======= ======= ======= =======
</TABLE>
F-10
<PAGE> 67
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
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 1997 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, 1996 and 1997, dividends in arrears on
Series A were approximately $19,270 and $28,850, 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 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.
F-11
<PAGE> 68
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
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 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
F-12
<PAGE> 69
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
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.
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
F-13
<PAGE> 70
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
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, 1997, 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
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 up 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,
F-14
<PAGE> 71
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
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 objectives 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 (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 current Eligible Directors at the date
of the closing of this offering, 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 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 be calculated as follows: (x) for
options issued at the time of this offering, the exercise price will equal the
initial public offering price; and (y) for all other grants, the exercise price
will equal the fair market value per share of the common stock on the date of
grant.
F-15
<PAGE> 72
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
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.......................................... 928,955 1.43-10.00 3.88
Canceled......................................... (100,968) 0.07- 7.00 1.63
Exercised........................................ (120,200) 0.07- 7.00 0.18
--------- ----------- --------
Options outstanding at December 31, 1997......... 1,840,501 $0.07-10.00 $ 2.18
========= =========== ========
</TABLE>
As of December 31, 1996 and 1997, options to purchase 193,906 and 334,814
shares of common stock were exercisable with a weighted average exercise price
of $0.14 and $0.70, respectively. The weighted average remaining contractual
life of options outstanding at December 31, 1996 and 1997 was 8.87 and 8.70
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, no compensation expense has been recognized in the accompanying
financial statements related to stock option grants in 1995 and 1996. The
Company has recorded deferred compensation of approximately $292,000 related to
stock option grants in 1997, of which approximately $45,000 has been amortized
in the year ended December 31, 1997.
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
F-16
<PAGE> 73
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
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 1997
------- ------- ------
<S> <C> <C> <C>
NET LOSS:
As reported........................................... $(1,791) $(6,983) $ (152)
Pro forma............................................. (1,792) (7,006) (270)
PRO FORMA NET LOSS PER COMMON AND COMMON EQUIVALENT
SHARE:
As reported........................................... $(0.01)
Pro forma............................................. (0.02)
</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, 1996 and 1997: no dividend
yield, expected volatility of zero, risk-free interest rates from 5.2% to 7.6%
and an 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 1995, 1996 and 1997
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, 1995, 1996 and 1997, 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> 74
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
The components of the Company's net deferred tax asset (liability) are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards................................ $ 2,250 $ 831
Depreciation.................................................... 15 31
Allowance for doubtful accounts................................. 55 144
Inventory valuation............................................. 253 412
Warranty reserve................................................ 23 106
Accrued liabilities............................................. 196 221
Deferred revenue................................................ 435 1,547
Valuation allowance............................................. (3,227) (3,292)
----- ------
Total net deferred tax asset.......................... $ -- $ --
===== ======
</TABLE>
The Company had net operating loss carryforwards to offset future taxable
income of approximately $2,260,000 as of December 31, 1997. 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
$270,000 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 $38,000, $146,000 and $557,000 during 1995, 1996 and
1997, respectively.
F-18
<PAGE> 75
VISUAL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1995, 1996 AND 1997
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>
1998.............................................................. $ 286 $ 406
1999.............................................................. 233 425
2000.............................................................. 49 639
2001.............................................................. -- 637
---- ------
Total minimum lease payments............................ 568 $ 2,107
======
Interest element of lease payment................................. (90)
----
Present value of future minimum lease payments.................... 478
Current portion................................................... (222)
----
Long-term portion................................................. $ 256
====
</TABLE>
The Company's office lease required 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 was 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 January 1999 (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> 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 and
optionholders 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
GLOSSARY
ASYNCHRONOUS TRANSFER MODE
("ATM") A communications protocol and switching
technology using fixed-length packets of data
to transport voice, data, and video traffic
across WANs or LANs.
BANDWIDTH The information carrying capacity of a
transmission line, typically measured in bits
per second.
CUSTOMER PREMISES EQUIPMENT
("CPE") Communications and network equipment physically
located on a subscriber's property (e.g.
router, DSU/CSU).
DATA SERVICE UNIT/CHANNEL
SERVICE
UNIT ("DSU/CSU") A type of CPE that adapts the physical
interface of data terminal equipment (such as a
router) to the physical interface requirement
of a digital WAN service.
DEMARC see Service Demarcation.
FRAME RELAY A communications protocol using variable-length
packets of data to transport data from a
subscriber location to the provider network.
FRAME RELAY ACCESS DEVICE
("FRAD") A type of CPE that is predominantly used to
connect mainframe, host-centric computing
environments over a Frame Relay WAN.
INTERNET Originally, a government-funded initiative to
interconnect networks from a variety of
scientific and educational institutions. More
recently, a publicly available network
interconnecting scientific, educational,
government, and commercial institutions as well
as individuals.
INTERNET PROTOCOL ("IP") A communications protocol widely used to enable
computer-to-computer communication for
distributed computing applications.
INTEGRATED SERVICES DIGITAL
NETWORK ("ISDN") A time division multiplexed WAN service that
allows for circuits to be established or broken
down on demand.
LOCAL AREA NETWORK ("LAN") A data communications network that connects a
variety of data devices in the same location to
enable the exchange and sharing of files,
applications, and other services.
LEASED LINE A time division multiplexed WAN service that
dedicates fixed bandwidth between two
subscriber locations.
MULTIPLEXER A type of network equipment that aggregates
multiple low-speed inputs onto a high speed
output.
MANAGEMENT INFORMATION BASE
("MIB") A structured approach to storing network
management information within network
equipment.
NETWORK OPERATIONS CENTER
("NOC") A control center from which network operators
run a network, typically engaging in
performance monitoring and troubleshooting.
PROTOCOL ANALYZER A diagnostic instrument that evaluates network
traffic by monitoring and analyzing the
conditions of the underlying communications
protocols.
G-1
<PAGE> 79
OPERATIONAL SUPPORT SYSTEM
("OSS") The software systems used by providers to
provision, maintain and administer their WAN
services.
ROUTER The prevalent type of CPE used to interconnect
LANs.
SERVICE DEMARCATION ("DEMARC") The point at which a subscriber's CPE connects
to a provider's WAN service.
STATISTICAL MULTIPLEXING A technique for combining multiple traffic
streams dynamically based on the activity of
each traffic stream.
SIMPLE NETWORK MANAGEMENT
PROTOCOL ("SNMP") A communications protocol used to transfer
network management information.
SWITCHED MULTIMEGABIT DATA
SERVICE ("SMDS") A communications protocol using fixed-length
packets of data to transport voice, data, and
video traffic across WANs.
TIME DIVISION MULTIPLEXING
("TDM") A technique for combining multiple traffic
streams by allocating a fixed amount of
bandwidth for each traffic stream.
VIRTUAL PRIVATE NETWORK
("VPN") A network used for intra-enterprise
communications over the Internet but
characterized by robust security.
WIDE AREA NETWORK ("WAN") A network used to connect geographically
dispersed computing locations.
X.25 A communications protocol using variable-length
packets of data to transport data from a
subscriber location to the provider network.
G-2
<PAGE> 80
------------------------------------------------------
------------------------------------------------------
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................ 48
Description of Capital Stock.......... 50
Shares Eligible for Future Sale....... 52
Legal Matters......................... 53
Experts............................... 53
Other Matters......................... 53
Additional Information................ 53
Index to Financial Statements......... F-1
Underwriting.......................... U-1
Glossary.............................. G-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 NETWORKS LOGO]
------------------------
GOLDMAN, SACHS & CO.
DEUTSCHE MORGAN GRENFELL
WESSELS, ARNOLD & HENDERSON
REPRESENTATIVES OF THE UNDERWRITERS
------------------------------------------------------
------------------------------------------------------
<PAGE> 81
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> 82
(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 December 31, 1997, the Registrant sold an
aggregate of 120,200 shares of Common Stock at purchase price ranging from
$.07 to $7.00 per share, for an aggregate consideration of $21,994 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* Amended and Restated 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> 83
<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.
10.18 Loan and Security Agreement dated January 8, 1998, by and between Silicon
Valley Bank and the Company.
10.18.1 Revolving Promissory Note issued by the Company as of January 8, 1998, to
Silicon Valley Bank.
11.1 Statement of computation of loss per share.
16.1 Letter regarding change in certified accountants.
23.1* Consent of Arthur Andersen LLP., dated February 4, 1998.
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>
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- --------- ------------------------------------------------------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>
- ---------------
+ Portions of this Exhibit were omitted and have been filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Act, filed on December
22, 1997, January 28, 1998 and February 4, 1998.
* Filed herewith. All other exhibits previously filed.
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.
II-3
<PAGE> 84
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 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> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment to 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 February, 1998.
VISUAL NETWORKS, INC.
By: /s/ SCOTT E. STOUFFER
------------------------------------
Scott E. Stouffer
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to 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 February 4, 1998
- ---------------------------------------- Officer and Director
SCOTT E. STOUFFER (Principal Executive Officer)
* Executive Vice President, February 4, 1998
- ---------------------------------------- Chief Financial Officer
PETER J. MINIHANE and Treasurer
(Principal Accounting
and Financial Officer)
* Director February 4, 1998
- ----------------------------------------
GRANT G. BEHRMAN
* Director February 4, 1998
- ----------------------------------------
MARC F. BENSON
* Director February 4, 1998
- ----------------------------------------
THEODORE R. JOSEPH
* Director February 4, 1998
- ----------------------------------------
TED H. MCCOURTNEY
* Director February 4, 1998
- ----------------------------------------
THOMAS A. SMITH
* Director February 4, 1998
- ----------------------------------------
WILLIAM J. SMITH
* /s/ EDWIN M. MARTIN, JR.
- ----------------------------------------
EDWIN M. MARTIN, JR.
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE> 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the 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)
included in this registration statement and have issued our report thereon dated
January 9, 1998. 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
Washington, D.C.
January 9, 1998
S-1
<PAGE> 87
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, 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
For the year ended December 31, 1997,
Deducted from assets accounts:
Allowance for doubtful accounts.............. 250 142 -- 392
</TABLE>
S-2
<PAGE> 88
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* Amended and Restated 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> 89
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
10.18 Loan and Security Agreement dated January 8, 1998, by and between Silicon
Valley Bank and the Company.
10.18.1 Revolving Promissory Note issued by the Company as of January 8, 1998, to
Silicon Valley Bank.
11.1 Statement of computation of loss per share.
16.1 Letter regarding change in certified accountants.
23.1* Consent of Arthur Andersen LLP., dated February 4, 1998.
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>
- ---------------
+ Portions of this Exhibit were omitted and have been filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Act, filed on December
22, 1997, January 28, 1998 and February 4, 1998.
* Filed herewith. All other exhibits previously filed.
<PAGE> 1
EXHIBIT 10.3
VISUAL NETWORKS, INC.
AMENDED AND RESTATED
1997 DIRECTORS' STOCK OPTION PLAN
1. PURPOSE.
The purpose of this Amended and Restated 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 ("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"), 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 be calculated as follows:
(i) for options granted at the Company's public offering, the option exercise
price shall equal the initial public offering price; (ii) for all other grants,
the option exercise price 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
-2-
<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.
-3-
<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
-4-
<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.
-5-
<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.
-6-
<PAGE> 1
EXHIBIT 10.5
RESELLER/INTEGRATION AGREEMENT
This Agreement is entered into as of August 29,1997 ("Effective
Date") by and between Visual Networks, Inc. with offices at 2092 Gaither Road,
Rockville, MD 20850 ("Systems Provider") and MCI Telecommunication Corporation
with offices at Six Concourse Parkway, Atlanta, GA 30328 ("MCI").
Whereas, Systems Provider is in the business of providing information
technology Products to its customers and MCI is in the business of, among other
things, providing systems integration, network management, technology
deployment, and outsourcing Services to its clients;
Whereas, both parties desire to profitably expand their business;
Whereas, MCI desires to propose, bid and deliver Systems Provider's
information technology Products, when it deems appropriate, as part of its
integrated business solutions or to purchase such Products for its own use.
Now, therefore, in consideration of the premises and mutual agreements
contained herein, the parties agree as follows:
1. DEFINITIONS
1.1 The term "Agreement" includes these Terms and Conditions; all
specifications, drawings, documents and addendum made a part of this Agreement,
or incorporated herein by reference; and any amendments to this Agreement.
1.2 The term "Affiliates" of MCI as hereinafter defined may elect to
purchase Products from Systems Provider under this Agreement by such Affiliate
issuing its own purchase order to Systems Provider. As used herein,
"Affiliate" of a named party or other entity shall mean a corporation,
partnership, joint venture or other entity controlling, controlled by or under
common control with such party or other entity. The dollar value of purchases
by Affiliates shall be included in the aggregate volume of Product purchases.
The Affiliate will have primary responsibility for charges incurred in
connection with such purchase order. A list of participating Affiliates as set
forth in Exhibit "C" will be provided by MCI to Systems Provider upon the
signing of this Agreement, and will be updated whenever a change is made. Any
Affiliate included on the list shall be deemed to have agreed in writing to be
bound by all the terms and conditions of the Agreement before Systems Provider
can accept any order(s) from an approved Affiliate under this Agreement. An
Affiliate shall be separately and legally bound by the terms and conditions of
this Agreement, and shall not in any way bind MCI.
1.3 The term "ASE" means Analysis Service Element.
1.4 The term "CPE" means Customer Premise Equipment.
1.5 The term "Delivery" means the receipt of the Product pursuant to the
terms and conditions of this Agreement by Systems Provider at the MCI
designated site, at the time(s) and place(s) specified in the Article of this
Agreement entitled "Delivery".
1.6 The term "DATANOC" shall mean Data Network Operation Center.
1.7 The term "Integrated Business Solutions" shall mean computing and
telecommunications systems installed by MCI consisting of some or all of
hardware and software Products manufactured by Systems Provider and/or other
suppliers, and associated project management, systems design, application
development, systems integration, network management, data center management,
systems support and/or maintenance Services.
1.8 The term "MSNOC" shall mean the Managed Service Network Operations
Center.
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1.9 "Net Revenues" shall mean revenues accruing to a customer of MCI from
sale or licensing of Products, excluding maintenance, consulting fees, and
rebates, and after any discounts on Products.
1.10 The term "Non-Standard Product" shall mean all Products as referenced
in Exhibit B, except for "Standard Products" as defined in article 1.18.
1.11 The term "PAM" shall mean Performance Archive Manager.
1.12 The term "Patent" means patents for inventions and similar forms of
statutory protection, domestic or foreign, such as utility models and
registered designs.
1.13 The term "Products" are all Products and maintenance Services
described in Exhibits A and B, and the related documentation, including updates
and modifications thereto as may be made generally available by Systems
Provider to its customers during the term hereof.
1.14 The term "Purchase Order" shall mean the standard purchase order form
as utilized from time to time by MCI, or an MCI Affiliate, as applicable, which
has been properly signed by a representative of the procurement function of the
purchasing entity authorized to execute such purchase order on behalf of the
entity and shall include all exhibits and attachments incorporated as part of
the purchase order. The term "Purchase Order" shall further include change
orders thereto and delivery orders.
1.15 The term "SDAR" shall mean the Strategic Data Account Representative.
1.16 The term "Services" shall mean the associate maintenance and warranty
services to be provided in support of any hardware and software Products
purchased under this Agreement
1.17 The term "Software" shall mean the Software Products and related
documentation, and any and all updates, modifications and enhancements thereto
furnished by Systems Provider.
1.18 The term "Standard Product" shall mean a csu/dsu, which includes an
ethernet interface as described in the attached Products, and Services exhibit.
1.19 The term "Territory" means the territories of North America, the
United States, and Canada.
1.20 The term "Work" shall mean the services that will be delivered by
Systems Provider or its sub-contractors.
1.21 The term "VTAC" shall mean Visual Technical Assistance Center.
2. ORGANIZATION
2.1 Each party shall appoint a Relationship Director and Technology
Expert. The Relationship Director and Technology Expert may be changed from
time to time at the appointing party's discretion. As of the Effective Date of
this Agreement, Systems Provider' Relationship Director is Ernie Stockton_and
MCI's Relationship Director is Jimmy Davis. As of the Effective Date of this
Agreement, MCI's Technology Expert shall be determined sixty days (60) after
the execution date of this Agreement. Systems Provider's Technology Expert is
Peter Luff.
2.2 Subject to appropriate security provisions and restrictions on use for
solicitation, in order to facilitate communication each Relationship Director
and Technology Expert shall provide their Internet address and allow to be
publicized within the other party.
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3. MARKETING AND SALES EFFORTS
3.1 Subject to client confidentiality considerations, each party may
identify prospects for the sale of the other party's Products and Services.
Upon notification by one party to the other of such an opportunity and the
provision of information adequate to assess such opportunity, the other will
use all commercially reasonable efforts to respond within five business days
regarding its intent. Any such opportunities will be considered the disclosing
party's confidential information. A standard teaming agreement to be developed
may be used on such opportunities if the requirements for Systems Provider's
pre-sales support go beyond that normally provided under this Agreement per
Section 7.1.
3.2 Each party shall develop standard descriptions of itself and of its
Products and Services for inclusion in the other party's sales material as
deemed appropriate by the other party, including responses to Request For
Information (RFI's) and Request For Proposal (RFP's).
3.3 MCI and Systems Provider will work to develop a marketing plan within
sixty (60) days from the execution of this Agreement which will include
announcements, press releases, training program efforts for internal MCI
technical consultants and SDAR's, and branch rollouts to include technical
consultant's and SDAR's and sales personnel
3.4 Upon execution of the Agreement, ***cities will be selected and
mutually agreed upon by both parties to serve as the initial Product launch
cities, with a mutually agreed upon press release to be issued thereafter by
both parties. The Product rollout will be predicated on the acceptance of
System Providers products within the CPE catalogue. System's Provider will
establish a fund to support all related expenses incurred by MCI up to ***
related to the initial Product launch and associated roadshow. These will
include, but will not be limited to, expenses incurred for travel and marketing
accommodations while traveling in support of the marketing of System Providers
Products.
3.5 Systems Provider will establish a mutually agreed upon pool of funds
for MCI to support marketing activities in support of System Providers Products
3.6 Systems Provider, at its expense, will provide funding for the testing
of Systems Providers Products within the MCI Labs at a not to exceed amount of
*** per Product.
4. INFORMATION EXCHANGE
4.1 Systems Provider will regularly inform MCI, with the coordination of
MCI's Technology Expert, of Systems Provider's product direction and will
solicit MCI's views on the appropriateness of that direction. Any direction
taken by Systems Provider based upon such direction shall be entirely at
Systems Provider's discretion. Such a preview will be provided not less than
twice each year.
4.2 Systems Provider may provide, at its discretion, MCI's Technology
Expert with Systems Provider's evaluations of products competitive to Products
including benchmarks. Unless express written permission is granted, MCI will
not copy such evaluations nor permit the evaluations to be distributed or
circulated within or external to MCI.
4.3 Subject to client ownership and/or confidentiality requirements, MCI
will use reasonable efforts to keep Systems Provider informed as to problems
encountered and resolutions developed and to communicate to Systems Provider
any and all material modifications, design changes or improvements to the
Products suggested by any customer, or any employee or agent of MCI. Systems
Provider's may use all such information without obligation of
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Securities and Exchange Commission.
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any nature to MCI. Systems Providers use of such information shall be at its
own risk. Not withstanding the foregoing, MCI may from time to time, develop
tools, including software, that are complementary to Products; such tools
shall, as between Systems Provider and MCI, remain the exclusive property of
and in the sole possession of MCI.
4.4 Systems Provider will provide telephone support to counsel and advise
MCI's Technology Expert on the use and maintenance of the Products at no charge
to MCI. MCI's Technology Expert will act as the contact with Systems Provider
for purposes of coordination and provision of support under this Agreement.
All requests for support shall be made through the Technology Expert.
4.5 Systems Provider will give MCI's Technology Expert access at no charge
(except for network charges, which shall be the responsibility of MCI) to
Systems Provider's bulletin board of Products' defects and fixes when this is
available. This access will be at least equivalent to that given to Systems
Provider's field engineering force. MCI may provide such fixes to its clients
where the clients have current maintenance agreements with Systems Provider.
4.6 Systems Provider shall provide MCI with one copy of the then current
generally available technical documentation for the Products. MCI shall have
the right to copy such documentation for internal use only. When requested by
MCI, Systems Provider shall provide *** copy of its documentation in
electronic form for internal use by MCI on MCI's internal electronic bulletin
board at *** to MCI; MCI may make such copies as it requires for such purpose
at no charge.
4.7 The Relationship Director of each party shall broadly distribute
within their company an announcement of the intent and features of this
Agreement. This announcement will be made within two (2) months of the
Effective Date of this Agreement.
5. TRAINING
5.1 MCI's Relationship Director or assignee may receive the same technical
training received by Systems Provider's field sales force at no cost to MCI
other than the transportation and living costs associated with the attendance
of MCI personnel at such training.
5.2 Systems Provider will provide at *** to MCI, *** full days of training
to MCI's DATANOC and MSNOC located in Cary, North Carolina. This will include,
but is not limited to *** days of operations training to MCI's DATANOC and
MSNOC and *** days of training on the PAMS and System Providers Software to
three (3) representatives of the DATANOC and MSNOC. This will also include ***
days of follow-up training at a date to be mutually agreed upon by both
parties. Systems Provider will also include *** days of training that will be
specifically developed for the needs of either the DATANOC or the MSNOC..
5.3 Systems Provider will provide, at ***, *** days of training for
representatives of MCI's SDAR organization. This will consist of pre-sales
training and will be provided at a location specified by MCI. If requested by
MCI, Systems Provider will split the training into a one-(1) day session at
field locations agreed to by both Systems Provider and MCI.
5.4 Systems Provider agrees to provide *** days of training to the Network
Services Organization. This training will consist of an overview of the ASE
units and installation procedures.
5.5 Systems Provider's self-study material on the Products, if any, shall
be made available to MCI personnel within a reasonable period of time. Request
from MCI personnel for use of such material shall be channeled
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*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
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through MCI's Relationship Director.
5.6 If Systems Provider certifies personnel in the use of its Products,
Systems Provider shall permit MCI personnel to take tests for such
certification at no charge to MCI, other than travel, to the testing locations.
The opportunity to take such tests shall not be contingent upon the completion
of Systems Provider courses.
6. APPOINTMENT OF RESELLER STATUS
6.1 During the term of the Agreement, MCI shall have a non-exclusive
right to resell the Products and Services in the Territory specified in this
agreement. Systems Provider hereby appoints MCI a non-exclusive reseller of
Systems Provider Products directly to end users within the specified Territory,
and MCI hereby accepts such appointment. MCI understands that it will be
deemed a material breach of this Agreement should Systems Provider discover
that MCI has resold Products outside of the Territory and that Systems Provider
may terminate the Agreement in accordance with Section 18 of this Agreement.
6.2 Systems Provider shall represent that MCI is qualified to use Systems
Provider's Products in the development of Integrated Business Solutions. Such
representation may not be exclusive and shall not constitute a warranty of
MCI's performance.
7. PRE AND POST SALES SUPPORT
7.1 MCI shall provide pre and post-sales support to its customers
regarding all aspects of the Products available through this Agreement.
7.2 MCI's Technology Expert or other MCI qualified personnel for the
Products shall provide pre-sales and technical support to MCI personnel
regarding all aspects of the Products available through this Agreement.
7.3 Systems Provider shall provide support to MCI's post-sales support
team if the post-sales support team, in working with a customer, diagnoses a
problem with the Products.
7.4 Upon receipt of an order for *** sites or more, MCI's Technology
Expert and pre and post-sales support personnel may gain the assistance of the
Systems Provider technical assistance center (VTAC) by telephone for six months
following thereafter. VTAC personnel will participate with MCI in delivering
technical assistance. After six months MCI support personnel will be
self-sufficient in providing pre and post-sales support.
7.5 No more than *** MCI project interface personnel, including MCI's
Technology Expert, may be authorized to request assistance from the VTAC. MCI
will provide Systems Provider with a written list of those persons who are
authorized to contact the VTAC on behalf of MCI. MCI may make substitutions to
the list at any time by communicating this in writing to Systems Provider.
7.6 Systems Provider will provide proposal support to MCI by supplying
appropriate boilerplate material and telephone support to answer technical
questions. MCI shall identify a point of contact that acts as the focal point
for Systems Provider proposal material in support of MCI proposal teams.
7.7 MCI is responsible for delivering software upgrades to its customers.
Systems Provider will provide to MCI at no additional cost, a "master" copy of
the latest Software release. It is MCI's responsibility to replicate this
Software and distribute to its customers. MCI may provide a customer address
list and have Systems Provider perform this service for an agreed upon charge
as referenced in Exhibit B of this Agreement.
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Securities and Exchange Commission.
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7.8 At its discretion, MCI may assist its clients in arranging for Systems
Provider or third parties to provide post-sales technical support services for
Products sold to its customers. Such services may include system
certification, installation, maintenance and training. Nothing herein shall be
construed as precluding MCI from providing services of any nature to its
clients, including, without limitation, services regarding the Products.
7.9 Systems Provider shall provide maintenance Services for the Products
as set forth on Exhibit A, attached hereto and incorporated herein.
8. PRODUCT LOANS
8.1 Systems Provider will provide up to *** demonstration sets, consisting
of *** ASE's and the applicable Software, along with upgrades to those Products
to selected MCI operating locations, including MCI's Technology Competence
Centers, for MCI's use in developing client prototypes of Integrated Business
Solutions, at either MCI or client sites at *** to MCI. As Systems Provider
provides the above demonstration sets to MCI, MCI will provide the necessary pc
hardware in conjunction with these samples. Subject to client-confidentiality
considerations, MCI will discuss with Systems Provider the nature of the
business opportunity and the revenue potential, if any, for Systems Provider.
The parties shall execute a mutually agreeable loan agreement. At Systems
Provider's request, MCI shall be responsible for distributing the loaned
Products to the MCI operating locations and for duplicating any software to be
distributed.
8.2 MCI may use the loaned Products for comparative analyses with other
products, but not in conjunction with or on behalf of a provider of products
competitive to System Providers Products. At Systems Provider's request, MCI
shall allow Systems Provider to review and comment upon any such comparative
analyses that are intended for general publication outside of MCI in either
print or other durable formats.
8.3 MCI will be given the opportunity to act as a beta site for selected
Systems Provider's Products. A mutually agreeable Beta Site agreement will be
separately signed for each such Product.
8.4 Systems Provider may from time to time develop software, videotapes,
presentation scripts, and other materials to demonstrate the features and
functions of the Products. Systems Provider shall provide such materials to
MCI upon request for use by MCI in training or in the sales and marketing of
Integrated Business Solutions.
8.5 Systems Provider may, from time to time, develop application software
to assist its field sales and engineering personnel in the modeling,
configuration and testing of Products. Such software may be operated on
workstations or accessed remotely while running on a mainframe or
mini-computer. Systems Provider shall make such software available for use by
appropriately trained MCI personnel at no charge.
9. PRODUCTS AND PRICE
9.1 MCI may purchase the Products at the prices and discounts set forth on
Exhibit "B", attached hereto and incorporated herein.
9.2 When requested by MCI, Systems Provider shall provide a quote for the
Products to be included in a proposed Integrated Business Solution. Such quote
shall be valid for the mutually agreed period of the proposal and shall only be
withdrawn if the project is awarded to someone other than MCI or the project is
cancelled.
9.3 MCI will supply Products directly to end-users or to MCI's prime
contractor if MCI is a subcontractor. MCI will not sell Products to any
customer for the purpose of further resale by such customer unless such
customer is MCI's prime contractor for the development of an Integrated
Business Solution. The price charged by MCI to any customer for the Products
shall be solely within the discretion of MCI.
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*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
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9.4 The prices and discounts referenced in Section 9.1 shall also apply to
purchases for internal use by MCI. Support required from Systems Provider for
internal purchases, including post-sales technical support, shall be provided
at Systems Provider's then prevailing rates.
9.5 The prices and discounts referenced in section 9.1 shall also apply to
purchases by MCI for use under MCI's outsourcing contracts. Characteristically
MCI, and not the end-user, would be the licensees or owners of the Products.
For the purposes of this Agreement the outsourcing transactions will be treated
as similar to sales and delivery of Integrated Business Solutions for
end-users.
9.6 Unless otherwise agreed, all prices quoted are payable in U.S. funds
and shall be exclusive of taxes (including without limitation any added value,
use, sales, or similar tax). Unless MCI has provided an approved tax exemption
certificate proving exception status, MCI shall pay any and all such taxes and
shall hold Systems Provider harmless therefrom, provided that if Systems
Provider at its sole discretion, chooses to make any such payment, MCI shall
reimburse Systems Provider in full. All transactions pursuant to this
Agreement shall be considered taxable unless MCI provides Systems Provider with
appropriate verification of exemption as stated herein in this Article. All
prices quoted shall likewise be exclusive of any import duties imposed by the
country of final destination upon shipments from Systems Provider to MCI.
9.7 Systems Provider represents and warrants that the prices set forth in
Exhibit B shall be no higher than the current Systems Provider price to any
other customer for the same quantity of Products purchased over a similar
period of time and under like conditions. Systems Provider further agrees that
in the event prices for the same quantity for such Products under like
conditions are lowered, Systems Provider shall notify MCI in writing of the new
prices and Exhibit B shall be adjusted by written amendment.
9.8. Systems Provider may sell to MCI at prices lower than those cited
herein on a case-by-case basis, and such sales shall not have the effect of
lowering the prices generally offered under this Agreement. Systems Provider
shall notify MCI in writing and the prices for special cases shall be adjusted
by written amendment to this Agreement.
9.9 Each party shall prepare and maintain, at its expense, complete and
accurate books and records documenting financial transactions. Under this
Agreement such books and records shall be maintained for a period of three (3)
years after the date of termination or expiration of this agreement.
9.10 During the initial term and any subsequent renewal periods, and for a
period of *** years after the termination or expiration of this Agreement, each
party shall have the right, at its expense and upon reasonable notice to the
other party, to examine or have examined by its authorized representatives the
Purchase Orders, Packing Slips, and Invoices on record as related to this
Agreement.
10. PAYMENT TERMS AND CONDITIONS OF SALE
10.1 All orders by MCI require a written Purchase Order or similar
documentation and are subject to acceptance and acknowledgment by Systems
Provider. Systems Provider acknowledges that any Purchase Orders received from
MCI shall be null and void unless issued by an MCI Procurement Department
representative. During the term of this Agreement, except where such
provisions are expressly agreed to, the terms and conditions of this Agreement
shall supersede all different or conflicting terms on MCI's Purchase Orders or
on Systems Provider's order acknowledgment forms. Systems Provider will
provide MCI with notice of acceptance or rejection of purchase order within ***
business days of receipt of the purchase order by Systems Provider. At the time
of acceptance of the order Systems Provider shall also accept MCI's requested
delivery date where the date complies with the delivery schedule commitments
described in section 12.1 of this Agreement, or propose a different delivery
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Securities and Exchange Commission.
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date to MCI; if Systems Provider proposes a different delivery date, the
parties shall agree on the delivery date before the order is deemed accepted.
If no notice of rejection is received within *** business days then the
Purchase Order will be deemed accepted.
10.2 Each Purchase Order shall specify the Services and/or Products to be
delivered, and/or will include quantity, price, delivery date, destination, and
other pertinent details. All Products shipped by Systems Provider to the site
designated by MCI on the applicable Purchase Order will be F.O.B destination
with shipping pre-paid by Supplier and added to the invoice. Title and risk of
loss will transfer once Products have reached its designated destination
10.3 Systems Provider shall comply with MCI bar coding requirements, which
include the following documents:
MCI Telecommunications Corporation bar code label
specification equipment labels, issue 4, dated November
15, 1991
MCI requirements for bar code labeling of shipping containers
and product packaging, dated November 15, 1991
TCIG shipping and receiving transaction bar code label
specification, issue 2, dated December 5, 1989.
Details of these guidelines will be provided to Systems Provider by MCI at a
later date.
10.4 In the event of any conflict as to the terms and conditions between
the pre-printed terms of the Purchase Order and this Agreement, this Agreement
shall take precedence.
10.5 Terms of payment are *** discount for payment within *** days of the
Product delivery date, otherwise payment in full within *** days after the
Product delivery date. In no event shall MCI be required to submit payment for
any Products prior to delivery and acceptance of the same. On the anniversary
date of the Agreement, both parties will review and evaluate the above
mentioned payment terms, and if necessary shall adjust accordingly and upon
mutual agreement between both parties.
10.6 Delivery will be F.O.B. Destination. Systems Provider shall ship the
ordered Products to such locations as MCI shall indicate on its ordering
documentation. Unless specifically authorized by MCI, Systems Provider shall
not ship partial orders to MCI. MCI will be responsible for the payment of all
shipping charges as referenced on the final invoice unless mutually agreed to
otherwise by both parties. All shipments will be made Federal Express, two-day
air using the MCI corporate Federal Express number, once it is supplied to
Systems Provider for this purpose.
10.7 MCI has a period of thirty (30) days after receipt of the Product
within which to notify Systems Provider in writing of any discrepancies between
the Products shipped and the applicable Purchase Order. No payment will be due
to Systems Provider by MCI until such discrepancies are resolved to the
satisfaction of both parties.
10.8 Shipments of Products scheduled under this Agreement may be deferred
or cancelled by MCI upon written notice to Systems Provider. In the event MCI
requests cancellation of any order for Standard Products within *** days of a
scheduled shipment date and Systems Provider accepts such cancellation, MCI
will pay to Systems Provider a cancellation charge as follows:
No. of Days Written
Notice Received Prior to Percentage of Order
Scheduled Shipment Date Price Due
----------------------- ---------
*** or more days: ***%
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*** days: ***%
*** days: ***%
11. PRICE CHANGES
11.1 All Products whose price has been "increased or decreased" will be
"price protected" under this paragraph if the following conditions are met:
11.1.1 Products are in MCI's stock or are in transit on the
effective date of the price decrease, are unopened and were
shipped to MCI *** days prior to the effective date of price
decrease.
11.1.2 1 Products are in MCI's stock or are in transit on
the effective date of the price increase, are unopened and
were shipped to MCI *** days prior to the effective date of
price increase
12. DELIVERY AND EXPORT
12.1 If Purchase Orders are received specifying shipment dates of less than
*** days on Standard Product, up to *** units per Purchase Order, and *** days
on Non-Standard Products, up to *** units per Purchase Order, Systems Provider
will use best efforts to meet such dates and may apply an expedite charge to
Purchase Orders requiring fulfillment in less than *** business days. Except as
provided above, if Systems Provider deliveries fail to meet the committed
schedule, MCI, without limiting its other rights or remedies as specified
herein, may reserve the right to reschedule the delivery of the Products,
direct expedited routing with Systems Provider paying for any excess costs
incurred thereby, or cancel the order in its entirety. MCI shall not be liable
for Systems Provider commitments or production arrangements in excess of the
amount, or in advance of the time, necessary to meet MCI's delivery schedule.
Products which Systems Provider delivers more than *** days in advance of
schedule may, at MCI's option, either (a) be returned at Systems Provider
expense for proper delivery, (b) have payment therefore, withheld by MCI until
the date that Products are actually scheduled for delivery or (c) be placed in
storage on Systems Provider account until the delivery date specified herein.
MCI may delay, at no cost to MCI, the delivery and invoicing of Products or
Services for a period of up to *** days; provided, however, that MCI notifies
Systems Provider at least *** days prior to the scheduled delivery date.
Delay(s) beyond *** days shall be deemed a change in accordance with the
Article of this Agreement entitled "Changes".
12.2 Systems Provider shall convey good title, free from any claim or
encumbrance, to MCI for all Products delivered under this Agreement. Title to
all such Products shall pass to MCI at the shipping point. Any loss or damage
to such items prior to passing of title shall be at Systems Provider risk.
12.3 MCI shall not export to or use Products in any country if (a) the
export of any such Product to such country is prohibited by the laws of the
United States; or (b) the import of any such Product into such country is
prohibited by the laws of such country; (c) MCI does not possess the proper
import certificate(s) required by the laws of such country for the lawful
importation of any such Product; or (d) if Systems Provider has previously
notified MCI that export of any such Product to such country is prohibited by
restrictions contained in contracts between Systems Provider and any Systems
Provider authorized reseller located in any such country.
12.4 After receipt of Products at the designated site as referenced on the
MCI Purchase Order, MCI shall promptly inspect the Products received. Within
ten (10) days days after such inspection, MCI shall notify Systems Provider in
writing of those damaged items or the incomplete shipment of the Products,
which could include but is not limited to, cables, power supplies,
documentation, and software. Remedy of damaged items or incomplete shipments
shall be made within twenty (20) days by Systems Provider at its expense, which
shall include all related costs for repair or replacement of the rejected
item(s) in accordance with Article 14, WARRANTIES AND
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INDEMNIFICATIONS, and all applicable shipping charges.
12.5 If Systems Provider fails to remedy any such damaged item(s), MCI may
elect either (i )to have any or all such damaged item(s) remedied through other
means as stated in Article 14.3, in which event Systems Provider shall pay the
reasonable costs of so remedying such damaged item(s).
13. REPORTS & AUDITS
13.1 Each quarter & year MCI shall provide Systems Provider a forecast of
its total dollar purchases from Systems Provider, including purchases for
internal use by MCI and by MCI's customer's. Forecasts shall be submitted to
Systems Provider's Relationship Director. Forecasts are non-binding and are
for planning purposes only.
13.2 Systems Provider shall submit monthly, a detailed report of all
purchases under this Agreement. Report shall include, but will not be limited
to, equipment purchased by Product and the associated stocking number,
cancellations, Purchase Order number, price invoiced, and delivery date.
Report is due to MCI within 15 days of reporting month and shall be in
Microsoft Excel format; version 6.0.
14. WARRANTIES AND INDEMNIFICATIONS
14.1 Systems Provider warrants that MCI end users shall acquire good title
to the hardware Products purchased under the terms of this Agreement free and
clear of all liens and encumbrances and that all hardware Products provided
hereunder with the exception of third party equipment, will be free from
defects in material and workmanship for a period of five (5) years under normal
operating conditions from the date of delivery to the end user. This warranty
will apply to all repaired or replaced Products for the unexpired period of the
original warranty or for ninety (90) days following delivery of the Product to
end user, whichever is longer. Systems Provider understands Products are
intended for standard commercial uses.
14.2 Systems Provider warrants that the diskette(s) on which the software
is provided will be free from defects in materials and workmanship under normal
use for a period of ninety (90) days from delivery to end user. Systems
Provider warrants that the Products will materially conform to the
specifications set forth in the relevant Product documentation then in effect,
when used without modification and in accordance with the then current user
documentation. Systems Provider assumes no responsibility for selection of the
Software to achieve the end user's intended results nor for the installation,
use and results obtained from the Software. Systems Provider does not warrant
a) that the functions contained in the Software will meet the end user's
requirements, b) that the Software will operate in the hardware or software
combinations that the end user may select, c) that the operation of the
Software will be uninterrupted or error free, or d) that all defects in the
operation of the Software will be corrected.
14.3 Should a hardware or Software Product fail within this warranty
period, Systems Provider will replace the defective Product when it is returned
to Systems Provider, shipping prepaid. Replacement Products may be refurbished
or contain refurbished materials. If Systems Provider, by its sole
determination, is unable to replace the defective Product, it will refund the
purchase price of the Product. Proof of date of delivery of the returned
Product is required.
14.4 This warranty does not apply if the Product fails or is damaged after
delivery due to shipment, handling, storage, abuse or misuse, has been used or
maintained in a manner not conforming to applicable Product manual
instructions, or modified in any way, or has any serial number removed or
defaced. Repair by anyone other than Systems Provider or an approved agent
will void this warranty.
14.5 THE WARRANTIES AND REMEDIES STATED ABOVE IN ARTICLE 14.1 THROUGH 14.4,
ARE EXCLUSIVE AND IN LIEU OF ALL OTHERS, ORAL OR WRITTEN, EXPRESS OR IMPLIED.
ANY AND
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ALL OTHER WARRANTIES, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, ARE EXPRESSLY EXCLUDED.
14.6 Systems Provider warrants that the Products do not infringe upon the
patent, trademark, copyright or other proprietary interest of any third party
and that it has the right to make the Products available to MCI as provided
herein:
a.) System Provider shall, at its own expense, defend or settle
any suit or proceeding that is instituted against MCI to the extent such suit
or proceeding alleges that any Product sold by System Provider hereunder
infringes any duly issued patent or copyright of the United States or the
Territory and shall pay all damages awarded therein against MCI or agreed upon
in settlement by System Provider; provided that MCI (i) gives System Provider
immediate notice in writing of any such suit, proceeding or threat thereof,
(ii) permits System Provider sole control, through counsel of System Provider's
choice, to defend and/or settle such suit and (iii) gives System Provider all
the needed information, assistance and authority, at System Provider's expense,
to enable System Provider to defend or settle such suit.
b.) The above provision shall not apply to and System Provider
shall have no liability or obligation for any infringement arising from: (a)
any modification, servicing or addition made to the Product by anyone other
than System Provider, (b) the use of such Product as a part of, or in
combination with, any devices, parts or software not provided by System
Provider, (c) compliance with MCI's design requirements or specifications, (d)
the use of other than the then current unaltered release of the software
Product available from System Provider or (e) the use of such Product to
practice any method or process which does not occur wholly within the Product.
The above exclusions apply to the extent that the infringement would have been
avoided but for such modifications, combinations, compliance with
specifications, use of other than the current release or practice of such
method or process.
c.) In the event the use or sale of any Product purchased from
System Provider is enjoined, or in the event System Provider wishes to minimize
its potential liability hereunder, System Provider may, at its sole option and
expense: (i) procure for MCI the right to use or sell such Product; (ii)
substitute a functionally equivalent, non-infringing unit of the Product; (iii)
modify such Product so that it no longer infringes but is substantially
equivalent in functionality; or (iv) if none of the foregoing are commercially
feasible, take back such Product and refund the purchase price paid by MCI for
such Product depreciated over a three (3) year period using the straight line
method. System Provider shall in no event be obligated to accept new orders
for Products, which are subject to a claim of infringement covered under this
Section.
d.) THIS SECTION STATES SYSTEM PROVIDER'S TOTAL RESPONSIBILITY AND
LIABILITY, AND MCI's SOLE REMEDY, FOR ANY ACTUAL OR ALLEGED INFRINGEMENT OF ANY
INTELLECTUAL PROPERTY RIGHT FOR ANY PRODUCTS DELIVERED HEREUNDER OR ANY PART
THEREOF AND IS IN LIEU OF AND REPLACES ANY AND ALL OTHER EXPRESS, IMPLIED OR
STATUTORY WARRANTIES OR CONDITIONS REGARDING INFRINGEMENT.
14.7 Systems Provider agrees to indemnify MCI, MCI's customers, or any such
party to whom MCI distributes Products hereunder against any claim that the
Products (or any Product) infringe, any patent, copyright, trademark or other
proprietary right, provided that MCI or its customers (1) give Systems Provider
prompt written notice of any claim, (2) grant Systems Provider control of the
defense and settlement of such claim, and (3) assist fully in the defense so
long as Systems Provider pays the out-of-pocket expenses. Systems Provider
shall, at its option and expense, (1) procure the right to continue using the
Product, (2) replace or modify the Product so that it becomes non-infringing or
(3) if neither option (1) nor (2) are reasonably practical, accept return of
the product and refund the amount paid for the Product.
14.8 Systems Provider shall have no liability or obligation for any
infringement claim based upon (1) modifications of the Products by parties
other than Systems Provider or use of such modified Product or (2) use of the
Products in combination with materials or Products not supplied or approved by
Systems Provider.
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<PAGE> 12
14.9 THE ABOVE STATES THE ENTIRE LIABILITY OF SYSTEMS PROVIDER AND IS THE
SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO CLAIMS OF INFRINGEMENT OF PROPRIETARY
RIGHTS OF ANY KIND.
14.10 MCI shall not alter or enlarge the representations or guarantees of
the warranty in any way beyond those expressly set forth above. MCI shall hold
harmless and indemnify Systems Provider for any expenses, claims, damages or
liability arising from or related to any unauthorized guarantees, warranties or
representations made by MCI, including without limitation, attorneys' fees. To
receive the foregoing indemnity, Systems Provider must notify MCI in writing of
a claim or suit promptly after its occurrence and provide MCI with reasonable
cooperation and full authority to defend or settle the claim or suit. MCI
shall not indemnify Systems Provider under settlement made without Systems
Provider's written consent.
14.11 Systems Provider shall hold harmless and indemnify MCI for any
expenses, claims, damages or liability arising from or related to any
unauthorized guarantees, warranties or representations made by Systems Provider
about MCI, including without limitation, attorneys' fees. To receive the
foregoing indemnity, MCI must notify Systems Provider in writing of a claim or
suit promptly after its occurrence and provide Systems Provider with reasonable
cooperation and full authority to defend or settle the claim or suit. Systems
Provider shall not indemnify MCI under settlement made without MCI's written
consent.
14.12 Without limiting MCI's obligations under 14.7, Systems Provider agrees
to indemnify and hold MCI and its customers harmless against any third party
claim based upon Systems Provider breach of this Section 14. To receive the
foregoing indemnity, MCI or its customer must notify Systems Provider in
writing of a claim or suit promptly after its occurrence and provide Systems
Provider with reasonable cooperation and full authority to defend or settle the
claim or suit. Systems Provider shall not indemnify MCI or its customer under
settlement made without Systems Provider's written consent.
14.13 Systems Provider agrees to indemnify MCI against any claim arising out
of or resulting from the Products or this Agreement, provided that any such
claim (1) is attributable to bodily injury or death or to injury to or
destruction of physical property and (2) is caused by a negligent act or
omission of Systems Provider. This obligation on the part of Systems Provider
shall exist only if MCI (1) gives Systems Provider prompt written notice of any
such claim, (2) grants Systems Provider control of the defense so long as
Systems Provider pays the out-of-pocket costs. Systems Provider shall have no
liability for any settlement or compromise made without its prior written
consent.
14.14 Systems Provider, at its expense, will maintain adequate insurance
coverage to protect against its liabilities under this Agreement. This
insurance will include (1) worker's compensation insurance, (2) comprehensive
general liability insurance, including coverage for product liability, bodily
injury and property damage,. Upon request, Systems Provider will furnish the
applicable certificate of insurance.
14.15 MCI may at its discretion extend the warranties and indemnification's
given in Sections 14.1, 14.2, 14.3, 14.5, 14.6, 14.7, 14.11, 14.13, and 14.19
to its customers.
14.16 For Products that fail after the warranty period has expired, MCI may
return parts to Systems Provider for replacement after obtaining a Return
Material Authorization ("RMA") number. MCI must provide a Purchase Order for
the replacement part. MCI will be invoiced for the replacement part upon
shipment by Systems Provider.
14.17 Spare parts will be available for a period of five (5) years after the
last date of this Agreement. Spare parts may consist of one part or a set of
parts. In some cases, where Products have been discontinued, the original part
may not be available but a functional, equivalent part or a set of parts would
be substituted for the failed part or a set of parts which includes the failed
part.
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<PAGE> 13
14.18 Upon MCI's request, Systems Provider shall certify that Products
purchased by MCI are new.
14.19 (a) Systems Provider warrants and represents that the Products,
including without limitation all incorporated or related hardware components as
well as all computer code whether in object code, executable, firmware,
microcode or other form, and whether such computer code is resident on or in
the hardware components within the Products or separately licensed by Systems
Provider for use with the Products, will:
(i) provide accurate processing of date and date
dependent data (including, but not limited to, calculating,
comparing and sequencing operations, as well as the
transmitting and receiving of date and date dependent data to,
from and through the Products) for all dates through the year
2100, including without limitation all leap year instances,
and
(ii) express all date and date dependent data passed to,
from or through the Products through the use of fully
complimented 4 digit years in a single field in the format
"CCYY", where "CC" stands for the century and "YY" stands for
the year.
(b) Systems Provider further agrees both that it will within five
(5) business days after MCI's request provide sufficient evidence through
adequate testing of the Products or otherwise to demonstrate compliance with
this warranty, and that the requirements of this warranty shall be part of the
specifications applicable to the Products.
DOCUMENTATION
Systems Provider shall supply MCI with originals of all documentation
available, solely for MCI's internal use, to support and maintain the Products
provided by Systems Provider to MCI under this Agreement, as well as grant a
limited rights license to MCI, at no charge, to reproduce this documentation in
quantities required for its internal. Other documentation which may be
requested pursuant to this Article at the request of MCI shall include:
(a) Installation, Operation and Maintenance (IOM) Manuals
Installation, operation and maintenance manuals, including
packing and unpacking instructions, general descriptions, tables of
specifications, theory of operation, installation procedures,
maintenance procedures, trouble-shooting procedures and parts list.
(b) Engineering Documentation
Non-proprietary specifications, functional descriptions and
operating descriptions.
(c) Acceptance Test Plan/Procedure
This documentation shall be sufficiently comprehensive to
ensure that Products subject to acceptance testing complies with the
requirements of this Agreement. Systems Provider shall develop such
test plans to include at a minimum:
i. Reference to specification
ii. List of the test equipment to be used
iii. Environmental conditions
iv. Initial condition of item being tested, (e.g.
profile, switch position, etc.)
v. Brief description of each test, in the sequence they
are to be performed including a list of parameters
to be measured
vi. Block diagrams of the testing setups
vii. Failure reporting, correction and analysis
requirements
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<PAGE> 14
(d) Factory Test Plan
This plan shall be sufficiently comprehensive to ensure that
upon shipment to MCI, the Products comply in all material respects
with the product specifications of this Agreement.
(e) Quality Assurance Documentation
This document shall describe the quality assurance program of
Systems Provider.
(f) Product Support Documentation
This documentation shall include all the information necessary to
support the continued operation of Products delivered by Systems Provider.
CHANGES TO PURCHASE ORDERS OR PRODUCT
16.1 MCI may request, by written change order or modification, and without
notice to any surety, changes within the general scope of this Agreement in
drawings, designs, specifications, methods of shipment or packaging/packing,
quantities, or time or place of delivery; require additional Work or direct the
omission of Work. In the event, and to the extent that such change modifies
or otherwise alters the scope of any of Systems Provider's obligations under
this Agreement, the Parties shall make best effort to negotiate an equitable
adjustment to the contract price and/or schedule as necessary. Changes to this
Agreement can only be mutually made by the duly authorized representatives of
the Parties.
16.2 Systems Provider shall submit a proposal for the contract adjustment
within thirty (30) days after receipt of written notice from MCI, which MCI
shall either accept or reject within thirty (30) days of receipt. After the
Parties have arrived at an equitable adjustment to the contract price and
schedule, nothing in this Article shall excuse Systems Provider from promptly
proceeding with this Agreement as changed.
16.3 MCI's personnel may from time to time render technical assistance or
give technical advice to, or effect an exchange of information with Systems
Provider personnel concerning the Work to be furnished under this Agreement.
However, Systems Provider shall not deviate from the requirements of this
Agreement by reason of such assistance or exchange of information, unless the
deviation is incorporated into and authorized by a change Purchase Order
issued. Systems Provider shall not, by reason of such assistance, advice or
exchange of information, delete or in any way modify any of MCI's rights or any
of Systems Provider obligations, express or implied, which are a part of this
Agreement.
16.4 Systems Provider may make or incorporate changes not affecting form,
fit, function, interface or interchangeability of the Product.
16.5 In the event certain changes become mandatory by reason of safety or
failure of the Products to perform in accordance with the requirements of this
Agreement, Systems Provider shall provide written notice to MCI and shall
proceed promptly to make the necessary change(s). Systems Provider shall bear
all costs and expenses relating to such retrofit or replacement of Products,
which are necessary for the Products to conform to the requirements of the
Agreement. Such retrofit or replacement applies only when attempting to
satisfy requirements in existence at the inception of this contract and do not
apply to new requirements, which come into existence at a later date.
16.6 Any mandatory changes to the Products, shall be compatible with all
Products in use (for a minimum of two releases backward) or on order pursuant
to this Agreement unless the Parties otherwise specifically agree. If any
mandatory change is not compatible, upward or downward as described, Systems
Provider, at MCI's option, shall retrofit such change(s) on all affected
installed Products ordered pursuant to this Agreement at no cost to MCI.
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<PAGE> 15
17. SOFTWARE
17.1 Systems Provider grants to MCI a transferable, non-exclusive license
to distribute to end users, or, if MCI is a subcontractor to a prime contractor
for an Integrated Business Solution, to a prime contractor for the purpose of
distributing to an end user, under the terms of this Agreement, the Software.
Notwithstanding any provision hereunder MCI may distribute such Software
electronically. Systems Provider grants directly to the end user a
nonexclusive license as set forth in the End User Software License Agreement,
which accompanies the Software. The license granted by Systems Provider is not
a sale. Systems Provider retains all title and ownership of the Software and
documentation. Systems Provider acknowledges that it is solely responsible for
performing any of its obligations as may be described in the End User License
Agreement and that MCI shall have no obligation to Systems Provider or the end
user under such agreement.
17.2 The Software and documentation are protected under copyright laws.
All copyright notices must be reproduced and included with any copy of any
portion of the Software. MCI shall not translate any portion of the Software
or associated documentation into any other format or language without the prior
written consent of Systems Provider. Except as specifically provided elsewhere
in this Agreement, MCI may not transfer the Software or the licenses granted
herein to any third party. MCI shall not, nor authorize any third party, to
reverse engineer, disassemble, decompile, or otherwise attempt to obtain the
source code for the Software.
17.3 In connection with any proposals to and agreements with government
entities, MCI shall work with Systems Provider to ensure that Systems
Provider's proprietary rights receive the maximum protection available from
such government entity for commercial computer Software developed at private
expense. All software and documentation acquired directly or indirectly by or
on behalf of the United States Government shall be identified and marked by
Systems Provider as being licensed only with restricted rights, subject to the
restrictions set forth in subparagraph (c) (1) of the Commercial Computer
Software-Restricted Rights clause of FAR 52.227-19 or subparagraph (c)(1)(ii)
of the Rights in Technical Data and Computer software clause of DFARS
252.227-7013, whichever applicable.
17.4 In all jurisdictions where an enforceable copyright covering the
computer programs of the Software does not exist, the Software must be
accompanied by a written license agreement, signed by the end user, that is no
less restrictive than the terms of Systems Provider's End User software License
Agreement.
17.5 The license shall also extend and Software shall be deemed to include
any revisions to the Software as are supplied by Systems Provider and accepted
by MCI. MCI reserves the right to control the shipment of all version updates
to the Software under this Agreement.
17.6 Systems Provider grants MCI a license during the term of this
agreement to incorporate portions of Systems Provider's documentation in the
Integrated Business Solution's documentation at no charge, provided that MCI
properly incorporates and references Systems Provider's copyright in such
portion of the documentation.
18. TERM AND TERMINATION
18.1 This Agreement shall commence on the Effective Date and shall continue
for three (3) years from the Effective Date. It shall be renewed automatically
for successive one-(1) year terms unless either party gives written notice of
termination to the other sixty-(60) days prior to expiration, or unless
terminated pursuant to Section 18.2 or 18.5 of this Agreement.
18.2 Subject to Section 18.3, either party shall have the right to
terminate this Agreement as follows:
(a) Upon the breach by the other party of any material term of
this Agreement;
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<PAGE> 16
(b) Upon the issuance of an injunction by a court or regulatory
agency of competent jurisdiction enjoining continued
performance by the parties, under this Agreement;
(c) Upon the filing of voluntary or involuntary bankruptcy by the
other party or the declaration of insolvency, however
evidenced, by the other party which is not dismissed within
thirty (30) days after the date of filing;
(d) Upon change of control of the other party or of any division
or subsidiary of the other party that is relevant to
performance under this Agreement if such change can be
reasonably interpreted by the terminating party as
substantially detrimental to the relationship between the two
parties.
18.3 If a party wishes to terminate this Agreement under Section 18.2
above, such party shall give the other party written notice of its intention to
terminate under this section 18, specifying in reasonable detail the reason(s)
for such termination and in the event that the non-terminating party does not
cure the reason thirty (30) days after such notice, this Agreement shall, at
the option of the party giving notice, terminate.
18.4 If a party terminates this Agreement under Section 18.2 above, at
MCI's request Systems Provider will fulfill all orders accepted under Section
10.1 prior to the date of the receipt of notice given in Section 18.3. Systems
Provider shall also refund to MCI any unused portions of maintenance and
support Services fees paid by MCI associated with any returned Products.
18.5 Notwithstanding anything to the contrary contained herein, either
party may terminate this Agreement at any time for its convenience.
19. CONFIDENTIALITY
19.1 Each party agrees to treat all information and materials received from
the other party that are labeled "Confidential" or "Proprietary" as
confidential information ("Confidential Information") of the other party. Each
party further agrees to use at least the same degree of care to avoid
disclosure or dissemination of the other party's Confidential Information as it
uses to protect its own confidential materials, but in any event, at least a
reasonable degree of care. Neither party shall use the Confidential
Information of the other party for its own benefit or for the benefit of any
third party, except as expressly permitted in this Agreement.
19.2 Each party agrees to advise all of its employees, agents,
subcontractors or consultants that may have access to or otherwise receive the
Confidential Information of the other party of all obligations pertaining to
the protection of the Confidential Information of the other party under this
Agreement.
19.3 Neither party shall disclose Confidential Information of the other
party to any third party (other than independent contractors having a
"need-to-know") without the other party's prior written consent; provided,
however, that a party shall not be liable for disclosure of information
designated as "Confidential" or "Proprietary" by the other party if the same:
(a) is in the public domain at the time of disclosure; or
(b) becomes known to the other party from a third-party source
under no obligation to maintain confidentiality; or
(c) becomes publicly available through no fault or failure to act
by the receiving party in breach of this Agreement; or
(d) is already known by the receiving party when received, or is
independently
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<PAGE> 17
developed by the receiving party without reference to the
information provided by the other party, as established by
documentary evidence; or
(e) is required by a court or other governmental authority to be
disclosed (provided that the receiving party has used
reasonable efforts to make such disclosure subject to a
protective order or confidentiality agreement).
19.4 If, in order to fulfill the purposes of this Agreement, it is
necessary for the party receiving Confidential Information of the other party
to copy the same, in whole or in part, the receiving party may do so, but
solely for the purpose of enabling such party to perform under this Agreement.
19.5 Upon achieving the purpose(s) intended, or in the event of the earlier
termination of this Agreement, each party shall immediately return and/or
destroy all materials containing Confidential Information of the other party.
Each party shall further certify in writing to the other party that all copies
or partial copies of material containing Confidential Information of the other
party have been returned and/or destroyed.
20. TRADEMARKS, TRADE NAMES AND MARKETING
20.1 Except for any announcement intended solely for internal distribution
(i.e., to any party under this Agreement) or any disclosure required in the
opinion of discloser's legal advisors by legal, accounting, or regulatory
requirements, all media releases, public announcements, or public disclosures
for general distribution (including, but not limited to, promotional or
marketing material) by any party under this Agreement, or by any of their
employees or agents relating to this Agreement or its subject matter, other
than general statements that a contractual relationship exists between the
parties, shall be coordinated with and approved in writing by the other party
prior to the release thereof.
20.2 In the advertising and sale or distribution of the Products, MCI may
use Systems Provider's regular logos, corporate name, trade names and
trademarks (the "Trademarks"). For this purpose, Systems Provider grants MCI a
non-exclusive, royalty-free, limited license to use the Trademarks, provided
that MCI displays the symbol "TM" adjacent to each use of a Trademark the first
time a Trademark is used, or displays such other symbols and notices as may be
prescribed by Systems Provider. Systems Provider will provide MCI with a list
of its Trademarks and with a copy of its graphics standards manual, which shall
define the appropriate usage of such Trademarks.
20.3 MCI acknowledges that it has been advised by Systems Provider that
Systems Provider is the exclusive owner of the Trademarks. The use of the
Trademarks by MCI does not convey to MCI any right, title or interest in or to
the Trademarks. MCI may not register any Trademark in any jurisdiction unless
such registration is made on behalf and for the benefit of Systems Provider and
is expressly approved by Systems Provider in advance and writing.
20.4 MCI will not make or permit alteration of the goods or removal or
modification of any tags, proprietary notices, labels, or any other identifying
marks placed by Systems Provider or its agents on its Products or associated
literature.
20.5 MCI agrees not to use the Systems Provider corporate name, trademarks,
trade names and copyright legends with respect to any Products or materials not
provided by Systems Provider, or in the way which might result in confusion as
to Systems Provider and MCI being separate and distinct entities.
20.6 Notwithstanding Section 20.1, MCI may describe its relationship with
Systems Provider in MCI's proposals and statements of qualification issued for
specific MCI prospects or clients without obtaining Systems Provider's approval
and without submitting such description to Systems Provider.
20.7 Systems Provider agrees not to use MCI's corporate name, trademarks,
trade names, copyright legends or
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<PAGE> 18
other intellectual property without the prior written permission of MCI.
INSURANCE AND INDEMNITY
21.1 Insurance. During the term of this Agreement, the Systems Provider
shall maintain insurance, the kinds and in the amounts specified with insurers
of recognized responsibility, licensed to do business in the State(s) where the
work is being performed and having either: an A.M. best rating of A8, a
Standard & Poor's rating of AA, or Moody 's rating of Aa2. If any work
provided for or to be performed under this Agreement is subcontracted, the
Systems Provider shall require the subcontractor to maintain and furnish
insurance equivalent to that required of Systems Provider.
(a) Comprehensive or Commercial General Liability. In accordance
with the above, the Systems Provider and any subcontractor
shall maintain the following insurance: $1 million per
occurrence combined single limit, $2 million general
aggregate, and will include coverage for contractual
liability, use of independent Systems Providers and Products
and completed operations.
(b) Business Automobile Liability Insurance. Coverage or owned,
hired, leased, rented and non-owned vehicles in the amount of
$1 million combined single limit per occurrence for bodily
injury and property damage.
(c) Worker's Compensation & Employers' Liability Insurance.
Workers' Compensation in the maximum amount(s) and with
benefits required by the laws of the state in which the Work
is performed and the state(s) the employees are hired, if the
state(s) are other than that in which the Work is performed.
Employers' Liability with minimum limit of liability of:
<TABLE>
<S> <C>
Bodily Injury by Accident $1 million each accident
Bodily Injury by Disease $1 million policy limit
Bodily Injury by Disease $1 million each employee
</TABLE>
A combination of primary and excess/umbrella liability
policies will be acceptable, as a means to meet the limit
required under this Agreement. The required minimum limits of
the coverage shown above DO NOT limit or diminish the Systems
Provider's liability under this Agreement.
The Systems Provider will submit to MCI a standard "Accord"
insurance certificate for comparable form acceptable to MCI
signed by an authorized representative of such insurance
company(ies), certifying that the insurance coverage(s)
required hereunder is in effect for the purposes of this
Agreement. If the event Systems Provider fails to maintain
adequate coverage as outlined above in this Article, Systems
Provider will notify MCI of such a lapse. In addition, if
System Providers coverage lapses Systems Provider will have
thirty (30) days to obtain adequate coverage as outlined
herein.
The Systems Provider, its subcontractor and its insurers shall
waive all rights of recovery against MCI for any injuries to
persons or damage to property related to performance of this
Agreement.
The Systems Provider and its subcontractor shall ensure full
compliance with terms of the Occupational Safety and Health
Administration (OSHA) and all local jurisdiction's safety and
health regulations during the full term of this Agreement.
The Systems Provider shall submit to MCI certificates of
insurance evidencing the above coverage. Should the Systems
Provider at any time neglect or refuse to provide the
insurance required herein, or should such insurance be
canceled or non-renewed, MCI shall have the right to terminate
this contract, or secure substitute coverage whose cost shall
be deducted from payments owed the Systems Provider.
The Systems Provider, at its own expenses, shall indemnify and
hold harmless against any and all
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<PAGE> 19
claims, expenses (including attorneys' fees) from loss or
liability for damage to property including property owned,
leased or borrowed by MCI and injuries, including death, to
all persons to the extent arising out of Systems Provider's
performance of this Agreement, unless by reasons of any and
all acts or omissions or negligence by MCI, its agents or
employees.
21.2 Payment. Payment of any amounts due pursuant to any indemnity
contained in this Agreement shall be made to MCI within thirty (30) days of
receipt of notice of same day Systems Provider.
21.3 Attorneys' Fees and Court Costs. In the event, either party takes
action to enforce this Agreement or to recover damages for a breach by the
other party, each party will be responsible for their own fees, expenses and
court costs.
21.4 Indemnification. Systems Provider agrees to indemnify and hold
harmless MCI its affiliates, directors, officers and employees, from any and
all claims, damages, fines, penalties, attorneys' fees, court costs or other
consequences arising out of Systems Provider's breach of any covenant or
representation set forth herein or Systems Provider's failure to abide by the
terms of this Agreement.
22. LIENS
22.1 As MCI requires, before submitting any invoice for payment, or at any
other time that MCI requires, Systems Provider shall deliver to MCI a
satisfactory release of any and all liens for which System Provider has under
their control arising in connection with the Products and Work under this
Agreement.
22.2 Systems Provider shall dispose of any claim and defend any suit or
injunction brought to enforce any lien arising from the performance and/or use
of any Products and Work under this Agreement, and shall pay all expenses
associated with such proceedings.
22.3 MCI may withhold from any payment or consideration otherwise due
Systems Provider, any sum that MCI has reason to believe may be needed to
satisfy any lien arising out the Work under this Agreement. Prior to the time
of any such withholding, MCI shall notify Systems Provider in writing of the
nature of the lien and the amount of money to be withheld pursuant to this
Article and afford Systems Provider reasonable opportunity to satisfy the lien.
22.4 Systems Provider shall reimburse MCI for all monies, including all
costs and reasonable attorneys' fees, incurred by MCI in removing liens arising
out of the Work under this Agreement. Such reimbursement may be deducted from
any payment or consideration otherwise due Systems Provider. Systems Provider
shall, upon written request by MCI, promptly pay MCI any amounts due under this
Article.
23. GENERAL
23.1 Limitation of Liability: NEITHER PARTY SHALL BE LIABLE TO THE OTHER
PURSUANT TO THIS AGREEMENT FOR ANY AMOUNTS REPRESENTING LOSS OF BUSINESS OR
INDIRECT, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF THE OTHER PARTY EVEN IF ADVISED
OF THEIR POSSIBLE EXISTENCE.
23.2 Force Majeure: Neither party shall be held liable to the other for
failure to fulfill its obligations hereunder if, and to the extent, due to
causes beyond its control.
23.3 Costs and Expenses: Except as specifically provided herein, each party
shall bear its own costs and expenses.
23.4 Waiver: The failure by either party to enforce, at any time or for any
period, any one or more of the terms of this agreement, shall not constitute
waiver of these terms, or subsequently the parties right to enforce all terms
and conditions of this Agreement.
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<PAGE> 20
23.5 Unenforceable Provisions:
(a) If any provision of this Agreement is held to be invalid, illegal
or unenforceable by a court of competent jurisdiction, the validity, legality
and enforceability of the remaining provisions of this Agreement shall continue
in full force and effect.
(b) It is expressly agreed that each provision of this Agreement that
provides for a limitation of liability or remedies, disclaimer of warranties,
indemnification of a party or exclusion of damages or other remedies is
severable and independent of any other provision and is intended to be enforced
as such. Further, it is expressly agreed that in the event any remedy under
this agreement is determined to have failed its essential purpose, all
limitations of liability and exclusions of damages or other remedies set forth
in this Agreement shall remain in effect.
23.6 Independent Contractors: Nothing in this Agreement is intended to or
shall be deemed to create a partnership, joint venture or agency relationship
between the parties of any kind for any purpose. The parties shall be and
remain independent contractors at all times. Neither parties shall have any
authority to, nor shall either attempt to, bind or commit the other party for
any purpose. Neither party shall make representations or warranties concerning
the Products or Services of the others that are inconsistent with those made by
the other party in its then current published materials or with the obligations
under this Agreement. Each party is solely responsible for the supervision and
control of its personnel and for the terms of their employment, including, but
not limited to, work assignments, labor relations, hiring and discharging,
performance evaluations, wages, hours, Social Security and tax withholding,
workers' compensation, and unemployment insurance.
23.7 Nonexclusivity: it is expressly understood and agreed that this
Agreement does not grant to Systems Provider an exclusive right to provide to
MCI any or all of the Products and Services of the type provided by Systems
Provider and shall not prevent MCI from developing or acquiring from other
suppliers such Products and Services. Systems Provider agrees that
acquisitions by MCI pursuant to this Agreement shall neither restrict the right
of MCI to cease acquiring nor require MCI to continue any level of such
acquisitions. Estimates or forecasts furnished by MCI to Systems Provider
shall not constitute commitments. It is also understood and agreed that
nothing in this Agreement shall restrict Systems Provider in any way from
marketing and selling any Products to or through any third party including, but
not limited to, clients or competitors of MCI.
23.8 Limitation of Actions: Neither party may bring an action, regardless
of form, arising out of this Agreement, more than two years after such party
becomes aware of the facts giving rise to the cause of action. For
non-payment, neither party may bring an action more than two years after the
date the last payment was due.
23.9 Notices: Whenever one party is required or permitted to give notice to
the other pursuant to this Agreement, such notice shall be effective when hand
delivered to the party for whom intended against a signed receipt thereof, or
five (5) days following deposit of the same into the mail, registered or
certified, return receipt requested, postage prepaid, or when delivered by a
third party courier service where receipt is verified by the receiving party's
acknowledgment and addressed to the Relationship Director of the other party,
with a copy to General Counsel. If a notice is mailed, the sending party
promptly will confirm such mailing by sending a copy thereof via facsimile
transmission to the Relationship Director of the other party. During the term
of this Agreement, all notices regarding this Agreement and anything contained
herein, will be directed to the following addresses:
Originals: Visual Networks, Inc.
2092 Gaither Road
Rockville, MD 20850
Attn: Chief Financial Officer/Peter Minihane
301-296-2365
301-296-2308(fax)
- 20 -
<PAGE> 21
MCI Telecommunications Corporation
6 Concourse Parkway
Atlanta, GA 30328
Attn: Gene Davidson/Procurement
770-284-3517
770-284-3466
Copies: MCI Telecommunications Corporation
6 Concourse Parkway
Atlanta, GA 30328
Attn: Jimmy Davis
770-284-1282
23.10 Governing Law: This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York.
23.11 Changes to Appendices: Subject to Article 11, Systems Provider
reserves the right to change list prices, Products offered, and other schedules
and programs, and MCI reserves the right to change the list of affiliated
organizations, as set forth in the appendices to this Agreement. At such
times, the party will issue a written revision to the applicable Appendix and
all such revisions automatically are incorporated as amendments to this
Agreement. For changes which, in, Systems Provider's opinion, may adversely
affect MCI, Systems Provider will provide at least thirty (30) days notice,
prior to the effective date of such change.
23.12 Assignment: The rights of either party under this Agreement may not be
assigned, in whole or in part, by operation of law or otherwise, without the
express written consent of the other party which such consent shall not be
unreasonably withheld or delayed, and any attempted assignment of rights,
duties or obligations hereunder without such consent shall be null and void.
Notwithstanding the foregoing, MCI may assign this Agreement to any affiliated
entity of MCI.
23.13 Arbitration: Any dispute or disagreement arising between the parties
in connection with this Agreement, which is not settled to the mutual
satisfaction of the parties within thirty (30) days (or such longer period as
may be mutually agreed upon) from the date that either party informs the other
in writing that such dispute or disagreement exists, shall be settled by
arbitration in accordance with the J.A.M.S./ENDISPUTE Arbitration Rules and
Procedures, as amended by this Agreement. The cost of the arbitration,
including the fees and expenses of the arbitrator(s), will be shared equally by
the parties unless the award otherwise provides. Each party shall bear the
cost of preparing and presenting its case. The parties agree that this
provisions and the arbitrator's authority to grant relief shall be subject to
the United States Arbitration Act, 9 U.S.C. 1-16 et seq. ("USAA"), the
provisions of this Agreement, and the ABA-AAA Code of Ethics for Arbitrators in
Commercial Disputes. The parties agree that the arbitrator(s)) shall have no
power or authority to make awards or issue orders of any kind except as
expressly permitted by this Agreement, and in no event shall the arbitrator(s)
have the authority to make any award that provides for punitive or exemplary
damages. The decision of the arbitrator(s) shall follow the plain meaning of
the relevant documents, and shall be final and binding upon the parties. The
award may be confirmed and enforced in any court of competent jurisdiction.
All post-award proceedings shall be governed by the USAA.
23.14 Entire Agreement: This instrument contains the entire Agreement
between the parties hereto and supersedes all prior negotiations,
representations or agreements, whether written or oral.
- 21 -
<PAGE> 22
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
VISUAL NETWORKS, INC. MCI TELECOMMUNICATIONS, INC.
By: /S/ Peter J. Minihane By: /S/ B.R. Bagby
--------------------- --------------
Name: Peter J. Minihane Name: B.R. Bagby
Title: Sr V.P./CFO/Treas. Title: Director, Network Acquisition
Date: 9/16/97 Date: 10/3/97
- 22 -
<PAGE> 23
EXHIBIT 10.5 (MCI)
EXHIBITS
EXHIBIT A
SERVICES
Services provided in this contract include the following:
LEVEL 3 HELPDESK
The Level 3 Helpdesk, also known as the Visual Networks Technical Assistance
Center (VTAC), is the interface to Visual Networks for corrective action to
reported product problems. The VTAC can be reached at ***
VISUAL NETWORKS CORRECTIVE ACTION
Visual Networks employs a closed loop corrective action system to identify,
track and resolve problems associated with Equipment. This system is used to
address problems identified both in the field and from within the MCI. Field
generated issues enter the system through the Visual Networks Technical
Assistance Center (VTAC) and are recorded in the call tracking system. Visual
Networks classifies each problem found and responds to it in accordance with
the table below.
<TABLE>
<CAPTION>
Classification Description Response
<S> <C> <C>
Critical The problem has no reasonable workaround Visual Networks applies engineering resources
and is service affecting or renders the to the problem and continues to do so until
product non-functional or unreliable. it is resolved.
Serious The problem would otherwise be critical, Visual Networks formulates a mechanism for
but has a reasonable workaround. communicating the workaround mechanism to
appropriate parties. The fix to the problem
is incorporated into the next scheduled
product release.
Low The problem is a cosmetic issue or minor The fix to the problem is incorporated into
annoyance to the user but is out of the next scheduled product release.
compliance with the functional
specification.
Enhancement The reported problem is deemed to be The enhancement is added to the requested
outside of the product's functional enhancement list and prioritized within the
specification. context of all other enhancement requests.
</TABLE>
SHIPMENT OF REPLACEMENT UNIT
Failed units are replaced within *** days following return to Visual Networks.
Call the VTAC for an RMA number.
DISPATCH OF PC MANUFACTURER FOR PC REPAIR
In the case of PC platform problems (e.g. hard drive, monitor, motherboard,
memory, etc.), the VTAC will dispatch the PC Manufacturer to the site for
repair. All Visual UpTime consoles carry the PC Manufacturer's 3-year on-site
service warranty.
SOFTWARE UPGRADES
MCI will receive all Software upgrades in the form of a single master CD. It
is MCI's responsibility to distribute upgrades to its customers.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 24
EXHIBIT B
PRODUCT AND PRICE SCHEDULE
PRODUCT DESCRIPTION
Supplier Products fall into three categories
Analysis Service Elements (ASE Products, both CSU/DSUs and probes)
Turnkey Management Consoles (MICs and PAMs)
Cables and Accessories
ANALYSIS SERVICE ELEMENTS (ASE'S)
ASEs are essentially the data collection and analysis engines for the Visual
UpTime system. ASEs consist of a hardware platform and embedded Software,
which together perform statistical analysis of the circuit to which they are
attached.
When selecting the right ASE for each network site, you need to consider the
following issues:
Physical connection that ASE will monitor at: V.35, X.21,
RS-449/530/232, or T1/Fractional T1
Maximum Frame Relay port (access channel) speed
Number of DLCI/PVC's to be defined
Type of LAN for in-band communication: Ethernet or Token Ring
Type of upper layer protocol encapsulation support: Multiprotocol
(default), Internet (option)
Integral DSU/CSU or passive monitoring ASE
BRANCH OFFICE ASES FOR FRAME RELAY
***
DISTRICT OFFICE ASES FOR FRAME RELAY
***
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 25
CENTRAL OFFICE ASES FOR FRAME RELAY
***
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 26
ENTERPRISE OFFICE ASES FOR FRAME RELAY
***
ASE FIRMWARE OPTIONS
***
TURNKEY MANAGEMENT CONSOLES
The Visual UpTime Software applications generically consist of two components
- -- client presentation Software, and data concentration and database Software.
The Software applications come in one of two categories: SINGLE-USER or
MULTI-USER.
The SINGLE-USER version of the Software is licensed as the Visual MIC
(Management Integrated Console) which integrates both Software components onto
a Pentium based hardware platform. Integration is done at the factory prior to
customer shipment. The total package includes:
Integration and testing of hardware platform (Pentium PC, 16M
RAM, 2G byte HD, SVGA Monitor, CD-ROM, MS Windows 95),
networking (Ethernet or Token Ring NIC, TCP/IP stack), remote
access (modem, PC/Anywhere), and Visual UpTime Console
Application Software.
***
The MULTI-USER version of the Software is licensed as the Visual PAM
(Performance Archive Manager) and Visual PAC (Platform Applicable Client). The
PAMs are structured according to the number of ASEs being supported. Each PAM
also includes one master copy of each type of PAC. The user is entitled to
make an unlimited number of PAC copies and connect up to five PACs concurrently
to the PAM. Licenses to increase the amount of concurrent PAC sessions are
also available.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 27
Each PAM also includes the Pentium based hardware that the PAM Software runs
on. The hardware platform, which the PACs run on, are NOT provided by Visual.
Integration of the PAM Software and its hardware platform is done at the
factory prior to customer shipment.
THE TOTAL PAM PACKAGE INCLUDES:
*** [two pages deleted]
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 28
PRICING SCHEDULE
*** [3 PAGES DELETED]
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 29
SUPPORT SERVICES
***
HELPDESK SUPPORT LEVEL 1
Visual Networks provides pre-sale telephone technical support to customers and
sales personnel during normal business hours 8 a.m. to 6 p.m. EST.
HELPDESK SUPPORT LEVEL 2
Visual Networks provides telephone assistance related to the installation,
setup, configuration, and operation of the Visual UpTime system during normal
business hours of 8 a.m. to 6 p.m. EST.
ASE PRE-CONFIGURATION: Visual Networks simplifies the installation process by
pre-configuring the ASE parameters prior to shipment. A Visual Networks
technician will custom configure each ASE to your specifications.
ON-SITE ASE INSTALLATION: This is a turnkey installation service where Visual
Networks takes full responsibility for ASE configuration and installation. A
field technician is dispatched to the site and configures and installs the ASE.
Visual Networks requires a *** day lead time to schedule the install.
SAME-DAY ON-SITE ASE REPLACEMENT: Visual Networks will dispatch a field
technician with a replacement unit to the site where a failed unit has been
diagnosed. Each unit that is under this service must be registered so that the
nationwide spares inventory can be deployed accordingly. Registration
information includes ASE serial number, site address, point of contact
information, circuit parameters, etc. A field technician is dispatched to the
site and configures and installs the ASE.
SPARES SUPPORT: Visual Networks will draw on its nationwide spares inventory
to deliver a replacement ASE to any U.S. location within *** hours of a
replacement request. The customer must register each ASE with Visual Networks
to activate this service and allow *** days lead time for activation to allow
for the need to move units to the appropriate depot center.
ON-SITE CONSOLE IMPLEMENTATION: A Visual Networks engineer will install the
Visual UpTime management platform on your Local Area Network (LAN). This
service includes initial network configuration and event definition, as well as
an overview of the capabilities of the UpTime tool.
ON-SITE SOFTWARE UPGRADES: Visual Networks will coordinate an on-site engineer
to perform a Software upgrade and remote download to all ASEs. Also included
is an in-depth review of all-new features and enhancements.
SHIPMENT OF SOFTWARE UPGRADE KIT: Visual Networks will ship a Software upgrade
kit to the address provided.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 30
TRAINING AND EDUCATION: Visual Networks offers a training course to
familiarize customers with the operation of Visual UpTime. This intensive,
one-day training course focuses on how to configure and operate the Visual
UpTime system through combined presentations, classroom discussion and
practical hands-on lab exercises. At the end of the Visual Networks
Orientation Course, students will be able to configure the Visual UpTime
Console and Analysis Service Elements, define network performance monitoring
thresholds, perform network troubleshooting, and generate network performance
reports. Students will also cover basic frame relay and T1 technologies.
Classes are offered on-site or at our headquarters in Rockville, Maryland, with
class sizes ranging from 4 to 12 students. For those customers already
familiar with T1 and frame relay networking concepts, or those that have
training requirements for fewer than 4 students, Visual Networks delivers
dial-up training. Using Visual UpTime's remote dial-in feature, a Visual
Networks instructor will dial-in to your Visual UpTime system and train you on
its configuration and operation using your own network to illustrate points.
Dial-up training is often the fastest and easiest way to become proficient with
Visual UpTime. Dial-up training requires one voice connection and one analog
telephone connection to the console modem.
DOCUMENTATION AND LITERATURE
***
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 31
EXHIBIT C
APPROVED MCI AFFILIATES AND ALLIANCE PARTNERS
A. AFFILIATES
1. networkMCI, Inc.
2. MCImetro Access Transmission Services, Inc.
3. MCI International, Inc.
4. MCI International Telecommunications Corporation
5. MCI Equipment Acquisition Corporation
6. MCI Wireless, Inc.
7. Overseas Telecommunications, Inc.
8. SHL Systemhouse Inc. (Canada)
9. SHL Systemhouse Corp. (U.S.)
10. SHL Computer Innovations, Inc. (Canada)
11. Telecom*USA, Inc.
B. ALLIANCE PARTNERS
1. Concert Communications Company
2. British Telecommunications plc
3. Stentor, Inc.
4. Avantel, S.A.
<PAGE> 32
EXHIBIT "D"
NON DISCLOSURE AGREEMENT
Agreement between MCI TELECOMMUNICATIONS CORPORATION, a Delaware
corporation having offices at Six Concourse Parkway, Atlanta, GA, 30328
("MCI"), and Visual Network, Inc., a corporation having offices at 2092
Gaither Road, Rockville, MD (the "COMPANY"), effective as of August 29, 1997.
WHEREAS, for the purpose as stated in Section 2 below, MCI and the
Company (collectively referred to as the "PARTIES" and individually referred to
as a "PARTY") have determined to establish terms governing the use and
protection of Confidential Information (as defined in Section 1 below) that one
Party ("OWNER") may disclose to the other Party ("RECIPIENT").
NOW, THEREFORE, the Parties agree as follows:
1. "CONFIDENTIAL INFORMATION" means information that relates to the
purpose stated in Section 2 below or that, although not related to such
purpose, is nevertheless disclosed as a result of the Parties' discussions in
that regard, and that should reasonably have been understood by the Recipient,
because of legends or other markings, the circumstances of disclosure or the
nature of the information itself, to be proprietary and confidential to the
Owner, an Affiliate of the Owner or to a third party. Confidential Information
may be disclosed in written or other tangible form (including on magnetic
media) or by oral, visual or other means. The term "AFFILIATE" means any
person or entity directly or indirectly controlling, controlled by, or under
common control with a Party.
2. A Recipient of Confidential Information may use the Confidential
Information only for the purpose of discussions relating to *** and only during
the period of time stated in the first sentence of Section 9.
3. Recipient shall protect such Confidential Information from
disclosure to others, using the same degree of care used to protect its own
confidential or proprietary information of like importance, but in any case
using no less than a reasonable degree of care. Recipient may disclose
Confidential Information received hereunder to (i) its Affiliates who agree, in
advance, in writing, to be bound by this Agreement, and (ii) to its employees
and independent contractors, and its Affiliates' employees and independent
contractors, who have a need to know, for the purpose of this Agreement, and
who are bound to protect the received Confidential Information from
unauthorized use and disclosure under the terms of a written agreement.
Confidential Information shall not otherwise be disclosed to any third party
without the prior written consent of the Owner.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 33
4. The restrictions of this Agreement on use and disclosure of
Confidential Information shall not apply to information that:
(a) Was publicly known at the time of Owner's communication
thereof to Recipient;
(b) Becomes publicly known through no fault of Recipient
subsequent to the time of Owner's communication thereof to
Recipient;
(c) Was in Recipient's possession free of any obligation of
confidence at the time of Owner's communication thereof to
Recipient;
(d) Is developed by Recipient independently of and without
reference to any of Owner's Confidential Information or other
information that Owner disclosed in confidence to any third
party;
(e) Is rightfully obtained by Recipient from third parties
authorized to make such disclosure without restriction; or
(f) Is identified by Owner as no longer proprietary or
confidential.
5. In the event Recipient is required by law, regulation or court
order to disclose any of Owner's Confidential Information, Recipient will
promptly notify Owner in writing prior to making any such disclosure in order
to facilitate Owner seeking a protective order or other appropriate remedy from
the proper authority. Recipient agrees to cooperate with Owner in seeking such
order or other remedy. Recipient further agrees that if Owner is not
successful in precluding the requesting legal body from requiring the
disclosure of the Confidential Information, it will furnish only that portion
of the Confidential Information which is legally required and will exercise all
reasonable efforts to obtain reliable assurances that confidential treatment
will be accorded the Confidential Information.
6. All Confidential Information disclosed under this Agreement
(including information in computer software or held in electronic storage
media) shall be and remain the property of Owner. All such information in
tangible form shall be returned to Owner promptly upon written request or the
termination or expiration of this Agreement, and shall not thereafter be
retained in any form by Recipient, its Affiliates, or any employees or
independent contractors of Recipient or its Affiliates.
7. No licenses or rights under any patent, copyright, trademark, or
trade secret are granted or are to be implied by this Agreement. Neither Party
is obligated under this Agreement to purchase from or provide to the other
Party any service or product.
<PAGE> 34
8. Owner shall not have any liability or responsibility for errors or
omissions in, or any decisions made by Recipient in reliance on, any
Confidential Information disclosed under this Agreement.
9. This Agreement shall become effective as of the date first written
above and shall automatically expire one (1) year thereafter, provided,
however, that prior to such expiration, either Party may terminate this
Agreement at any time by written notice to the other. Notwithstanding such
expiration or termination, all of Recipient's nondisclosure obligations
pursuant to this Agreement shall survive with respect to any Confidential
Information received prior to such expiration or termination.
10. Except upon mutual written agreement, or as may be required by
law, neither Party shall in any way or in any form disclose the existence or
terms of this Agreement, the discussions that gave rise to this Agreement or
the fact that there have been, or will be, discussions or negotiations covered
by this Agreement.
11. The Parties acknowledge that Confidential Information is unique
and valuable, and that disclosure in breach of this Agreement will result in
irreparable injury to Owner for which monetary damages alone would not be an
adequate remedy. Therefore, the Parties agree that in the event of a breach or
threatened breach of confidentiality, the Owner shall be entitled to specific
performance and injunctive or other equitable relief as a remedy for any such
breach or anticipated breach without the necessity of posting a bond. Any such
relief shall be in addition to and not in lieu of any appropriate relief in the
way of monetary damages.
12. Neither Party shall assign any of its rights or obligations
hereunder, except to an Affiliate or successor in interest, without the prior,
written consent of the other Party, which consent shall not be unreasonably
withheld.
13. No failure or delay in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any right, power or privilege hereunder.
14. This Agreement: (a) is the complete agreement of the Parties
concerning the subject matter hereof and supersedes any prior such agreements
with respect to further disclosures concerning such subject matter; (b) may not
be amended or in any manner modified except by a written instrument signed by
authorized representatives of both Parties; and (c) shall be governed and
construed in accordance with the laws of New York without regard to its choice
of law provisions.
<PAGE> 35
15. If any provision of this Agreement is found to be unenforceable,
the remainder shall be enforced as fully as possible and the unenforceable
provision shall be deemed modified to the limited extent required to permit its
enforcement in a manner most closely representing the intention of the Parties
as expressed herein.
IN WITNESS WHEREOF, each of the Parties hereto has caused this
Agreement to be executed by its duly authorized representative.
MCI TELECOMMUNICATIONS VISUAL NETWORKS, INC.
CORPORATION
By: /s/ B. R. Bagby By: /s/ Peter J. Minihane
----------------------------- -----------------------
Name: B. R. Bagby Name: Peter J. Minihane
Title: Director, Network Acquisition Title: SR VP/CFO/Tres
Date: 10/3/97 Date: 9/16/97
<PAGE> 1
EXHIBIT 10.6
CONTRACT NO.
MASTER RESELLER AGREEMENT
BETWEEN
SPRINT/UNITED MANAGEMENT COMPANY
AND
VISUAL NETWORKS
This MASTER RESELLER AGREEMENT ("Agreement") effective August 23, 1996
("Effective Date"), between Sprint/United Management Company, a Kansas
corporation, ("Sprint"), with offices located at 8140 Ward Parkway, Kansas
City, Missouri 64114 and Visual Networks, a Delaware corporation ("Supplier"),
with offices located at 2092 Gaither Road, Rockville, MD 20850.
BACKGROUND
Supplier designs, develops, manufactures, and sells electronic equipment
("Equipment") and firmware and software as further defined in Section 13, below
("Software"), (collectively, "Products"), including auxiliary installation,
training, and technical and marketing support services ("Services"); and
Sprint desires to purchase or license various Products and Services from
Supplier that Sprint expects to use itself, or resell or sublicense to others
solely in association with Sprint network Services provided to Sprint or
Sprint's customers ("Customers"), and Supplier is willing to sell and license
the Products to Sprint and provide Services subject to the terms of this
Agreement.
The parties agree as follows:
1.0 SCOPE
(a) This Agreement contains the terms that will apply to any
contract or purchase order("Order") that Sprint may place with
Supplier during the term of this Agreement for Products and
Services offered by Supplier more fully described in Exhibit
A, attached to and incorporated in this Agreement.
In addition, Sprint may issue a non-binding yearly Order
("Blanket Order") which will apply to Products ordered during
that year. During a given year, Sprint may amend from time to
time the Blanket Order. The parties agree that the Blanket
Order does not obligate Sprint to any dollar amount or volume
of purchases of Product and is only intended to facilitate in
order administration.
Under a Blanket Order, Sprint will issue a document for the
purchase of Product under it ("Release"). A Release commits
Sprint to the purchase of the specific dollar amount or
quantity set forth in that Release. In addition, a Release
commits Supplier to ship the Product identified in the Release
and invoice Sprint in accordance with this Agreement.
- 1 -
<PAGE> 2
CONTRACT NO.
(b) The terms of this Agreement control over any additional or
inconsistent terms found in any Order under this Agreement or
in any acknowledgment or other form used by Supplier, or any
exhibits attached to this Agreement.
(c) The Order becomes a binding obligation of the parties when
Supplier signs and returns to Sprint an acceptance copy of the
Order or begins performance of the Order, whichever occurs
first.
(d) This Agreement is entered into by Sprint on its own behalf and
for the benefit of all Sprint Corporation affiliated entities
("Sprint Affiliates") as set forth in Exhibit C. The term
Sprint Affiliate includes: a) controlled Sprint Affiliates,
meaning any entity in which Sprint Corporation or its
wholly-owned affiliates has practical management control over
the entity by virtue of majority stock ownership or an
equivalent ownership interest, b) uncontrolled Sprint
Affiliates, meaning any entity in which Sprint Corporation
directly or indirectly holds an equity or similar interest,
but the interest does not give practical management control,
or c) remote Sprint Affiliates, meaning parent entities of
joint ventures of which Sprint or Sprint Affiliates are a
part, telecommunications entities which have an affiliation
with those joint ventures, and business customers of Sprint of
Sprint Affiliates.
Any controlled Sprint Affiliate may automatically execute a
Contract Order under this Agreement. Subject to negotiation
and upon approval by Sprint's Material & Services Management
Department ("M&SM"), Supplier will accept any uncontrolled or
remote Sprint Affiliate Contract Order. All references to
Sprint refer equally to Sprint Affiliates executing Contract
Orders with terms in accordance with this Agreement. No
commitment is made by Sprint or any Sprint Affiliate, nor any
liabilities accepted, except that set forth in a properly
signed Contract Order. All communications and invoices must
be directed to the Affiliate issuing the Contract Order under
the instructions issued in the Contract Order. Services
performed on behalf of any Sprint Affiliate will be billed to
or collected from only that Affiliate. Only the Sprint
Affiliate issuing a specific Contract Order under this
Agreement will incur any obligation or liability to Supplier
for any claim which may arise from or relate to that Contract
Order.
(e) Sprint is not committed to purchasing any minimum Order or
aggregate dollar volume of Products or Services during the
term of this Agreement, however, Sprint may provide monthly
and yearly estimates of Product purchases ("Forecast") for
planning purposes. Any Forecast provided to Supplier by
Sprint is not a commitment on Sprint's part to purchase
certain dollar amounts or quantities.
- 2 -
<PAGE> 3
CONTRACT NO.
Pricing for Year One of this Agreement is as indicated in
Exhibit A, Pricing, Schedule I. If Sprint does not purchase
80% of the amount for the specific period as detailed below,
the pricing for the subsequent year will be as indicated in
Exhibit A, Pricing, Schedule II. If Sprint purchases 80% or
greater than the amount for the specific period, as detailed
below, then the pricing will be as indicated in Exhibit A,
Pricing, Schedule I, for the subsequent period.
Year One of Agreement: $ *** (net of applied discounts)
Year Two of Agreement: $ *** (net of applied discounts)
Year Three of Agreement: $ *** (net of applied discounts)
NOTE: Any purchases made, prior to this Agreement, against the
CUSTOMER-SPECIFIC INTEGRATOR PARTNER AGREEMENT between the
parties, # CSIP-SP-001, will be included toward Year One's
volume.
2.0 TERM & TERMINATION
(a) This Agreement begins on the Effective Date and will remain in
force for a period of 3 years unless terminated as provided in
this Agreement.
(b) Either party may terminate this Agreement upon 30 days' prior
written notice to the other party if the other party
materially breaches the Agreement and fails to cure the breach
within 30 days of written notice of the breach.
(c) Either party may terminate this Agreement upon written notice
to the other party, if the other party is placed in
liquidation or receivership, if a petition of voluntary or
involuntary bankruptcy is filed against it and if the petition
is not dismissed within 30 days, or if it fails to satisfy a
final and valid court judgment for payment of money.
(d) This Agreement, including any Order, may be terminated
immediately at any time by Sprint without penalty if there is
any change in control or ownership of Supplier to a direct
competitor of Sprint (as reasonably determined by Sprint). If
permitted under applicable securities law, Supplier must give
Sprint no less than 30 days written notice of any change in
control or ownership of Supplier. This subsection does not
apply in the event of Supplier's acquisition as a
publicly-traded company.
3.0 PRICE AND TERMS OF SALE
(a) Prices for the Products and Services for the Term of this
Agreement are set forth in Exhibit A.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
- 3 -
<PAGE> 4
CONTRACT NO.
(b) Supplier warrants that the terms of this Agreement and the
prices on Exhibit A are no less favorable than the terms given
to any third party that purchases or licenses similar Products
or Services from Supplier under similar terms and conditions.
If Supplier offers more favorable prices and terms to any
Customer during the term of this Agreement, the prices and
terms will be applicable to Sprint Orders. Supplier warrants
that the prices on Exhibit A are complete and include, but are
not limited to, purchase price, maintenance fees, taxes,
packaging, labeling, custom duties, storage and insurance. In
determining whether an agreement is of similar scope and the
consideration is less, all the terms of this Agreement and
that agreement will be analyzed as a whole.
(c) Post Term Maintenance. At Sprint's option at the end of the
Term, Supplier will offer maintenance Services under the terms
of this Agreement at an annual cost not to exceed ***% of the
cumulative sales of ASEs, PAMs, PACSs, & MICs, as defined in
Exhibit A.
4.0 INVOICING AND PAYMENT
(a) Invoices must show:
(i) the Contract number, Order number, and Release
number,
(ii) the date shipment was made and the shipping point for
Products;
(iii) that the line item on the Order matches the line item
on the invoice, including the price and description,
unless there has been a price decrease.
(b) Sprint may specify additional invoicing instructions on the
Order. Supplier may not invoice Sprint until Products are
shipped, or Services have been accepted by Sprint.
(c) Payment *** days after receipt of valid invoice for the first
12 months of this Agreement. Thereafter, payment is *** days
from receipt of valid invoice . A legible FAX invoice is
acceptable provided no other copy is provided.
(d) Sprint and Supplier may desire to facilitate certain commercial
transactions between them electronically in Electronic Data Interchange ("EDI")
format in substitution for conventional paper-based documents. EDI
transactions under this Agreement, may include transmitting and receiving EDI
data for ordering, invoicing and payment. Prior to initiating an EDI
transaction, Sprint and Supplier will separately execute Sprint's Trading
Agreement which will set forth the terms and conditions of the EDI transaction.
5.0 DELIVERY, TITLE, RISK OF LOSS
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
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CONTRACT NO.
(a) Delivery of Products will be F.O.B. Origination Freight
collect, and title and risk of loss will pass to Sprint, upon
delivery to Sprint carrier. Supplier agrees to follow
Sprint's shipping instructions, as detailed in Exhibit B,
Sprint Transportation Routing Guide.
(b) If Supplier fails to meet the delivery date, Sprint may direct
expedited routing and excess costs will be debited to
Supplier's account, or, in accordance with Paragraph 7,
Cancellation for Cause, cancel all or part of the Order. If
Products are delivered ahead of the delivery date, Sprint may:
(i) return the Products at Supplier's expense for early
delivery; or
(ii) withhold payment for the Products until after the
specified delivery date; or
(iii) place Products in storage for Supplier's account
until the specified delivery date.
(c) *** days before each quarter, Sprint will provide to Supplier
a quarterly Forecast by Product, and upon Sprint's request,
Supplier agrees to deliver any amount of Product included
within that Forecast within ***days. On amounts exceeding
the prorated volumes, delivery will occur consistently within
*** days.
***
(d) The name, addresses and contact person of Supplier's
Affiliates and distributors, through which any Services may be
ordered by Sprint, are set forth in Exhibit C. Supplier will
notify Sprint, in writing, of any changes in the Affiliates
and distributors on Exhibit C.
6.0 INSPECTION, ACCEPTANCE AND QUALITY CONTROL
(a) Sprint may inspect Products according to an agreed upon
incoming inspection procedure and rejection rate. Products
that fail to meet inspection criteria will be returned to
Supplier, at Supplier's expense. Supplier will pay for
reshipping conforming Products to Sprint. Sprint may place a
hold on all pending Orders until Supplier has demonstrated
that the cause for rejection has been corrected. If the cause
for rejection is not corrected within 30 days after rejection,
Sprint may cancel outstanding Orders without further
obligation or liability. Sprint may conduct a site inspection
at Supplier's facility during business hours by providing 7
days notice to Supplier.
(b) If Supplier becomes aware of any problem with a Product that
is of a safety, regulatory compliance, environmental
compliance, or serious performance nature, and changes the
design or documentation related to the Product, Supplier must
implement the change in accordance with Exhibit D.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
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CONTRACT NO.
(c) In order for the Products to be connected to the Sprint public
communications network, the Products must pass Sprint's
certification tests. This includes any material modifications
made to any Products to ensure operability and backward
compatibility with Sprint's network. Such materiality shall
be determined by Sprint. Accordingly, Supplier will provide
Sprint units of Product at no charge, along with cables, and
Documentation, to enable Sprint to perform its certification
process.
7.0 CANCELLATION
(a) Cancellation for Cause. Sprint may cancel an Order, in whole
or in part, if Supplier fails or refuses to deliver Products
or Services as ordered on the delivery date, or if Supplier is
not performing in accordance with Supplier-published
specifications. Sprint's acceptance of all or any part of the
Products or Services will not waive claims which Sprint may
have for delays.
If Sprint cancels an Order in whole or in part for cause,
Sprint may procure similar Products or Services from a third
party, and Supplier must pay Sprint for the excess cost for
the replacement Products or Services to be capped at 200% of
Sprint's purchase price for that Order. If cancellation is
partial, Supplier must continue the performance of the
remaining portion of the Order
(b) Cancellation for Convenience:
(i) Prior to delivery, for Releases and orders under ***,
Sprint may, without penalty or other liability
reschedule or cancel a delivery. For Releases or
Orders over ***, Sprint may cancel a Release or Order
within *** days of the shipment date, or pay
reasonable inventory carrying costs until such
inventory is sold to Sprint.
(ii) After partial delivery, Sprint may cancel any or all
of the remaining portion of the Release or Order upon
written notice. Upon receipt of notice, Supplier
must discontinue work, preserve and protect
materials, work in progress and completed work and
conclude performance in accordance with Sprint's
instructions. Sprint will pay Supplier's costs
properly incurred (substantiated by documentation
satisfactory to Sprint) Supplier will not be entitled
to any additional damages on account of cancellation.
8.0 TERRITORY
- ------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
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CONTRACT NO.
The territory will be defined by the address of Sprint's network services
client. Supplier will ship Products only to United States locations at
Sprint's expense. Sprint will be responsible for shipment of Supplier's
Products outside of the United States, at Sprint's expense. Supplier's
Products shall be leased, resold or integrated only into Sprint network
services offerings for clients that are United States based, United States
based multinationals or United States based divisions of international
corporations.
9.0 WARRANTY
(a) Supplier warrants all Equipment against material defects in
material and workmanship and warrants that Equipment will
strictly conform with Supplier's written specification for 5
years from either the date of shipment (or installation if
applicable). Equipment that is repaired or replaced is
warranted by Supplier for the remaining period of the original
warranty, or for 90 days from date of shipment by Supplier,
whichever is longer. All Equipment must be new.
(b) If the Equipment is defective in material or workmanship or
fails to comply with the applicable Equipment specification
during the warranty period, Supplier will repair or replace
the Equipment at Supplier's facility or modify the Equipment
to comply with the Equipment specification. Sprint will
notify Supplier if Sprint requires the original Equipment to
be repaired and returned to Sprint. Sprint will pay the cost
of shipping the defective Equipment to Supplier. The repair
or replacement of the Equipment will be made within 10
business days of receipt by Supplier, at no charge to Sprint.
Shipment of the repaired Equipment to Sprint will be at
Supplier's expense. If Supplier is unable to repair or
replace the Equipment or to modify the Equipment within the 10
business days, Sprint may reject the Equipment and Supplier
will refund to Sprint all monies paid in connection with that
Equipment including but not limited to shipping..
(c) Supplier warrants that all Products, when delivered, conform
to all applicable laws and regulations.
(d) i) Supplier warrants all Software will be in
accordance with Supplier's specifications for a
period of 45 days, from Sprint's acceptance.
Supplier will, at its option, correct or replace any
defective Software version or update at Supplier's
expense, if the Software was installed properly and
used in accordance with Supplier's specification.
ii) Supplier has the full power and authority to grant
the license granted Sprint under this Agreement with
respect to the Software, and neither the license to
nor use by Sprint of the Software, as permitted under
this Agreement, will in any way constitute an
infringement or other violation of any copyright,
patent, trade secret, trademark, nondisclosure, or
any other intellectual property right, moral right,
or right of publicity. The
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CONTRACT NO.
Software licensed under this Agreement will be free
and clear of all liens and encumbrances.
iii) To the best of Supplier's knowledge, after
investigation, neither Supplier nor its personnel
performing Services under this Agreement has any
existing obligation that would violate or infringe
upon the rights of third parties, including property,
contractual, employment, trademark, trade secrets,
copyright, patent, proprietary information and non
disclosure rights, that might affect Vendor's ability
to fulfill its obligations under this Agreement.
iv) During Term or when Maintenance is provided after the
Term, Supplier guarantees that its maintenance and
technical support Services described in this
Agreement and the Schedule hereto will be available
for the then-current and immediately preceding
versions of the Software licensed under this
Agreement.
(e) Supplier warrants all Services provided will be performed in a
workmanship like and timely manner, in conformance with the
highest professional standards of the industry and to Sprint's
reasonable satisfaction. Defective or deficient Services will
be corrected, or, at Sprint's option, monies paid to Supplier
in connection with the Services will be refunded.
(f) Additional Supplier warranties and maintenance Services which
must be provided by Supplier are included in Exhibit D.
(g) The warranties are made solely to and for the benefit of
Sprint and its Customer. Supplier makes no other warranties
with respect to the products or any services and disclaims all
other warranties, . Sprint's sole remedy with respect to any
warranty or defect is as stated above.
10.0 SUPPLIER SUPPORT OBLIGATIONS
Supplier agrees to provide to Sprint the support Services detailed in
Exhibit E.
11.0 OWNERSHIP
(a) All Equipment, materials, drawings, Software or data of every
description that Supplier receives directly or indirectly from
Sprint or from a third party on behalf of Sprint, or that is
paid for in whole or in part by Sprint, is the property of
Sprint ("Sprint-owned"). Supplier must mark all such property
as Sprint-owned, and must return all Sprint-owned property to
Sprint upon Sprint's request, or upon the termination or
expiration of this Agreement, whichever is earlier. Supplier
is responsible and must account for all Sprint-owned property,
and bears the risk of loss while the property is in Supplier's
possession. Sprint-owned property may only be used in
Supplier's performance of this Agreement. Sprint may inspect
any
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<PAGE> 9
CONTRACT NO.
agreements and associated records, including invoices, by
which Supplier acquires Sprint-owned property.
(b) Supplier retains all ownership and unrestricted rights to the
Products. In the future, Sprint and Visual may conduct good
faith negotiations on future product enhancements to the
Products as part of a new and separate executed agreement.
The purpose of such agreement will be to define possible
specific developments unique to Sprint (for which Sprint would
pay for development) and possible specific, defined
restrictions on Supplier's distribution rights for those
developments.
12.0 PROPRIETARY INFORMATION
(a) Supplier and Sprint acknowledge that while performing this
Agreement they may have access to Supplier-owned or
Sprint-owned trade secrets including, but not limited to,
products, planned products, service or planned service,
suppliers, customers, prospective customers, data, financial
information, computer software, processes, methods, knowledge,
inventions, ideas, marketing promotions, discoveries, current
or planned activities, research, development or other
information relating to Sprint's or Supplier's business
activities or operations or those of either's customers or
suppliers ("Proprietary Information").
(b) This Agreement creates a confidential relationship between
Sprint and Supplier. Sprint and Supplier will keep
Proprietary Information confidential and, except as authorized
by Sprint or Supplier in writing, Supplier and Sprint may only
use Proprietary Information to perform the Services or provide
the Products as required under this Agreement, and may only
make copies necessary for performing or reselling the Services
or providing the Products. Supplier or Sprint will label all
Proprietary Information as proprietary or if disclosed in an
intangible format, confirm in writing within 30 days of
disclosure. Upon cessation of work, or upon Sprint's or
Supplier's request, Sprint or Supplier will return all
documents and other materials in their control that contain
or relate to Proprietary Information.
(c) Sprint may require signed non-disclosure agreements from
Supplier's employees, agents or subcontractors.
(d) Proprietary Information does not include information that
Supplier or Sprint can demonstrate by written documentation:
(i) is rightfully known to Supplier or Sprint prior to
negotiations leading to this Agreement;
(ii) is independently developed by Supplier or Sprint
without any reliance on Proprietary Information; or
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<PAGE> 10
CONTRACT NO.
(iii) is or later becomes part of the public domain or is
lawfully obtained by Supplier or Sprint from a third
party.
(e) Supplier and Sprint acknowledge that disclosure of Proprietary
Information by Supplier or Sprint will cause irreparable
injury to Sprint or Supplier, Sprint's Customers and other
suppliers, that is inadequately compensable in monetary
damages. Accordingly, Sprint or Supplier may seek injunctive
relief in any court of competent jurisdiction for the breach
or threatened breach of this Section 12, in addition to any
other remedies in law or equity.
13.0 LICENSE OF SOFTWARE
(a) "Software" means any program stored on any media, including
but not limited to, magnetic tape, semiconductor device, disk,
or other memory device, or computer memory and including
related items. Supplier grants to Sprint a non-exclusive,
fully paid-up, perpetual license to use the object code of the
Software with the right to sublicense the object code to its
Customers, provided that the object code will only be used in
connection with the Products for which it was acquired and by
Sprint's consultants and agents on a need-to-know basis. This
right to use and sublicense the object code is subject to
payment of applicable license fees.
(b) Sprint acknowledges that Supplier claims that the Software is
proprietary to Supplier and third parties from whom Supplier
has acquired license rights. Title to the Software will
remain with Supplier or the third-party owners. Sprint will
enter into a software license agreement with its Customers,
prior to providing the object code of the Software. The
software license will be either a separate agreement or a
master sublicense agreement under which various products are
sublicensed by Sprint and will contain provisions that are no
less restrictive than those of this Section 13.
(c) Sprint may copy the object code of the Software for the
purpose of distributing it to its Customers. Additionally,
Sprint, its distributors, Customers and prime contractors may
copy the object code of the Software for back-up or archival
purposes. Each copy of the Software made by Sprint, its
distributors, Customers, and prime contractors will include
the proprietary notice contained in the Software as delivered
by Supplier.
(d) During the Term of this Agreement or when maintenance is
provided following the Term, Sprint may distribute copies of
any Software correction, modification, or update provided to
Sprint or its Customers at no additional cost.
(e) Sprint will not, and will not assist any third party to,
modify, reverse assemble, reverse compile or reverse engineer
the Software.
(f) The expiration or termination of this Agreement will not
terminate the right of Sprint or its Customers to use the
Software.
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<PAGE> 11
CONTRACT NO.
(g) Supplier warrants, that it is not necessary for Sprint, or its
Customers to obtain a license from any third party in order to
use the Products, other than the license granted by Supplier
under Sections 13 and 15.
(h) Failure to comply with Section 13 is a material breach of this
Agreement.
14.0 ESCROW AGREEMENT
(a) Within 30 days after the Effective Date, Supplier and Sprint
will enter into an escrow agreement ("Escrow Agreement") with
an escrow agent. The Escrow Agreement will provide for the
delivery of items necessary to recreate, modify, maintain and
use the Software, including without limitation, flow chart and
diagrams, compilers, operating Software, and relevant
documentation, such as design documentation and the document
environment ("Source Code") to the escrow agent, and require
the Supplier to deposit in escrow any modifications or
enhancements to the Source Code of the Software within 45 days
after provision of such modifications and/or enhancements to
Sprint or its Customers. In addition, Sprint will be
permitted to inspect the Source Code, which has been deposited
in escrow, through an independent third-party, to verify that
the Source Code has been deposited and that it contains
everything needed to use and maintain the Software. The fees
of the escrow agent will be paid by Sprint.
(b) Sprint will have the right to obtain a copy of the Source Code
from the escrow agent to maintain, modify and enhance the
Software for itself and sublicensees, subject to the
confidentiality provisions of this Agreement, and only if one
or more of the following events occurs:
(i) Supplier willfully refuses for more than 30 days to
deliver the Software to Sprint, or to support the
Software licensed by Sprint to a Customer, in breach
of Supplier's obligations under this Agreement, or
(ii) Supplier is unable to deliver the Software to Sprint
due to Supplier's voluntary or involuntary
bankruptcy, insolvency, dissolution or cessation of
active business operations for a period of more than
30 days.
If one or more of the above listed events occurs, Supplier
automatically, by the terms of this Agreement, grants to
Sprint a personal (except for third parties permitted to work
with the source code pursuant to Subsection (c) below,
non-exclusive, royalty free, worldwide license to use the
Source Code for the purpose of meeting its support obligations
to itself and its Customers. The 30-day period referred to
in subsections (i) and (ii) commences when Supplier receives
written notice from Sprint that the event has occurred.
(c) In the event of an Escrow withdraw as set forth in this
Section, Sprint may not sublicense the Source Code to any
third party not a Customer. Sprint may permit
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CONTRACT NO.
third parties to work with the Source Code on Sprint's behalf,
provided the third-parties are subject to a non-disclosure
agreement.
15.0 USE OF PRODUCTS
(a) The Products purchased under this Agreement may either be used
by Sprint or Sprint may sell, lease, sublicense or distribute
in any manner the Equipment or Software directly to its
Customers. Supplier licenses to Sprint and authorizes Sprint
to sublicense to Customers the right to use any intellectual
property, if any, contained in the Products for use by Sprint
and its customers under this Agreement.
(b) Sprint may make copies of Product documentation if Sprint
reproduces Supplier's proprietary notice on each copy.
16.0 LIABILITY AND INDEMNIFICATION
(a) Supplier and Sprint agree to release, irrevocably and forever
each other, and will defend, pay all judgments, expenses, and
costs (including attorney fees) and generally indemnify,
defend and hold each other harmless from all liability, suit,
claim or proceeding ("claims") resulting from the performance
or non-performance of this Agreement brought against either
party by any person for any damage, loss or destruction of
any kind, including, without limitation, loss to any property
or for any personal injury, including, without limitation,
death, defamation and invasion of privacy, to any person,
including without limitation any personnel of Sprint or
Supplier if the loss, destruction, injury or death results or
allegedly results, in whole or in part, from the act,
negligence, error, omission or willful misconduct or breach of
this Agreement by Supplier or Sprint.
(b) Supplier agrees to handle and defend all claims brought
against Sprint or its Customers, including without limitation,
Sprint's lessees, bailees, transferees and assigns, so far as
based on any claim that the work or Services performed, or the
Products furnished or manufactured by Supplier in the course
of this Agreement or any resulting use or sale of any work,
Services or Products constitutes an infringement of any patent
or copyright of any country, or misappropriation of any trade
secret, or constitutes a breach of any moral right, right of
publicity, or intellectual property right.
(c) If the sale or use of the Products or Services is enjoined,
Supplier must, at Supplier's option and Supplier's expense,
either:
(i) procure for Sprint and its Customers the right to use
the Products or Services; or
(ii) replace the Products or Services with equivalent
non-infringing Products or Services; or
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CONTRACT NO.
(iii) modify the Products and Services so they become
non-infringing; or
(iv) remove the Products or Services and refund the
purchase price, including transportation,
installation, removal and other incidental charges.
(d Sprint will notify Supplier in writing of any claims, and will
provide information, assistance and authority for Supplier's
handling and defense of the claim, all at Supplier's expense.
(e) Other than the parties's indemnification obligations under
section 16 of this agreement, neither party will be
responsible to the other for: i) except for indemnifications
made under Section 16b, special, indirect or consequential
loss or damage (including lost data) whether or not such loss
or damage is caused by the fault or negligence of that party,
its employees, agents or subcontractors, ii) for procurement
of substitute goods, technology of services, iii) except for
indemnification obligations under Section 16b, any amounts in
excess, in the aggregate, *** This section does not limit
liability for bodily injury to a person.
17.0 INSURANCE
(a) Supplier will obtain and maintain during the term of this
Agreement, with financially reputable insurers licensed to do
business in all jurisdictions where Product or Services are
delivered or performed and that are reasonably acceptable to
Sprint, not less than the following insurance:
(i) Workers' Compensation as required under any Workers'
Compensation or similar law in the jurisdiction where
the Product is manufactured or work is performed with
an employer's liability limit of not less than
$500,000 per accident; and
(ii) Commercial General Liability, including Product
Liability Insurance and Contractual Liability and
Products/Completed Operations Liability, with a limit
of not less than $1,000,000 combined single limit per
occurrence for bodily injury, personal injury, and
property damage liability, naming Sprint as an
additional insured;
(iii) Business Auto liability insurance covering the
ownership, maintenance or use of any owned, non-owned
or hired automobile with minimum limits of one
million dollars ($1,000,000) combined single limit
per accident for each bodily injury, including death,
and property damage liability, naming Sprint as an
additional insured; and
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
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CONTRACT NO.
(iv) "All Risk" Property Insurance covering not less than
the full replacement cost of Supplier's personal
property while installing, training, or servicing on
Sprint or Customer premises.
(b) Certificates of Insurance. Supplier must, as a material
condition of this Agreement, prior to commencement of any work
and prior to any renewal of insurance, deliver to Sprint a
certificate of insurance, satisfactory in form and content to
Sprint, evidencing that the above insurance, is in force and
will not be canceled or materially altered without first
giving Sprint 30 days' prior written notice.
(c) Nothing contained in this Section 17 limits Supplier's
liability to Sprint to the limits of insurance certified or
carried.
18.0 RIGHT OF AUDIT
Supplier will maintain all records pertaining to this Agreement for at
least 3 years after final payment. Sprint may audit, copy and inspect
the records at reasonable times during the term of this Agreement and
for the 3-year period to verify costs incurred. The audit will be
performed by an independent third party mutually agreed upon and paid
for by Sprint, unless issues related to costs charged Sprint or
Supplier's performance are discovered, in which case the Supplier will
incur the cost of the audit.
19.0 NOTICE
Any communication relating to this Agreement must be in writing and
reference the Contract Number and Order number, if applicable and sent
by certified mail, return receipt requested, telex, facsimile or
overnight mail to the following addresses or as may be later
designated by written notice of a party:
Sprint: Ted Berberich
SPRINT
Switched Data Services
8320 Ward Parkway
Kansas City, MO 64114
Phone: (913) 624-4681
Fax: (913) 624-4681
Copy: Ted Freese
Lead Negotiator, Materials & Services Management
SPRINT
903 E. 104th Street
Kansas City, MO 64131
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CONTRACT NO.
Phone: 816-854-7880
Fax: 816-854-7022
With a copy of Default Notice to:
SPRINT LAW DEPARTMENT
8140 Ward Parkway
Kansas City, Missouri 64114
Supplier: Richard Wathen, VP Finance
VISUAL NETWORKS
2092 Gaither Road
Rockville, MD 20850
Phone: 301-330-7140
Fax: 301-258-5137
20.0 ARBITRATION
(a) Any dispute arising out of or relating to this Agreement,
including any issues relating to arbitrability or the scope of
this arbitration clause, will be finally settled by
arbitration in accordance with the rules of the American
Arbitration Association applying the substantive law of Kansas
without regard to any conflict of laws provision. The
arbitration will be governed by the United States Arbitration
Act, 9 U.S.C. Section 1 et seq., and judgment upon the award
rendered by the arbitrator(s) may be entered by any court with
jurisdiction. The arbitration will be held in the Kansas
City, Missouri metropolitan area. The arbitrators are not
empowered to award damages in excess of compensatory damages
and each party waives any damages in excess of compensatory
damages. Notwithstanding the foregoing, Sprint or Supplier
may bring a claim for injunctive relief as provided in Section
12(e) in a court of competent jurisdiction without first
submitting the matter to Arbitration.
(b) Claims made by Supplier may only be brought against the Sprint
Affiliate which issued the Order giving rise to the claim.
21.0 FEDERAL REQUIREMENTS
(a) Sprint's Status as a Government Contractor. If Sprint or the
federal government determines that this Agreement supports
specific requirements included in a Sprint contract or
subcontract with the federal government, Supplier will be
subject to certain federal acquisition regulations ("FAR's")
contained in Sprint's contract or subcontract. Supplier will
be subject only to FAR's that must be included in all
subcontracts as a matter of law. The applicable FAR will be
attached to the affected Order.
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CONTRACT NO.
(b) Small Business/Small Disadvantaged Business Reporting. If
this Agreement has subcontracting opportunities, Supplier will
make an accounting of dollars applicable to the Products and
Services purchased by Sprint that are subcontracted to firms
that are Small Businesses, Small Disadvantaged Businesses, or
Women-Owned Businesses under Small Business Administration
Regulations. These dollars will be reported annually in
writing to the following address:
Small Business Coordinator
SPRINT
903 E. 104th Street
Kansas City, Missouri 64131
22.0 GENERAL
(a) Ethics Code. Supplier agrees to comply with Sprint's Code of
Ethics, where applicable, a copy of which is attached to this
Agreement and is incorporated in this Agreement.
(b) Supplier Performance. Time is of the essence in Supplier's
performance under this Agreement. Sprint is not obligated to
pay for Products delivered or Services performed which do not
conform to Sprint's Order.
(c) Independence of Parties. Neither party is in a joint venture
with or partner or agent of the other. Neither party has the
authority to bind the other in any way. Both parties agree
not to make any commitment in the name of or which purports to
be binding on the other.
(d) Independent Contractor
(i) Supplier must comply with laws, regulations and
orders relating to equal employment opportunity,
workers' compensation, unemployment compensation and
FICA. Upon request, Supplier will furnish Sprint
with
its EEO policies and procedures, verification of
workers' compensation, unemployment compensation,
FICA and the number of hours any individual performs
Services for Sprint within any 12 consecutive month
period.
(ii) Supplier, its subcontractors, employees or agents are
independent contractors for all purposes and at all
times. Supplier has the responsibility for, and
control over, the means and details of performing the
Services, subject to Sprint's inspection. Supplier
will provide all training, hiring, supervising, hours
of work, work policies and procedures, work rules,
compensation, payment for expenses and discipline and
termination of its employees.
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CONTRACT NO.
(iii) Sprint will incur no responsibility or obligation to
employees, agents, subcontractors or other parties
utilized by Supplier to perform the Services set
forth in this Agreement. Such person or parties
will, at all times, remain employees, agents or
subcontractors (whichever is applicable) of Supplier.
(iv) Supplier is solely responsible for payment of wages,
salaries, fringe benefits and other compensation of,
or claimed by, Supplier's employees including,
without limitations, contributions to any employee
benefit, medical or savings plan and is responsible
for all payroll taxes including, without limitation,
the withholding and payment of all federal, state and
local income taxes, FICA, unemployment taxes and all
other payroll taxes. Supplier is also solely
responsible for compliance with applicable Workers'
Compensation laws with respect to maintenance of
workers' compensation coverages on Supplier's
employees. Supplier will indemnify and defend Sprint
from all claims by any person, government or agency
relating to payment of taxes and benefits, including
without limitation, any penalties and interest which
may be assessed against Sprint. Supplier will
similarly indemnify and defend Sprint from all claims
by any person or governmental agency which arise
directly or indirectly from any failure by Supplier
to comply with applicable Workers' Compensation laws
with respect to maintenance of workers' compensation
coverage on Supplier's employees.
(v) If Sprint determines that a Supplier-provided
employee, agent or subcontractor is not providing
satisfactory service, Sprint will advise Supplier and
may require Supplier to remove that individual or
subcontractor. Sprint will only pay for work
actually performed by the removed individual or
subcontractor prior to Sprint's notice for removal
and not for transportation or per diem costs
associated with replacing the individual. Supplier
will submit additional resumes to Sprint for purposes
of filling a vacancy at no additional charge.
(vi) Supplier and Sprint will require its employees,
agents and subcontractors to comply with the terms
and conditions of this Agreement.
(f) Survival. Numbered provisions 9, 10 ,11, 12, 13, 14, 15, 16,
17, 18, 20, 22(j) and (k) will survive the expiration or
termination of this Agreement, as well as provisions in this
Agreement that by their content are intended to survive the
performance, termination or cancellation of this Agreement.
(g) Severability. If a provision of this Agreement is
unenforceable, the remaining provisions will remain in effect,
to be construed as if the unenforceable provision were
originally deleted.
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<PAGE> 18
CONTRACT NO.
(h) Waiver. The waiver of a breach of any term of this Agreement
will not constitute the waiver of any other breach of the same
or any other term.
(i) Assignment. Neither party may assign all or any part of this
Agreement without the prior written notice of the other, which
may not be unreasonably withheld, except Sprint may assign
this Agreement to any Sprint controlled Affiliate without
Supplier's consent.
(j) Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the State of Kansas,
without regard to any conflict of laws provision therein.
(k) Publicity. Except as required by law or this Agreement,
neither party will, without the other party's prior written
consent, which shall not be unreasonably withheld:
(i) make any news release, public announcement, denial or
confirmation of this Agreement or its subject matter;
or
(ii) in any manner advertise or publish the fact of this
Agreement
(l) Remedies. Remedies available to either party under this
Agreement are cumulative and may be exercised concurrently or
separately. The exercise of any one remedy is not an election
of that remedy to the exclusion of other remedies. The rights
and remedies of the parties in this Agreement are not
exclusive and are in addition to any other rights and remedies
available in law or in equity.
(m) Security. Supplier warrants and agrees its employees, agents
and subcontractors will abide by Sprint's security
requirements provided by Sprint to Supplier for the designated
premises where services are performed under this Agreement.
Any security breach will be referred to Sprint's Corporate
Security department.
Supplier will be liable for any security breach resulting from
its failure to comply with Sprint Security requirements, and
will indemnify, defend and hold Sprint harmless for any loss
or damage arising out of or relating to any security breach.
(n) Weapons. Supplier is prohibited from carrying weapons or
ammunition onto Sprint's premises or using or carrying weapons
while performing work on Sprint's behalf or attending
Sprint-sponsored activities. Supplier further agrees to
comply with any postings or notices located at Sprint's
premises regarding safety, security or weapons.
23.0 ENTIRE AGREEMENT
This Agreement, including all Exhibits listed below, contains the
entire agreement between the parties with respect to the subject
matter contained. In the event of an
- 18 -
<PAGE> 19
CONTRACT NO.
inconsistency between the terms of this Agreement and those of an
Order, the terms of this Agreement control. In the event of an
inconsistency between the body of this Agreement and the exhibits, the
body of this Agreement controls:
Exhibit A including any related Schedules:
Product and Cable prices to Sprint
Post Term Maintenance Support Fees
Post Warranty Equipment Warranty Fees
Installation Fees
Post Term Spare Parts Prices
Exhibit B: Sprint Transportation Routing Guide
Exhibit C: Supplier Affiliates and Distributors
Exhibit D: Warranty and Maintenance Services
Exhibit E: Supplier Support Obligations
- 19 -
<PAGE> 20
CONTRACT NO.
SIGNED:
SPRINT/UNITED MANAGEMENT VISUAL NETWORKS COMPANY
/s/ John Todd /S/ Richard Wathen
- -------------------------------- ----------------------------------
(SIGNATURE) (SIGNATURE)
JOHN TODD RICHARD WATHEN
- -------------------------------- ----------------------------------
(PRINT NAME) (PRINT NAME)
VP - ENTERPRISE SERVICES CHIEF FINANCIAL OFFICER
- -------------------------------- ----------------------------------
(TITLE) (TITLE)
8/22/96 8/20/96
- -------------------------------- ----------------------------------
(DATE) (DATE)
/S/ GARY MEDFORD
- --------------------------------
(SIGNATURE
GARY MEDFORD
- --------------------------------
(PRINT NAME)
AVP - MATERIALS & SERVICES MGMT.
- --------------------------------
(TITLE)
AUGUST 23, 1996
- --------------------------------
(DATE)
- 20 -
<PAGE> 21
CONTRACT NO.
EXHIBIT A, PRICING, SCHEDULE I
EXHIBIT 10.6 (SPRINT)
EXHIBITS
***.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 22
CONTRACT NO.
EXHIBIT A, PRICING, SCHEDULE II
***
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 23
CONTRACT NO.
POST PRICING: EQUIPMENT EXTENDED WARRANTY PRICING
EXHIBIT A
After expiration of the Product 5-year warranty, Sprint may extend a
specific piece of Product's warranty by annually paying ***. For each
succeeding year, After Supplier agrees the pricing for the extended
warranty ***.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 24
CONTRACT NO.
POST TERM SOFTWARE MAINTENANCE PRICING
EXHIBIT A
At Sprint's option at the end of the Term, Visual will offer Software
maintenance services under the terms of this Agreement at an annual
cost *** .
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 25
CONTRACT NO.
INSTALLATION
EXHIBIT A
Visual will install the ASE hardware for *** per ASE. Installation
will be done by Visual's contractor. Services related to configuring,
tuning or customizing a customer installation will be at ***.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 26
CONTRACT NO.
POST TERM SPARE PARTS PRICING
EXHIBIT A
Visual will offer spare parts at the end of the term *** .
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 27
CONTRACT NO.
TRANSPORTATION ROUTING GUIDE
ROUTING: The carriers listed below shall be used for the inbound and outbound
movement of materials to, from, and between Spring Corporation locations and
suppliers.
BILLING: All freight charges which are directly, or indirectly, the
responsibility of Sprint, Sprint International, Sprint Services and Sprint
Telemedia should be billed third party to Sprint Accounts Payable, P.O. Box
5409, Kansas City, MO 64131. Purchase of insurance coverage from transportation
carriers is NOT authorized.
DOCUMENTATION: All shipping documents should reference Purchase Order, Work
Order, or Cost Center number. INTERNATIONAL PAPERWORK SHOULD BE VERIFIED BY
SPRINT'S TRANSPORTATION DEPARTMENT PRIOR TO SHIPMENT.
COMPLIANCE: Failure to comply with Sprint's Transportation Routing Guide
Instructions will result in excess freight chargebacks to your company.
Shipments routed by means other than the guidelines within will be charged back
to the supplier at 50% of the total transportation cost. PENALTIES WILL BE
ENFORCED ON ALL SHIPMENTS BEGINNING May 1, 1995.
SPRINT TRANSPORTATION: Please refer any questions to Sprint's Transportation
Department to the following Transportation Specialist:
***
SMALL PACKAGE SURFACE ROUTING UNDER 150 LBS. TOTAL
(Including to and from Canada)
AUTOMATED RECEIVING LOCATIONS:
If shipments meet UPS guidelines and the materials are going to one of the
receiving locations below, see UPS Consignee Building:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
2375 Eichler St. 2-J Hayward California 94545 8189 Lackland Rd. St.Louis Missouri 63114
3065 Gold Camp Rancho Cordova California 95670 8140 Ward Pkwy. Kansas City Missouri 64114
1099 18th St. Denver Colordado 80202 901/903 E. 104th St. Kansas City Missouri 64131
3100 Cumberland Cr. Atlanta Georgia 30339 1200 Main St. Kansas City Missouri 64152
5600 N. River Rd. Rosemont Illinois 60018 29 Stults Rd. Dayton New Jersey 08810
2330 Shawnee Msn. Westwood Kansas 66205 1 Manhattanville Rd. Purchase New York 10577
6600 College Blvd. Overland Park Kansas 66211 1520 E. Rochelle Irving Texas 75039
9350 Metcalf Overland Park Kansas 66212 14012 Welch Rd. Farmers Branch Texas 75244
11701 W. 85th St. Lenexa Kansas 66215 12490 Sunrise Valley Reston Virginia 22096
</TABLE>
UPS CONSIGNEE BILLING:
<TABLE>
<S> <C>
1. Inbound materials to the above locations should be routed via 4. Sprint's six digit cost center number must be on
UPS Consignee Billing. each package's address label. This number
can be found on the Express Buy Order Form or on
the distribution account line of the Purchase
Order. Example: Dist. Acct.: 01USS 01
(XXXXXX) 61200000 000
2. If your company is not set up to ship via Consignee Billing, 5. These packages will be picked up with your
please contact UPS at 800/345-7527 to request a Consignee regularly scheduled UPS pickup. No additional
Billing Kit. pickups are required.
3. Each individual package must meet UPS size and weight
</TABLE>
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 28
CONTRACT NO.
<TABLE>
<S> <C>
restrictions:
- - 150 pounds maximum weight per pkg. UPS Consignee Billing Desk 800/354-7527
- - 130 inches combined length & girth
- - 108 inches maximum length
</TABLE>
SMALL PACKAGES FOR OTHER RECEIVING LOCATIONS:
<TABLE>
<S> <C>
1. If the receiving location on the purchase order is NOT listed 2. ROADWAY PACKAGE SYSTEM or UNITED PARCEL
above, shipping charges should be added to the invoice for SERVICE may be used for shipments to locations
goods listed on the Purchase Order. NOT listed above.
</TABLE>
ROUTE SHIPMENTS WHICH TOTAL 151 POUNDS OR GREATER VIA LTL CARRIERS
<PAGE> 29
CONTRACT NO.
TRANSPORTATION ROUTING GUIDE
LTL SURFACE ROUTING OVER 150 LBS. TOTAL
(Including to and from Canada - Region map below)
Shipments above 10,000 lbs. require authorization by Sprint's
Transportation Department prior to shipment
NATIONWIDE LONG HAUL LTL CARRIERS: Consolidated Freightways, Yellow Freight
System
REGIONAL SHORT HAUL LTL CARRIERS:
<TABLE>
<S> <C> <C>
NORTHWEST MIDWEST NORTHEAST
--------- ------- ---------
Silver Eagle American Freightways Howard Express
Con-Way Central TNT Red Star
WEST SOUTHWEST SOUTHEAST
---- --------- ---------
Con-Way Western American Freightways AAA Cooper
Con-Way Southern Express Averitt Express
Southeastern Freightways
Con-Way Southern Express
</TABLE>
Regional LTL (Less-than-truckload) shipments are defined as short haul
interstate LTL movements, normally under 500 miles which occur either within a
region, or between a region and the bordering states of a neighboring region or
bordering Canadian Provinces.
DEFINED REGIONS FOR LTL FREIGHT
[Map of United States Appears here]
ELECTRONIC (PADDED) VAN SHIPMENTS
BEKINS VAN LINES (ALL POINTS) 816/763-6300 800/767-1120
NORTH AMERICAN VAN LINES (BELTMANN) 913/888-9105 800/869-6114
UNITED VAN LINES (FRY-WAGNER) 913/541-0020 800/829-0049
<PAGE> 30
CONTRACT NO.
DOMESTIC AIR EXPRESS AND AIR FREIGHT ROUTING
(See Geographic Routing Exceptions for Canada, Alaska, Hawaii, Puerto Rico and
International shipments)
Shipments above 1,000 lbs. require authorization by Sprint Transportation prior
to shipment
<TABLE>
<CAPTION>
WEIGHT SAME DAY NEXT DAY 2ND DAY 3-5 DAYS INTERNATIONAL
<S> <C> <C> <C> <C> <C>
LTR - 50 QUICK AIRBORNE EXPRESS* UPS GROUND AIRBORNE EXPRESS
FEDERAL EXPRESS DHL WORLDWIDE*
51-70 COURIER EMERY EMERY
WORLDWIDE WORLDWIDE
71+ BURLINGTON BURLINGTON CALL
AMERTRANZ TRANSPORTATION
PILOT AIR FREIGHT FOR INTERNATIONAL
ROUTING GUIDE
AND INSTRUCTIONS
</TABLE>
Air routing is only authorized when expedited service is requested by Corporate
Procurement to meet specific delivery requirements. Packages shipped via air,
without authorization from Corporate Procurement, by the supplier will result
in a 50% chargeback, to that supplier, of the total transportation cost.
GEOGRAPHIC EXCEPTIONS (AIR & SURFACE)
(Inbound and Outbound)
<TABLE>
<CAPTION>
CANADA CANADA ALASKA & PUERTO
WEIGHT (Air) (Surface) HAWAII RICO
<S> <C> <C> <C> <C>
LETTER AIRBORNE UPS AIRBORNE EXPRESS*
- DHL WORLDWIDE GROUND FEDERAL EXPRESS
70 FEDERAL EXPRESS
71+ EMERY CONSOLIDATED BURLINGTON AMERTRANZ
WORLDWIDE FREIGHTWAYS AMERTRANZ BURLINGTON
BURLINGTON YELLOW FREIGHT
SYSTEM
</TABLE>
CONTACT INFORMATION
<TABLE>
<CAPTION>
CARRIER CUSTOMER SERVICE CONTACT
<S> <C>
Airborne Express* 800/247-2676
AmerTranz Worldwide Contact local station
Bekins Van Lines 800/767-1120 or 816/763-6300, Customer Sercvice
Burlington Contact local station
DHL Worldwide Express* 800/345-3601, Monika Hayworth
Emery Worldwide 800/443-6379
Federal Express 800/238-5355
LTL Carriers Contact local terminal - customer service/dispatch
North American Van Lines 800/869-6114 or 913/888-9105, Deanna Cox
Pilot Air Freight 800/447-4568 or local station
Quick International Courier 800/488-4400, extension 475
Sprint Transportation Dept. ***
</TABLE>
*Preferred Carrier for specific service requirement
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 31
CONTRACT NO.
SPRINT AFFILIATE LIST
<TABLE>
<CAPTION>
Name Address Telephone No.
<S> <C>
CORPORATE
***
SPRINT CORPORATION 2330 Shawnee Mission Parkway,
Westwood, Kansas 66205
SPRINT/UNITED MANAGEMENT COMPANY 2330 Shawnee Mission Parkway,
Westwood, Kansas 66205
LONG DISTANCE DIVISION
SPRINT COMMUNICATIONS COMPANY L.P. 8140 Ward Parkway, Kansas City, MO 64114-8417
MAJORCO, L.P. (Sprint Spectrum) 4717 Grand Avenue, Kansas City, MO 64112
GLOBAL ONE 12490 Sunrise Valley Drive, Reston, VA 22096
Sprint International of Canada, Inc. 12490 Sunrise Valley Drive, Reston, VA 22096
Sprint International Mexico S.A. de C.V. 12490 Sunrise Valley Drive, Reston, VA 22096
ADN (Alcatel) 12490 Sunrise Valley Drive, Reston, VA 22096
LOCAL DIVISION
CENTRAL TELEPHONE - ILLINOIS 8725 Higgins Road, Chicago, Illinois 60631
CENTRAL TELEPHONE - NEVADA 330 S. Valley View, Las Vegas, Nevada 89152
MID-ATLANTIC TELECOM 14111 Capital Blvd., Wake Forest, N.C. 27587-5900
Sprint/Carolina Telephone 720 Western Blvd., Tarboro, N.C. 27886
Sprint/Centel - North Carolina 320 First Avenue N.W., Hickory, N.C. 28601-6123
Sprint/Centel - Virginia 2211 Hydraulic Road, P.O. Box 6788,
Charlottesville, VA 22906
Sprint/United Telephone - Southeast 112 Sixth Street, Bristol, Tennessee 37620
UNITED TELEPHONE - EASTERN 1201 Walnut Bottom Road, Carlisle, PA 17013-0905
United Telephone - New Jersey 1201 Walnut Bottom Road, Carlisle, PA 17013-0905
United Telephone - Pennsylvania 1201 Walnut Bottom Road, Carlisle, PA 17013-0905
UNITED TELEPHONE OF FLORIDA 555 Lake Border Drive, Apopka, Florida 32703
Vista-United Telecommunications 3100 Bonnet Cred Road, Lake Buena Vista, FL
UNITED TELEPHONE MIDWEST 5454 West 110th, Overland Park, Kansas 66211
United Telephone - Kansas 123 North Eisenhower, Junction City, Kansas 66441
United Telephone - Minnesota 105 Peavey Road, Chaska, Minnesota 55318
United Telephone - Missouri (East) 319 Madison Street, P.O. Box 689, Jefferson City,
Missouri 65102
United Telephone - Missouri (West) 210 East Market, P.O. Box 87, Warrensburg, Missouri 64093
United Telephone - Nebraska 2806 Avenue D, Scottsbluff, Nebraska 69361
United Telephone - Texas 1005 Congress Avenue, Suite 400, Austin, TX 78701
UNITED TELEPHONE - NORTH CENTRAL 665 Lexington Avenue, Mansfield, Ohio 44907
United Telephone - Indiana P.O. Box 391 2000 W. William Avenue, Warsaw, Indiana 46580
United Telephone - Ohio P.O. Box 3555, 839 W. Longview Road, Mansfield, Ohio 44907
UNITED TELEPHONE - NORTHWEST 902 Wasco Street, Hood River, Oregon 97031
</TABLE>
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 32
CONTRACT NO.
COMPLEMENTARY DIVISION
<TABLE>
<S> <C>
SPRINT NORTH SUPPLY 600 New Century Parkway, New Century,
Kansas 66031
SPRINT PUBLISHING & ADVERTISING 6666 West 110th, Overland Park, Kansas 66211
</TABLE>
<PAGE> 33
CONTRACT NO.
WARRANTY AND MAINTENANCE SERVICES
EXHIBIT D
(a) Equipment that fails within the warranty period will be returned to
Supplier. Sprint will obtain a Returned Material Authorization
("RMA") from Supplier prior to returning. Supplier will provide the
RMA within *** of Sprint's request.
(b) Engineering Change Notices ("ECNs") will be placed, based on the
severity of the problem, into one of 5 classes as follows:
(i) Class 1. The ECN generated change is incorporated into all
existing Products, including Products in the field. This
change must be made when the ECN is received on the
manufacturing floor on the cut-in date assigned and shipments
will be stopped until the ECN is implemented. ECNs that are
safety related will be implemented by Supplier on any affected
Products sold to Sprint at no additional charge, provided
Sprint makes the affected Product available for repair.
Supplier will pay all shipment charges resulting from an
agreed method of Product repair. If the Product must be
shipped back to Supplier in order to implement the ECN,
Supplier will provide and install at no cost an equivalent
Product on a loaned basis until the original Product is
returned to Sprint and is operational.
(ii) Class 2. Rework is required in-house from the origin of the
Product. This change will begin on the cut-in date assigned.
(iii) Class 3. Change will be incorporated in all new production
starts and in new Purchase Orders. Change will be
incorporated into new builds as of the cut-in date assigned.
(iv) Class 4. These changes indicate one of the following: (a) a
document change only to the records of a Product, or (b) a
change in the initial release of some phase of a new Product
design.
(v) Class 5. Indicates a Software change.
(c) Supplier must provide Sprint a written report no less than quarterly
stating:
***
In addition, Supplier must provide Sprint no less than quarterly a
summary of ECNs that affect form, fit, function or safety of the
Products. Supplier will provide a copy of an ECN upon Sprint's
request. In addition, Supplier must provide Sprint quarterly with any
Technical Bulletins that it issues.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 34
CONTRACT NO.
MAINTENANCE:
During the Term of this Agreement, Supplier will provide Software maintenance
Services as described in Exhibit E or under any maintenance following the Term.
For five years after purchase of each Equipment unit, Supplier will provide
warranty support for all Equipment.
(a) During the term of this Agreement, Supplier will provide software
maintenance services as described in Exhibit E. For five years after
purchase of each Equipment unit, Supplier will provide warranty
support. The fee for extended Equipment warranty after expiration of
the five year warranty period is set forth in Exhibit A.
(b) Software maintenance will be as set forth in Exhibit E.
(c) The diagnostic software needed to maintain the Products is included in
the Products.
(d) Supplier will include with each Product a set of the Documentation
that it normally provides with that Product. However, if Supplier
converts the Documentation into a Sprint format, or if Sprint provides
Supplier with copies of the Documentation, Supplier will include the
Sprint version. Sprint will pay additional reasonable costs required
to maintain a separate Sprint format of the documentation.
SPARE PARTS:
(a) During the term of this Agreement and for a period of 5 years
following discontinuance of a Product, Supplier will make all
necessary spare parts and Products, or their functional equivalent,
available for purchase by Sprint. Supplier will also make available
information reasonably required to allow functionally equivalent
Products and spare parts to perform with Products previously
purchased. The prices charged for the spare parts and Products
following the termination of this Agreement will be Supplier's then
current published list prices less a discount as set forth in Exhibit
A for existing Supplier Product.
(b) If Supplier intends to either (i) replace a Product with one that is
functionally equivalent or better or (ii) discontinue a Product,
Supplier will provide Sprint with at least 3 months prior written
notice.
<PAGE> 35
CONTRACT NO.
SUPPLIER SUPPORT OBLIGATIONS
EXHIBIT E
1.0 TRAINING:
(a) Supplier will train Sprint representatives with respect to
sales, operation, configuration, installation, service,
maintenance and support of the Products, as well as new
Products, ("Sales and Technical Training"). The Sales and
Technical Training will take place at an agreed facility at
agreed times. Sprint may have *** in each session. Supplier
will provide the Technical Training to Sprint during *** at
Sprint's facility at agreed times as requested by Sprint.
Included in these training sessions may be Sprint's own
trainers. There will be *** to Sprint for this training and
the training documentation. Supplier will provide *** at
Supplier's location ***.
(b) Supplier will provide Sprint with *** copies of its current
training catalog within *** of the Effective Date.
Thereafter, Supplier will provide Sprint with ***
copies of its then current training catalog:
(i) whenever Supplier provides such catalog to other
resellers, distributors and/or Customers, or
(ii) *** whichever date comes first.
Sprint will provide Supplier with the names of the recipients
of this catalog. Sprint may reproduce copies for internal
distribution. In addition, when Supplier provides Sprint with
a copy of a new training catalog, Supplier will provide
additional training as Sprint requests, at a time and place
agreed upon and at the prices set forth in Exhibit A for
training.
(c) Sprint may copy, modify, and use the materials provided to it
by Supplier during a training session, if Sprint reproduces
the proprietary notice contained in the original document.
Sprint may use these materials to train Sprint employees,
Customers and third parties with respect to the Products.
2.0 DOCUMENTATION:
Supplier will provide Sprint with the number of copies of the
Documentation set forth below within *** of the Effective Date.
Supplier will provide Sprint with other Documentation ordered at the
prices set forth in Exhibit A. If Supplier modifies any Documentation,
Supplier will notify Sprint of the changes and provide Sprint with a
copy of the modified Documentation. Documentation is to be made
available in both hard and soft copy form.
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 36
CONTRACT NO.
3.0 MARKETING & SALES:
Sprint will feature the "Visual Up Time" and "On Ramp" Product lines
as Sprint's preferred product for Sprint's Customers.
*** Sprint agrees that sales and support personnel covering the
territory will receive detailed information regarding Supplier's
Products within *** of the beginning date of this Agreement.
Sprint will make opportunities available for Supplier's
representatives to present Product and sales training seminars to
groups of Sprint's sales and support representatives to keep them
abreast of current developments.
Where appropriate, Sprint agrees to incorporate portions of Supplier's
sales presentation regarding the Products into Sprint's sales
presentations relative to network management.
Sprint agrees to make reasonable efforts to feature Supplier Products
in marketing collateral which Sprint produces and distributes relating
to network management. Furthermore, Sprint agrees to make reasonable
efforts to include Supplier Products in appropriate sales training of
their field sales force, direct mailings, product fairs and
demonstrations to Sprint's sales force and customers.
4.0 INSTALLATION:
If requested by Sprint, Supplier will install the Products at Customer
locations. The fee for this service is set forth on Exhibit A.
5.0 TECHNICAL ASSISTANCE AND TELEPHONE SUPPORT:
(a) During the term of this Agreement, Supplier will provide
technical assistance in the form of a help desk, remote
diagnostics and network emergency assistance to Sprint with
respect to the use, maintenance, and installation of the
Products. These Services will be available 24 hours per day,
every day of the year through a Sprint toll free number.
Supplier will respond within *** to a request for assistance
made between the hours of 5:00 a.m. and 5:00 p.m., Supplier's
local time, Monday through Friday.
In addition, Supplier will respond within *** to any request
for emergency support, even if made outside of those hours.
Supplier will maintain a system that records Sprint's requests
for support. ***
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 37
CONTRACT NO.
Sprint shall be responsible for 1st level support of its
customers and distribution of maintenance Software releases.
First level support includes:
- providing initial installation and configuration Services
- answering most installation, use and problem queries from
Sprint's customers
- including provisions of existing workarounds to their
customers.
- where practical, replicating an end-user customer problem
and sending all relevant technical data on the replication to
Visual.
- distributing Software updates to their end users
(b) In addition to the technical assistance set forth in Section
5(a), Supplier must provide toll free telephone support to
Sprint for other issues affecting the Product, such as
training. This support will be provided between the hours of
8:00 a.m. and 5:00 p.m., Supplier's local time, Monday through
Friday.
(c) Supplier will, within *** of the Effective Date, provide
Sprint with a list of recommended types and models of tools
and test gear needed to provide Product installation Services
and technical assistance. Supplier must give Sprint written
notice within *** of any change made to the list.
(d) Supplier will provide Product updates that Supplier in its
discretion, makes generally available. Product updates
consist of copies of published revisions to the printed
documentation and copies of revisions to the machine readable
Software which are not designated by Supplier as Products for
which it charges a separate fee. All Product updates provided
to Sprint shall be governed by the terms of the Agreement.
<PAGE> 1
EXHIBIT 10.7
[AT&T LOGO]
GENERAL AGREEMENT #
FOR THE PROCUREMENT OF
EQUIPMENT, SERVICES AND SUPPLIES,
AND THE LICENSING OF SOFTWARE
BETWEEN
VISUAL NETWORKS, INC.
AND
AT&T CORP.
Agreement made November 26, 1997 by and between VISUAL Networks, Inc.(Visual) a
Delaware corporation, having a place of business at 2092 Gaither Road,
Rockville, Maryland, 20850 and AT&T Corp. (AT&T) a New York corporation,
having a place of business at 10 Independence Boulevard, Warren, NJ 07059, to
facilitate the anticipated future procurement for both internal use and resale
of Equipment, the license of Software, and the purchase of Maintenance Services
and Materials.
On the basis of VISUAL's representations and in reliance upon VISUAL's
expertise in analyzing, designing and providing Equipment and Software for
AT&T's applications per the specifications, the parties agree as follows:
<PAGE> 2
pg 2
Article I
Definitions Applicable To
The Entire Agreement
DEFINITIONS
The definitions of this Article, which are set forth below in italics, apply to
all the Articles of this Agreement:
Associated Entity means a corporation, partnership or venture, forty
(40) percent of whose voting stock or ownership interest is
owned directly or indirectly by AT&T.
AT&T means AT&T Corporation or an Associated Entity which enters into
or issues an Order under this Agreement.
Console Software means PACs ,PAMs, and MICs
Enhancements mean all Software changes, including enhancements, new
releases, new versions, product improvements, system
modifications, updates, upgrades, field modifications and the
like.
Equipment means either standard or non-standard equipment. standard
equipment means Ethernet CSU/DSC devices & V35 probes with
Ethernet interfaces; non-standard equipment means any other
equipment supplied under the terms of this agreement.
Identification means any copy or semblance of any trade name,
trademark, service mark, insignia, symbol, logo, or any other
product, service, or organization designation, or any
specification or drawing of AT&T.
Indemnities means AT&T, its customers, officers, directors, employees
and representatives, others doing work under its immediate or
ultimate direction and control, its end customers and
intermediaries in the distribution chain, and its successors
and assigns.
Information means any idea, data, program, technical, business or
other intangible information, however conveyed.
Installation Date means the dates by which the Equipment or Materials
which have been delivered are to be installed and ready for
use.
Maintenance Order means an order for Maintenance Services written on
AT&T's Order.
Maintenance Services includes all Services required by this Agreement
to keep the Equipment in good operating condition within the
Equipment manufacturer's specifications and other
specifications applicable to this Agreement.
Materials mean repair, maintenance or replacement parts for Equipment,
Media not fixedly embedded in Equipment, and tangible supplies
of other kinds which are for or associated with Equipment.
Media or Medium means any document, print, tape, disc, tool,
semiconductor chip or other tangible information-conveying
article.
Modifications mean AT&T additions to the Software, deletions from the
Software, or merges of the Software with one or more programs
owned or licensed by AT&T forming an updated and otherwise
modified software.
Order means AT&T's form of purchase order or contract used for the
purpose of ordering Equipment, Software, Services or
Materials.
Product means Equipment, Software, or Materials supplied under this
agreement.
Services means (1)Maintenance Services and other services in support
of purchased Equipment; (2) other services such as
installation, configuration, staging, training or other
professional services; or 3) the subject matter called for by
any Order.
Software means intangible Information constituting one or more
computer or apparatus programs and the informational content
of such programs, together with any documentation
<PAGE> 3
pg 3
supplied in conjunction with and supplementing such programs,
the foregoing being provided to AT&T by way of electronic
transmission or by being fixed in Media furnished to AT&T.
Software Source Material means Information consisting of all
intangible source programs, technical documentation and other
information required for maintenance, modification or
correction of the most current version of the Software
supplied to AT&T.
Specifications means the specifications for the Equipment and Software
as set forth in Exhibit 1 of this Agreement or if not so set
forth, shall mean VISUAL's current published specifications,
user documentation, and other information for the Equipment
and Software as of the date of an Order and any additional
specifications furnished by AT&T.
Use means use by any individual having authorized access to the
computer on which the Software is operated.
<PAGE> 4
pg 4
Article II
Provisions Applicable To
Purchase of Equipment And Materials
CONTENTS
<TABLE>
<CAPTION>
CLAUSE PAGE
- ------ ----
<S> <C>
EQUIPMENT TESTING 5
MARKING 5
MEAN TIME BETWEEN FAILURE RATES 5
RETURN OF EQUIPMENT and MATERIALS 5
RISK OF LOSS 6
SPECIFICATION 6
TITLE 6
WARRANTY 6
</TABLE>
<PAGE> 5
pg 5
DEFINITIONS
The definitions of Article I apply to this Article.
EQUIPMENT TESTING
In addition to any other tests to be requested by AT&T as set forth in this
Agreement, VISUAL is responsible for the performance of standard factory
production tests established by VISUAL which, in the absence of any other
testing requested by AT&T as set forth elsewhere in this Agreement, shall be
deemed to be the final tests under this Agreement. Such tests shall be
performed in accordance with VISUAL normal testing and quality control
procedures for Equipment of the type purchased hereunder to insure that the
Equipment provided hereunder meets all applicable Specifications. At the
option of AT&T, VISUAL shall furnish a copy of its test plans and quality
control procedures to AT&T prior to initiating any such testing and AT&T, at
its expense, may witness any of the testing by giving prior notice to VISUAL.
VISUAL also agrees to maintain detailed records of all such tests and to
provide AT&T, if requested, with written results of these tests.
VISUAL shall only ship units which have successfully passed testing for safety
and for compliance with the functional specification. Specifically, each unit
shipped shall pass in-circuit-test (ICT), power surge (Hypot), and functional
testing per the product Specification.
MARKING
All material furnished under this Agreement shall be marked for identification
purposes in accordance with the Specifications set forth in this Agreement or
an Order, and as follows:
(a) with VISUAL model/serial number;
(b) with month and year of manufacture
VISUAL agrees to add any other identification which might be requested by AT&T
such as but not limited to distinctive marks conforming to AT&T's serialization
plan. Charges, if any, for such additional identification marking shall be as
agreed upon by VISUAL and AT&T.
MEAN TIME BETWEEN FAILURE RATES
VISUAL shall issue a quarterly report that provides the necessary information
to clearly identify quality issues that may occur in its product lines. That
report shall include the following metrics:
***
The information shall be presented in several different formats including an
overall product summary and a summary for each discrete product type.
RETURN OF EQUIPMENT AND MATERIALS
VISUAL agrees to accept for credit Equipment and Materials returned under any
of the following circumstances:
1. AT&T termination or cancellation of an Order for VISUAL's standard
Equipment or exchange by AT&T of one VISUAL Product for another VISUAL
Product within *** days of the termination or cancellation, provided
Product is not usable in other equipment within the location;
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 6
pg 6
2. VISUAL or AT&T error in the ordering or shipping process, provided the
Equipment or Materials are returned by AT&T to VISUAL within *** days of
receipt; or
3. Receipt of defective Equipment or Materials or failure of Equipment or
Materials under the applicable warranty.
Equipment shall be returned without penalty to AT&T if the return is due to
fault of VISUAL. If the return is not the result of any VISUAL fault, AT&T's
may return standard equipment within *** days of the date of shipment from
VISUAL and shall be subject to a *** % restocking charge . Return of
non-standard Equipment shall be dealt with on a case by case basis with VISUAL
making good faith efforts to accept non-standard equipment back under the same
terms as standard Equipment if possible. Equipment or Materials returned for
credit must be in complete cartons and in good resaleable condition, except
where the Equipment or Materials are defective or fail under the applicable
warranty
RISK OF LOSS
VISUAL shall retain risk of loss and damage to the Equipment or Materials prior
to the passage of title pursuant to the Title clause unless caused by the
willful or negligent acts of AT&T or its employees. Shipments shall be made FOB
destination , prepay and add. Carrier is to be chosen by VISUAL unless
otherwise determined by AT&T
SPECIFICATION
Products sold by VISUAL to AT&T under this Agreement shall meet VISUAL'S design
and manufacturing Specifications as defined under Warranty. In addition, VISUAL
agrees that it will meet the Specifications defined in Exhibit 1 and any future
specifications agreed to by the parties.
TITLE
Title to Product shall rest in AT&T upon their acceptance which shall be deemed
to occur upon receipt of the Product at AT&T's receiving dock unless otherwise
specified by AT&T before or promptly after such receipt.
WARRANTIES
Equipment Warranty
VISUAL warrants to AT&T and its customers that the Equipment and Materials
furnished shall be merchantable and free from defects in design, material and
workmanship and shall conform to and perform in accordance with the
Specifications. These warranties extend to the future performance of the
Equipment and materials and shall continue for the longer of (a) five (5) years
after the Equipment or materials are accepted by AT&T, or (b) a greater period
if specified elsewhere in this Agreement or an Order. VISUAL also warrants to
AT&T and its customers that the Equipment and Materials shall be new and that
services shall be performed in a first class, workmanlike manner. In addition,
if the Equipment or materials furnished contains one (1) or more manufacturer's
warranties, VISUAL hereby assigns those warranties to AT&T and its Customers.
Equipment, Materials or Services not meeting the warranties will, at AT&T's
option, (a) be returned for repair or replacement by VISUAL at no cost to AT&T
or its customers and with transportation costs and risk of loss and damage in
transit borne by the respective parties as
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 7
pg 7
described herein. VISUAL shall not charge AT&T for any repair or maintenance of
Equipment or Materials covered by this warranty
All warranties shall continue in full force and effect notwithstanding transfer
of title to the Equipment or Materials by AT&T, so long as AT&T and its
customers shall remain the user of the Equipment or Materials. All warranties
shall also survive inspection, acceptance and payment.
SERVICE WARRANTY
Visual warrants to AT&T and its customers that replacement and repair parts and
components furnished under this Agreement or an Order shall be new,
merchantable, free from defects in design, material and workmanship and shall
conform to and perform in accordance with the specifications and drawings and
shall function properly for their intended purpose. These warranties extend to
the future performance of the parts and components and shall continue for the
longer of (a) the design life of such parts or components, (b) five (5) years
from the date of AT&T's acceptance of their installation, (c) the duration of
the Maintenance Order, or (d) a greater period as may be specified elsewhere in
the Maintenance Order. Visual further warrants to AT&T that the Maintenance
Services shall be performed with promptness and diligence, in a first-class,
workmanlike manner and to AT&T's satisfaction and that the Equipment shall
function in good operating condition during the duration of the Maintenance
Order. In addition, if the parts or components bear one (1) or more
manufacturers' warranties, Visual hereby assigns those warranties to AT&T.
All warranties shall survive inspection, acceptance and payment.
Equipment, parts, components or Maintenance Services not meeting the warranties
will, at AT&T's option, be returned for repair, replacement or reperformance
by Visual at no cost to AT&T or be subject to refund.
Whenever Equipment , repair parts or components under warranty are returned to
Visual for repair or replacement purposes, AT&T shall bear all costs of
packing, rigging, transportation and insurance to return the Equipment to
Visual, and Visual shall bear all costs of packing, rigging, transportation and
insurance to replace that Equipment.
Software Warranty
VISUAL warrants to AT&T and its customers the following:
1. The Software will conform to and perform in accordance with the
Specifications.
2. That for a period of 90 days after receipt, the Media conveying the
Software will be free from defects in material and workmanship. VISUAL
will replace defective Media at no charge.
3. The foregoing warranties extend to the future performance of the Software
and shall continue for the longer of (a) five (5) years after the Software
is accepted by AT&T, or (b) a greater period specified elsewhere in this
Agreement or an Order
4. There are no copy protection or similar mechanisms within the Software
which will, either now or in the future, interfere with the grants made in
this Agreement or an Order.
5. AT&T and its customers shall have quiet enjoyment of the Software.
6. As to Software for which VISUAL does not solely own all intellectual
property rights, VISUAL has full right, power and authority to sub-license
the Software to AT&T and its customers as provided in this Agreement or an
Order.
7. If the Software, or any portion thereof, is or becomes unusable, totally,
or in any respect during the applicable warranty period, VISUAL will
re-perform Services, correct errors, defects and non-conformities and
restore the Software to conforming condition free of significant errors at
no cost to AT&T or its customers. Corrected Software shall be warranted as
set forth in this clause.
8. To the best of VISUAL knowledge, the Software does not contain any
malicious code, program, or other internal component (e.g. computer virus,
computer worm, computer time bomb, or similar component ) that could
damage, destroy, or alter Software, firmware, or hardware or which could,
in any manner, reveal, damage, destroy, or alter any data or other
information accessed through or
<PAGE> 8
pg 8
processed by the Software in any manner. VISUAL shall immediately advise
AT&T, in writing, upon reasonable suspicion or actual knowledge that the
Software provided under this Agreement or an Order may result in the harm
described above.
9. VISUAL warrants that Software will record, store, process and present
calendar dates falling on or after January 1, 2000, in the same manner and
with the same functionality as it performed before January 1, 2000.
10. VISUAL warrants that any Software upgrade will not cause the system
configuration to become corrupt or lost. VISUAL also warrants any Software
upgrade will not adversely effect the "database" or the elements supported
(e.g. if the application database has 5000 elements, the change will not
cause the data to be re-keyed back in to the application ).
11. All warranties shall survive inspection, acceptance and payment.
All warranties shall continue in full force and effect notwithstanding transfer
of title to the Equipment or Materials by AT&T, so long as AT&T, its customers
or its Associated Entities shall remain the user of the Equipment or Materials.
All warranties shall also survive inspection, acceptance and payment.
Whenever Equipment , repair parts or components under warranty are returned to
Visual for repair or replacement purposes, AT&T shall bear all costs of
packing, rigging, transportation and insurance to return the Equipment to
Visual, and Visual shall bear all costs of packing, rigging, transportation and
insurance to replace that Equipment.
<PAGE> 9
pg 9
Article III
Provisions Applicable to License of Software
<TABLE>
<CAPTION>
CLAUSE PAGE
------ ----
<S> <C>
DEFINITIONS 10
LICENSE GRANT 10
LICENSE IDENTIFICATION 10
INTELLECTUAL PROPERTY RIGHTS 10
REMOTE ACCESS 10
RISK OF LOSS 10
SOFTWARE AND PROGRAMMING AIDS 11
SOURCE PROGRAMS AND TECHNICAL DOCUMENTATION 11
SEVERITY EPIDEMIC CONDITIONS 11
</TABLE>
<PAGE> 10
pg 10
DEFINITIONS
The definitions of Article I apply to this Article.
LICENSE GRANT
Visual hereby grants to AT&T an irrevocable, nonexclusive, worldwide license to
Use the Software. *** The license shall be effective from the date of AT&T's
acceptance of the Equipment and Software and shall remain in effect until the
Use of the Software, as it may have been updated or enhanced by Visual from
time to time, is permanently discontinued by AT&T under the terms of the Order.
AT&T agrees that, upon termination of the license of Software, all parts of the
Software shall be completely removed, destroyed, or returned to Visual, at
AT&T's option, unless this requirement is waived by Visual. However, in the
event of such termination, AT&T may retain copies of the Software for archival
purposes only. Upon delivery to AT&T, all media shall become the property of
AT&T except that fixed in Equipment, title to which shall pass to AT&T upon
acceptance of the Equipment. The foregoing license extends to any use of any
program or Software developed using the object code of the Software. AT&T may
sublicense the Software as set forth above. All obligations, undertakings and
indemnifications by Visual under an Order shall run and inure to the benefit of
AT&T and the sublicenses. No sublicense shall release Visual from its
obligations under an Order, except that Visual shall be a third party
beneficiary .
LICENSE IDENTIFICATION
AT&T and Visual will develop a method for Visual Software packaged by AT&T to
inform AT&T customers that their use of Visual Software is subject to the
license grant terms of this agreement .
INTELLECTUAL PROPERTY RIGHTS
Title to the Software and to intellectual property rights therein shall remain
in VISUAL or VISUAL's licensor, as applicable. AT&T shall have the right to
make a reasonable number of copies of the Software for Use as authorized in
this Agreement. AT&T however, shall not knowingly reproduce copies of the
Software for the purpose of supplying it to others except individuals
authorized herein.
REMOTE ACCESS
AT&T shall have the right, at no additional charge or fee, to have the Software
used at any other location by means of remote electronic access subject to the
limitations of the applicable licenses granted.
RISK OF LOSS
If any Software fixed in the Media is lost, damaged, or made invalid during
shipment, Visual will promptly replace the Software and Media at no additional
charge to AT&T. VISUAL acknowledges that, from time to time, Software in AT&T's
possession may become lost or damaged. Accordingly, VISUAL agrees that, during
the six-month period following delivery of any Software to AT&T, VISUAL shall
promptly replace any Software that is lost or damaged while in the possession
of AT&T, at the established charge for the associated Media. Notwithstanding
anything to the contrary contained in the preceding sentence, AT&T agrees that
it will take reasonably prudent steps to safeguard all Software against loss
and damage and VISUAL shall only be required to replace a reasonable number of
copies of any lost or damaged Software, with the determination of such
reasonable number being made by VISUAL.
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 11
pg 11
SOFTWARE AND PROGRAMMING AIDS
On the delivery date, VISUAL shall furnish to AT&T, at no additional charge or
fee, the following basic items:
1. Object program (the fully compiled or assembled series of
instructions, written in machine language, ready to be loaded into the
computer, that guides the operation of the computer) stored in a
Medium compatible with the Equipment described in the Order;
2. Program implementation and user instructions and required procedures;
3. The Software Specifications, as well as the required machine
configuration;
4. Sample data output, such as printouts or typical screen displays, and
any other programs, routines, subroutines, utility or service
programs, flow charts, logic diagrams and listings, descriptive
Specifications and acceptance Specifications or related material
VISUAL may have which is necessary or useful for the full
implementation and Use of the Software and which VISUAL normally
furnishes to users of the Software .
SOURCE PROGRAMS AND TECHNICAL DOCUMENTATION
VISUAL shall, at AT&T's request, enter into an Escrow Agreement substantially
the same in form and substance to the form attached to this Agreement to
safeguard VISUAL's Software Specifications and source program at any time
during the duration of this Agreement. Both parties shall negotiate in good
faith such Escrow Agreement.
EPIDEMIC CONDITION
If during the term of this Agreement and for one year after the last shipment
date of Equipment, Software, or Materials (collectively referred to as
"Product") under this Agreement AT&T notifies VISUAL that Product shows
evidence of an "Epidemic Condition," VISUAL shall prepare and propose a
Corrective Action Plan ("CAP") with respect to such material within five (5)
working days of such notification, addressing implementation and procedure
milestones for remedying such Epidemic Condition(s). An extension of this
time-frame is permissible upon mutual written agreement of the parties.
***
An Epidemic Condition will be considered to exist when one or more of the
following conditions occur:
***
Only major functional and visual/mechanical/appearance defects are considered
for determining Epidemic Condition. Product may be either sampled or, at AT&T's
option, 100% audited at AT&T premises or AT&T's customers' locations.***
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 12
pg 12
For the purpose of this Agreement, functional DOA shall be defined as any
Product that during the test, installation or upon its first use fails to
operate per the specification. Visual/mechanical/appearance DOA is defined as
any Product containing one or more major defects that would make the Product
unfit for use or installation. An Epidemic Condition shall not include failures
due to customer misapplication, utilization of parts not approved by VISUAL, or
chain failures induced by internally or externally integrated subassemblies.
In the event that VISUAL develops a remedy for the defect(s) that caused the
Epidemic Condition and AT&T agrees in writing that the remedy is acceptable,
VISUAL shall:
***
VISUAL and AT&T shall mutually agree in writing as to the remedy's
implementation schedule. VISUAL shall use its best efforts to implement the
remedy in accordance with the agreed-upon schedule.
***
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 13
pg 13
Article IV
Provisions Applicable To
MAINTENANCE SERVICES For EQUIPMENT
CONTENTS
<TABLE>
<CAPTION>
CLAUSE PAGE
------ ----
<S> <C>
DEFINITIONS 14
BREAKAGE, DISAPPEARANCE AND CONDITION 14
CONTINGENCY 14
ELIGIBILITY FOR MAINTENANCE SERVICES 14
IDENTIFICATION CREDENTIALS 14
MAINTENANCE FACILITIES 15
PRECAUTIONS 15
TECHNICAL INFORMATION, SOFTWARE AND PROGRAMMING AIDS 15
TITLE 15
</TABLE>
<PAGE> 14
pg 14
Definitions
The definitions of Article I apply to this Article.
BREAKAGE, DISAPPEARANCE AND CONDITION
VISUAL shall take such precautions VISUAL deems necessary or desirable (which
do not violate AT&T's plant rules or cause inconvenience or delay to AT&T)
regarding tools, equipment, and Materials, regardless of whether or not owned
by VISUAL, which VISUAL causes to be brought to AT&T's premises. AT&T shall
have no responsibility for their care, safekeeping, or operating condition.
AT&T shall not bear any cost or expense associated with their breakage or
disappearance unless resulting from AT&T's negligence.
Notwithstanding anything to the contrary contained in the preceding sentence ,
in the event that AT&T makes a special request of VISUAL to perform special
demonstrations of Equipment, Software, systems capabilities, etc., at any
AT&T site or at the site of AT&T's customers and such demonstrations require
the use of Visuals equipment, AT&T shall be responsible for and bear the risk
of loss associated with any breakage, destruction or disappearance of such
Equipment, Software, & Material, resulting from AT&T's negligence.
CONTINGENCY
If VISUAL fails to perform the Maintenance Services, AT&T may arrange for the
performance of the Maintenance Services by another party after having given
VISUAL at least twenty-four (24) hours prior written notice of intention to do
so. VISUAL shall be responsible to AT&T for all reasonable expenses incurred
in such performance.
ELIGIBILITY FOR MAINTENANCE SERVICES
Equipment shall be eligible for Maintenance Services provided it shall have
been under Maintenance Service or warranty by VISUAL or any authorized
maintenance provider on the date of commencement of this Agreement. From time
to time, AT&T may assume responsibility for equipment either:
1.owned by AT&T customers or
2.having that ownership transferred to AT&T
If the Equipment is not eligible, but can be made eligible, AT&T may, at its
expense, make or have made those changes required to upgrade the Equipment to
eligibility status. Warranties shall be effective as provided for in this
Agreement. VISUAL will invoice AT&T a one time equipment transfer fee per unit
at a cost of ***. Additionally, after the initial term of this agreement is
over, Visual may invoice AT&T, on a per unit basis, a cost of either i.***
per year or ii. *** for the balance of any extension to this agreement but not
to exceed 3 years.
IDENTIFICATION CREDENTIALS
AT&T may, at its discretion, require VISUAL's employees and subcontractors to
exhibit identification credentials, which AT&T may issue, in order to gain
access to AT&T's premises for the performance of
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 15
pg 15
the Services. If for any reason, any of VISUAL's employees or subcontractors
are no longer performing Services, VISUAL shall immediately inform AT&T's
Representative in the speediest manner possible. Notification shall be
followed by the prompt delivery to AT&T's Representative of the identification
credentials involved or a written statement of the reasons why the
identification credentials cannot be returned. VISUAL shall be liable for any
damage or loss sustained by AT&T if the identification credentials are not
returned to AT&T. until VISUAL has informed AT&T of the loss.
MAINTENANCE FACILITIES
AT&T shall provide VISUAL with adequate working space, including heat, light,
ventilation, electric current and outlets for use by VISUAL's maintenance
personnel. These facilities shall be within a reasonable distance of the
Equipment to be serviced and shall be provided at no charge to VISUAL. AT&T
shall not be responsible for any damage to VISUAL's Equipment or Materials
stored on AT&T's premises unless the damage results from AT&T's negligence.
PRECAUTIONS
VISUAL shall take care in all operations to safeguard people as well as
property and not to interfere with or curtail AT&T or customer operations at
the services site.
TECHNICAL INFORMATION, SOFTWARE AND PROGRAMMING AIDS
VISUAL shall furnish to AT&T on the agreed-upon delivery date without
additional charge any technical information, programs, routines, subroutines,
documentation, or related material it has or may develop or modify, necessary
for the general use or maintenance of Equipment under Maintenance Service,
which are normally so furnished to maintenance customers.
TITLE
Title to replacement, repair parts and components of Equipment shall vest in
AT&T upon installation. Title to enhancements and modifications and to
intellectual property rights therein (other than those originating as a result
of development Services funded by AT&T) shall remain in VISUAL. Title to
updates and modifications originating as a result of development Services
funded by AT&T and to intellectual property rights therein vest in accordance
with the applicable underlying contract between AT&T and VISUAL.
<PAGE> 16
pg 16
Article V
General Provisions Applicable To
Entire Agreement
Contents
<TABLE>
<CAPTION>
Clause PAGE
<S> <C>
Assignment and Subcontracting 20
Assignment by AT&T 19
AT&T Announcement Plan 19
Benefits 25
Capacity Planning Review 19
CFC Packaging 20
Change 20
Changes to Product 20
Choice of Law 21
Clause Headings 21
Clean-up 21
Contents of Order 21
Continuing Availability 22
Compliance with Laws 21
Default 22
Discontinuance of Manufacture 23
Documentation 24
Effective Date and Duration of Agreement 18
Emergency 24
Entire Agreement 33
Force Majeure 24
Future Improvements 25
Government Contract Provisions 25
Heavy Metals in Packaging 25
Identification 26
Impleader 26
Indemnity 26
Infringement 27
Inspection 27
Insurance 27
Invoices and Terms of Payment 28
ISO Certification 28
Labor Relations 28
Mediation 29
Non-exclusive Market Rights 29
Notices 29
Order 18
Order Termination 30
Ordering Companies 18
Ozone Depleting Substances 30
Planning and Production Capacity 18
Quarterly Reports 30
Releases Void 30
Right of Entry and Plant Rules 30
</TABLE>
<PAGE> 17
pg 17
<TABLE>
<S> <C>
Sale & License 18
Scope of Agreement 18
Severability 31
Shipping 31
Standards 31
Survival of Obligations 32
Taxes 32
Timely Performance 32
Tools and Equipment 32
Use of Information 33
Variation of Quantity 33
VISUAL's Information 32
Waiver 33
Work Done by Others 33
</TABLE>
<PAGE> 18
pg 18
DEFINITIONS
The definitions of Article I apply to this Article.
ORDERING COMPANIES
AT&T may order under this Agreement. Also, those additional Associated
Entities, both U.S. and foreign, designated in writing by AT&T, may order
under this agreement.
Any order issued under this Agreement shall be a contractual relationship
between the ordering Company and Visual, and Visual shall only look to the
ordering Company for performance of Company's obligations under such an order.
SCOPE OF AGREEMENT
This Agreement is applicable to the procurement for internal use and resale by
AT&T from VISUAL of Equipment, Software, intellectual property rights,
Services, and Materials.
EFFECTIVE DATE AND DURATION OF AGREEMENT
This Agreement shall become effective as of the date set forth above and shall
continue in effect for a period of three (3) years (the initial term) and
thereafter until terminated by either VISUAL or AT&T upon delivery of thirty
(30) days' prior written notice to the other party. The amendment or
termination of this Agreement shall not affect the obligations of AT&T or
VISUAL under any then existing Order issued under this Agreement.
SALE & LICENSE
***
ORDER
Each Order shall reference this Agreement thereby incorporating the provisions
of this Agreement. If notice of rejection of an Order is not received by AT&T
within *** days from the date of issuance of an Order, the Order shall be
deemed to have been accepted by VISUAL.
PLANNING AND PRODUCTION CAPACITY
It is AT&T's intent to utilize VISUAL products at AT&T's discretion. Both
companies recognize that potential AT&T *** at VISUAL with *** if the ***.
Both companies also recognize that there will be ***. The following AT&T
estimated usage forecasts are to ***. These forecasts are AT&T's best
estimates only and are not commitments.
Period Estimated Notes
volume
***
***
CAPACITY PLANNING REVIEW
AT&T and VISUAL agree to meet on a *** beginning at *** following signing of
this Agreement to review status of marketing milestones as defined in Exhibit 3
(AT&T Announcement Plans for Visual Networks) and ***. If, at the end of ***
following signing of this agreement, the marketing plan ***, as defined in the
schedule ***, VISUAL ***. ***
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 19
pg 19
AT&T ANNOUNCEMENT PLAN FOR VISUAL NETWORKS
AT&T & VISUAL will interface in implementing a marketing plan for use of VISUAL
Products in a managed DSU offer as outlined in Exhibit 3.
ASSIGNMENT BY AT&T
AT&T Corp. shall have the right to assign this Agreement or an Order and to
assign its rights and delegate its duties under this Agreement or an Order
either in whole or in part at any time and without VISUAL's consent to (i) any
present or future Associated Entity of AT&T Corp. which may not be a competitor
of VISUAL,, or (ii) any other entity resulting from the sale, reorganization
or other transfer of all or part of the assets of AT&T Corp. or any Associated
Entity. AT&T shall give VISUAL written notice of any assignment and
delegation. The assignment and delegation shall not affect any rights or
duties that VISUAL or AT&T may then or thereafter have as to Equipment,
Software, Services or Materials ordered by AT&T prior to the effective date of
the assignment and delegation. Upon acceptance of the assignment and
delegation and assumption of the duties under this Agreement or an Order, AT&T
shall be released and discharged, to the extent of the assignment and
delegation, from all further duties under this Agreement or the Order as to
Equipment, Software, Services or Materials so assigned.
ASSIGNMENT AND SUBCONTRACTING
VISUAL shall not assign any right or interest under this Agreement or an Order
(excepting monies due or to become due) nor delegate any Services or other
obligation to be performed or owed by VISUAL under this Agreement without the
prior written consent of AT&T, whose consent will not be unreasonably withheld.
Any attempted assignment, delegation, or subcontracting in contravention of
the above provisions shall be deemed void and ineffective. Any assignment of
monies shall be void and ineffective if any of the following occur: (1) AT&T
receives less than thirty (30) days' prior written notice of the assignment
from VISUAL or (2) the assignment attempts (i) to impose upon AT&T obligations
to the assignee additional to the payment of monies, or (ii) to preclude AT&T
from dealing solely and directly with VISUAL in all matters pertaining to this
Agreement including the negotiation of amendments or settlements of charges
due. All Services performed by VISUAL subcontractors at any tier shall be
deemed Services performed by VISUAL.
CFC PACKAGING
VISUAL warrants that all packaging materials furnished under this Agreement and
all packaging associated with Equipment, Software, or Materials furnished
under this Agreement were not manufactured using and do not contain
chlorofluorocarbons. "Packaging" means all bags, wrappings, boxes, cartons and
any other packing materials used for packaging. VISUAL agrees to indemnify,
defend (at AT&T's request), and hold harmless Indemnities from and against
any losses, damages, claims, demands, suits, liabilities, fines, penalties, and
expenses (including reasonable attorneys' fees) that arise out of or result
from AT&T's good faith reliance upon this warranty.
CHANGE
***
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 20
pg 20
CHOICE OF LAW
The construction, interpretation and performance of this Agreement and all
transactions under it shall be governed by the laws of the State of New Jersey,
excluding its choice of law rules and excluding the Convention for the
International Sale of Goods. The provisions of the New Jersey Uniform
Commercial Code apply to this Agreement and all transactions under it,
including agreements and transactions relating to the furnishing of Services,
the Lease or rental of Equipment or Materials, the procurement of intellectual
property rights and the license of Software. VISUAL shall submit to the
jurisdiction of any court wherein an action is commenced against AT&T based on
a claim for which VISUAL has agreed to indemnify AT&T under this Agreement.
CLAUSE HEADINGS
The headings of the clauses in this Agreement are inserted for convenience only
and are not intended to affect the meaning or interpretation of this
Agreement.
CLEAN-UP
Upon completion of installation or removal of the Equipment or of any other
Services performed on AT&T's or its customer's premises, VISUAL shall, at its
expense, promptly remove all implements, surplus materials and debris used in
or produced by those activities.
COMPLIANCE WITH LAWS
VISUAL and all persons furnished by VISUAL shall comply, at their own expense,
with all applicable federal, state, local and foreign laws, ordinances,
regulations and codes
CONTENTS OF ORDER
1) EQUIPMENT, SOFTWARE OR MATERIALS
An Order for the purchase of Equipment, Software, or Materials shall contain
the following:
1. The incorporation by reference of this Agreement;
2. A complete list of the Equipment or Materials to be purchased or
Software to be licensed specifying the quantity, type, model, feature
description, list price, and purchase price to be paid (net of
discount) and if applicable the name or names of the manufacturer and
model number or numbers of the equipment with which the Software shall
be compatible;
3. The invoice address;
4. The location at which the Equipment or Materials are to be delivered
or installed including floor, street, city and state;
5. The ship date
6. A complete list of the Services and associated costs, if any, such as,
but not limited to, training, if any required, and a schedule of their
performance;
7 Any other special provisions agreed upon by both parties.
<PAGE> 21
pg 21
Ordered items shall be shipped complete on date(s) specified in an Order unless
otherwise agreed to by AT&T.
CONTINUING AVAILABILITY
Except as set forth in the clause DISCONTINUANCE OF MANUFACTURE, VISUAL agrees
to offer for sale to AT&T, during the Term of this Agreement***:
(a) Equipment and Software conforming to the Specifications set
forth in this Agreement or in an Order;
(b) maintenance, replacement and repair parts which are
functionally equivalent to those in the Equipment covered by
this Agreement (the "Parts"); and
(c) support Services which are equivalent to the support Services
set forth in this Agreement, or support services as may be
otherwise agreed upon by the parties.
The prices for such Equipment, Software, Parts, or Services shall be the prices
set forth in this Agreement and the Appendices hereto during the Term. Prices
for Equipment, Software, Parts, or Services following the end of the Term shall
be the prices in VISUAL 's then current agreement with AT&T for said Equipment,
Software, Parts, or Services, or if no such agreement exists, VISUAL 's then
current Service Provider Standard Pricing Schedule prices or other prices
agreed upon by the parties. If the Equipment, Software, Parts, or Services is
not offered on VISUAL 's then current price Service Provider Standard Pricing
Schedule or if the parties fail to agree on prices, such Equipment, Software,
Parts, or Services shall be made available to AT&T at reasonable prices for
said Equipment, Software, Parts, or Services at the time for delivery.
DEFAULT
If VISUAL shall be in material breach or default of any of the provisions of
this Agreement and the breach or default shall continue for a period of THIRTY
(30) days after AT&T gives written notice to VISUAL, then in addition to all
other rights and remedies which AT&T may have at law or equity or otherwise,
AT&T shall have the right to cancel this Agreement without any charge to, or
obligation or liability of, AT&T. If AT&T shall be in material breach or
default of any of the provisions of this Agreement and the breach or default
shall continue for a period of THIRTY (30) days after VISUAL gives written
notice to AT&T, then in addition to all other rights and remedies which
VISUAL may have at law or equity or otherwise, VISUAL shall have the right to
cancel this Agreement without any charge to, or obligation or liability of,
VISUAL .
DISCONTINUANCE OF MANUFACTURE
VISUAL shall provide AT&T at least six (6) months prior written notice of its
intent to discontinue manufacture ("MD") of any Equipment or Software covered
by this Agreement. VISUAL shall continue to provide spare parts as well as
repair and/or refurbish the MD Equipment or Software for a period of five
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 22
pg 22
(5) years from the date of VISUAL's written notice to AT&T of discontinuance
of manufacture. In addition, AT&T shall have the opportunity to make an
end-of-life buy of such MD Equipment or Software for a period of up to six (6)
months from the date of VISUAL 's MD notice. VISUAL shall fill all such
end-of-life buy Orders placed by AT&T in accordance with its then-current lead
times and manufacturing capabilities. Any changes to quantities in such Orders
must be mutually agreed to by the parties.
<PAGE> 23
pg 23
DOCUMENTATION
1) VISUAL agrees to furnish at no charge, with each and every shipment to
AT&T, standard user documentation necessary and required for AT&T to install,
operate and maintain the Equipment, Software and Materials purchased hereunder
in paper or electronic form as requested by AT&T; and to update documentation
to reflect changes and updates in Equipment, Software and Materials. AT&T may
reproduce such documentation for internal use, provided such reproduced
documentation contains all appropriate Copyrights and Trademarks of VISUAL .
Such Equipment and Materials will include paper documentation for installation.
VISUAL will provide AT&T with electronic formatting documentation containing
these Copyrights and Trademarks.
2) VISUAL agrees to provide current supporting documentation, for use by AT&T
in responding to RFP's, regarding the capabilities, interfaces, power, heat,
foot print, Mean Time Between Failures, and management capabilities of VISUAL's
Equipment, Software and Materials covered under this Agreement.
EMERGENCY
VISUAL shall use commercially resonable efforts to assist AT&T in obtaining
components and equipment compatible with the Equipment in an emergency.
FORCE MAJEURE
Neither party shall be held responsible for any delay or failure in performance
of any part of an Order to the extent the delay or failure is caused by fire,
flood, explosion, war, strike, embargo, government requirement, civil or
military authority, act of God, or other similar cause beyond its control and
without the fault or negligence of the delayed or nonperforming party or its
subcontractors ("Force Majeure Conditions"). Notwithstanding the foregoing,
VISUAL's liability for loss or damage to AT&T's Equipment, Software, Materials
or other tangible article in VISUAL's possession or control shall not be
modified by this clause. If any Force Majeure Condition occurs, the party
delayed or unable to perform shall give immediate notice to the other party,
stating the nature of the Force Majeure Condition and any action being taken to
avoid or minimize its effect, and the party affected by the other's delay or
inability to perform may elect to:
1. suspend this Agreement or the Order for the duration of the Force Majeure
Condition, and
a. at the affected party's option, as applicable:
i. obtain a Lease elsewhere for equipment to perform the
functions of the Equipment leased under the Order and
deduct from the duration of the Order the time for which
such other Lease was obtained, or
ii. obtain a license elsewhere for Software to perform the
functions of the Software licensed under the Order and
deduct from the duration of the Order the time for which
such other license was obtained, or
iii. buy or sell elsewhere Equipment, Materials or Services to
be bought or sold under an Order and deduct from any
commitment the Equipment, Materials or Services bought
or sold or for which commitments have been made
elsewhere, and
b. resume performance under the Order for the remainder of the
duration (once the Force Majeure Condition ceases) with an
option in the affected party to extend such duration up to
the length of time the Force Majeure Condition endured and/or,
<PAGE> 24
pg 24
2. terminate the Order (at no charge) as to any Equipment, Software or
Materials which have not been shipped or as to any Services which has not
been commenced, when the delay or nonperformance continues for a period of
at least twenty five (25) days
Unless written notice is given within twenty five ( 25 ) days after the
affected party is notified of the Force Majeure Condition, paragraph 1 of this
section shall be deemed selected.
FUTURE IMPROVEMENTS
At least forty-five (45) days before VISUAL publicly announces improvements,
enhancements or new features, VISUAL shall advise AT&T of such features and
advantages.
BENEFITS
VISUAL assures AT&T that all prices, terms, warranties and benefits granted to
AT&T for like products and like quantities by VISUAL for the Equipment,
Software, Materials, Services and improvements, are at least as favorable as
those now offered by VISUAL to any of its commercial customers. If, during the
duration of this Agreement, VISUAL should enter into a supply arrangement with
any other customer for the Equipment, Software, and Services provided
hereunder with a third party upon terms that, with respect to purchase prices
or other items which could provide a change in relative benefits, are more
favorable to such third party than the overall terms contained herein, then
VISUAL agrees to amend this Agreement to provide AT&T with the same or
comparable overall terms.
GOVERNMENT CONTRACT PROVISIONS
The following provisions regarding equal opportunity, and all applicable laws,
rules, regulations and executive orders specifically related thereto,
including applicable provisions and clauses from the Federal Acquisition
Regulation and all supplements thereto, are incorporated in this Agreement as
they apply to Services performed under specific U.S. Government contracts: 41
CFR 60-1.4, Equal Opportunity; 41 CFR 60-1.7, Reports and Other Required
Information; 41 CFR 60-1.8, Segregated Facilities; 41 CFR 60-250.4, Affirmative
Action for Disabled Veterans and Veterans of the Vietnam Era (if in excess of
$10,000); and 41 CFR 60-741.4, Affirmative Action for Disabled Workers (if in
excess of $2,500), wherein "contractor" and "subcontractor" mean "VISUAL".
In addition, Orders placed under this Agreement containing a notation that the
Equipment, Software, Services or Materials are intended for use under U.S.
Government contracts shall be subject to the other U.S. Government provisions
printed, typed or written thereon, or on the reverse side thereof, or in
attachments thereto.
HEAVY METALS IN PACKAGING
VISUAL warrants to AT&T that no lead, cadmium, mercury or hexavalent chromium
have been intentionally added to any packaging or packaging component (as
defined under applicable laws) to be provided to AT&T under this Agreement.
VISUAL further warrants to AT&T that the sum of the concentration levels of
lead, cadmium, mercury and hexavalent chromium in the package or packaging
component provided to AT&T under this Agreement or an Order does not exceed one
hundred (100) parts per million. Upon request, VISUAL shall provide to AT&T
Certificates of Compliance certifying that the packaging and/or packaging
components provided under this Agreement are in compliance with the
requirements set forth above in this clause. VISUAL agrees to indemnify,
defend (at AT&T's request), and hold harmless Indemnities (all hereinafter
referred to in this clause as "AT&T") from and against any
<PAGE> 25
pg 25
losses, damages, claims, demands, suits, liabilities, fines, penalties, and
expenses (including reasonable attorneys' fees) that arise out of or result
from AT&T's good faith reliance upon said warranties or any certifications of
compliance.
IDENTIFICATION
VISUAL shall not, without AT&T's prior written consent, engage in advertising,
promotion or publicity related to this Agreement, or make public use of any
Identification in any circumstances related to this Agreement. VISUAL shall
remove or obliterate any Identification prior to any use or disposition of any
Equipment, Software or Materials rejected or not purchased, licensed or leased
by AT&T, and failing to do so, shall indemnify, defend (at AT&T's request) and
hold harmless Indemnities (all hereinafter referred to in this clause as
"AT&T") from and against any losses, damages, claims, demands, suits,
liabilities, fines, penalties and expenses (including reasonable attorneys'
fees) arising out of VISUAL's failure to so remove or obliterate.
IMPLEADER
VISUAL shall not implead or bring any action against AT&T or its customers or
the employees of AT&T or its customers based on any claim by a person for
personal injury or death to an employee of AT&T or its customers occurring in
the course or scope of employment that arises out of Equipment, Software,
Services or Materials furnished under this Agreement or an Order.
INDEMNITY
All persons furnished by VISUAL shall be considered solely VISUAL's employees
or agents, and VISUAL shall be responsible for payment of all unemployment,
social security and other payroll taxes, including contributions when required
by law. VISUAL shall indemnify, defend (at AT&T's request), and hold
harmless Indemnities from and against any losses, damages, claims, demands,
suits, liabilities, fines, penalties, and expenses (including reasonable
attorneys' fees) that do, or allegedly do, arise out of or result from:
1. injuries or death to persons or damage to property, including
theft, in any way arising out of, occasioned by, caused or alleged to have
been caused by the performance of the Services performed by VISUAL or persons
furnished by VISUAL ,
2. assertions under Workers' Compensation or similar acts made by
persons furnished by VISUAL or by any subcontractor, or by reason of any
injuries to persons for which AT&T would be responsible under Workers'
Compensation or similar acts if the persons were employed by AT&T,
3. any failure on the part of VISUAL to satisfy all claims
against it for labor, equipment, materials, intangible items and other
obligations relating directly or indirectly to the performance of the Services;
or
4. any failure by VISUAL to perform VISUAL's obligations under
this clause or the Insurance clause.
VISUAL shall defend Indemnities, at AT&T's request, against any of these
claims, demands or suits. AT&T shall notify VISUAL within a reasonable time
of any written claims or demands against AT&T for which VISUAL is responsible
under this clause.
<PAGE> 26
pg 26
INFRINGEMENT
VISUAL shall indemnify, and hold harmless Indemnities from and against any
losses, damages, liabilities, fines, penalties, and expenses (including
reasonable attorneys' fees) that arise out of or result from any proved claim
(1) of infringement of any patent, copyright, trademark or trade secret right,
or other intellectual property right, private right, or any other proprietary
or personal interest, and (2) related by circumstances to the existence of
this Agreement or an Order or performance under or in contemplation of either
of them ("Infringement Claim"). However, if the Infringement Claim arises
solely from VISUAL's adherence to AT&T's written instruction regarding
Services or tangible or intangible goods provided by VISUAL ("Items") and if
the Items are not (1) commercial items available on the open market or the same
as such items, or (2) items of VISUAL's designated origin, design or
selection, AT&T shall indemnify VISUAL. AT&T or VISUAL (at AT&T's request)
shall defend or settle, at its own expense, any demand, action or suit on any
Infringement Claim for which it is the indemnitor under the preceding
provisions and shall timely notify the other of any assertion against it of
any Infringement Claim and shall cooperate in good faith with the other to
facilitate the defense of any such claim.
INSPECTION
AT&T reserves the right to witness testing procedures and inspect Equipment,
Software and Materials furnished under this Agreement or an Order. AT&T shall
also have access to VISUAL's facilities for Quality System Reviews. If such
inspection at VISUAL's manufacturing facility is requested by AT&T, VISUAL's
shall notify AT&T when Equipment, Software or Materials are ready for
inspection. Arrangements will be mutually agreed upon between VISUAL's and
for inspection prior to shipment. VISUAL's shall make available to AT&T, on a
mutually-agreed to scheduled basis, without charge, its current production
testing facilities and personnel as may be requested by AT&T to inspect
Equipment, Software and Materials to determine whether they meet the
requirements of the Specifications.
INSURANCE
VISUAL shall maintain and cause VISUAL's subcontractors to maintain during the
duration of this Agreement all of the following:
1. Workers' Compensation insurance as prescribed by the law of the state or
nation in which the Services is performed;
2. Employer's liability insurance with limits of at least $500,000 for each
occurrence;
3. comprehensive automobile liability insurance if the use of motor vehicles
is required, with limits of at least $1,000,000 combined single limit for
bodily injury and property damage for each occurrence;
4. Commercial General Liability ("CGL") insurance, including Products Blanket
Contractual Liability and Broad Form Property damage, with limits of at
least $1,000,000 combined single limit for bodily injury and property
damage for each occurrence;
5. if the furnishing to AT&T (by sale or otherwise) of Equipment, products or
Materials is involved, CGL insurance endorsed to include products
liability and completed operations coverage in the amount of $5,000,000
for each occurrence; and
6. Errors and Omissions insurance in the amount of at least $1,000,000 per
claim with an annual aggregate of at least $3,000,000 inclusive of legal
defense costs.
<PAGE> 27
pg 27
VISUAL 's insurer(s) and anyone claiming by, through, under or in VISUAL 's
behalf shall have no claim, right of action or right of subrogation against
AT&T and its customers based on any loss or liability insured against under
the foregoing insurance. VISUAL and VISUAL's subcontractors shall furnish
prior to the start of Services certificates or adequate proof of the foregoing
insurance including, if specifically requested by AT&T, copies of the
endorsements and insurance policies. AT&T shall be notified in writing at
least thirty (30) days prior to cancellation of or any change in the policy.
INVOICES AND TERMS OF PAYMENT
Invoices for the charges specified in an Order shall be submitted by VISUAL to
the address specified in the Order. Unless payment terms more favorable to
AT&T are stated on VISUAL 's invoices and AT&T elects to pay on such terms,
undisputed invoices for purchased Equipment, Materials, annual Maintenance
Services or licensed Software shall be payable no later than the *** day after
(a) the date of receipt of undisputed invoices or (b) the date of acceptance of
the Equipment or Software or Materials or delivery of Materials at AT&T's
dock, whichever is later.
VISUAL shall (1) render proper original invoices showing Order number, through
routing, weight and unit price per the denomination specified in the Order,
(2) render separate invoices for each shipment and (3) forward bill of lading
and shipping notices with invoice. If prepayment of transportation charges is
authorized, VISUAL shall include the transportation charges from the FOB point
to the destination as a separate item on the invoice stating the name of the
carrier used.
ISO CERTIFICATION
AT&T recognizes that VISUAL intends to be ISO 9000 registered. Therefore,
under this Agreement, VISUAL shall have the portion of VISUAL 's quality system
that applies to the Equipment, Materials, and Services covered under this
Agreement registered to the then current and applicable ISO 9000 Series
standards (which may have a different nomenclature in applicable other
countries). Such registration must be made by an accredited third party
registrar(s).
VISUAL warrants that VISUAL is in the process of obtaining ISO certification
and shall receive such certification no later than March 31, 1998.
VISUAL shall provide AT&T's representative (if requested) with a copy of the
appropriate certificates of registration issued by such third party
registrar(s). If VISUAL fails, for any reason, to obtain or maintain or
provide to AT&T certificates of registration as set forth above, or fails to
become certified in countries requested by AT&T, then AT&T shall have the
right, and without any cost to or obligation or liability of AT&T, to terminate
this Agreement and any outstanding orders placed under this Agreement.
LABOR RELATIONS
VISUAL shall be responsible for its labor relations with any labor organization
represented among its employees and shall be responsible for adjusting all
disputes between itself and its employees or any union representing such
employees. The provisions of this paragraph shall be extended by VISUAL to all
subcontractors hereunder. VISUAL shall immediately notify AT&T if VISUAL has
knowledge of any actual or potential labor dispute which is delaying or could
delay the timely performance of this Agreement.
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 28
pg 28
MEDIATION
If a dispute arises out of or relates to this Agreement, or its breach, and the
parties have not been successful in resolving the dispute through direct
negotiation, the parties shall attempt to resolve the dispute through non-
binding mediation by submitting the dispute to a sole mediator selected by the
parties or, at the option of a party, to mediation by the American Arbitration
Association ("AAA"). Each party shall bear its own expenses and an equal
share of the expenses of the mediator and the fees of the AAA. The parties,
their representatives, other participants and the mediator shall hold in
confidence the existence, content and result of the mediation. If the dispute
is not resolved by the mediation, the parties shall have the right to resort to
any remedies permitted by law. Defenses based on the passage of time are
suspended upon submitting the dispute to the mediator and during the mediation.
The time period during the mediation shall be disregarded in calculating such
defenses. Nothing in this clause shall be construed to preclude any party
from seeking injunctive relief in order to protect its rights during
mediation. A request by a party to a court for injunctive relief shall not be
deemed a waiver of the obligation to mediate.
NON-EXCLUSIVE MARKET RIGHTS
This Agreement neither grants to VISUAL an exclusive right or privilege to
sell, license or Lease to AT&T any or all Equipment, Software, Services or
Materials described in this Agreement which AT&T may require, nor requires the
purchase, license or lease of any Equipment, Software, Services or Materials
from VISUAL by AT&T. AT&T may contract with other manufacturers for the
acquisition of comparable Equipment, Software, Services or Materials.
Purchases, licenses or leases by AT&T under this Agreement shall be initiated
by the placement of an Order by AT&T and the Order shall not restrict the
right of AT&T to cease acquisition nor require AT&T to continue any level of
acquisition from VISUAL .
NOTICES
Any notice, demand or other communication (other than an Order) required, or
which may be given, under this Agreement shall, unless specifically otherwise
provided in this Agreement, be in writing and shall be given or made by
overnight courier service, confirmed facsimile, registered or certified mail
(return receipt) or other media which provides the sender with written record
of delivery, and shall be addressed to the respective parties as follows:
To VISUAL : VISUAL
2092 Gaither Rd.
Rockville, Md. 20850
Mr. Peter Minihane
Fax ( 301) 296-2308
To AT&T: AT&T Corp.
***
10 Independence Boulevard
Warren, NJ 07059
***
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 29
pg 29
The notice, demand or other communication (other than an Order) shall be deemed
to have been given or made when picked up by the delivery services mentioned
above. The above addresses may be changed at any time by giving thirty (30)
days prior written notice.
ORDER TERMINATION
An Order of standard Equipment may be terminated by AT&T, at no charge, at any
time prior to shipment from VISUAL's plant or commencement of Services.
Orders for non-standard Equipment may be terminated, at no charge, *** days in
advance of required ship date. In the event that AT&T desires to cancel
non-standard Equipment in less than *** days from required ship date, Visual
agrees to good faith efforts to accept that cancellation at no charge to AT&T.
AT&T shall notify VISUAL in writing of any such termination for either standard
or non-standard Equipment.
At any time, AT&T may terminate individual Orders for Maintenance Services, at
no charge, provided AT&T gives at least *** days prior written notice to
VISUAL. If the charges for a terminated Order were paid annually in advance,
VISUAL shall promptly refund to AT&T the unused prorata portion of the charges.
OZONE DEPLETING SUBSTANCES
VISUAL warrants and certifies that all Equipment, Software, and Materials,
including packaging and packaging components, provided to AT&T under this
Agreement have been accurately labeled, in accordance with the requirements of
40 CFR Part 82 entitled "Protection of Stratospheric Ozone, Subpart E - The
labeling of Products Using Ozone Depleting Substances." VISUAL agrees to
indemnify, defend and hold harmless Indemnities from and against any losses,
damages, claims, demands, suits, liabilities, fines, penalties, and expenses
(including reasonable attorneys' fees) that may be sustained by reason of
VISUAL 's non-compliance with such applicable law or the terms of this
warranty and certification.
QUARTERLY REPORTS
VISUAL shall render quarterly reports covering Orders placed under this
Agreement for Equipment, Software, Services and Materials as early in the
subsequent quarter as possible. This report shall be submitted in a mutually
agreed upon format.
RELEASES VOID
Neither party shall require (i) waivers or releases of any personal rights, or
(ii) execution of documents which conflict with the provisions of this
Agreement, from employees, representatives or customers of the other in
connection with visits to its premises, and no such releases, waivers, or
documents shall be pleaded by them or third persons in any action or
proceeding.
- ----------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 30
pg 30
RIGHT OF ENTRY AND PLANT RULES
Each party shall have the right to enter the premises of the other party during
normal business hours with respect to the performance of this Agreement,
subject to all plant rules and regulations, security regulations and
procedures and U.S. Government clearance requirements, if applicable. VISUAL
shall become acquainted with conditions governing the delivery, receipt and
storage of Materials and Equipment at the site of the Services so that VISUAL
will not interfere with AT&T's operations. Storage space will not necessarily
be provided adjacent to the site of the Services. Therefore, VISUAL shall be
expected to select, uncrate, remove and transport Materials and Equipment from
the storage areas provided. AT&T is not responsible for the safekeeping of
VISUAL 's property on AT&T's premises. VISUAL shall not stop, delay or
interfere with AT&T's work schedule without the prior approval of AT&T's
Representative. VISUAL shall provide and maintain sufficient covering and
take any other precautions necessary to protect AT&T's stock, equipment and
other property from damage due to VISUAL's performance of the Services.
SEVERABILITY
If any of the provisions of this Agreement shall be invalid or unenforceable,
the invalidity or unenforceability shall not invalidate or render
unenforceable the entire Agreement or Order, but rather the entire Agreement or
Order shall be construed as if not containing the particular invalid or
unenforceable provision or provisions, and the rights and obligations of the
parties shall be construed and enforced accordingly.
SHIPPING
VISUAL shall do all of the following:
1. Ship the Equipment, Software and Materials to the site designated in an
Order by the date set forth in the Order in accordance with specific
shipping instructions,
2. Place the Order number on all subordinate documents,
3. Enclose a packing memorandum with each shipment, and when more than one
(1) package is shipped, identify the one containing the memorandum,
4. Mark the Order number on all packages and shipping papers, and.
5. Furnish adequate protective packing at no additional charge.
If VISUAL does not comply with the F.O.B. terms of an Order or with AT&T's
shipping or routing instructions, VISUAL authorizes AT&T to deduct from any
invoice any increased costs incurred by AT&T as a result of VISUAL 's
noncompliance.
STANDARDS
Employees of VISUAL with records of criminal convictions, other than minor
traffic violations, shall not be assigned to AT&T's premises until a detailed
statement of the circumstances is furnished to AT&T for its review, and AT&T
has given its written approval of such assignment. In fulfilling VISUAL 's
obligations
<PAGE> 31
pg 31
under this clause, VISUAL shall comply fully with all laws relating to the
making of investigative reports and the disclosure of information contained
therein.
VISUAL 'S INFORMATION
VISUAL shall not provide nor have they provided in contemplation of, this
Agreement any information or medium, unless VISUAL has the right to do so, and
VISUAL shall not view any of the information as confidential or proprietary.
Further, there are no limitations on the Use of Software except as otherwise
agreed to in the OPERATING SYSTEM SOFTWARE clause in Article II and in the
LICENSE GRANT and INTELLECTUAL PROPERTY RIGHTS clauses in Article III.
Notwithstanding the above, AT&T will protect Software received from VISUAL
with the same degree of care that AT&T normally uses to protect its own
Software that it does not wish to become public knowledge, and AT&T will advise
any recipient of such Software of that obligation.
SURVIVAL OF OBLIGATIONS
The obligations of the parties under this Agreement, which by their nature
would continue beyond the termination, cancellation or expiration of this
Agreement, including, by way of illustration only and not limitation, those in
the COMPLIANCE WITH LAWS, IDENTIFICATION, IMPLEADER, INDEMNITY, INFRINGEMENT,
INSURANCE, RELEASES VOID, USE OF INFORMATION and WARRANTY clauses, shall
survive termination, cancellation or expiration of this Agreement.
TAXES
AT&T shall reimburse VISUAL for only State and local sales and use taxes, as
applicable, with respect to transactions under this Agreement or an Order
unless AT&T advises Visual that an exemption applies. Taxes payable by AT&T
shall be billed as separate items on VISUAL's invoices and shall not be
included in VISUAL's prices. AT&T shall have the right to have VISUAL
contest any such taxes that AT&T deems improperly levied at AT&T's expense and
subject to AT&T's direction and control.
TIMELY PERFORMANCE
If VISUAL has knowledge that anything prevents or threatens to prevent the
timely performance of the Services under this Agreement, VISUAL shall
immediately notify AT&T's Representative thereof and include all relevant
information concerning the delay or potential delay.
TRAINING AND TECHNICAL SERVICE
VISUAL shall provide, (a) assistance and advice, as may be reasonably
requested by AT&T necessary to assist in the use of the Equipment and Software
and (b) any training as it normally provides without charge to users of the
Equipment or Software.
<PAGE> 32
pg 32
TOOLS AND EQUIPMENT
Unless otherwise specifically provided in an Order, VISUAL shall be responsible
for providing all labor, tools and equipment ("Tools") for performance of an
Order. If VISUAL actually uses any Tools owned or rented by AT&T or its
customers, VISUAL acknowledges that VISUAL accepts the Tools "as is, where is"
and that neither AT&T nor its customers have any responsibility for the
condition or state of repair of the Tools and that VISUAL shall have risk of
loss and damage to such Tools. VISUAL shall not remove the Tools from AT&T's
or its customers' premises and shall return the Tools to AT&T or its customers
upon completion of use, or at such earlier time as AT&T or its customers may
request, in the same condition as when received by VISUAL, reasonable wear
and tear excepted.
USE OF INFORMATION
VISUAL shall view as AT&T's property, any Information or Medium, however
conveyed, provided to, or acquired by VISUAL ,under or in contemplation of
this Agreement or an Order. VISUAL shall, at no charge to AT&T, and as AT&T
directs, destroy or surrender to AT&T promptly at its request any such Medium
or any copy of such Information. VISUAL shall keep Information confidential
and use it only in performing under this Agreement or an Order and obligate its
employees, subcontractors and others working for it to do so, provided that
the foregoing shall not apply to Information previously known to VISUAL free
of obligation, or made public through no fault imputable to VISUAL .
VARIATION OF QUANTITY
AT&T assumes no liability for Equipment, Software, or Materials produced,
processed or shipped in excess of the amount specified in any Order placed
with VISUAL.
WAIVER
The failure of either party at any time to enforce any right or remedy
available to it under this Agreement or otherwise with respect to any breach
or failure by the other party shall not be construed to be a waiver of that
right or remedy with respect to any other breach or failure by the other party.
WORK DONE BY OTHERS
If any part of the Services performed by VISUAL is dependent upon Services done
by others, VISUAL shall inspect and promptly report to AT&T any defect that
renders the other work unsuitable for VISUAL's proper performance. VISUAL's
silence shall constitute approval of the other work as fit, proper and suitable
for VISUAL's performance of the Services or other work.
ENTIRE AGREEMENT
This Agreement shall incorporate the typed or written provisions on AT&T's
Orders issued pursuant to this Agreement and shall constitute the entire
agreement between the parties with respect to the subject matter of this
Agreement and the Order(s) and shall not be modified or rescinded, except by a
writing signed by duly authorized representatives of VISUAL and AT&T.
<PAGE> 33
pg 33
The provisions of this Agreement shall apply to:
1. any Orders issued pursuant to this Agreement, and
2. any Services, Material, Equipment, intellectual property
rights and Software or other Information furnished under, in
performance of, pursuant to, or in contemplation of, this
Agreement.
Printed provisions on the reverse side of AT&T's Orders (except as specified
otherwise in this Agreement) and all provisions on VISUAL's forms shall be
deemed deleted. Additional or different provisions inserted in this Agreement
by VISUAL, or deletions thereto, whether by alterations, addenda, or
otherwise, shall be of no force and effect, unless expressly consented to by
AT&T in writing. Estimates or forecasts furnished by AT&T shall not
constitute commitments. The provisions of this Agreement supersede all
contemporaneous oral agreements and all prior oral and written quotations,
communications, agreements and understandings of the parties with respect to
the subject matter of this Agreement.
APPENDICES
The following Appendices are attached and by this reference are made a part of
this Agreement:
EXHIBIT 1 SPECIFICATIONS
EXHIBIT 2 SERVICE LEVEL AGREEMENT
EXHIBIT 3 AT&T ANNOUNCEMENT PLAN FOR VISUAL NETWORKS
EXHIBIT 4 VISUAL NETWORKS SERVICE PROVIDER STANDARD PRICING SCHEDULE
AGREED:
VISUAL NETWORKS, INC. AT&T CORP.
By: /s/ Scott Stouffer By: /s/ Diana Jones
------------------------- ------------------------------
(signed) (signed)
Name: Scott Stouffer Name: Diana Jones
------------------------- --------------------------
(printed) (printed)
Title: President Title: Director
------------------------- --------------------------
Date: December 3, 1997 Date: December 2, 1997
------------------------- --------------------------
<PAGE> 34
EXHIBIT 10.7 (AT&T)
EXHIBITS
EXHIBIT 1
SPECIFICATIONS.
1. HARDWARE SPECIFICATIONS
1.1. SERIAL INTERFACE
***
1.2. PAYLOAD LOOPING CAPABILITY
***
1.3. V.35 AND NETWORK STATUS INDICATORS FROM MANAGEMENT STATION
***
1.4. WATHCHDOG TIMER
***
1.5. FRAME RELAY LMI TERMINATION
***
1.6. IN-BAND MANAGEMENT
***
1.7. TELNET CAPABILITY
***
1.8. MIB II COMPLIANCE
***
1.9. FRAME RELAY / PVC MIB
***
1.10. T1 / E1 COMPLIANCE
***
1.11. VISUAL NETWORKS PRIVATE MIB
***
1.12. REPORTING CAPABILITY WITH SINGLE ENDED VISUAL CSU / DSU SITES
***
1.13. TRAP FORWARDING
***
1.14. DISK MIRRORING ON THE MANAGEMENT STATION
***
1.15. SNMP TRAPS ON SLIP CONNECTIONS
***
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 35
1.16. SNMP COMMUNITY STRINGS AND MANAGER SECURITY
***
1.17. ROUND TRIP DELAY
***
2. REPORT REQUIREMENTS FOR PUBLISHING
Definitions:
A. Publishing - This is a scheduled action performed by
the central management server / station currently known as
the Visual Networks' Performance Archive Manager (PAM).
The publishing action will be to run the reports (a
database function) and store the results both textually in
a Hyper Text Mark-up Language (HTML) Format and
graphically in a Graphics Interchange Format (GIF) in a
directory structure that is easily accessible and
predictable by AT&T***.
B. Third Party Web Server - ***
C. Quarterly reports are 13 weeks. The first day of the first
week of the first quarter is the first Sunday of the
calendar year.
2.1. TYPES OF REPORTS
Below are some of the type of reports AT&T expects to see
published and their respective frequency. THE REQUIREMENT IS
FOR ALL TYPES OF REPORTS THE VISUAL NETWORK'S PAM PRODUCES,
NOT ONLY THE ILLUSTRATIVE ONES LISTED BELOW. AT&T also
requires any new reports developed by Visual Networks be
published in the same manner.
The components of the report requirements will include AT&T's
requirement for content, form, and frequency.
- Graphically is to denote the Graphical Interchange
Format
- Textually / ASCII denotes an ASCII Report
- HTML Table denotes the output is required in an HTM
- Frequency of Quarterly, Monthly, Weekly, Daily, and
Other will be shown as required by a "Yes" or not
required by a "No".
***
2.3. DIRECTORY STRUCTURE REQUIREMENTS
***
2.4. GENERAL HTML REQUIREMENTS
***
2.5. REPORT STORAGE
***
VISUAL UPTIME RELEASE SCHEDULE
***
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 36
EXHIBIT 2
SERVICE LEVEL AGREEMENT
OVERVIEW
This Service Level Agreement (SLA) is intended to identify the features and
define the processes involved with Visual's delivery of various support
functions to AT&T.
Within 30 days following the signature of the Agreement, AT&T and Visual will
each appoint persons to act as the primary and secondary interfaces for product
release and technical support process issues related to the Agreement.
BASIC SUPPORT FOR NETWORK MANAGEMENT OPERATIONS
A. VTAC ACCESS AND INFORMATION SERVICES
1. AT&T will be entitled to Visual Technical Assistance Center ("VTAC")
telephone support. The VTAC is a telephone handling service staffed by
Visual's product support personnel which provides assistance with diagnosis of
defects and/or failures in Visual's Products. VTAC access is intended to
supplement ***. Accordingly, VTAC personnel accepting calls from and providing
responses to AT&T personnel ***. VTAC telephone access is available seven days
per week, twenty-four hours per day. In the event Visual is unable to diagnose
and, where appropriate, resolve a problem through VTAC access, then Visual
agrees to escalate the problem resolution in accordance with Visual's
escalation procedure. Visual will make best efforts to respond to trouble calls
within *** during the *** after signing of the Agreement. Effective at the
beginning of the *** of the Agreement, Visual agrees to use reasonable
commercial efforts to respond to AT&T trouble calls within *** of the time and
within *** of the time of receipt of such calls from AT&T. AT&T shall
implement a procedure to limit the number of their AT&T personnel who interface
with the VTAC
2. AT&T is entitled to access Visual's electronic information delivery,
as it may change from time to time, which contains general technical information
about the Products, including by way of example any known bugs or corresponding
fixes in the Software. AT&T's access to Visual's Electronic Information Delivery
shall include access to all capabilities provided to any another commercial
customer including, but not limited to, the ability to download software fixes.
Visual will have electronic information delivery mechanisms in place within ***
after signing of the Agreement. Visual agrees to provide AT&T with proactive,
written notification of any mandatory changes made by reason of safety or
failure of the equipment to perform in accordance with the requirements of this
agreement as set out in the CHANGE section of the Agreement.
B. SOFTWARE UPDATES; SOFTWARE FIXES
1. This SLA includes the distribution of Visual's Software releases and
enhancements ("Software Updates") and related documentation as they are made
generally available.. Visual agrees that Software Updates will remain
compatible with the Equipment.. Visual further agrees that Software Updates
will not hinder centralized distribution of Software Updates.. Visual agrees to
use reasonable commercial efforts to distribute the Software Updates and
related documentation to AT&T within ***. . All Software Updates and related
documentation shall be distributed by Visual to AT&T personnel at the locations
specified by AT&T at *** for up to *** Software Update release packages per
release including software media and
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 37
documentation. ***. Visual shall support all versions of its Software shipped
to AT&T under this Agreement. ***
2. If AT&T is unable to complete, or requires assistance in, the
diagnosis of a reported problem because of the unusual or unique nature of the
problem, then Visual shall aid AT&T to perform a diagnosis. If Visual
determines the problem is due to nonconformance to published Specifications of
a Software version, then Visual shall provide any Software fix for the reported
nonconformance that may be available at the time the problem is reported. If
there is no such available fix, Visual shall use reasonable commercial efforts
to remedy such nonconformance, which may include a workaround or other
temporary fix to the Software. If a workaround or other temporary fix to the
Software is provided, Visual shall make reasonable commercial efforts to
include it in a subsequent Software Update. If Visual, after being given
reasonable opportunity by AT&T, is unable to correct a substantial
non-conformance of the Software Update with its published specifications and
such non-conformance materially and adversely affects form, fit or function to
published Specifications (including reliability) or backward compatibility, as
defined earlier, then AT&T may ***.
3. In the event AT&T and Visual are unable to complete the diagnosis
through the VTAC, or through dial-in remote access, Visual may, at its
discretion and ***, but subject to AT&T's written approval, dispatch a service
technician to accompany AT&T to the customer's site in order to facilitate
diagnosis. In any such event, Visual shall be acting on behalf of and as a
subcontractor to AT&T while at a customer's site. AT&T acknowledges that any
such dispatch by Visual shall not create in AT&T any right or power to bind
Visual to any customer or to make any commitments for or on behalf of Visual.
If AT&T fails to provide the required approval to allow Visual to accompany
AT&T to the customer site, AT&T agrees that Visual shall be *** and Visual is
***.
C. RESPONSIBILITIES OF AT&T
AT&T will perform support for the customer in connection with any Product
failure reported to it by a customer. This requires AT&T to act as the initial
interface to the customer ***. In general, AT&T will engage the VTAC when AT&T
determines that the customer's problem is due to non-conformance of the
Products to the Specifications. ***.
AT&T will provide Visual with a name, phone number, and script to use in the
event that the VTAC is contacted directly by an AT&T customer. The VTAC will
redirect such calls to AT&T support with minimal inconvenience to the customer.
D. NETWORK MANAGEMENT CENTER SUPPORT AT OFFER AVAILABILITY
Visual will provide *** on-site resources at AT&T Network Management Work
Centers to assist in training AT&T technical personnel to become proficient in
supporting the Products. Training will include, but not be limited to: system
administration of the PAM, PAC training, and major hardware and software
release features of the Products utilized in AT&T network solutions
During the *** of the Agreement, AT&T may conference in the VTAC during normal
business hours (M-F 8 a.m. to 8 p.m. ET) and the VTAC will participate with
AT&T support personnel in problem diagnoses at all call levels.
ADDITIONAL VISUAL SUPPORT
A. PRODUCT AWARENESS AND PRODUCT TRAINING
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 38
Product training and Product awareness shall be provided on an on-going basis
for new AT&T personnel and new technologies introduced by Visual . AT&T and
Visual shall work together to determine the appropriate Product training and
Product awareness training regimens and schedules. AT&T and Visual shall review
AT&T Product training and Product awareness needs annually or sooner when
requested by either party. In general Visual will provide Product awareness
***. Visual will provide Product training to AT&T ***.
1. During each year of the Agreement, Visual will provide a comprehensive
Product awareness road show at *** locations***.
Product awareness in this context means the transfer of knowledge ***. In
order to maintain the momentum of this initial investment, Visual shall provide
***. Personnel to receive this training may include, but are not limited to:
***. Product awareness shall be provided at AT&T sites, or other facilities as
determined by AT&T. Visual shall provide Product awareness materials and
Product awareness training personnel ***
2. Visual will provide Product training to AT&T for ***. AT&T will be
committed to obtain proper Product training, which in this context means ***.
B. NETWORK SOLUTION DESIGN AND ENGINEERING SUPPORT
Visual shall provide network solution design and engineering support
to AT&T***, shall assign a sales representative on Visual's AT&T sales team to
be the point of contact for AT&T personnel in support of the design and
engineering of network solutions involving the Products. The role of Visual's
inside sales representative will be to ***. Such design and engineering
support shall be ***. Design and engineering support shall be available during
Visual's normal business hours, unless otherwise mutually agreed on a case by
case basis.
C. SERVICE DEVELOPMENT AND TESTING SUPPORT
1. AT&T will furnish Visual with a detailed scope of work, in writing,
for service development and testing support it requires, such as assistance in
software testing and certification of the Products. Visual shall respond to
this request in *** . Visual shall furnish a written proposal with the
estimated price and schedule. Service development and testing support shall be
available during Visual's normal business hours, unless otherwise mutually
agreed on a case by case basis. As additional releases of s the Products are
introduced into the AT&T service, Visual shall provide *** on-site training for
the additional features.
2. Visual will provide loaner Equipment to AT&T for the purpose of
evaluating new equipment released for certification. Upon AT&T submitting a
written request to Visual and with *** notice, AT&T will receive, subject to
loaner Equipment availability, loaner equipment from Visual for lab use for a
period of time ***. Equipment shall be provided by Visual ***. AT&T will
assume ***. At the end of *** period, AT&T may either purchase by paying for
the Equipment, or promptly return the Equipment to Visual.
3. Whenever Visual engages in a Beta testing effort of Equipment or
Software planned for general availability with any of its commercial customers
or potential customers, Visual shall offer AT&T an opportunity to participate
in the same Beta testing effort. AT&T will be notified of each Beta testing
effort for those Products that are then currently supported under the AT&T ***.
Any refusal by AT&T to participate in any one or more Beta tests shall not
affect its opportunity for participation in future Beta tests.
D. DOCUMENTATION
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 39
1. Product documentation is available and shall be furnished according to
the PRODUCT DOCUMENTATION section of the General Agreement. Visual agrees to
provide AT&T specified personnel, within *** of its general availability,
CD-ROM and hard-copy versions of all generally available documentation relating
to the Products. Such documentation shall include, but is not limited to:
product descriptions, price lists, , installation guides, product operation
manuals and release notes. Visual agrees to make reasonable efforts to provide
any technical documentation provided to Visual's own engineering staff, subject
to Visuals policy on release of confidential information.
Visual will provide *** copies of newly released documentation to AT&T *** and
any additional hardcopy versions of documentation ***. Additionally, Visual
will supply electronic versions of documentation and literature which AT&T may
use at its discretion.
2. Advertising source materials and reasonable quantities of sales
literature shall be available according to the MARKETING SUPPORT section below.
3. Visual shall assign an inside sales representative on Visual's AT&T
sales team to be the point of contact to coordinate AT&T' requests to furnish
other documentation in reasonable quantities which Visual generally makes
available to resellers of its Products.
E. MARKETING SUPPORT
1. Visual grants AT&T a non-exclusive *** limited license to use Visual's
trade names, logos and trademarks ("Trademarks"), in its advertising, sales and
promotional efforts.
2. When requested by AT&T with at least *** advance written notice,
Visual shall provide support for AT&T's participation in trade shows as
mutually determined between the parties. This support may include but is not
limited to supplying loaner Products and installation and de-installation
services. Visual shall provide this support***.
3. Visual shall provide upon reasonable request,*** advertising source
materials. AT&T may acquire Visual sales literature through the Visual's
literature distribution contractor. . AT&T is permitted to incorporate, either
wholly or partially, any supplied advertising source material in AT&T sales and
promotional materials subject to paragraph 1 above in this MARKETING SUPPORT
section.
4. When an AT&T customer prospect represents a potential for substantial
sales of the Products, Visual shall provide to AT&T *** for *** for a maximum
period of *** days. In order to be eligible for this ******. Visual shall not
be responsible for either ***. Upon conclusion of ***, AT&T may either
purchase the Products, or promptly return the Products to Visual.
5. Visual shall provide to AT&T support in preparing responses to
customer requests for information (RFI) and requests for quotations (RFQ) as
reasonably requested by AT&T. AT&T will act as Visual subject-matter experts to
prepare standard RFI and RFQ responses. Visual will provide support to AT&T on
unusual or complex responses.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 40
F. AT&T LAB EQUIPMENT
Purchases of a number of Products or Product upgrades, as agreed upon by the
parties, when identified for use in the AT&T engineering lab shall receive ***
available in the the Agreement. The *** will apply only to Products reflected
on Orders identified as "Order for AT&T Engineering Lab Use". The *** of
Equipment purchased under these terms of this clause may ***.
G. EXPEDITES
Visual shall cooperate with AT&T to expedite shipment of Products on Orders to
meet customers' critical needs.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 41
VISUAL RESPONSE COMMITMENTS
PROBLEM PRIORITY DEFINITIONS AND COMMITMENT
For each problem reported to Visual, AT&T will declare the appropriate problem
severity code based on the guidelines listed below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
BASIC SUPPORT
SEVERITY -------------
LEVEL DEFINITION RESPONSE COMMITMENT
----- ---------- -------- ----------
TIME
----
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 *** *** ***
- ---------------------------------------------------------------------------------------------------------
2 *** *** ***
- ---------------------------------------------------------------------------------------------------------
3 *** *** ***
- ---------------------------------------------------------------------------------------------------------
</TABLE>
ESCALATION PROCESS
The Visual escalation guidelines, as they relate to the support of AT&T, are
shown in the chart below. A combination of increasing levels of technical
expertise along with increasingly higher levels of services management is
employed. Escalation is triggered at differing times dependent on the priority
of the problem. AT&T can elevate any problem to the next higher level any time
it is deemed appropriate.
VISUAL TECHNICAL ESCALATION PROCESS
<TABLE>
================================================================================
<S> <C> <C> <C>
ELAPSED TIME SEVERITY 1 SEVERITY 2 SEVERITY 3
================================================================================
***
</TABLE>
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 42
EXHIBIT 3
AT&T ANNOUNCEMENT PLANS FOR VISUAL NETWORKS
Press Release by Visual Networks
Upon contract signature, AT&T's name may be used in the Visual Press
Release. There will be no mention of any AT&T specific service offers under
development or any reference to *** in said press release or any other public
document. AT&T shall have the right to approve or disapprove Press Release or
any other public document prior to any public communication to press, media,
trade journals, periodicals, financial analysis, consultants or any other
distribution medium.
Upon completion of any AT&T service offer in which Visual Networks
equipment is utilized, Visual may issue Press Releases upon the content
approval by AT&T.
Internal AT&T Announcement
AT&T will communicate via *** the AT&T/Visual Networks General Agreement
for the procurement of Equipment, Services and Supplies, and the Licensing of
Software to *** sales organization with reference to the intention ***. This
announcement will be released simultaneously to the Visual Networks Press
Release.
Upon completion of any AT&T service offers which utilize the Visual
Networks Equipment, AT&T will issue additional *** and will utilize the Visual
Networks name.
External AT&T Announcements
Upon completion of any AT&T service offers which utilize the Visual
Networks Equipment, AT&T, at their discretion, will announce externally the
service offer.
*** Visual may be called upon to provide support in connection with
product literature and equipment demonstration capabilities.
Account Stimulation
Upon completion of both the AT&T/Visual Networks General Agreement and
any AT&T service offer in which the Visual Networks Equipment is utilized, AT&T
***. Account opportunities will be reviewed at the periodically held
AT&T/Visual Status Review meetings to be *** following the General Agreement
and internal announcement of any AT&T service offer. Visual *** and any
announcement of any associated AT&T service offer in which the Visual Networks
Equipment is utilized.
Trade Shows
When AT&T service offers which utilize the Visual Networks Equipment are
a part of AT&T's participation in various Trade Shows, such as NetWorld InterOp
or ComNet, Visual may be called upon to provide support in connection with
product literature and equipment demonstration capabilities.
WEB content
AT&T and Visual will jointly approve all content by AT&T & Visual
Networks in any WEB content that makes reference to the AT&T/Visual Networks
General Agreement and any AT&T service offering in which the Visual Networks
Equipment is used.
Plan for Literature Fulfillment
AT&T and Visual will jointly approve all content in product literature
utilized by AT&T & Visual Networks in any account opportunity, trade show, etc.
associated with the discussion of any AT&T service offering in which the Visual
Networks Equipment is used.
Program Launch Schedule Milestones
- - General Agreement with AT&T and Visual Networks, Inc. - October 1997
- - Press Release by Visual - within 60 days of Agreement signing
- - Internal Sales Brief by AT&T - (simultaneous to Press Release by Visual)
- - Internal Sales Briefs by AT&T - ***
- - External Announcement by AT&T - ***
- - ***
*** Confidential Information has, been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 43
EXHIBIT 4
VISUAL NETWORKS
SERVICE PROVIDER STANDARD PRICING SCHEDULE
***
- -------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<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
Washington, D.C.
February 4, 1998
