SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-23699
VISUAL NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1837515
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
2092 GAITHER ROAD, ROCKVILLE, MD. 20850
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 296-2300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes x No ---
As of November 9, 1998, 20,032,400 shares of the registrant's Common Stock,
par value $.01 per share, were outstanding.
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VISUAL NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Three and nine months ended September 30, 1998
and 1997 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosure about 15
Market Risk
PART II. OTHER INFORMATION
Items 1. - 6. 15
Signatures 18
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<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Visual Networks, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share data)
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September December
Assets 30, 31,
1998 1997
--------- ---------
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Current assets:
Cash and cash equivalents.......................................... $ 47,702 $ 8,902
Accounts receivable, net of allowance of $494
and $412, respectively.......................................... 4,663 3,559
Inventory.......................................................... 5,054 3,724
Other current assets............................................... 1,579 602
--------- ---------
Total current assets.......................... ................. 58,998 16,787
Property and equipment, net.......................................... 3,542 1,824
--------- ---------
Total assets.................................................. $ 62,540 $ 18,611
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.............................. $ 8,985 $ 5,794
Customer deposits.................................................. 3,017 3,068
Accrued compensation............................................... 2,066 1,606
Deferred revenue................................................... 5,070 5,211
Bank line of credit................................................ --- 126
Loan payable to stockholder........................................ --- 500
Capital lease obligation........................................... 497 753
---------- -----------
Total current liabilities..................................... 19,635 17,058
========== ===========
Redeemable convertible preferred stock:
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 issued
and outstanding as of December 31, 1997(aggregate liquida-
tion preference of $14,484 as of December 31,997)................ --- 14,855
---------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding................................. --- ---
Series A convertible preferred stock, $.01 par value, 347,070
shares authorized, 347,070 shares issued and outstanding as
of December 31, 1997 (aggregate liquidation preference of
$149 as of December 31, 1997).................................... --- 3
Common stock, $.01 par value, 50,000,000 shares authorized,
20,005,929 and 5,005,140 shares issued and outstanding as of
September 30, 1998 and December 31, 1997, respectively........... 200 50
Deferred compensation.............................................. (212) (247)
Additional paid-in capital......................................... 73,972 12,783
Accumulated deficit................................................ (31,055) (25,891)
--------- ---------
Total stockholders' equity.................................... 42,905 (13,302)
--------- ---------
Total liabilities and stockholders' equity.................... $ 62,540 $ 18,611
========= =========
See accompanying notes to consolidated financial statements.
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Visual Networks, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except share and per share data)
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For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------ ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- --------------
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Revenues........................................ $ 13,460 $ 7,934 $ 35,766 $ 18,151
Cost of goods sold.............................. 4,830 2,987 13,731 7,114
----------- ----------- ----------- -----------
Gross profit.................................... 8,630 4,947 22,035 11,037
----------- ----------- ----------- -----------
Operating expenses:
Research and development...................... 2,725 1,835 7,640 5,116
Sales and marketing........................... 3,258 3,451 10,545 9,302
General and administrative.................... 1,051 830 3,167 2,290
Merger-related costs.......................... --- --- 7,347 ---
----------- ----------- ----------- -----------
Total operating expenses..................... 7,034 6,116 28,699 16,708
----------- ----------- ----------- -----------
Income (loss) from operations................... 1,596 (1,169) (6,664) (5,671)
Interest income, net............................ 615 2 1,670 68
----------- ----------- ----------- -----------
Net income (loss)............................... 2,211 (1,167) (4,994) (5,603)
Preferred dividends and accretion............... --- (365) (144) (1,094)
------------ ------------ ------------ -----------
Net income (loss) applicable to common
shareholders.................................... $2,211 $(1,532) $(5,138) $(6,697)
============ ============ ============ ============
Basic net income (loss) per common share........ $ 0.11 $ (0.31) $ (0.29) $ (1.36)
=========== ============ ============ ============
Diluted net income (loss) per common share...... $ 0.10 $ (0.31) $ (0.29) $ (1.36)
============ ============ ============ ============
Pro forma diluted income (loss) per common share $ 0.10 $ (0.07) $ (0.26) $ (0.36)
============ ============ ============ ============
Basic weighted average shares outstanding...... 19,965,302 4,966,027 17,629,587 4,919,623
------------ ------------ ------------ -----------
Diluted weighted average shares outstanding..... 21,596,540 4,966,027 17,629,587 4,919,623
------------ ------------ ------------ -----------
Pro forma diluted weighted average shares
outstanding.................................. 21,596,540 15,571,762 19,261,239 15,525,358
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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<PAGE>
Visual Networks, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
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For the nine months ended
September 30,
1998 1997
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Cash flows from operating activities:
Net loss..................................................... $ (4,994) $ (5,603)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................... 930 711
Loss on disposal of property and equipment.............. --- 131
Changes in assets and liabilities:
Accounts receivable..................................... (1,104) (598)
Inventory............................................... (1,330) (883)
Other current assets.................................... (936) (212)
Accounts payable and accrued expenses................... 3,191 2,682
Customer deposits....................................... (51) ---
Accrued compensation.................................... 460 22
Deferred revenue........................................ (141) 2,734
-------- --------
Net cash used in operating activities.............. (3,975) (1,016)
-------- --------
Cash flows from investing activities:
Proceeds from sale leaseback transactions............... --- 544
Expenditures for property and equipment................. (2,611) (1,030)
-------- --------
Net cash used in investing activities.............. (2,611) (486)
-------- --------
Cash flows from financing activities:
Exercise of stock options............................... 414 17
Proceeds from issuance of common stock, net of issuance
costs.............................................. 45,384 94
Repayments under credit agreements...................... (126) (848)
Payment of Series A dividends........................... (30) ---
Principal payments on capital lease obligations......... (256) (191)
-------- ---------
Net cash provided by (used in) financing activities 45,386 (928)
-------- ---------
Net increase (decrease) in cash and cash equivalents......... 38,800 (2,430)
Cash and cash equivalents, beginning of period............... 8,902 7,551
-------- ---------
Cash and cash equivalents, end of period..................... $ 47,702 $ 5,121
-------- ---------
Supplemental cash flow information:
Cash paid for interest....................................... $ 149 $ 96
-------- ---------
Cash paid for income taxes................................... $ 513 $ ---
======== =========
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See accompanying notes to consolidated financial statements.
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<PAGE>
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
(1) Nature of Operations and Summary of Significant Accounting Policies:
Visual Networks, Inc. ("Visual" or the "Company") is engaged in developing,
manufacturing and marketing wide-area-network service level management systems.
Visual's operations are subject to certain risks and uncertainties, including
among others, successful implementation of the Visual 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, integration of its recent acquisition of Net2Net Corporation
("Net2Net"), uncertainty of future profitability and possible fluctuations in
financial results.
Financial Statement Presentation
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, the
disclosure of contingent assets and liabilities at the date of statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These financial statements are unaudited and have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, and it is suggested
that these financial statements be read in conjunction with the financial
statements and the notes thereto, included in the Company's registration
statement on Form S-1 dated August 5, 1998 and its Annual Report on Form 10-K
for the year ended December 31, 1997. In the opinion of management, the
comparative financial statements for the fiscal periods presented herein include
all adjustments that are normal and recurring which are necessary for a fair
statement of results for the interim periods. The results of operations for the
three and nine months ended September 30, 1998 are not necessarily indicative of
the results for the entire year ending December 31, 1998.
On May 15, 1998, Visual acquired Net2Net in a merger transaction accounted
for as a pooling of interests. Net2Net is engaged in developing, manufacturing
and marketing Asynchronous Transfer Mode ("ATM") wide-area-network management
and analysis systems. The accompanying consolidated financial statements have
been retroactively restated to reflect the combined financial position and
combined results of operations and cash flows for all periods presented, giving
effect to the acquisition as if it had occurred at the beginning of the earliest
period presented. For the three months ended September 30, 1997, Visual had
previously reported revenues of $7,017,000 as compared to combined revenues of
$7,934,000 and a net income of $536,000 as compared to a combined net loss of
$1,167,000.
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.
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VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
Revenue Recognition
The Company generally recognizes revenue from the sale or license of its
products upon delivery and passage of title to the customer. 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
generally ranges from one to three years.
Inventory
Inventory is stated at the lower of cost or market. Inventory consists of
the following (in thousands):
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December 31, September 30,
1997 1998
---------- ------------
Raw materials... $ 439 $ 781
Work-in-progress 635 1,270
Finished goods.. 2,650 3,003
------ -------
$3,724 $ 5,054
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Income Taxes
The Company accounts for income taxes in accordance with Statment of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes"
("SFAS No. 109"). 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.
Basic and Diluted Net Loss per Common Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires dual
presentation of basic and diluted earnings (loss) per share. Basic earnings
(loss) per share includes no dilution and is computed by dividing net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted income (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 2,060,470 shares of common stock that were outstanding
at September 30, 1998 were not included in the computation of diluted loss per
share for the nine months ended September 30, 1998 as their effect would be
anti-dilutive. The treasury stock effect of these options has been included in
the computation of diluted net income per share for the three months ended
September 30, 1998. Options to purchase 1,808,743 shares of common stock that
were outstanding at September 30, 1997 were not included in the computation of
diluted loss per share for the three and nine months ended September 30, 1997 as
their effect would be anti-dilutive. The effect of preferred stock convertible
into 10,605,735 shares of common stock as of September 30, 1997 was not included
in the computation of diluted loss per share for the three and nine months ended
September 30, 1997 as such effect would have been anti-dilutive. The effect of
the conversion of the preferred stock into 10,605,735 shares of common stock is
included in the computation of basic loss per share from the date of conversion
on February 11, 1998 for the nine months ended September 30, 1998. Pro forma
basic and diluted weighted average shares outstanding for each period presented
assumes the conversion of all of the Company's outstanding convertible preferred
stock into common stock as of January 1, 1997.
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VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(2) Credit Agreements and Notes Payable:
Effective June 30, 1998, the Company amended its bank credit agreement.
This revolving line of credit, as amended (the "Revolving Line"), provides for
borrowings up to the lesser of $7,000,000 or 80% of eligible accounts
receivable. The Revolving Line matures on April 5, 1999 and borrowings under the
Revolving Line bear interest at the prime rate. Borrowings are collateralized by
inventory and accounts receivable. The Revolving Line also contains restrictive
covenants, including, but not limited to, restrictions related to liquidity and
net worth, as well as restrictions related to acquisitions, disposition of
assets, distributions and investments. As of September 30, 1998, the Company had
no borrowings against the Revolving Line, and in the three months ended
September 30, 1998, a letter of credit for $190,000 that had been issued against
the Revolving Line was cancelled.
Effective as of December 31, 1997, Net2Net issued a $500,000 subordinated
note payable to a stockholder bearing interest at a per annum rate of 15%. In
July 1998, this note was satisfied by issuing 16,848 shares of common stock to
the holder of the note. The fair value of the shares issued approximated the
carrying value of the note plus accrued but unpaid interest. Accordingly, no
gain or loss was recognized on this transaction.
(3) New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company adopted SFAS No. 130 for the nine months ended
September 30, 1998 and will adopt SFAS No. 131 with the issuance of its
financial statements for the year ending December 31, 1998. The adoption of
these new pronouncements will not have a material impact on the Company's
results of operations, financial position or cash flows.
(4) Initial Public Offering
In February 1998, the Company completed an initial public offering ("IPO")
of 4,025,000 shares of common stock, resulting in net proceeds of approximately
$45.4 million. All of the shares sold were issued and sold by the Company.
Concurrent with the closing of the offering, the outstanding shares of Series A
convertible preferred stock and Series B, C, D and E redeemable convertible
preferred stock were converted into 485,890 and 10,119,845 shares of common
stock, respectively.
(5) Net2Net Merger
In May 1998, Visual issued 2,056,204 shares of common stock in exchange
for all of the outstanding preferred and common stock of Net2Net. In addition,
outstanding Net2Net stock options were converted into options to purchase
189,733 shares of common stock. In connection with the acquisition, the
Company recorded merger-related costs in the three months ended June 30, 1998
for transaction costs, integration expenses and restructuring charges of
approximately $7,347,000. Transaction costs totaled approximately $4,391,000 and
consisted primarily of fees for investment bankers, attorneys, accountants and
other direct costs necessary to complete the transaction. Integration expenses
totaled $207,000 and represented incremental and non-recurring costs necessary
to integrate Net2Net and Visual. These costs were expensed as incurred. The
restructuring charge totaled approximately $2,749,000 and related primarily to
the consolidation of the Company's manufacturing, sales, marketing and
administrative functions and the discontinuance of certain product development
efforts. This consolidation will include a reduction of approximately 20
employees, which will result in severance and out-placement costs. Other
restructuring costs related to the termination of lease agreements or other
contractual arrangements with no future benefit. Approximately $510,000 was
charged against this reserve during the three months ended September 30, 1998.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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
Corporation ("Sprint"), resulting in the shipment of the Company's products
through Sprint to subscribers. In August 1997, the Company entered into a
similar master reseller agreement with MCI Communications Corp. ("MCI"), which
also resulted in the shipment of the Company's products through MCI to
subscribers. In December 1997, the Company entered into an agreement with AT&T,
which provides for the sale of the Company's products to AT&T for deployment as
part of AT&T's infrastructure. During 1997 and 1998, the Company focused on
selling Visual UpTime directly to providers as part of their network
infrastructure.
On May 15, 1998, Visual acquired Net2Net in a merger accounted for as a
pooling of interests. The combination with Net2Net will affect the future
results of operations reported by the Company (see Notes 1, 2 and 5 of Notes
to Consolidated Financial Statements).
The Company generally recognizes revenue from the sale or license of its
products upon delivery and passage of title to the customer. Where agreements
provide for the 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
generally ranges from one to three years.
The Company currently contracts with third parties for manufacturing,
warehousing and shipping of its product in addition to having manufacturing
operations that perform final assembly, testing and shipping of its product at
its facilities in Rockville, Maryland and Hudson, Massachusetts. The Company
anticipates maintaining a portion of its internal manufacturing function for the
foreseeable future at its Rockville, Maryland facility.
Results of Operations for the Three Months Ended September 30, 1998 Compared
with the Three Months Ended September 30, 1997
Revenue. The Company recognized $13.5 million in revenue for the three
months ended September 30, 1998, a 69.6% increase over revenue of $7.9 million
reported for the three months ended September 30, 1997. The increase was due
primarily to the continued acceptance of Visual UpTime in the Frame Relay
market, with a significant increase in sales to providers and, to a lesser
extent, the increase in sales of the Company's network analysis tools. Sales to
providers accounted for approximately 65% of revenue for the three months ended
September 30, 1998 as compared to approximately 46% for the three months ended
September 30, 1997.
Gross Profit. Cost of goods sold consists of subcontracting costs,
component parts, direct compensation costs, warranty and other contractual
obligations, royalties, license fees and other overhead expenses related to
manufacturing operations. Gross profit was $8.6 million for the three months
ended September 30, 1998, as compared to $4.9 million for the three months ended
September 30, 1997, an increase of $3.7 million. Gross margin was 64.1% of
revenue for the three months ended September 30, 1998, as compared to 62.4% of
revenue for the three months ended September 30, 1997. The increase in gross
margin percentage was due primarily to product cost reductions and to changes in
product sales mix. The Company's future gross margins may be adversely affected
by a number of factors, including product mix, the proportion of sales to
providers, competitive pricing, manufacturing volumes and an increase in
component costs.
Research and Development Expense. Research and development expense consists
of compensation for research and development staff, depreciation of test and
development equipment, certain software development costs and costs of prototype
materials. Research and development expense was $2.7 million for the three
months ended September 30, 1998 as compared to $1.8 million for the three months
ended September 30, 1997, an increase of $0.9 million. The increase in research
and development expense was due primarily to increased staffing levels and, to a
lesser extent, purchases of materials used in the development of new or enhanced
products. Research and development expense was 20.2% and 23.1% of revenue for
the three months ended September 30, 1998 and 1997, respectively. The Company
expects that research and development expenditures will increase in absolute
dollars, and may decrease as a percentage of revenue, during the remainder of
1998 and thereafter. The increase in absolute dollars will support continued
development of new enhanced products and the exploration of new or complementary
technologies.
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<PAGE>
Sales and Marketing Expense. Sales and marketing expense consists of
compensation for the sales and marketing staff, commissions, pre-sales support,
travel and entertainment, trade shows and other marketing programs.
Sales and marketing expense was $3.3 million for the three months ended
September 30, 1998, as compared to $3.5 million for the three months ended
September 30, 1997, a decrease of $0.2 million. The decrease in sales and
marketing expense was due primarily to the consolidation of Visual's and
Net2Net's sales and marketing functions, with a corresponding decrease in
employees subsequent to the May 15, 1998 acquisition of Net2Net by Visual. Sales
and marketing expense was 24.2% and 43.5% of revenue for the three months ended
September 30, 1998 and 1997, respectively. The Company expects that sales and
marketing expenditures will increase in absolute dollars, and may decrease as a
percentage of revenue, during the remainder of 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 market
opportunities.
General and Administrative Expense. General and administrative expense
consists of finance, administration and general management activities. General
and administrative expense was $1.1 million for the three months ended September
30, 1998 as compared to $0.8 million for the three months ended September 30,
1997, an increase of $0.3 million. The increase in general and administrative
expense was due primarily to increased staffing levels and costs incurred
related to a planned secondary public offering that was cancelled in September
1998. These increases were partially offset by reductions in administrative
expenses during the three months ended September 30, 1998 resulting from the
consolidation of Visual's and Net2Net's administrative functions as part of the
Company's restructuring plan that included a reduction in the number of
employees. General and administrative expense was 7.8% and 10.5% of revenue for
the three months ended September 30, 1998 and 1997, respectively. The Company
expects that general and administrative expenditures will increase in absolute
dollars, and may decrease as a percentage of revenue, during the remainder of
1998 and thereafter. The increase in absolute dollars is expected to be required
for the expansion of the Company's administrative staff and internal systems to
support expanding operations.
Interest Income, Net. Interest income, net, for the three months ended
September 30, 1998 was approximately $0.6 million as compared to zero for the
three months ended September 30, 1997. The increase was due to the significant
increase in cash and cash equivalents resulting from the proceeds of the
Company's IPO in February 1998.
Net Income (Loss). Net income for the three months ended September 30, 1998
was $2.2 million as compared to a net loss of $1.2 million for the three months
ended September 30, 1997, an increase of $3.4 million. Increases in revenue,
gross profit and interest income achieved in the three months ended September
30, 1998 offset the increased operating expenses described above.
Results of Operations for the Nine Months Ended September 30, 1998 Compared
with the Nine Months Ended September 30, 1997
Revenue. The Company recognized $35.8 million in revenue for the nine months
ended September 30, 1998, a 97.0% increase over revenue of $18.2 million
reported for the nine months ended September 30, 1997. The increase was due
primarily to the continued acceptance of Visual UpTime in the Frame Relay
market, with a significant increase in sales to providers and, to a lesser
extent, the increase in sales of the Company's network analysis tools. Sales to
providers accounted for approximately 62% of revenue for the nine months ended
September 30, 1998 as compared to approximately 37% for the nine months ended
September 30, 1997.
Gross Profit. Gross profit was $22.0 million for the nine months ended
September 30, 1998, as compared to $11.0 million for the nine months ended
September 30, 1997, an increase of $11.0 million. Gross margin was 61.6% of
revenue for the nine months ended September 30, 1998, as compared to 60.8% of
revenue for the nine months ended September 30, 1997. The increase in gross
margin percentage was due primarily to product cost reductions and to changes in
product sales mix. The Company's future gross margins may be adversely affected
by a number of factors, including product mix, the proportion of sales to
providers, competitive pricing, manufacturing volumes and an increase in
component costs.
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<PAGE>
Research and Development Expense. Research and development expense was $7.6
million for the nine months ended September 30, 1998 as compared to $5.1 million
for the nine months ended September 30, 1997, an increase of $2.5 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
21.4% and 28.2% of revenue for the nine months ended September 30, 1998 and
1997, respectively. The Company expects that research and development
expenditures will increase in absolute dollars, and may decrease as a percentage
of revenue, during the remainder of 1998 and thereafter. The increase in
absolute dollars will support continued development of new enhanced products and
the exploration of new or complementary technologies.
Sales and Marketing Expense. Sales and marketing expense was $10.6 million
for the nine months ended September 30, 1998, as compared to $9.3 million for
the nine months ended September 30, 1997, an increase of $1.3 million. The
increase in sales and marketing expense was due primarily to increased staffing
levels and related costs, such as commissions. These increases were partially
offset by reductions in sales and marketing expenses resulting from the
consolidation of Visual's and Net2Net's sales and marketing functions as part of
the Company's restructuring plan that included a reduction in the number of
employees. Sales and marketing expense was 29.5% and 51.2% of revenue for the
nine months ended September 30, 1998 and 1997, respectively. The Company expects
that sales and marketing expenditures will increase in absolute dollars, and may
decrease as a percentage of revenue, during the remainder of 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 market opportunities.
General and Administrative Expense. General and administrative expense was
$3.2 million for the nine months ended September 30, 1998 as compared to $2.3
million for the nine months ended September 30, 1997, an increase of $0.9
million. The increase in general and administrative expense was due primarily to
increased staffing levels and to costs incurred in 1998 related to a planned
secondary public offering that was cancelled in September 1998. These increases
were partially offset by reductions in administrative expenses resulting from
the consolidation of Visual's and Net2Net's administrative functions as part of
the Company's restructuring plan that included a reduction in the number of
employees. General and administrative expense was 8.9% and 12.6% of revenue for
the nine months ended September 30, 1998 and 1997, respectively. The Company
expects that general and administrative expenditures will increase in absolute
dollars, and may decrease as a percentage of revenue, during the remainder of
1998 and thereafter. The increase in absolute dollars is expected to be required
for the expansion of the Company's administrative staff and internal systems to
support expanding operations.
Merger-related Costs. In connection with the Net2Net acquisition, the
Company recorded merger-related costs of $7.3 million consisting of transaction
costs, integration expenses and restructuring charges. Transaction costs of $4.4
million consisted primarily of fees for investment bankers, attorneys,
accountants and other direct costs. Integration expenses of $0.2 million
consisted of incremental and non-recurring costs necessary to integrate Net2Net
and Visual. The restructuring charge of $2.7 million includes severance,
outplacement and other costs relating primarily to the elimination of certain
field offices, the consolidation of the Company's manufacturing, sales,
marketing and administrative functions and the discontinuance of certain product
development efforts.
Interest Income, Net. Interest income, net, for the nine months ended
September 30, 1998 was approximately $1.7 million as compared to $0.07 million
for the nine months ended September 30, 1997. The increase was due to the
significant increase in cash and cash equivalents resulting from the proceeds of
the Company's IPO in February 1998.
Net Loss. Net loss for the nine months ended September 30, 1998 was $5.0
million as compared to a net loss of $5.6 million for the nine months ended
September 30, 1997, a decrease of $0.6 million. Increases in revenue, gross
profit and interest income achieved during 1998 offset increased operating
expenses and the effect of the merger-related costs described above.
-11-
<PAGE>
Liquidity and Capital Resources
At September 30, 1998, the Company's combined balance of cash and cash
equivalents was $47.7 million as compared to $8.9 million as of December 31,
1997. This increase is primarily attributable to the $45.4 million in net
proceeds that the Company received from the sale of common stock in its IPO in
February 1998. Cash used in operating activities totaled $4.0 million during the
nine months ended September 30, 1998 and was primarily to fund operating losses
of Net2Net, to pay for merger-related costs associated with the Net2Net
acquisition, and to finance increases in accounts receivable and inventories.
Capital expenditures were approximately $2.6 million during the nine months
ended September 30, 1998.
On May 15, 1998, Visual acquired Net2Net in a stock transaction accounted
for as a pooling of interests. The Company incurred merger-related costs of
approximately $7.3 million. The payment of these costs has resulted to be a use
of cash by the Company during the nine months ended September 30, 1998 and will
continue to be a use of cash by the Company during the remainder of 1998.
The Company requires substantial working capital to fund its business,
particularly to finance inventories, accounts receivable, research and
development activities and capital expenditures. The Company currently has
commitments for capital expenditures for the remainder of 1998 that are not
expected to exceed $1.0 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 and extent of spending to support continued
expansion of internal systrems and networks, 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.
In addition to the Company's cash and cash equivalents, the Company's other
principal source of liquidity is its bank credit facility. The credit facility
includes a revolving line of credit providing for borrowings up to the lesser of
$7.0 million or 80% of eligible accounts receivable (as defined in the credit
facility). The agreement entitles a bank to a security interest in the Company's
inventory and accounts receivable. The agreement contains restrictive financial
covenants, including, but not limited to, restrictions related to liquidity and
net worth, as well as restrictions related to acquisitions, dispositions of
assets, distributions and investments. Interest is payable monthly at the prime
rate. As of September 30, 1998, there were no borrowings outstanding under the
bank credit facility.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Year 2000 Compliance
General
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions. The
potential costs and uncertainties associated with the Year 2000 issue will
depend on a number of factors, including software, hardware and the nature of
the industry in which a company operates.
Visual has instituted a company-wide project for addressing the Year 2000
issue (the "Project"). The Project is divided into four major sections - Product
Compliance, Oracle Implementation and System Infrastructure Upgrades, Vendor
Compliance and Customer Assessment. Each of these sections is discussed
separately below. The Company has engaged third party consultants to assist in
program management of the Project and in testing of critical business systems.
The Project is on schedule for completion by the end of the third quarter, 1999.
Product Compliance
Visual believes that the products that it currently is shipping have
already achieved Year 2000 compliance as defined within the requirements
established by the U.S. Government detailed in the Federal Acquisition
Regulations (FAR) Section 39 - Final. Should a Year 2000 compliance issue arise
in the future, Visual will take whatever steps it deems necessary to correct it
in currently shipping product for current maintenance customers.
Although all previously shipped products are believed to be compliant,
Visual does not commit to perform tests on product versions that the company no
longer is shipping. Should such non-shipping products be found non-compliant,
Visual will not update them to make them compliant.
The Company does not guarantee and specifically disclaims any liability for
the Year 2000 compliance of operating systems, hardware, software or other
products not developed by the Company.
-12-
<PAGE>
Oracle Implementation & System Infrastructure Upgrades
Early in 1998, in order to improve access to business information through
scaleable, integrated computing systems across the company, Visual began a
business systems replacement project. The new Oracle Enterprise Resources
Planning (ERP) application software packages that will replace the core legacy
systems, are expected to make approximately 75 percent of Visual systems Year
2000 compliant. This replacement effort is on track for implementation during
the first quarter of 1999 with several applications already successfully
implemented.
Following replacement of the core systems with Oracle software in January,
1999 the Company will seek to achieve Year 2000 compliance for minor application
software, computer hardware, network equipment and miscellaneous components of
our internal business systems. Visual anticipates that this effort will be less
significant compared to the replacement of core applications with Oracle
software.
The Company intends to achieve Year 2000 compliance for its remaining
internal systems as soon as possible after the Oracle implementation. The
Company's limited number of personal computers and application systems is
anticipated to facilitate rapid progress toward full Year 2000 compliance after
Oracle is successfully implemented.
Visual intends to continue to work to achieve Year 2000 compliance for its
systems using a methodology that incorporates the following steps:
Update the inventory of computer hardware, software and miscellaneous
network components.
Evaluate application development environment compliance,
Conduct overall assessment of systems infrastructure compliance,
Complete business risk analysis,
Take remedial actions (upgrade, repair, replace, retire or retain),
Develop appropriate contingency plans, and
Develop and implement regimes to test Year 2000 compliance for
mission-critical systems.
The Company currently anticipates completion of this process by the end of
the third quarter 1999 in order to avoid Year 2000 impact on remaining legacy
systems.
Vendor Compliance
This section includes the process of identifying and prioritizing critical
suppliers at the direct interface level and communicating with them about their
plans and progress in addressing the Year 2000 problem. This process will
include not only component part suppliers for Visual products, but also
providers of insurance, financial and other services.
The Company's vendor compliance program will include the following steps:
Catalog and classify all vendors,
On-site review and testing of out-sourced services or systems,
Review responses from vendors to determine the level of compliance,
Determine the timing, method and cost of vendor solutions,
Assess vendor Year 2000 compliance and business risks, and
Develop remedial actions or contingency plans, as necessary.
Achievement of vendor Year 2000 compliance is anticipated to be an on-going
effort during 1999. The current target to achieve compliance or complete
contingency plans is the end of the third quarter 1999.
- 13 -
<PAGE>
Customer Assessment
The Company is developing a program to assess the impact that Year 2000
issues may have upon its customers and their purchasing decisions. Many
companies are expending significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase system products such as those offered by the
Company. Conversely, Year 2000 issues may cause other companies to accelerate
purchases, thereby causing an increase in short-term demand and a consequent
decrease in long-term demand for system products. Additionally, Year 2000
compliance issues could cause a significant number of companies, including
current customers of the Company, to re-evaluate their current systems' needs,
and as a result, consider switching to other systems or suppliers. The Company
expects to complete its customer assessment by the end of the third quarter
1999.
Costs
The estimated total cost of the Year 2000 compliance project, exclusive of
the Oracle ERP implementation, is approximately $300,000. These costs are
expected to be incurred beginning in the fourth quarter of 1998 and throughout
1999. These costs will be incurred primarily for the use of outside consultants,
setting up Year 2000 testing environments, and the replacement of existing
software and hardware.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect Visual's results
of operations, liquidity and financial condition. Moreover, even if Visual
successfully remediates its Year 2000 issues, it can be materially and adversely
affected by failures of third parties to remediate their own Year 2000 issues.
The failure of third parties with which Visual has financial or operational
relationships (such as its customers and vendors) to remediate their computer
and non-information technology systems issues in a timely manner could result in
a material financial risk to Visual. In addition, Visual believes that the
purchasing patterns of customers and potential customers may be significantly
affected by Year 2000 issues. Due to the general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party customers and vendors, Visual is unable to determine at
this time whether the consequences of Year 2000 failures will have a material
impact on the Company's results of operations, liquidity or financial condition.
Accordingly, Visual may experience business interruption or shutdown, financial
loss, damage to Visual's reputation and legal liability. Visual believes that,
with the implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The Company's expectations about future costs and the timely completion of
its Year 2000 Project are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above. Factors that
could influence the amount of future costs and the effective timing of
remediation efforts include the success of Visual in identifying computer
programs and non-information technology systems that contain two-digit year
codes, the nature and amount of programming and testing required to upgrade or
replace each of the affected programs and systems, the rate and magnitude of
related labor and consulting costs, and the success of the Company's vendors and
customers in addressing the Year 2000 issue.
- 14 -
<PAGE>
Factors That May Affect Future Results
The Company raised $45.4 million (net of issuance costs) in its IPO in
February 1998. The Company also has a $7.0 million line of credit with a bank.
As of September 30, 1998, there were no borrowings outstanding under this bank
credit facility. The Company requires substantial working capital to fund its
business, particularly to finance inventories, accounts receivable, research and
development activities and capital expenditures. The Company's future capital
requirements will depend on many factors, including the rate of revenue growth,
if any, the timing and extent of spending to support product development efforts
and expansion of sales and marketing, the timing of introductions of new
products and enhancements to existing products and market acceptance of the
Company's products. The Company believes that its current cash position combined
with the $7.0 million line of credit are sufficient to meet its capital
expenditures and working capital requirements for the next 18 to 24 months. The
Company may consider from time to time various alternatives and may seek to
raise additional capital through equity or debt financing or to enter into
strategic agreements. There can be no assurance, however, that any of such
financing alternatives will be available on terms acceptable to the Company, if
at all.
The market for the Company's products is growing rapidly and the Company's
business environment is characterized by rapid technological changes, changes in
customer requirements and new emerging market segments. Consequently, to compete
effectively, the Company must make frequent new product introductions and
enhancements and deploy sales and marketing resources to take advantage of new
business opportunities. The Company's operations are also subject to certain
other risks and uncertainties including, among other things, the effectiveness
of actual and potential competition, the success of the Company's relationships
with its current strategic partners, the continued development of reseller
relationships with new service providers, and the risks associated with
acquisitions and international expansion. Failure to meet any of these
challenges could adversely affect future operating results.
Although a significant majority of the Company's sales to date have been
made to customers in the United States and Canada, the Company intends to
increase its sales efforts in international markets. The Company plans to sell
its products to international customers at prices denominated in U.S. dollars.
However, if the Company experiences material levels of sales at prices not
denominated in U.S. dollars, the Company intends to adopt a strategy to hedge
against currency fluctuations.
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.
The foregoing discussion contains forward-looking information within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and is subject to the safe harbor created by
those sections. The Company assumes no obligations to update the information
contained in this press release. The Company's future results may be impacted by
various important factors including, but not limited to, its ability to
implement its provider deployment model, its lengthy sales cycle, dependence on
its major customers, risks associated with rapid technological change and the
emerging services market, potential fluctuations in quarterly results, its
dependence on sole and limited source suppliers and fluctuations in component
pricing and its dependence on key employees and other risk factors set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Item 3. Qualitative and Quantitative Disclosure about Market Rish
Not applicable
<TABLE>
<CAPTION>
<S> <C> <C>
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to Vote of Security None
Holders
Item 5. Other Information None
</TABLE>
-15-
<PAGE>
Item 6 (a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* Restated By-Laws of the Registrant.
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.
-16-
<PAGE>
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.
10.18.2@ First Amendment to Loan and Security Agreement dated June 30,1998, by and
between Silicon Valley Bank and the Company.
10.18.3@ Amended and Restated Revolving Promissory Note issued by the Company
as of June 30, 1998, to Silicon Valley Bank.
10.19** Agreement and Plan of Merger dated April 15, 1998, by and among the
Company, Visual Acquisition, Inc. and Net2Net.
10.20*** Net2Net 1994 Stock Plan, assumed by by the Company.
11.1 Statement of computation the Company.of loss per share.
27 Financial Data Schedule.
</TABLE>
- ------------------
@ Incorporated herein by reference to the Company's Registration Statement on
Form S-1, No. 333-58443.
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1, No. 333-41517.
** Incorporated herein by reference to Exhibit 2.1 to the Company's Current Form
on Form 8-K dated May 19, 1998.
*** Incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8, No. 333-53153.
+ 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.
(b) Reports on Form 8-K
None.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Visual Networks, Inc.
November 16, 1998 By: /s/ Scott E. Stouffer
-------------------------
Scott E. Stouffer
Chief Executive Officer and President
November 16, 1998 By: /s/ Peter J. Minihane
-------------------------
Peter J. Minihane
Executive Vice President, Chief Financial Officer
and Treasurer (principal financial and
accounting officer)
-18-
Exhibit 11.1
Visual Networks, Inc.
Calculation of Income (Loss) Per Common Share
(unaudited)
(In thousands, except for share and per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the three months ended For the nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---------------- ------------ ------------- ------------
Adjustments to net income (loss):
Net income (loss)...................................... $ 2,211 $ (1,167) $ (4,994) $ (5,603)
Preferred dividend and accretion....................... - (365) (144) (1,094)
------------ ------------ ------------ ------------
Net income (loss) applicable to common
shareholders..................................... $ 2,211 $ (1,532) $ (5,138) $ (6,697)
------------ ------------ ------------ ------------
Weighted average share calculation:
Basic weighted average shares outstanding:
Average number of shares of common stock
outstanding during the period........................ 19,965,302 4,966,027 17,629,587 4,919,623
------------ ------------ ------------ ------------
Diluted weighted average shares outstanding:
Treasury stock effect of options (2)................. 1,631,238 - - -
Conversion of preferred stock (1) (3)................ - - - -
----------- ------------ ------------ -------------
Diluted weighted average shares outstanding.......... 21,596,540 4,966,027 17,629,587 4,919,623
Pro Forma diluted weighted average shares outstanding:
Conversion of preferred stock (1).................. - 10,605,735 1,631,652 10,605,735
----------- ------------ ------------ ------------
Pro forma diluted weighted average
shares outstanding............................... 21,596,540 15,571,762 19,261,239 15,525,358
============= ============= ============= ============
Income (loss) per common share:
Basic income (loss) per share (4)...................... $0.11 ($0.31) ($0.29) ($1.36)
============= ============= ============= ============
Diluted income (loss) per share (5).................... $0.10 ($0.31) ($0.29) ($1.36)
============= ============= ============= ============
Pro forma income (loss) per share (6).................. $0.10 ($0.07) ($0.26) ($0.36)
============= ============= ============= ============
</TABLE>
(1) Series A Convertible Preferred Stock and Series B, C, D and E Redeemable
Convertible Preferred Stock were converted into 485,890 and 10,119,845 shares of
common stock, respectively, concurrent with the Company's February 1998 initial
public offering.
(2) The treasury stock effect of options to purchase common stock has not been
included in the computation of diluted loss per share for the three months ended
September 30, 1997, the nine months ended September 30, 1998 or the nine months
ended September 30, 1997 as such effect would be anti-dilutive.
(3) The effect of convertible preferred stock has not been included in the
computation of diluted weighted average shares outstanding for the three months
ended September 30, 1997, the nine months ended September 30, 1998 or the nine
months ended September 30, 1997 as such effect would be anti-dilutive.
(4) Basic income (loss) per share is calculated by dividing net income (loss)
applicable to common shareholders by the basic weighted average shares
outstanding.
(5) Diluted income (loss) per share is calculated by dividing net income (loss)
applicable to common shareholders by the diluted weighted average shares
outstanding.
(6) Pro forma diluted income (loss) per share is calculated by dividing net
income (loss) by the pro forma weighted average shares outstanding.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 47,702
<SECURITIES> 0
<RECEIVABLES> 5,157
<ALLOWANCES> 494
<INVENTORY> 5,054
<CURRENT-ASSETS> 58,998
<PP&E> 5,407
<DEPRECIATION> 1,865
<TOTAL-ASSETS> 62,540
<CURRENT-LIABILITIES> 19,635
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 42,705
<TOTAL-LIABILITY-AND-EQUITY> 62,540
<SALES> 13,460
<TOTAL-REVENUES> 13,460
<CGS> 4,830
<TOTAL-COSTS> 4,830
<OTHER-EXPENSES> 7,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (615)
<INCOME-PRETAX> 2,211
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,211
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.10)
</TABLE>
