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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
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, MD 20850
(301) 296-2300
(Address of Principal Executive Offices)
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DELAWARE 3576 52-1837515
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(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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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:
NANCY A. SPANGLER, ESQUIRE
PIPER MARBURY RUDNICK & WOLFE LLP
1850 CENTENNIAL PARK DRIVE
RESTON, VIRGINIA 20191
(703) 391-7100
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. [ X ]
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
AMOUNT TO BE MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE REGISTRATION FEE
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Common stock, par value $.01 per share 4,110,897 $ 168,032,915 (1) $ 46,713
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(1) Pursuant to Rule 457(c), the proposed maximum aggregate offering price and
registration fee are based upon the closing price of $40.875 per share of
Visual Networks, Inc.'s common stock on October 27, 1999, as reported on
the Nasdaq National Market.
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 SECURITIES AND
EXCHANGE 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
PRELIMINARY PROSPECTUS
NOVEMBER 1, 1999
4,110,897 SHARES
VISUAL NETWORKS, INC.
COMMON STOCK
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This Prospectus relates to the public offering, which is not being
underwritten, from time to time of up to an aggregate of 4,110,897 shares of
common stock, par value $.01 per share, of Visual Networks, Inc., a Delaware
corporation, by various stockholders. See "Selling Stockholders" on page 16.
Visual's common stock is traded on the Nasdaq National Market under
the symbol "VNWK." On October 29, 1999, the reported closing price of Visual's
common stock on the Nasdaq National Market was $41.625 per share.
BEGINNING ON PAGE 5, VISUAL HAS LISTED SEVERAL "RISK FACTORS" WHICH
YOU SHOULD CONSIDER. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY BEFORE YOU
MAKE YOUR INVESTMENT DECISION.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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WHERE YOU CAN FIND MORE INFORMATION
Visual is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Securities Exchange Act"), and in accordance with the
Securities Exchange Act, files reports, proxy statements and other information
with the SEC. You may obtain such reports, proxy statements and other
information from the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330, or from the
SEC's Internet web site at http:\\www.sec.gov.
This Prospectus is a part of a registration statement that Visual
filed with the SEC. The registration statement contains more information than
this Prospectus, including certain exhibits. You can get a copy of the
registration statement from the SEC at the address listed above or from its web
site.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows Visual to "incorporate" into this Prospectus
information Visual periodically files with the SEC in other documents. This
means that we can disclose important information to you by referring to other
documents that contain that information. The information may include documents
filed after the date of this Prospectus which update and supersede the
information you read in this Prospectus. We incorporate by reference the
documents listed below, and all future documents filed with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act until we
terminate the offering of these securities.
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SEC File No.: 000-23699 Period/Filing Date
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Annual Report on Form 10-K........................... Year ended December 31, 1998
Quarterly Reports on Form 10-Q....................... Quarters ended March 31, 1999 and June 30, 1999
Registration Statement on Form S-3................... March 2, 1999
Registration Statement on Form S-3/A................. March 9, 1999
Preliminary Proxy Statement.......................... April 23, 1999
Definitive Proxy Statement .......................... April 30, 1999
Registration Statement on Form S-8 .................. August 12, 1999
Current Report on Form 8-K .......................... September 22, 1999
Current Report on Form 8-K........................... October 8, 1999
Registration Statement on Form S-8 .................. October 8, 1999
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You may request a copy of these documents, at no cost, by writing to:
Visual Networks, Inc.
Manager of Investor Relations
2092 Gaither Road
Rockville, Maryland 20850
You should rely on the information incorporated by reference or provided
in this prospectus or the prospectus supplement. We have authorized no one to
provide you with different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus or the prospectus supplement is accurate
as of any date other than the date on the front of the document.
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OUR BUSINESS
We design, manufacture and sell service management systems for
corporate networks based on the internet protocol ("IP") and the Internet. Our
systems combine purpose-built software agents placed at key demarcation points
in the network with centralized software applications for performance
monitoring, troubleshooting and network capacity planning. Visual UpTime, Visual
IP Insight and Visual Internet Benchmark provide instrumentation for network
performance measurement and analysis that allows service providers to achieve
the service levels required by their customers and to lower operating costs
associated with IP networks and the Internet. The availability of performance
monitoring and troubleshooting instrumentation also allows subscribers to verify
service levels being supplied by their service provider and monitor traffic
traversing networks, a requirement for many subscribers wishing to use public
services to carry mission-critical data traffic. We believe that our systems are
deployed in configurations managing up to 4,500 circuits and 1,500,000 desktop
computers.
We believe that we are a worldwide leader in providing service
management systems and we have shipped systems for deployment on an aggregate of
over 80,000 circuits and over 20,000,000 desktops. We have developed
relationships with major service providers such as AT&T Corporation ("AT&T"),
Sprint/United Management Company ("Sprint"), MCI Worldcom, Inc. ("MCI"), British
Telecommunications, Concentric Network Corporation, Earthlink Network, Inc.,
Prodigy Communications Corporation, Ameritech Corporation, Bell Atlantic, Inc.,
BellSouth Communication Systems, Inc., and GTE Communications Systems
Corporation. These service providers either resell our systems to their
subscribers or integrate our systems into their network infrastructure to
enable them to offer enhanced network service levels. Subscribers deploying our
systems in their IP networks include ABN-AMRO Bank, BP Amoco p.l.c., Cargill,
Inc., Cisco Systems, Inc., Citicorp, Delta Air Lines, Inc., EDS Electronic
Commerce Division, Federal Express Corporation, Household International, Inc.,
Intuit Inc., Marriott International, Inc., Alcoa, Inc., and Waste Management,
Inc. For the year ended December 31, 1998, we had consolidated revenue of
approximately $56.1 million.
Vertical Systems Group, a leading industry analyst, estimates that
approximately 1,000,000 Frame Relay circuits and 45,000 ATM circuits will be
installed worldwide from 1999 through 2001. GartnerGroup, a leading industry
analyst, estimates that the number of remote users - telecommuters and other
mobile users - will grow from 30 million today to more than 100 million by the
year 2002. To take advantage of this projected growth in these markets, we plan
to expand our relationships with our service provider customers which together
account for the majority of IP network and Internet traffic worldwide. The
percentage of revenue attributable to service providers increased from
approximately 42% of consolidated revenue for the year ended December 31, 1997,
to approximately 65% of consolidated revenue for the year ended December 31,
1998. Sprint, AT&T and MCI accounted for approximately 26%, 8% and 2%,
respectively, of consolidated revenue for the year ended December 31, 1997.
Sprint, AT&T and MCI accounted for 27%, 14% and 13%, respectively, of
consolidated revenue for the year ended December 31, 1998.
Visual was incorporated in Maryland in August 1993 under the name Avail
Networks, Inc. and reincorporated in Delaware in December 1994 as Visual
Networks, Inc. On May 15, 1998, we acquired Net2Net Corporation ("Net2Net"). On
September 30, 1999, we acquired Inverse Network Technology ("Inverse"). Both
acquisitions have been accounted for as pooling of interests transactions.
References herein to "we" and "us" refer to Visual on a consolidated basis. Our
principal executive offices are located at 2092 Gaither Road, Rockville,
Maryland 20850, and our telephone number is (301) 296-2300.
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risks, together with all other
information included in this Prospectus, before you decide to buy our common
stock.
OUR SUCCESS DEPENDS ON SERVICE PROVIDER COMPANIES INCORPORATING OUR PRODUCT
INTO THEIR INFRASTRUCTURE.
Network service companies have not typically offered products and
services that enable their customers to measure and test the level of service
they receive on their communications networks, and if these companies do not
want to offer this type of service, our future revenues could be significantly
lower than anticipated. Our leading sales and marketing strategy, which we refer
to as the "provider deployment model," depends on sales of Visual UpTime and
Visual IP Insight to service provider companies for them to deploy as part of
their network infrastructure. Although we expect that by the year 2000, a
significant portion of our revenue will be attributable to sales of Visual
UpTime and Visual IP Insight using this provider deployment model, we cannot be
sure that we will be successful in persuading service provider companies to
adopt this model.
We believe that the success of the provider deployment model depends
on a number of factors over which we may have little or no control, including:
- acceptance of and satisfaction with our systems by service
provider companies and their customers;
- the realization of operating cost efficiencies when Visual Uptime
and/or Visual IP Insight is deployed;
- our ability to demonstrate the operational benefits of Visual
UpTime and Visual IP Insight;
- generating demand for these systems from customers and support for
the systems within the service provider companies' sales forces;
- the competitive dynamics between service provider companies that
provide communication networks for wide area use and the
development of service for IP networks overall;
- our successful development of systems and products that address
the requirements for systems deployed as part of a service
provider company's infrastructure;
- the timing and successful completion of integration development
work by service provider companies to incorporate our service
management functionality into their operational infrastructure;
and
- the absence of new technologies that make our products and systems
obsolete before they become standardized in network systems.
The failure of our products to become an accepted part of the service
provider companies' service offerings or a slower than expected increase in the
volume of sales by us to these companies would have a material adverse effect
on our business.
OUR LONG SALES CYCLE REQUIRES US TO EXPEND SIGNIFICANT RESOURCES ON POTENTIAL
SALES OPPORTUNITIES THAT MAY NEVER BE CONSUMMATED.
If we do not eventually generate additional revenue from our sales and
marketing efforts the expended resources and lack of increased revenues could
have a material adverse affect on our business, financial condition and results
of operations. Our future business prospects depend on growing the sales of our
products and services. The provider deployment model under which we are
emphasizing future sales is characterized by a long sales cycle to turn
opportunities into sales.
The risks inherent in the long sales cycle for Visual UpTime and
Visual IP Insight, many of which we have little or no control over, include:
- service provider companies' internal acceptance reviews;
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- service provider companies' budgetary constraints and technology
assessment;
- service provider companies' lengthy decision-making processes;
- the attendant delays frequently associated with service provider
companies' internal procedures to approve large capital
expenditures; and
- the substantial commitment of capital from service provider
companies.
Sales of Visual UpTime and Visual IP Insight generally involve
significant testing by and education of both service provider companies and
their customers as well as a substantial commitment of our sales and marketing
resources. As a result, we may expend significant resources pursuing potential
sales opportunities that will not be consummated. Even if the provider
deployment model is implemented, curtailment or termination of service provider
company marketing programs, decreases in service provider company capital
budgets or reduction in the purchasing priority assigned to products such as
Visual UpTime and Visual IP Insight, particularly if significant and
unanticipated by us, could have a material adverse effect on our business,
financial condition and results of operations.
THE LOSS OF SPRINT, AT&T OR MCI AS A CUSTOMER COULD HARM OUR BUSINESS.
Our provider deployment model depends predominantly onsales to service
provider companies. The loss of either Sprint, AT&T or MCI, which have
historically provided a majority of our revenue, would result in a substantial
loss of revenues that could have a material adverse effect on our business,
financial condition and results of operations. During 1998, Sprint, AT&T and
MCI accounted for 27%, 14% and 13%, respectively, of our consolidated revenue.
During the nine months ended September 30, 1999, Sprint, AT&T and MCI accounted
for 25%, 24% and 8%, respectively, of our consolidated revenue. As our provider
deployment model develops, this concentration should continue as our customer
base will consist predominantly of service provider companies. The
concentration will be further increased upon the consummation of the pending
merger between Sprint and MCI.
Existing service provider company customers are not easily replaced
because of the relatively few participants in that market. High barriers to
entry due to extraordinary capital requirements and the likelihood that mergers
of existing providers may further reduce their number mean that replacing a
significant network provider company customer will be even more difficult in
the future.
Furthermore, the small number of customers means that the reduction,
delay or cancellation of orders or a delay in shipment of our products to any
one service provider company customer could have a material adverse effect on
our business, financial condition and results of operations.
Our anticipated dependence on sizable orders from a limited number of
service provider companies will make the relationship between us and each
service provider company critically important to our business. As our
relationships with these service provider companies evolve over time, we will
make adjustments to product specifications, forecasts and delivery timetables in
response to service provider company demands and expectations. Further, because
none of our agreements contain minimum purchase requirements, there can be no
assurance that the issuance of a purchase order will result in significant
repeat business. Any inability to manage our service provider company
relationships successfully could have a material adverse effect on our business,
financial condition and results of operations.
OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND WE MUST ADAPT
QUICKLY TO THESE CHANGES TO COMPETE EFFECTIVELY.
The market for Frame Relay, ATM and IP/Internet network 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. If we are unable to develop and
introduce new products and product enhancements in a timely fashion that
accommodate these changes, we will likely lose customers and business which
could have a material adverse effect on our business, financial condition and
results of operations. Visual UpTime and Visual IP Insight are focused on
service management for corporate networks that utilize statistically multiplexed
technologies. The introduction of new technologies or advances in techniques for
statistically multiplexed network services or the integration of service level
management functionality into other network hardware components could render
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our products obsolete or unmarketable. Further, we will be required to make
enhancements and refinements to our products for wide scale implementation
through the provider deployment model. There can be no assurance that (i) Visual
UpTime and/or Visual IP Insight will continue to compete successfully; (ii) our
future product offerings will keep pace with the technological changes
implemented by our competitors; (iii) our products will satisfy evolving
industry standards or preferences of existing or prospective customers; or (iv)
we will be successful in developing and marketing products for any future
technology. Failure to achieve any one of these objectives could have a material
adverse effect on our business, financial condition and results of operations.
OUR FUTURE SUCCESS DEPENDS ON CONTINUED MARKET ACCEPTANCE OF THE IP TECHNOLOGY
AND OUR ABILITY TO ADAPT TO NEW NETWORK TECHNOLOGIES THAT MAY DEVELOP.
Because Visual UpTime is deployed predominantly on IP networks, our
near-term success will depend on the continued market acceptance of IP
technology as a preferred networking solution. If services for IP networking do
not maintain widespread market acceptance, the market for our products will be
substantially reduced which could have a material adverse effect on our
business, financial condition and results of operations. Although we are
currently devoting significant resources to the development of additional
products, there can be no assurance that we will complete the development of
these or any future products in a timely fashion, that we will successfully
manage the transition from existing products, that our future products will
achieve market acceptance, or if market acceptance is achieved, that we will be
able to maintain such acceptance for a significant period of time. If we are
unable to develop products on a timely basis that address changing customer
needs and technologies, we may lose market share to competitors or be required
to substantially increase development expenditures. Such an increase in research
and development expenditures may have a material adverse effect on our business,
financial condition and results of operations. There also can be no assurance
that products or technologies developed by others will not adversely affect our
competitive position or render our products or technologies noncompetitive or
obsolete.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE WIDESPREAD ADOPTION OF THE INTERNET
BY BUSINESS AND CONSUMERS FOR E-COMMERCE AND COMMUNICATIONS.
Because our Internet service management products and services (Visual
IP Insight and Visual Internet Benchmark) are based on providing performance
measurement and diagnostics for the Internet and corporate IP networks, the
Internet must be widely adopted, in a timely manner, as a means of electronic
commerce, or e-commerce, and communications. Because e-commerce and
communications over the Internet are new and evolving, it is difficult to
predict the size of this market and its sustainable growth rate. In addition,
we believe that the use of the Internet for conducting business transactions
could be hindered for a number of reasons, including, but not limited to:
- security concerns including the potential for fraud or theft of
stored data and information communicated over the Internet;
- inconsistent quality of service, including well-publicized outages
of popular web sites;
- lack of availability of cost-effective, high-speed service;
- limited numbers of local access points for corporate users;
- delay in the development of enabling technologies or adoption of
new standards;
- inability to integrate business applications with the Internet;
- the need to operate with multiple and frequently incompatible
products; and
- a lack of tools to simplify access to and use of the Internet.
IMPROVEMENTS TO THE INFRASTRUCTURE OF THE INTERNET COULD REDUCE OR ELIMINATE
DEMAND FOR OUR INTERNET PERFORMANCE MEASUREMENT PRODUCTS AND SERVICES.
The demand for our Internet service management products and services
could be reduced or eliminated if future improvements to the infrastructure of
the Internet lead companies to conclude that measuring and evaluating the
performance of their networks is no longer important to their business. The
Internet is a complex, heterogeneous network of communications networks with
multiple operators and vendors supplying and managing the underlying
infrastructure as well as connections to this infrastructure. Because the
inherent complexity of the Internet currently
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causes significant e-commerce quality of service problems for companies, the
vendors and operators that supply and manage the underlying infrastructure are
continuously seeking to improve the speed, availability, reliability and
consistency of the Internet. If these vendors and operators succeed in
significantly improving the performance of the Internet, which would result in
corresponding improvements in the performance of companies' networks, demand for
our products and services would likely decline which could have a material
adverse effect on our business, financial condition and results of operations.
ERRORS IN OUR PRODUCTS OR SERVICES COULD DISCOURAGE CUSTOMERS AND DAMAGE OUR
REPUTATION.
If our existing or future products or services contain errors that are
not detected before shipment, we could experience a loss of or delay in market
acceptance of our products, diversion of development resources, damage to our
reputation or increases in service or warranty costs, any of which could have a
material adverse effect upon our business, financial condition and results of
operations. Products and services as complex as those we offer may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by us and by current
and potential customers, errors will not be found in new products and services
until commercial shipments have commenced.
WE FACE GROWING COMPETITION THAT COULD MAKE IT DIFFICULT FOR US TO ACQUIRE AND
RETAIN CUSTOMERS.
The market for service management systems for corporate IP networks
and the Internet is new and rapidly evolving. We expect competition in this
market to intensify in the future. Our competitors vary in size and in the scope
and breadth of the products and services that they offer. Many of these
competitors have greater financial, technical, marketing and other resources
than us, and some have well established relationships with our current and
potential customers. As a result, these competitors may be able to respond to
new or emerging technologies and changes in customer requirements more
effectively than us, or devote greater resources than us 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 could
have a material adverse effect on our business, financial condition and results
of operations.
Companies directly competing with Visual UpTime include:
- ADC Telecommunications, Inc. - Kentrox Division;
- Adtran, Inc.;
- Digital Link Corp.;
- Agilent Technologies, Inc.;
- NetScout Systems, Inc.;
- Network Associates, Inc.;
- Paradyne Corporation; and
- Sync Research, Inc.
Companies directly competing with Visual IP Insight include:
- Concord Communications, Inc.;
- First Sense Software, Inc.;
- Ganymede Software, Inc.;
- Agilent Technologies, Inc.;
- Lucent Technologies, Inc. - INS/InSoft Division;
- Micromuse, Inc.;
- NextPoint Networks, Inc.; and
- Response Networks, Inc.
Companies directly competing with Visual Internet Benchmark include:
- Freshwater Software, Inc.;
- Internet Resources Group;
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- Keynote Software, Inc.; and
- Service Metrics, Inc.
We expect that we may experience competition from less expensive
products and services that provide only a portion of the functionality provided
by our products and services. In particular, as prices for network equipment
components such as data service units/channel service units decrease, customers
may decide to purchase these less expensive products even though they lack
certain features offered by our products. For example, we expect that
participants with strong capabilities in these various segments could partner
with each other to offer products that supply functionality approaching that
provided by Visual UpTime. We are aware of such arrangements between Digital
Link and NetScout, and NetScout and Paradyne. The success of such products could
have a material adverse effect on our business, financial condition and results
of operations.
If we expand the scope of our products and services, we may encounter
many additional, market-specific competitors. These potential competitors
include companies that sell network management software such as Lucent
Technologies, Inc. - OneVision Division and Telecordia Technologies, Inc., each
of which has announced products that could potentially compete with us in the
future. The success of such products could have a material adverse effect on our
business, financial condition and results of operations.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT AND WE MAY NOT BE
PROFITABLE IN THE FUTURE.
Our limited history, operating losses and accumulated deficit make
predicting our future operating results difficult. Visual was organized in 1993
and we introduced Visual UpTime in mid-1995. Accordingly, we have only a limited
operating history upon which an evaluation of our product and prospects can be
based. As of September 30, 1999, we had an accumulated deficit of approximately
$36.3 million. We incurred consolidated net losses in 1996, 1997 and 1998 of
approximately $12.5 million, $9.2 million and $6.5 million, respectively. For
the nine months ended September 30, 1999, we incurred a consolidated net loss of
$1.2 million. The losses in 1996 and 1997 related primarily to our expenditures
associated with the development and marketing of the Visual UpTime product, the
products of Net2Net, and the products of Inverse. The losses in 1998 and 1999
related primarily to the effect of the merger-related costs and the effect of
the Net2Net and Inverse operating losses prior to respective dates of
acquisition.
Our revenue may not continue to grow or be sustained in the future.
Although we have recently experienced an increase in revenue from service
provider companies, such growth should not be considered indicative of future
revenue growth, if any, or of future operating results. Our revenue in any
period depends primarily on the volume and timing of orders received during the
period, which are difficult to predict. Our expense levels are based, in part,
on the 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. Results of operations may be affected disproportionately by a
reduction in revenue because a large portion of our expenses are fixed and
cannot be easily reduced without adversely affecting our business. In addition,
we currently intend to increase funding of research and product development
efforts and sales, marketing and customer support operations and to expand
distribution channels. To the extent such expenses precede or are not promptly
followed by increased revenue, our business, financial condition and results of
operations could be adversely affected.
OUR DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS MAKES THE PRICE WE PAY FOR
IMPORTANT COMPONENTS IN OUR PRODUCTS MORE VOLATILE.
We purchase many key components used in the manufacture of our
products only from sole or limited sources. If a sole or limited source
supplier raises their prices, delays shipments or becomes unable or unwilling to
supply a key component, we may be forced to obtain these components from
alternative sources if they are available which could impair our ability to
deliver our products to our customers in a timely and cost-effective manner, or
could force us to increase our prices or reduce our gross profit margins. Any of
these events could have a material adverse effect on our business, financial
condition and results of operations and could jeopardize our relationships with
those customers.
The risks associated with being dependant on sole or limited source
suppliers of key components include the following:
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- we have not identified alternative suppliers for all of our key
components and we may not be able to find alternative suppliers,
if necessary, or find alternative components of comparable
quality;
- we will have to qualify alternative suppliers before we purchase
components from them which will, even if successful, necessarily
delay the process of procuring the replacement components;
- we do not have long-term agreement with most of our suppliers so
these suppliers could suddenly increase component prices;
- even minor delays in shipments of key components from suppliers -
which we have experienced in the past - could delay the shipment
of our products;
- although all of our sole or limited source suppliers are based in
the United States, some of them may manufacture or acquire
components from outside of the United States and thus they may be
unable to deliver their components if their own supplies are
interrupted by events in other countries; and
- some of the components, including dynamic random access memories
and embedded communications processors, are subject to
significant price fluctuations.
Sole-source components presently include framers, certain
semiconductors, embedded communications processors, communication controllers
and line interface components.
THE FAILURE TO SUCCESSFULLY INTEGRATE INVERSE NETWORK TECHNOLOGY INTO OUR
BUSINESS COULD NEGATIVELY AFFECT OUR OPERATIONS.
If we are unable to successfully integrate the product line,
personnel, business and operations of Inverse, which we acquired in September
1999, in an efficient and effective manner, the advantages that we anticipated
from such acquisition could be undermined and we could experience a material
adverse effect on our business, financial condition and results of operations.
We face challenges integrating the Inverse products and services with our
product line and expect that this will continue for some time. There can be no
assurance that such integration will be accomplished smoothly or successfully.
Coordinating geographically separated organizations and addressing differences
in corporate cultures and management philosophies further complicates this
process. The integration of certain operations requires the dedication of
management resources which may temporarily distract attention from the
day-to-day business of the combined companies. The business of the combined
companies may also be disrupted by employee uncertainty and lack of focus during
such integration.
WE MAY FACE DIFFICULTIES ASSIMILATING AND MAY INCUR COSTS ASSOCIATED WITH ANY
FUTURE ACQUISITIONS.
As part of our business strategy, we may seek to acquire or invest in
businesses, products or technologies that we feel could complement or expand
our business, augment our market coverage, enhance our technical capabilities
or that may otherwise offer growth opportunities. Acquisitions could create
risks for us, including:
- difficulties in assimilation of acquired personnel, operations
and technologies;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with channel
partners of our products and services and our customers; and
- use of substantial portions of our available cash to consummate
the acquisition.
IF WE EXPAND OUR INTERNATIONAL ACTIVITIES, OUR BUSINESS WILL BE SUSCEPTIBLE TO
ADDITIONAL RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We believe we must expand the sales and marketing activities for our
products and services outside the United States and hire additional
international personnel. Therefore, we expect to commit significant resources to
expand our international sales and marketing activities, which were less than
10% of our consolidated revenue for the nine months ended September 30, 1999 and
prior periods. With respect to the Visual Internet Benchmark product, we intend
to deploy additional measurement computers worldwide, which would require us to
maintain and service computers over longer distances.
10
<PAGE> 11
Conducting international operations would subject us to risks we do
not face in the United States. These include, but are not limited to:
- currency exchange rate fluctuations;
- seasonal fluctuations in purchasing patterns;
- unexpected changes in regulatory requirements;
- maintaining and servicing computer hardware in distant locations;
- longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
- difficulties in managing and staffing international operations;
- potentially adverse tax consequences, including restrictions on
the repatriation of earnings;
- the burdens complying with a wide variety of foreign laws; and
- reduced protection for intellectual property rights in some
countries.
The Internet and other IP services, such as Frame Relay and ATM, may
not be used as widely in other countries and the adoption of public data service
for transporting mission-critical applications may evolve slowly or may not
evolve at all. As a result, we may not be successful in selling our products and
services to customers in markets outside the United States. Failure to expand
our international activities successfully could have a material adverse effect
on our business, financial condition and results of operations.
THE LOSS OF KEY PEOPLE COULD JEOPARDIZE OUR GROWTH PROSPECTS
The loss of the services of our President and Chief Executive Officer
or any other key employee could adversely affect our ability to execute our
business plan and could have a material adverse effect on our business,
financial conditions and results of operations. Our success depends to a
significant degree upon the continuing contributions of our key management and
technical employees, particularly Scott E. Stouffer, our Chairman, President and
Chief Executive Officer. We maintain, and are the beneficiary under, $2.0
million of key person life insurance on Mr. Stouffer.
OUR INABILITY TO HIRE AND RETAIN EMPLOYEES MAY HURT OUR GROWTH PROSPECTS.
If we fail to hire and retain personnel it could damage our ability to
grow and expand our business. Our future success depends on our ability to
attract and retain highly skilled managerial, sales, marketing, customer support
and product development personnel. Intense competition for technically trained
sales and product development personnel makes recruiting qualified personnel
difficult. There can be no assurance that we will be successful in retaining our
key employees or that we can attract or retain additional skilled personnel as
required. Failure to attract and retain key personnel could have a material
adverse effect on our business, financial condition and results of operations.
OTHERS MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS.
If others claim that our products infringe on their intellectual
property rights, whether the claims are valid or not, we may be forced to spend
significant sums in litigation, pay damages, delay product shipments, reengineer
our products or acquire licenses to the claimant's intellectual property. We
expect that these claims may become more common as the number of products in the
network management industry increases and the functionality of these products
further overlaps. If a claimant is successful in a lawsuit arising from such a
claim, it could have a material adverse effect on our business.
WE MUST PROTECT OUR OWN INTELLECTUAL PROPERTY RIGHTS.
Our success is dependent on our proprietary technology and
intellectual property rights. We hold two patents and also rely on copyright
and trade secret laws, trademarks, confidentiality procedures and contractual
provisions to protect our proprietary software, documentation and other
proprietary information. These protection methods may not be adequate to
prevent competitors from developing similar technology. Moreover, in the
absence of patent protection, our business may be adversely affected by
competitors that develop functionally equivalent technology. Litigation to
enforce our intellectual property rights, regardless of its success or failure,
could be
11
<PAGE> 12
burdensome and expensive and could involve a high degree of uncertainty. In
addition, legal proceedings may divert management's attention from growing our
business.
We may be subject to additional risk as we enter into transactions in
countries where intellectual property laws are not well developed or enforced
effectively. Legal protection of our 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. Failure
to adequately protect our intellectual property rights could have a material
adverse effect on our business, financial condition and results of operations.
WE HAVE ANTITAKEOVER PROTECTIONS THAT MAY DELAY OR PREVENT A CHANGE IN CONTROL
THAT COULD BENEFIT OUR STOCKHOLDERS.
Terms of our certificate of incorporation and bylaws make it more
difficult for another individual or company to acquire control of our company,
even if a change of control would benefit our stockholders. These terms
include:
- Our board of directors, without stockholder approval, may issue up to
5,000,000 shares of preferred stock on terms that they determine. This
preferred stock could be issued quickly with terms that delay or
prevent the change in control of our company, make removal of
management more difficult or depress the price of our stock;
- certain provisions of our Certificate of Incorporation and Bylaws and
of Delaware law could delay or make more difficult a merger, tender
offer or proxy contest;
- we are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law which 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;
- our board of directors is "staggered" so that only a portion of its
members are elected each year;
- only our board of directors, our chairman of the board, our president
or stockholders holding a majority of our stock can call special
stockholder meetings; and
- special procedures must be followed in order for stockholders to
present proposals at stockholder meetings.
In addition, our credit facility with Silicon Valley Bank prohibits us
from engaging in a merger with or being acquired by another entity without
their consent, unless we are the surviving entity.
THE FAILURE OF OUR CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD NEGATIVELY IMPACT
OUR BUSINESS
Many currently installed operating systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields need additional digits to distinguish accurately dates prior to January
1, 2000 and those after December 31, 1999. As a result, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance. We
believe that the purchasing patterns of customers and potential customers may
be significantly affected by Year 2000 issues. 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 software products such as those offered by us. 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 software products.
Additionally, Year 2000 compliance issues could cause a significant
number of companies, including our current customers, to re-evaluate their
current systems' needs and, as a result, consider switching to other systems or
suppliers. This could have a material adverse effect on our business,
financial condition and results of operations.
12
<PAGE> 13
OUR FAILURE TO BE YEAR 2000 COMPLIANT COULD NEGATIVELY IMPACT OUR BUSINESS
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.
We have instituted a company-wide project for addressing the Year 2000
issue (the "Project"). The Project is divided into four major sections -
Product Compliance, ERP Implementation and System Infrastructure Upgrades,
Vendor Compliance and Customer Assessment. Each of these sections is discussed
separately below. We have engaged third party consultants to assist in program
management of the Project and in testing of critical business systems.
Due to our recent acquisition of Inverse, we have expanded the
Project to include our new business locations. This expansion will extend the
Project, which will be completed during the fourth quarter of 1999.
Product Compliance
We believe that the products currently being shipped by us 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, we will take
whatever steps we deem necessary to address it in accordance with our product
warranties. However, we do not guarantee and specifically disclaim any
liability for the Year 2000 compliance of operating systems, hardware, software
or other third-party products not developed by us. It is the responsibility of
any such third parties to test and validate Year 2000 compliance.
Although all previously shipped products are believed to be compliant,
we will not commit to perform tests on obsolete product versions. Should
obsolete products be found non-compliant, we will not update them to make
them compliant.
Visual IP Insight products have been successfully tested to ensure
that the system will behave correctly with respect to dates in the year 2000 and
in the transition from December 31, 1999 to January 1, 2000. The Visual IP
InSight system is dependent on the customer's computer operating system and some
third party software. We have tested the interaction of these products with
Visual IP InSight on certain hardware platforms to assure that it is compliant.
Certain hardware platforms and versions of underlying operating system software
may have general Year 2000 compliance problems that may impact customers use of
the Visual IP InSight product. In this case, customers will need to obtain Year
2000 compliant products from third-party vendors, or use hardware platforms and
operating system software recommended by us. Customers are also responsible for
verifying that all other products (that is, other software, firmware, and
hardware) that customers may choose to use with Visual IP InSight properly
handle date information.
ERP Implementation and System Infrastructure Upgrades
Early in 1998, in order to improve access to business information
through scaleable, integrated computing systems across the company, we began a
business systems replacement project. Our Enterprise Resources Planning ("ERP")
application software system replaced core legacy systems, making approximately
13
<PAGE> 14
seventy-five (75) percent of our systems Year 2000 compliant. The
implementation of the ERP software was substantially completed in the first
quarter of 1999.
We are currently evaluating the Year 2000 compliance of the remaining
application software, computer hardware, network equipment and miscellaneous
components of our internal business systems. The evaluation of the engineering
application development environment has been completed. The overall effort,
which is less significant than the replacement of the core systems with the ERP
software, will be substantially completed during the fourth quarter of 1999 and
may include the upgrade, repair or replacement of certain elements of these
systems.
Vendor Compliance
This section of the Project, which 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, is nearly complete. Included were suppliers of parts for our
products and providers of mission-critical services. Remaining tasks include
the assessment of critical vendors utilized by Inverse and the expansion of our
contingency plans to encompass the Inverse business locations. We intend to
continually revise and update our contingency plans to reflect our assessment
of our current business environment.
Customer Assessment
Based on the input provided as part of our sales forecasting
activities, we have been unable to assess the full impact that Year 2000 issues
may have upon our customers and their purchasing decisions over the next six
months.
Costs
The estimated total cost of the Year 2000 compliance project,
exclusive of the ERP implementation, is approximately $400,000 of which
approximately $300,000 had been spent as of September 30, 1999. These costs will
be incurred primarily in 1999 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 our business,
financial condition and results of operations. Moreover, even if we successfully
remediate our Year 2000 issues, we 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 we have financial or operational relationships (such
as our customers and vendors) to remediate their computer and non-information
technology systems issues in a timely manner could have a material adverse
affect on our business, financial condition and results of operations. In
addition, we believe 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, we
are unable to determine at this time whether the consequences of year 2000
failures will have a material impact on our business, financial condition and
results of operations. Accordingly, we may experience business interruption or
shutdown, financial loss, damage to our reputation and legal liability. We
believe 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.
Our expectations about future costs and the timely completion of our
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 our success 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
14
<PAGE> 15
systems, the rate and magnitude of related labor and consulting costs, and the
success of our vendors and customers in addressing the Year 2000 issue.
USE OF PROCEEDS
Visual will not receive any proceeds from the sale of the shares
hereunder.
15
<PAGE> 16
SELLING STOCKHOLDERS
Each of the Selling Stockholders was a stockholder or creditor of
Inverse. On September 30, 1999, Visual Acquisitions Two, Inc., our wholly owned
subsidiary ("Merger Sub") merged into Inverse under the terms of an Agreement
and Plan of Merger dated September 15, 1999 (the "Merger"). In the Merger, the
shares of capital stock of Inverse owned by the Selling Stockholders and
certain obligations of Inverse to creditors were converted, on a pro rata
basis, into shares of Visual's common stock, and Inverse became our wholly
owned subsidiary. The Selling Stockholders received, in the aggregate,
4,110,897 shares of common stock in the Merger, all of which may be offered for
sale from time to time by the Selling Stockholders pursuant to the registration
statement of which this Prospectus is a part.
The following table sets forth the name of each of the Selling
Stockholders, the positions, offices and other material relationships, if any,
of the Selling Stockholders with Inverse prior to the merger, the number of
Shares held by such Selling Stockholder as a result of the Merger, and the
number of Shares being offered by such Selling Stockholder.
<TABLE>
<CAPTION>
Number of
Shares Held Number of
as a Result of Shares Position, Office or Other Material
Name the Merger Offered(1) Relationship with Inverse
---- ---------- --------- -------------------------
<S> <C> <C> <C>
Dale M. Anderson .............................. 4,591 4,591
Dale M. Anderson and Lleanna R. Anderson
Revocable Trust .......................... 2,265 2,265
Associated Venture Investors III L.P. ......... 76,449 76,449
AVI Capital L.P. .............................. 523,696 523,696
AVI Partners Growth Fund II L.P. .............. 14,889 14,889
AVI Silicon Valley Partners L.P. .............. 5,458 5,458
Robert E. Berry, Jr. .......................... 58,772 58,772 Vice President, Sales
Jennifer Bestor................................ 22,116 22,116
Shekhar Bhide.................................. 4,744 4,744
Linda Bower.................................... 397 397
Matt J. Burdick................................ 22,304 22,304
Corinne Cheung................................. 734 734
Gigi Chu....................................... 15,424 15,424
Rachel Cox..................................... 714 714
Andrew Davis................................... 105,101 105,101
Dominion Ventures.............................. 4,217 4,217
David J. Ehrlich............................... 47,752 47,752 Vice President, Business Development
Raphael Frommer................................ 2,601 2,601
Jon Furukawa................................... 734 734
Kimberly A. Gazlay............................. 2,851 2,851
Joan and Frank Gennaro......................... 1,224 1,224
Michael Gennaro................................ 46,528 46,528 Chief Financial Officer
Fred Gibbons (Trust)........................... 31,222 31,222 Director
Fred Gibbons, Trustee of the Fred Gibbons
Separate Property Trust................... 26,432 26,432 Director
Michael Gilbert................................ 48,201 48,201 Director
</TABLE>
(1) This registration statement also shall cover any additional shares of
common stock which become issuable in connection with the shares registered
for sale hereby by reason of any stock dividend, stock split,
recapitalization or other similar transaction effected without the receipt
of consideration which results in an increase in the number of our
outstanding shares of common stock.
16
<PAGE> 17
<TABLE>
<S> <C> <C> <C>
Susan E. Gilbert and Michael M. Gilbert.......... 4,897 4,897
Anne M. Gilbert and Michael M. Gilbert........... 4,897 4,897
Jasinder Gill.................................... 2,601 2,601
Greylock IX Limited Partnership.................. 934,925 934,925
John Hancock..................................... 47,752 47,752 Vice President, Operations
Steve J. Hand.................................... 3,183 3,183
Claudis and Helen Hicks.......................... 1,224 1,224
HSBC Trustee (Jersey) Limited.................... 369,974 369,974
William Whit Jelks............................... 1,224 1,224
Marnie L. Lambert................................ 153 153
John Leong....................................... 120,116 120,116
Jamshid Mahdavi.................................. 397 397
Belle Marino..................................... 994 994
Matt Mathis...................................... 397 397
Roberta Murphy................................... 96,576 96,576 Vice President, Marketing
Prem Nambiar..................................... 1,224 1,224
Erikas Napjus.................................... 3,918 3,918
John J. Pacholski................................ 13,963 13,963
Thomas Panicker.................................. 1,101 1,101
Kathleen Parks................................... 1,224 1,224
Ann Peckenpaugh.................................. 2,485 2,485
Drew Perkins..................................... 40,405 40,405
Karen Perry...................................... 3,061 3,061
Jenny K. Redo.................................... 3,443 3,443
Veronica Richardson.............................. 1,224 1,224
Lee Schweichler.................................. 3,037 3,037
Ashok Sethi...................................... 2,066 2,066
Amanda G. Seward-Chavis.......................... 91 91
Thomas A. Skornia................................ 7,346 7,346
Richard Sneiderman............................... 2,754 2,754
Priyadarshini Tamhankar.......................... 1,148 1,148
Thompson Clive Investments plc................... 201,003 201,003
Silicon Valley Bank.............................. 4,452 4,452
Venture Lending and Leasing...................... 5,799 5,799
David L. Walters................................. 2,321 2,321
Michael G. Watters............................... 965,169 965,169 Director, President, Chief Executive Officer
Raymond Andrew Wimset............................ 1,734 1,734
Robert Zeljko.................................... 1,193 1,193
Total....................................... 4,110,897 4,110,897
</TABLE>
If all the shares of common stock being offered by the Selling
Stockholders are sold, none of the Selling Stockholders will own any common
stock that they acquired as part of the Merger upon completion of this offering.
17
<PAGE> 18
PLAN OF DISTRIBUTION
We are registering an aggregate of 4,110,897 shares of common stock
to permit public secondary sales of the shares of Common Stock by the Selling
Stockholders, or any of them, from time to time after the date of this
Prospectus. We anticipate that the Selling Stockholders may sell all or a
portion of the common stock from time to time through the Nasdaq National
Market and may sell common stock to or through one or more broker-dealers at
prices prevailing on such Nasdaq National Market at the times of such sales.
The Selling Stockholders may also make private sales directly or through one or
more broker-dealers. Broker-dealers participating in such transactions may
receive compensation in the form of discounts, concessions or commissions
(including, without limitation, customary brokerage commissions) from the
Selling Stockholders effecting such sales. The Selling Stockholders and any
broker-dealers who act in connection with sales of common stock may be deemed
to be "underwriters" as that term is defined in the Securities Act, and any
commissions received by them and profit on any resale of the common stock might
be deemed to be underwriting discounts and commissions under the Securities
Act. In effecting sales, broker-dealers engaged by a Selling Stockholder may
arrange for other broker-dealers to participate.
The Selling Stockholders will pay all discounts and selling
commissions (if any), fees and expenses of counsel and other advisors to the
Selling Stockholders, or any of them, and any other expenses incurred in
connection with the registration and sale of the common stock, other than the
registration fee payable to the SEC hereunder, the listing fee to be paid for
listing the shares of common stock on the Nasdaq National Market, fees and
expenses relating to the registration or qualification of the shares of common
stock pursuant to any applicable state securities or "blue sky" laws and the
fees and expenses of our counsel and independent accountants, which will
be paid by us.
LEGAL MATTERS
Counsel for Visual, Piper Marbury Rudnick & Wolfe LLP, Reston,
Virginia, has rendered an opinion to the effect that the Visual Common Stock
offered hereby is duly and validly issued, fully paid and nonassessable.
EXPERTS
Our consolidated financial statements of the Company as of
December 31, 1997 and 1998, and for each of the three years in the period ended
December 31, 1998, included in this Prospectus and elsewhere in this
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.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling Visual pursuant to the foregoing provisions, we have been informed
that in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
18
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Visual Networks, Inc.:
We have audited the accompanying consolidated balance sheets of Visual
Networks, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. 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. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Vienna, Virginia
October 12, 1999
<PAGE> 20
<TABLE>
<CAPTION>
VISUAL NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1997 1998 1999
--------- --------- -------------
(UNAUDITED)
-
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 9,601 $ 51,655 $ 54,938
Short-term investments.......................................................... -- 1,002 --
Accounts receivable, net of allowance of
$412, $493 and $759, respectively.............................................. 4,526 5,948 8,676
Inventory....................................................................... 3,724 5,086 7,320
Other current assets............................................................ 661 1,902 2,322
------- ------- ----------
Total current assets....................................................... 18,512 65,593 73,256
Property and equipment, net.......................................................... 2,294 5,814 8,375
Other assets......................................................................... 230 373 149
------- ------- ----------
Total assets............................................................... $ 21,036 $ 71,780 $ 81,780
======= ======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................ $ 6,098 $ 6,388 $ 16,469
Accrued compensation............................................................. 1,778 2,853 2,931
Customer deposits................................................................ 3,068 4,613 --
Deferred revenue................................................................. 6,735 7,957 11,473
Bank line of credit.............................................................. 326 -- 578
Note payable to stockholder...................................................... 500 -- --
Current portion of long-term debt................................................ 789 636 668
------ ------ ----------
Total current liabilities................................................... 19,294 22,447 32,119
Long-term debt, net of current portion................................................ 138 1,011 866
------ ------ ----------
Total liabilities........................................................... 19,432 23,458 32,985
------ ------ ----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
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 shares issued and outstanding in aggregate
as of December 31, 1997, and no shares outstanding as
of December 31, 1998 and September 30, 1999 (aggregate
liquidation preference of $14,484 as of December 31, 1997)...................... 14,855 -- --
------- ------- ----------
STOCKHOLDERS' EQUITY (DEFICIT):
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, issued and
outstanding as of December 31, 1997 and no shares
outstanding as of December 31, 1998 and September 30,
1999 (liquidation preference of $149 as of December 31,
1997).......................................................................... 3 -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 7,525,270, 24,190,219 and 24,662,415 shares
issued and outstanding as of December 31, 1997, 1998,
and September 30, 1999, respectively........................................... 75 242 247
Additional paid-in capital....................................................... 15,303 83,977 85,761
Notes receivable from stockholders............................................... -- (147) (147)
Deferred compensation............................................................ (247) (739) (809)
Accumulated deficit.............................................................. (28,385) (35,011) (36,257)
-------- -------- ----------
Total stockholders' equity (deficit)........................................ (13,251) 48,322 48,795
-------- ------ ----------
Total liabilities and stockholders' equity (deficit)........................ $21,036 $ 71,780 $ 81,780
======== ======= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 21
VISUAL NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE............................................... $ 8,762 $ 29,300 $ 56,088 $ 39,312 $ 64,320
COST OF REVENUE....................................... 3,715 11,179 20,829 14,827 22,204
----------- ------------ ----------- ----------- -----------
Gross profit..................................... 5,047 18,121 35,259 24,485 42,116
----------- ------------ ----------- ----------- -----------
OPERATING EXPENSES:
Research and development......................... 5,880 9,148 13,771 10,136 12,083
Sales and marketing.............................. 9,605 14,555 19,759 14,761 17,925
General and administrative....................... 2,281 3,798 5,528 4,051 5,623
Merger-related costs............................. -- -- 5,069 7,347 6,776
----------- ------------ ----------- ----------- -----------
Total operating expenses.................... 17,766 27,501 44,127 36,295 42,407
----------- ------------ ----------- ----------- -----------
LOSS FROM OPERATIONS.................................. (12,719) (9,380) (8,868) (11,810) (291)
----------- ------------ ----------- ----------- -----------
INTEREST INCOME, NET.................................. 217 165 2,413 1,787 1,647
----------- ------------ ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES..................... (12,502) (9,215) (6,455) (10,023) 1,356
PROVISION FOR INCOME TAXES............................ -- -- -- -- (2,602)
----------- ------------ ----------- ----------- -----------
NET LOSS.............................................. (12,502) (9,215) (6,455) (10,023) (1,246)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK............ (1,012) (1,457) (171) (171) --
----------- ------------ ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS................................. $ (13,514) $ (10,672) $ (6,626) $ (10,194) $ (1,246)
=========== ============ =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE...................... $ (2.36) $ (1.44) $ (.30) $ (.48) $ (.05)
=========== ============ =========== =========== ===========
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES
OUTSTANDING........................................... 5,715 7,431 21,946 21,169 24,456
=========== ============ =========== =========== ===========
PRO FORMA BASIC AND DILUTED LOSS
PER SHARE........................................... $ (.51) $ (.28) $ (.44) $ (.05)
============ =========== =========== ===========
PRO FORMA BASIC AND DILUTED WEIGHTED-
AVERAGE SHARES OUTSTANDING.......................... 18,037 23,166 22,801 24,456
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 22
VISUAL NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.................. 4,188,438 $ 3,385 347,070 $ 3 4,032,794 $ 40
Issuance of Series D preferred stock... 2,285,714 3,983 -- -- -- --
Issuance of Series E preferred stock... 754,321 5,018 -- -- -- --
Accretion on preferred stock........... -- 177 -- -- -- --
Accrued dividends on preferred stock... -- 835 -- -- -- --
Issuance of common stock............... -- -- -- -- 3,274,464 33
Repurchase of common stock............ -- -- -- -- (8,729) --
Exercise of stock options.............. -- -- -- -- 38,785 --
Net loss............................... -- -- -- -- -- --
--------- --------- ------- ------- --------- -----
BALANCE, December 31, 1996.................. 7,228,473 13,398 347,070 3 7,337,314 73
Accretion on preferred stock........... -- 235 -- -- -- --
Accrued dividends on preferred stock... -- 1,222 -- -- -- --
Issuance of common stock............... -- -- -- -- 35,504 --
Exercise of stock options.............. -- -- -- -- 152,452 2
Deferred compensation.................. -- -- -- -- -- --
Amortization of deferred compensation.. -- -- -- -- -- --
Net loss............................... -- -- -- -- -- --
--------- --------- ------- ------- --------- -----
BALANCE, December 31, 1997.................. 7,228,473 14,855 347,070 3 7,525,270 75
Accretion on preferred stock........... -- 16 -- -- -- --
Accrued dividends on preferred stock... -- 125 -- 30 -- --
Conversion of preferred stock and
payment of dividend.................. (7,228,473) (14,996) (347,070) (33) 10,605,735 106
Issuance of common stock............... -- -- -- -- 5,325,849 53
Repurchase of common stock............. -- -- -- -- (75,073) --
Exercise of stock options.............. -- -- -- -- 783,049 8
Issuance of common stock for services.. -- -- -- -- 6,316 --
Settlement of note for common stock.... -- -- -- -- 16,848 --
Issuance and exercise of warrant....... -- -- -- -- 2,225 --
Deferred compensation.................. -- -- -- -- -- --
Amortization of deferred compensation.. -- -- -- -- -- --
Net loss............................... -- -- -- -- -- --
--------- --------- ------- ------- --------- -----
BALANCE, December 31, 1998.................. -- -- -- -- 24,190,219 242
Exercise of stock options (unaudited).. -- -- -- -- 532,254 6
Repurchase of common stock (unaudited). -- -- -- -- (60,058) (1)
Deferred compensation (unaudited)...... -- -- -- -- -- --
Amortization of deferred compensation
(unaudited)......................... -- -- -- -- -- --
Net loss (unaudited)................... -- -- -- -- -- --
--------- --------- ------- ------- --------- -----
BALANCE, September 30, 1999 (unaudited)..... -- $ -- -- $ -- 24,662,415 $ 247
========= ========= ======= ======= =========== =====
</TABLE>
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PAID-IN FROM DEFERRED ACCUMULATED
CAPITAL STOCKHOLDERS COMPENSATION DEFICIT TOTAL
------------ ------------ ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.................. $ 4,745 $ -- $ -- $ (4,110) $ 678
Issuance of Series D preferred stock... -- -- -- -- --
Issuance of Series E preferred stock... -- -- -- -- --
Accretion on preferred stock........... -- -- -- (177) (177)
Accrued dividends on preferred stock... -- -- -- (835) (835)
Issuance of common stock............... 10,136 -- -- (89) 10,080
Repurchase of common stock............ -- -- -- -- --
Exercise of stock options.............. 10 -- -- -- 10
Net loss............................... -- -- -- (12,502) (12,502)
-------- -------- ------ ----------- ----------
BALANCE, December 31, 1996.................. 14,891 -- -- (17,713) (2,746)
Accretion on preferred stock........... -- -- -- (235) (235)
Accrued dividends on preferred stock... -- -- -- (1,222) (1,222)
Issuance of common stock............... 94 -- -- -- 94
Exercise of stock options.............. 26 -- -- -- 28
Deferred compensation.................. 292 -- (292) -- --
Amortization of deferred compensation.. -- -- 45 -- 45
Net loss............................... -- -- -- (9,215) (9,215)
-------- -------- ------ ----------- ----------
BALANCE, December 31, 1997.................. 15,303 -- (247) (28,385) (13,251)
Accretion on preferred stock........... -- -- -- (16) (16)
Accrued dividends on preferred stock... -- -- -- (155) (125)
Conversion of preferred stock and
payment of dividend.................. 14,923 -- -- -- 14,996
Issuance of common stock............... 51,800 -- -- -- 51,853
Repurchase of common stock............. (1) -- -- -- (1)
Exercise of stock options.............. 792 (147) -- -- 653
Issuance of common stock for services.. -- -- -- -- --
Settlement of note for common stock.... 542 -- -- -- 542
Issuance and exercise of warrant....... 12 -- -- -- 12
Deferred compensation.................. 606 -- (606) -- --
Amortization of deferred compensation.. -- -- 114 -- 114
Net loss............................... -- -- -- (6,455) (6,455)
-------- -------- ------ --------- ----------
BALANCE, December 31, 1998.................. 83,977 (147) (739) (35,011) 48,322
Exercise of stock options (unaudited).. 1,479 -- -- -- 1,485
Repurchase of common stock (unaudited). -- -- -- -- (1)
Deferred compensation (unaudited)...... 305 -- (305) -- --
Amortization of deferred compensation
(unaudited)......................... -- -- 235 -- 235
Net loss (unaudited)................... -- -- -- (1,246) (1,246)
-------- -------- ------ -------- ---------
BALANCE, September 30, 1999 (unaudited)..... $ 85,761 $ (147) $ (809) $(36,257) $ 48,795
======== ======= ====== ======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 23
VISUAL NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- ---------- --------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............................. $(12,502) $ (9,215) $ (6,455) $(10,023) $ (1,246)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities:
Depreciation and
amortization................ 498 1,103 1,912 1,296 2,903
Loss on disposal of
property and equipment...... 323 408 -- -- --
Changes in assets and
liabilities -
Accounts receivable....... (2,490) (1,824) (1,422) (974) (2,728)
Inventory................. (675) (2,326) (1,362) (1,330) (2,234)
Other assets.............. (288) (513) (1,384) (1,260) (420)
Accounts payable and
accrued expenses........ 1,326 4,283 290 3,771 10,081
Accrued compensation...... 725 819 1,075 691 78
Customer deposits......... -- 3,068 1,545 (51) (4,613)
Deferred revenue.......... 1,087 5,486 1,222 899 3,516
------- -------- -------- -------- --------
Net cash (used in)
provided by operating
activities.................... (11,996) 1,289 (4,579) (6,981) 5,337
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (purchases) sales/maturities
of short-term investments..... -- -- (1,002) -- 1,002
Proceeds from sale leaseback
transactions.................. -- 544 -- -- 750
Expenditures for property and
equipment..................... (1,680) (1,898) (5,234) (3,789) (4,402)
------- -------- -------- -------- --------
Net cash used in investing
activities.................... (1,680) (1,354) (6,236) (3,789) (2,650)
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
preferred stock, net of
issuance costs................ 9,001 -- -- -- --
Series A Convertible Preferred
Stock dividend................ -- -- (30) (30) --
Proceeds from issuance of
common stock, net of
issuance costs................ 10,080 94 51,853 51,884 578
Exercise of stock options....... 11 28 652 419 1,484
Proceeds from note payable
to stockholder................ -- 500 -- -- --
Net borrowings (repayments)
under credit agreements....... 848 (348) 764 253 (1,058)
Principal payments on
capital lease
obligations................... (130) (290) (370) (256) (408)
------- -------- -------- -------- --------
Net cash provided by (used
in) financing activities...... 19,810 (16) 52,869 52,270 596
------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 6,134 (81) 42,054 41,500 3,283
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD................ 3,548 9,682 9,601 9,601 51,655
------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END
OF PERIOD.......................... $ 9,682 $ 9,601 $ 51,655 $ 51,101 $ 54,938
======= ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.......... $ 77 $ 143 $ 241 $ 194 $ 189
======= ======== ======== ======== ========
Cash paid for income taxes...... $ - $ - $ 513 $ 513 $ -
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 24
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Visual Networks, Inc. ("Visual" or "The Company") operations involve the
design, development, manufacture and marketing of service management systems for
corporate networks based on the internet protocol ("IP") and the Internet.
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 acquisitions, uncertainty of future
profitability and possible fluctuations in financial results.
BUSINESS COMBINATIONS AND BASIS OF PRESENTATION
On May 15, 1998, Visual acquired Net2Net Corporation ("Net2Net") in a
merger transaction accounted for as a pooling of interests. Net2Net was engaged
in developing, manufacturing and marketing Asynchronous Transfer Mode ("ATM")
wide-area-network management and analysis systems. Visual issued 2,056,204
shares of its 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 Visual common stock.
In connection with the Net2Net acquisition, the Company recorded
merger-related costs of approximately $5,069,000. Transaction costs totaled
approximately $4,111,000 and consisted primarily of fees for investment bankers,
attorneys, accountants and other direct transaction costs. Integration costs
totaled approximately $207,000 and consisted of incremental and non-recurring
costs necessary to integrate Visual and Net2Net. These costs were expensed as
incurred. Restructuring costs totaled approximately $751,000 (Note 6).
On September 30, 1999, Visual acquired Inverse Network Technology
("Inverse") in a merger transaction accounted for as a pooling of interests.
Inverse is a provider of service level management software solutions and
internet measurement services. Visual issued 4,096,429 shares of its common
stock in exchange for all of the outstanding preferred and common stock of
Inverse. In addition, outstanding Inverse stock options and warrants were
converted into options and warrants to purchase 425,088 shares of Visual common
stock.
<PAGE> 25
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
In connection with the Inverse acquisition, the Company recorded
merger-related costs of approximately $6,776,000. Transaction costs totaled
approximately $6,400,000 and consisted primarily of fees for investment bankers,
attorneys, accountants and other direct transaction costs. The remaining
$376,000 in non-recurring costs consisted of a non-cash charge related to the
accelerated vesting of certain options held by employees of Inverse, the
write-off of certain assets as a result of the merger and the accrual of certain
employee benefits to conform the policies of Inverse with those of the Company.
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
acquisitions of Net2Net and Inverse as if they had occurred at the beginning of
the earliest period presented for Net2Net and as of April 1996, the date of
inception, for Inverse, (hereafter, Net2Net and Inverse will be collectively
referred to as the "Pooled Entities" and Visual, Net2Net and Inverse are
collectively referred to as the "Company"). Results of operations for the
separate and combined companies prior to the poolings are as follows (in
thousands).
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------ ------------
1996 1997 1998 1999
--------- --------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Visual........... $ 6,335 $ 23,651 $ 49,699 $ 36,005
Pooled Entities.. 2,427 5,649 6,389 3,793
--------- -------- -------- --------
$ 8,762 $ 29,300 $ 56,088 $ 39,798
========= ======== ======== ========
Net Income
(loss):
Visual........... $ (6,983) $ (152) $ 3,145 $ 6,178
Pooled Entities.. (5,519) (9,063) (9,600) (5,074)
---------- --------- -------- ---------
$ (12,502) $ (9,215) $ (6,455) $ 1,104
========= ======== ======== ========
</TABLE>
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of September 30, 1999, and
the accompanying consolidated statements of operations and cash flows for the
nine months ended September 30, 1998 and 1999, are unaudited. The unaudited
financial statements include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of such financial statements. The data disclosed in the notes to
the financial statements for those periods are unaudited. The results of
operations for the nine months ended September 30, 1998 and 1999, are not
necessarily indicative of the results to be expected for the entire fiscal
year.
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, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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. The Company maintains its cash and cash equivalents with high
credit quality financial institutions. The Company's cash equivalents consist
primarily of investments in money market funds that invest in U.S. Treasury
obligations, repurchase agreements collateralized by U.S. Treasury securities,
and high quality corporate obligations. The Company had approximately
$8,847,000 and $41,919,000, respectively, invested in money market funds as of
December 31, 1997 and 1998, and $469,000 invested in commercial paper as of
December 31, 1997. All other liquid investments are classified as short-term
investments and consist of U.S. corporate bonds with maturities in excess of
three months. The Company classifies its investments as available-for-sale
securities, and reports them at fair value with unrealized gains and losses
included as a separate component of stockholders' equity. As of December 31,
1998, the difference between the fair value and the amortized cost of
available-for-sale securities was not significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. The carrying values of
current assets and current liabilities approximate fair value because of the
relatively short maturities of these instruments. The fair value of the
Company's long-term debt is estimated using a discounted cash flow analysis
based on the Company's borrowing cost for similar credit facilities. The Company
estimates that as of December 31, 1998, the fair value of its long-term debt
does not differ materially from its carrying value.
<PAGE> 26
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
REVENUE RECOGNITION
The Company's service management products and services include
hardware, software, benchmark services and technical support. 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. Revenues from services are recognized
when the services are performed. Subscription fees for the Company's benchmark
reports are deferred and recognized upon delivery of the reports.
The Company adopted the American Institute of Certified Public
Accountants (the "AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition" in 1998. The adoption of SOP 97-2 did not have a material effect on
the Company's operating results or financial position.
The Company has an agreement with one reseller that provides price
protection for units that remain in that reseller's inventory. Reserves for
estimated price protection 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 price protection 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, cash
equivalents, short-term investments, and accounts receivable. The Company sells
its products to large telecommunications and internet service 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, one customer individually
represented 10% of revenue. During 1997, one customer individually represented
26% of revenue. For the year ended December 31, 1998, three customers
individually represented 27%, 14% and 13% of revenue, respectively. For the nine
months ended September 30, 1999, two customers individually represented 25% and
24% of revenue, respectively.
WARRANTY
The Company warrants its hardware products for periods of up to five years.
Estimated warranty costs are charged to cost of revenues in the period in which
revenue from the related product sale is recognized.
INVENTORY
Inventory is stated at the lower of average cost or market. Inventory
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1997 1998 1999
--------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials... $ 439 $ 821 $2,819
Work-in-progress 635 1,228 1,148
Finished goods.. 2,650 3,037 3,353
------ ------ ------
$3,724 $5,086 $7,320
====== ====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost and depreciated over its
estimated useful life, ranging from three to five 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.
<PAGE> 27
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment and software..... $ 3,108 $ 6,991 $ 9,838
Furniture and fixtures..... 245 1,644 2,764
Leasehold improvements..... 24 59 1,095
------- -------- -------
3,377 8,694 13,697
Less-Accumulated
depreciation............. (1,083) (2,880) (5,322)
-------- --------- -------
$ 2,294 $ 5,814 $ 8,375
======= ======== =======
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable........... $2,223 $2,055 $ 2,991
Accrued expenses........... 3,875 4,333 4,775
Income taxes............... -- -- 2,089
Accrued merger-related
costs.................... -- -- 6,614
------ ------ -------
$6,098 $6,388 $16,469
====== ====== =======
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
The Company accounts for software development costs in accordance with 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 consolidated statements of operations. For the years
ended December 31, 1996, 1997 and 1998, 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.
In March 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the
Company to capitalize internal computer software costs once the capitalization
criteria are met. SOP 98-1 is effective January 1, 1999, and is applied to all
projects in progress upon initial application. The Company adopted SOP 98-1 on
January 1, 1999 and its adoption had no material impact on the Company's
operating results or financial position.
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.
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." 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.
<PAGE> 28
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
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 and warrants to purchase shares of common stock that
were outstanding at December 31, 1996, 1997 and 1998 and at September 30, 1998
and 1999, were not included in the computation of diluted loss per share as
their effect would be anti-dilutive. The effect of preferred stock convertible
into 10,605,735 shares of common stock as of December 31, 1996, and 1997,
respectively, has not been included in the computation of diluted loss per share
as such effect would have been anti-dilutive. The effect of preferred stock
convertible into 10,605,735 shares of common stock outstanding from January 1,
1998, to February 11, 1998, has also not been included in the computation of
diluted loss per share. The effect of the conversion of the preferred stock is
included in the computation of both basic and diluted loss per share from the
date of conversion on February 11, 1998. Pro forma basic and diluted
weighted-average common shares outstanding assumes the conversion of all of the
Company's outstanding convertible preferred stock for each period presented.
The following details the computation of the income (loss) per share (in
thousands, except per share data).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
ADJUSTMENTS TO NET LOSS:
Net loss................................. $ (12,502) $ (9,215) $ (6,455) $ (10,023) $ (1,246)
Dividends and accretion on preferred
stock.................................. (1,012) (1,457) (171) (171) --
----------- ------------ ------------ ------------ ------------
Net loss attributable to common
shareholders......................... $ (13,514) $ (10,672) $ (6,626) $ (10,194) $ (1,246)
=========== ============ ============ ============ ===========
WEIGHTED-AVERAGE SHARE CALCULATION:
Basic and diluted weighted-average
shares outstanding:
Average number of shares of common
stock outstanding.................... 5,715 7,431 21,946 21,169 24,456
Pro forma basic and diluted
weighted-average shares outstanding:
Conversion of preferred stock......... -- 10,606 1,220 1,632 --
---------- ----------- ----------- ----------- -----------
Pro forma basic and diluted
weighted-average shares
outstanding.................. 18,037 23,166 22,801 24,456
=========== ============ =========== ===========
LOSS PER COMMON SHARE:
Basic and diluted loss
per share............................ $ (2.36) $ (1.44) $ (0.30) $ (0.48) $ (0.05)
========== =========== ============ =========== ===========
Pro forma basic and diluted loss per
share................................ $ (0.51) $ (0.28) $ (0.44) $ (0.05)
=========== ============ =========== ===========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
Under SFAS No. 130, the Company is required to display comprehensive income
(loss) and its components as part of the financial statements. Comprehensive
income (loss) includes certain changes in equity that are excluded from net
income (loss). Specifically, SFAS No. 130 requires unrealized holding gains and
losses on available-for-sale securities, to be included in accumulated and
other comprehensive income (loss). The Company has no material components of
other comprehensive income (loss) and, accordingly, the comprehensive loss is
the same as net loss for all periods presented.
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The adoption of SFAS No. 131 did not have
a significant effect on the disclosure of segment information as management
concluded that operations occur primarily in one segment only.
2. CREDIT AGREEMENTS AND LONG-TERM DEBT:
The Company's line of credit agreement (the "Loan Agreement"), as amended on
April 5, 1999, provides for a revolving credit line with borrowings up to the
lesser of $7,000,000 or 85% of eligible accounts receivable as well as a
$1,000,000 capital equipment line. The revolving line matures in April 2000 and
borrowings under the revolving line bear interest at the prime rate. Borrowings
under the capital equipment line will be payable over a three-year period. The
Loan Agreement also contains restrictive covenants, including, but not limited
to, restrictions related to liquidity, profitability and net worth, as well as
restrictions related to acquisitions, disposition of assets, distributions and
investments. As of December 31, 1997 and 1998, and September 30, 1999, the
Company had no borrowings outstanding under the Loan Agreement.
<PAGE> 29
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
Net2Net had a $1,000,000 accounts receivable based line-of-credit facility
with a bank. Borrowings under this line were collateralized by substantially all
of Net2Net's assets. Net2Net had outstanding borrowings of approximately
$126,000 under this line-of-credit as of December 31, 1997. In April 1998, all
outstanding borrowings under this line of credit were repaid and the facility
was terminated.
On January 9, 1998, Net2Net executed a Loan and Security Agreement with a
bank to provide $500,000 of bridge financing. All borrowings under this
facility were repaid in April 1998. In connection with the Loan and Security
Agreement, the Company issued the bank a warrant to purchase 4,004 shares of
common stock at a price of $12.49 per share. The warrant was valued at
approximately $12,000 on the date of issuance and proceeds from the debt of
this amount have been allocated to the warrant in the accompanying financial
statements. The resulting discount on the debt was amortized using the
effective interest method. In October 1998, the bank, in lieu of exercising the
warrant, elected to convert the warrant into 2,225 shares of common stock in
accordance with the terms of the warrant.
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.
In June 1999, Inverse entered into an accounts receivable purchase agreement
("Accounts Receivable Agreement") with a bank. The Accounts Receivable
Agreement, as amended, allows for the sale of Inverse accounts receivable of up
to $2,500,000 to the bank, subject to certain limitations. The Accounts
Receivable Agreement matures on June 25, 2000, and outstanding balances bear
interest at the bank's prime rate plus 4%. The Accounts Receivable Agreement
also provides for certain other administrative and facility fees. Outstanding
balances and other obligations under the Accounts Receivable Agreement are
secured by substantially all of Inverse's assets. As of September 30, 1999,
outstanding balances under the Accounts Receivable Agreement totaled $578,000.
In connection with the Accounts Receivable Agreement, the Company issued the
bank a warrant to purchase 4,452 shares of common stock at a price of $22.46 per
share. The warrant is exercisable through June 2004. The fair value of this
warrant was immaterial.
In June 1998, Inverse entered into an equipment financing agreement for up
to $1,000,000 with a bank. As of December 31, 1998, Inverse had financed
$1,000,000 in equipment purchases under this agreement structured as loans. The
equipment loans are repaid over 48 months at a rate of the institution's prime
lending rate plus 0.5% and are secured by certain assets of Inverse.
In August 1997, Inverse entered into a line of credit agreement with a
financial institution with a one-year term and borrowings not to exceed the
lesser of $1,000,000 or 75% of eligible receivables. Borrowings under this
credit agreement were secured by certain assets of Inverse. As of December 31,
1997, $200,000 was outstanding under this line of credit.
In January 1997, Inverse entered into an equipment financing agreement for
up to $350,000 with a bank. As of December 31, 1997 and 1998, Inverse had
financed approximately $183,000 and $350,000, respectively, in equipment
purchases under this agreement structured as loans. The equipment loans are
repaid over 42 months with interest at a rate of approximately 16% and are
secured by the related equipment. In connection with the equipment financing
agreement, the Company issued a warrant to purchase 5,799 shares of common
stock at a price of $3.62 per share. The warrant is exercisable through
December 2002. The fair value of this warrant was immaterial.
Following is a schedule of future principal payments under the equipment
financing arrangements as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C>
1999 $ 253
2000 414
2001 449
2002 148
--------
$1,264
========
</TABLE>
<PAGE> 30
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
3. PREFERRED STOCK:
The Company had a total of 12,576,508 shares of authorized preferred stock,
7,576,508 shares of which were designated as Series A, B, C, D and E
convertible preferred stock and 5,000,000 of which has not been designated. All
of the then outstanding shares of Series A, B, C, D and E convertible preferred
stock were converted to common stock in connection with the Company's initial
public offering ("IPO") in February 1998. The following details the number of
shares issued and the liquidation preference (in thousands) for each series of
the convertible preferred stock as of December 31, 1997.
<TABLE>
<CAPTION>
LIQUIDATION
SHARES OUTSTANDING AMOUNT PREFERENCE
------------------ ------ -----------
<S> <C> <C> <C>
Series A..... 347,070 $ 3 $ 149
Series B..... 2,588,438 1,611 1,560
Series C..... 1,600,000 2,551 2,483
Series D..... 2,285,714 4,904 4,773
Series E..... 754,321 5,789 5,668
--------- -------- -------
7,575,543 $ 14,858 $14,633
========= ======== =======
</TABLE>
SERIES A PREFERRED STOCK
In connection with the Series B Preferred Stock ("Series B") offering,
notes payable of $119,500 together with accrued interest of $1,176 were
converted into shares of Series A Preferred Stock ("Series A"). The Series A
had liquidation preferences over the common stock. The Series A shares were
convertible at any time at the option of the holder, or automatically upon the
consummation of a qualified (as defined) underwritten public offering into an
aggregate of 485,890 shares of common stock. The Series A had cumulative
dividends equal to 8% per annum. The Company had not declared dividends through
December 1997 on Series A shares based on legal limitations on the declarations
of dividends. At December 31, 1997, dividends in arrears on Series A were
approximately $29,000.
Upon conversion, all accrued and unpaid dividends could also be converted
into common stock at the then current market price of the common stock (as
defined). The Company could, however, elect to pay any accrued but unpaid
dividends in cash in lieu of converting such dividends into shares of common
stock. In connection with the conversion of the Series A into common stock upon
completion of the IPO, the Company declared and paid cash dividends of
approximately $30,000 to holders of the Series A.
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 had liquidation preferences over the Series
A and the common stock. The holders of Series B were entitled to receive
dividends payable equal to 10% of the Series B stated value annually. Such
dividends were 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 would be waived. The Series B was convertible
at any time at the option of the holder, or automatically upon the consummation
of a qualified (as defined) underwritten public offering into an aggregate of
3,623,811 shares of common stock.
At any time after five years following the Series E Preferred Stock
("Series E") issuance, the Company was 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
recorded periodic accretion under the interest method for the excess of the
redemption value over the stated value.
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 had liquidation
preferences over the Series B and Series A and the common stock and had parity
with the Series D Preferred Stock ("Series D") with respect to liquidation. The
holders of Series C were entitled to receive dividends payable equal to 10% of
the Series C stated value annually. Such dividends were 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 would be
waived. The Series C was convertible at any time at the option of the holder,
or automatically upon the consummation of a qualified (as defined) underwritten
public offering into an aggregate of 2,239,998 shares of common stock.
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, could request that the Company redeem all or a part of
the outstanding Series C, Series D, and Series E. Any redemption was 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 was equal to 110% of the stated value for such
<PAGE> 31
series of preferred stock plus all accrued and unpaid dividends. The Company
recorded periodic accretion under the interest method of the excess of the
redemption values of each series over the stated value.
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 had liquidation preferences over the Series
B and Series A preferred stock and the common stock and had parity with the
Series C with respect to liquidation. The holders of Series D were entitled to
receive dividends payable equal to 10% of the Series D stated value annually.
Such dividends were 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 would be waived. The Series D was convertible
at any time at the option of the holder, or automatically upon the consummation
of a qualified (as defined) underwritten public offering into an aggregate of
3,199,996 shares of common stock.
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, could request that the Company redeem all or a part of
the outstanding Series C, Series D and Series E. The redemption price for each
series of preferred stock was equal to 110% of the stated value for such series
of preferred stock plus all accrued and unpaid dividends. The Company recorded
periodic accretion under the interest method of the excess of the redemption
values of each series over the stated value.
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 had liquidation preferences over the Series
D, Series C, Series B and Series A preferred stock and the common stock. The
holders of Series E were entitled to receive dividends payable equal to 10% of
the Series E stated value annually. Such dividends were 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 would be
waived. The Series E was convertible at any time at the option of the holder,
or automatically upon the consummation of a qualified (as defined) underwritten
public offering into an aggregate of 1,056,040 shares of common stock.
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, could request that the Company redeem all or a part of
the outstanding Series C, Series D, and Series E. The redemption price for each
series of preferred stock was equal to 110% of the stated value for such series
of preferred stock plus all accrued and unpaid dividends. The Company recorded
periodic accretion under the interest method of the excess of the redemption
values of each series over the stated value.
4. STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING
In February 1998, the Company completed an IPO of 4,025,000 shares of the
Company's common stock resulting in net proceeds of approximately $45,353,000.
Concurrent with the offering, the Series A convertible preferred stock and its
Series B, C, D, and E redeemable convertible preferred stock were converted
into 485,890 and 10,119,845 shares of common stock, respectively.
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 have been restated in these notes and the
accompanying financial statements to reflect this stock split.
<PAGE> 32
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
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 options. 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.
NET2NET 1994 STOCK PLAN
The Net2Net 1994 Stock Plan (the "Net2Net Plan") authorizes the issuance of
shares of common stock with respect to certain "Stock Rights" granted under the
Net2Net Plan. In connection with the Net2Net merger, the Company assumed the
obligations of Net2Net under the Net2Net Plan. Subsequent to the merger,
Visual's Board of Directors adopted a resolution not to make any future option
grants under the Net2Net Plan. Stock Rights under the Net2Net Plan took the
form of grants of incentive stock options, non-statutory stock options, awards
of stock of the Company, opportunities to make direct purchases of stock in the
Company or any combination thereof. The Net2Net Plan provided for grants of
options to employees, officers, directors and consultants of Net2Net or any
affiliate of Net2Net.
INVERSE 1996 STOCK OPTION PLAN
Under the 1996 Stock Option Plan (the "Inverse Plan"), both incentive and
nonqualified stock options may be granted to eligible employees. In connection
with the Inverse merger, the Company assumed the obligations of Inverse under
the Inverse Plan. Options granted under the Inverse Plan, generally vest over
four years.
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 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 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
<PAGE> 33
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
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,
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 thereafter, 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.
Annual Options will vest at the rate of one-twelfth of the total grant per
month, and will vest in full at the earlier of (i) the first anniversary of the
date of the grant or (ii) the date of the next annual meeting of stockholders.
The exercise price of options granted under the Director Plan will equal the
fair market value per share of the common stock on the date of grant.
A summary of the Company's stock option activity is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
OPTION PRICE AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
---------- ------------ --------------
<S> <C> <C> <C> <C>
Options outstanding at December 31,
1995................................. 590,716 $ 0.02 -- $ 1.58 $ 0.26
Granted......................... 970,899 0.03 -- 4.73 0.76
Canceled........................ (117,930) 0.19 -- 1.58 0.35
Exercised....................... (38,785) 0.02 -- 1.58 0.28
---------- ---- ---- ----
Options outstanding at December 31,
1996................................. 1,404,900 0.02 -- 4.73 0.59
Granted......................... 1,355,117 0.17 -- 7.00 2.63
Canceled........................ (163,420) 0.07 -- 7.00 1.56
Exercised....................... (126,202) 0.02 -- 7.00 0.17
---------- ---- ---- ----
Options outstanding at December 31,
1997................................. 2,470,395 0.03 -- 7.00 1.67
Granted......................... 1,148,862 0.41 -- 34.50 14.33
Canceled........................ (236,292) 0.17 -- 29.00 12.23
Exercised....................... (782,946) 0.07 -- 17.50 1.03
---------- ---- ----- ----
Options outstanding at December 31,
1998................................. 2,600,019 0.03 -- 34.50 6.50
Granted (unaudited)............. 573,438 0.62 -- 31.50 26.30
Canceled (unaudited)............ (262,120) 0.17 -- 34.50 13.94
Exercised (unaudited)........... (533,028) 0.03 -- 31.50 2.79
---------- ---- ----- ----
Options outstanding at September 30,
1999 (unaudited)..................... 2,378,309 $ 0.03 -- $ 34.50 $11.28
========= ===== ====== ======
</TABLE>
As of December 31, 1998, options to purchase 575,893 shares of common stock
were exercisable with a weighted-average exercise price of $2.64. The
weighted-average remaining contractual life of options outstanding at December
31, 1998 was 7.2 years.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." 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 1996. The Company has
recorded deferred compensation of approximately $292,000 and $606,000 related
to stock option grants in 1997 and 1998, of which approximately $45,000 and
$114,000 has been amortized in the years ended December 31, 1997 and 1998,
<PAGE> 34
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
respectively. The Company also recorded deferred compensation of approximately
$305,000 in the nine months ended September 30, 1999.
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 income or (loss) and income or (loss) per share
would have decreased or increased to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net loss attributable to common stockholders:
As reported................................ $(13,514) $(10,672) $(6,626)
-------- -------- -------
Pro forma.................................. $(13,540) $(10,814) $(8,658)
-------- -------- -------
Basic and diluted income (loss) per share:
As reported................................ $ (2.36) $ (1.44) $ (0.30)
-------- ------- -------
Pro forma.................................. $ (2.37) $ (1.46) $ (0.39)
-------- ------- --------
</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, 1996, 1997 and 1998: no dividend
yield, expected volatility from zero to 88%, risk-free interest rates from 4.2%
to 7.6% and an expected terms ranging from 5 to 10 years.
6. RESTRUCTURING:
In the second quarter of 1998, the Company recorded a restructuring charge
of approximately $2,749,000 primarily in connection with the consolidation of
Visual and Net2Net's manufacturing, sales, marketing and administrative
functions as well as the discontinuance of certain Net2Net product development
efforts. The consolidation included a reduction in employees that resulted in
severance and other termination benefits including out-placement assistance. The
remaining restructuring costs related primarily to the termination of
contractual obligations, including leases and OEM distribution agreements, with
no future benefit. During 1998, approximately $751,000 was charged against the
restructuring reserve. This amount included approximately $546,000 related to
termination costs for approximately 15 employees including severance and other
benefits. The remaining charge to the reserve of approximately $205,000 related
primarily to amounts paid under contractual obligations. In the fourth quarter,
the Company reversed approximately $1,998,000 of the restructuring charge
previously recorded. The lower than estimated cost resulted from fewer than
planned terminations and higher than planned attrition, along with lower than
estimated costs associated with exiting certain contractual obligations. As of
December 31, 1998, all amounts due under the contractual obligations have been
paid and all of the employee terminations have been completed and the related
benefits have been paid.
7. EMPLOYEE BENEFIT PLANS:
Effective January 1, 1996, the Company adopted a defined contribution plan
(the "Visual 401(k) Plan"), available to all eligible full-time employees upon
employment. The Savings Plan qualifies for preferential tax treatment under the
Internal Revenue Code. Employee contributions are voluntary and are determined
on an individual basis with a maximum annual amount 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 have been no employer contributions under the Visual
401(k) Plan.
During 1996, Net2Net adopted a qualified 401(k) retirement plan (the
"Net2Net 401(k) Plan"). The Net2Net 401(k) Plan covers substantially all
employees who satisfied a three-month service requirement and attained the age
of 21. The Net2Net 401(k) Plan provides for an optional Net2Net contribution for
any plan year at Net2Net's discretion. There were no Net2Net contributions to
the plan for the years ended December 31, 1997 and 1998.
During 1997, Inverse adopted a defined contribution retirement plan under
Internal Revenue Service Code Section 401(k) (the "Inverse 401(k) Plan"). All
Inverse employees are eligible, following three months of employment, to
contribute a specified percentage of their salary, not to exceed the statutory
limit, to the Inverse 401(k) Plan. Inverse's contributions were insignificant
during the year ended December 31, 1998.
<PAGE> 35
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
8. INCOME TAXES:
For the years ended December 31, 1996, 1997 and 1998, 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 for 1996, 1997 and 1998 differed
from the expected tax benefit, computed by applying the U.S. Federal statutory
rate, principally due to the effect of increases in the valuation allowance. For
the nine months ended September 30, 1999, the tax provision differed from the
Company's estimated effective tax rate due to the effect of non-deductible
merger-related transaction costs incurred in connection with the Inverse merger
in September 1999.
The components of the Company's net deferred tax asset (liability) are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax asset:
Net operating loss
carryforwards.............. $5,984 $8,007
Depreciation............... 161 351
Allowance for doubtful
accounts................... 152 181
Inventory valuation........ 657 680
Warranty reserve........... 106 327
Accrued liabilities........ 748 921
Deferred revenue........... 1,627 1,169
Tax credit carryforwards... 120 1,202
Other ..................... 104 279
Valuation allowance........ (9,659) (13,117)
------- --------
Total net deferred
tax asset......... $ -- $ --
======== ========
</TABLE>
The Company had net operating loss carryforwards to offset future taxable
income of approximately $21,800,000 as of December 31, 1998. These net operating
loss carryforwards expire through 2018. 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. Because of the changes in
the ownership of Net2Net and Inverse, the use of the Net2Net and Inverse net
operating losses will be limited to approximately $3,500,000 and $8,600,000 per
year, respectively, and may not be available to offset future taxable income.
9. 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 $323,000, $854,000 and $1,242,000 during 1996, 1997
and 1998, respectively.
The Company also leases certain equipment under noncancelable capital lease
agreements which expire in 1999. Future minimum lease payments as of December
31, 1998 under noncancelable operating and capital leases are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999...................................... $ 409 $1,247
2000...................................... -- 892
2001...................................... -- 839
----- ------
Total minimum lease payments.... 409 $2,978
======
Interest element of lease payment......... 26
-----
Present value of future minimum lease
payments.................................. 383
Current portion........................... 383
-----
Long-term portion......................... $ --
=====
</TABLE>
During 1997, Visual entered into 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.
During 1996 and 1997, Net2Net entered into sale-leaseback transactions
involving computer and lab equipment. Such equipment was sold at its net book
value and leased back under capital leases.
In May 1999, Inverse entered into a master lease agreement, as amended,
with a leasing company to provide up to $1,750,000 in financing to purchase
furniture and equipment through April 2000. During 1999, Inverse purchased
approximately $1,064,000 of furniture end equipment under the master lease
agreement. As of September 30, 1999, approximalely $769,000 in capital lease
obligations was outstanding. Inverse also entered into a sale-leaseback
transaction with the leasing company in which equipment with a net book value
of $750,000 was sold and leased back under noncancelable capital leases. No
gain or loss was recognized on the transaction. In connection with the master
lease and sale-leaseback transaction, the Company issued the leasing company a
warrant to purchase 4,217 shares of common stock at a price of $9.19 per share.
The warrant is exercisable through April and May 2008. The fair value of this
warrant was immaterial.
<PAGE> 36
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999, IS UNAUDITED)
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.
10. INTERIM FINANCIAL DATA -- UNAUDITED:
The following table of quarterly financial data has been prepared from the
financial records of the Company, without audit, and reflects all adjustments
that are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim periods presented:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- --------------- --------------
1997 1998 1997 1998 1997 1998 1997 1998
---- -------- ------- ------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue..................... $ 4,195 $11,348 $ 6,506 $13,075 $ 8,776 $ 14,889 $ 9,823 $ 16,776
Gross profit................ 2,420 6,570 3,992 8,369 5,651 9,546 6,058 10,774
Income (loss) from
operations.................. (3,312) (2,750) (2,320) (8,709) (1,411) (351) (2,337) 2,942
Net income (loss)........... (3,251) (2,843) (2,270) (7,484) (1,392) 304 (2,302) 3,568
Net income (loss)
attributable to common
shareholders.............. (3,615) (3,014) (2,635) (7,484) (1,757) 304 (2,664) 3,568
Basic income (loss) per
share....................... (.49) (.19) (.36) (.32) (.24) .01 (.35) .15
Diluted income (loss) per
share..................... (.49) (.19) (.36) (.32) (.24) .01 (.35) .13
Pro forma basic and diluted
income (loss) per share... (.18) (.14) (.13) (.32) (.08) .01 (.13) .13
</TABLE>
The sum of the per share amounts may not equal the annual amounts because
of the changes in the weighted-average number of shares outstanding during the
year. The net loss for the three months ended June 30, 1998, includes
merger-related costs of approximately $7,347,000 related to the Net2Net merger.
Net income for the three months ended December 31, 1998, includes the reversal
of approximately $2,278,000 of the aforementioned merger-related costs (see
Notes 1 and 6). The reversal resulted from the payment of lower than estimated
costs in connection with the Net2Net transaction and subsequent restructuring
and included approximately $280,000 in transaction costs and approximately
$1,998,000 in restructuring costs.
<PAGE> 37
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs expected
to be incurred 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 SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee..................................... $ 46,713
Legal fees and expenses.................................. 5,000
Accounting fees and expenses............................. 5,000
Transfer Agent fees...................................... 2,000
Printing expenses........................................ 5,000
---------------
Total $ 63,713
===============
</TABLE>
All expenses will be borne by Visual Networks, Inc.
15. 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.
Our Bylaws include provisions to require us to indemnify our directors and
officers to the fullest extent permitted by Section 145, including
circumstances in which indemnification is otherwise discretionary. Section 145
also empowers us to purchase and maintain insurance that protects our 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 Visual as to which indemnification is being sought nor
are we aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
16. EXHIBITS
The following exhibits are filed or incorporated by reference, as
stated below:
<TABLE>
<CAPTION>
Exhibit Number Description
- ------------- -----------
<S> <C>
3.1## Amended and Restated Certificate of Incorporation of Visual.
3.2* Restated By-Laws of Visual.
5.1 Opinion of Piper Marbury Rudnick & Wolfe LLP, regarding legality of securities being registered.
10.1* 1994 Stock Option Plan.
10.2 1997 Omnibus Stock Plan, as amended.
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 Visual and certain stockholders.
10.5*+ Reseller/Integration Agreement, dated August 29, 1997 by and between Visual and MCI
Telecommunications Corporation.
10.5.1#++ Second Amendment to the Reseller/Integration Agreement, dated November 4, 1998 by and
between Visual and MCI Telecommunications Corporation (relating to Exhibit 10.5).
10.6*+ Master Reseller Agreement, dated as of August 23, 1996, between Sprint/United Management
Company and Visual.
10.6.1## Amendment No. 2 to Agreement between Visual and Sprint/United Management Company,
</TABLE>
II-1
<PAGE> 38
<TABLE>
<S> <C>
dated as of August 12, 1999 (relating to Exhibit 10.6).
10.7*+ General Agreement for the Procurement of Equipment, Services and Supplies between Visual
and AT&T Corp.
10.8* Lease Agreement, dated December 12, 1996, by and between Visual and The Equitable Life
Assurance Society of The United States.
10.8.1* Lease Amendment, dated September 2, 1997, by and between Visual and The Equitable Life
Assurance Society of The United States (relating to Exhibit 10.8).
10.8.2# Second Lease Amendment, dated February 8, 1999, by and between Visual and TA/Western,
LLC, successor to The Equitable Life Assurance Society of the United States
(relating to Exhibit 10.8).
10.9 [Intentionally Omitted.]
10.10* Employment Agreement dated December 15, 1994, by and between Visual and Scott E. Stouffer,
as amended.
10.11* Employment Agreement dated December 15, 1994, by and between Visual and Robert Troutman, as
amended.
10.12* Terms of Employment dated June 11, 1997, by and between Visual and Peter J. Minihane, as
amended.
10.15 Loan and Security Agreement dated April 5, 1999, by and between Silicon Valley Bank and
Visual.
10.15.1 Revolving Promissory Note issued by Visual as of April 5, 1999, to Silicon Valley Bank
(relating to Exhibit 10.15).
10.15.2 Equipment Term Note No. 1 of 2 issued by Visual as of April 5, 1999, to Silicon Valley Bank
(relating to Exhibit 10.15).
10.15.3 Equipment Term Note No. 2 of 2 issued by Visual on April 5, 1999, to Silicon Valley Bank
(relating to Exhibit 10.15).
10.16** Agreement and Plan of Merger dated April 15, 1998, by and among Visual, Visual Acquisition,
Inc. and Net2Net.
10.17*** Net2Net 1994 Stock Option Plan.
10.20## 1999 Employee Stock Purchase Plan.
10.21### Agreement and Plan of Merger dated September 15, 1999, by and among Visual Acquisition Two,
Inc. and Inverse.
10.22$ Inverse Network Technology 1996 Stock Option Plan.
16.1* Letter regarding change in certified accountants.
21.1 Subsidiaries of Visual.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.1).
24.1 Power of Attorney (included in signature pages).
27 Financial Data Schedule.
</TABLE>
- ----------
* Incorporated herein by reference to our Registration Statement on Form
S-1, No. 333-41517.
** Incorporated herein by reference to Exhibit 2.1 to our Current Report
on Form 8-K dated May 19, 1998.
*** Incorporated herein by reference to Exhibit 10.1 to our Registration
Statement on Form S-8, No. 333-53153.
# Incorporated herein by reference to our Annual Report on Form 10-K for
the year ended December 31, 1998.
## Incorporated herein by reference to our Quarterly Report on Form 10-Q
for the three months ended June 30, 1999.
### Incorporated herein by reference to Exhibit 2.1 to our Current Report
on Form 8-K dated October 8, 1999.
$ Incorporated herein by reference to Exhibit 10.1 to Registration
Statement on Form S-8, No. 333-88719.
II-2
<PAGE> 39
+ Portions of these Exhibits were omitted and have been filed separately
with the Secretary of the SEC pursuant to our Applications Requesting
Confidential Treatment under Rule 406 of the Act, filed on December
22, 1997, January 28, 1998 and February 4, 1998.
++ Portions of this Exhibit were omitted and have been filed separately
with the Secretary of the Commission pursuant to our Application
Requesting Confidential Treatment under Rule 24b-2 of the Securities
Exchange Act of 1934.
II-3
<PAGE> 40
17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement 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.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and therefore is
unenforcable. 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 asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rockville, State of
Maryland, on November 1, 1999.
VISUAL NETWORKS, INC.
By:
/s/ SCOTT E. STOUFFER
------------------------------
Scott E. Stouffer
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Scott E. Stouffer, Peter J. Minihane and
Nancy A. Spangler, and each of them, his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
from such person and in each person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, any registration statement relating
to this registration statement under Rule 462 and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SCOTT E. STOUFFER President, Chief Executive Officer 11/1/99
--------------------- and Director (Principal Executive ----------------
Scott E. Stouffer Officer)
/s/ PETER J. MINIHANE Executive Vice President, 11/1/99
---------------------- Chief Financial Officer and ----------------
Peter J. Minihane Treasurer (Principal Financial
Officer)
</TABLE>
II-5
<PAGE> 42
<TABLE>
<S> <C> <C>
/s/ GRANT G. BEHRMAN 11/1/99
- ---------------------------- Director ----------------------------
Grant G. Behrman
/s/ MARC F. BENSON 10/28/99
- ---------------------------- Director ----------------------------
Marc F. Benson
/s/ THEODORE R. JOSEPH 10/28/99
- ---------------------------- Director ----------------------------
Theodore R. Joseph
/s/ TED H. MCCOURTNEY 10/28/99
- ---------------------------- Director ----------------------------
Ted H. McCourtney
- ---------------------------- Director ----------------------------
Thomas A. Smith
/s/ WILLIAM J. SMITH 10/28/99
- ---------------------------- Director ----------------------------
William J. Smith
</TABLE>
II-6
<PAGE> 1
EXHIBIT 5.1
[PIPER MARBURY RUDNICK & WOLFE LLP LETTERHEAD]
November 1, 1999
Visual Networks, Inc.
2092 Gaither Road
Rockville, Maryland 20850
Ladies and Gentlemen:
We have acted as counsel to Visual Networks, Inc., a Delaware
corporation (the "Company"), in connection with the Company's Registration
Statement on Form S-3 (the "Registration Statement") filed on the date hereof
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). The Registration Statement
relates to 4,110,897 shares of the Company's Common Stock, par value $.01 per
share (the "Shares"), which were previously issued by the Company and are being
registered for resale by the holders thereof.
In this capacity, we have examined the Company's Certificate of
Incorporation and By-laws, the proceedings of the Board of Directors of the
Company relating to the issuance of the Shares and such other documents,
instruments and matters of law as we have deemed necessary to the rendering of
this opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity with originals of all documents submitted to us as copies.
Based upon the foregoing, we are of the opinion and advise you that
each of the Shares described in the Registration Statement has been duly
authorized and validly issued and is fully paid and nonassessable.
We hereby consent to the use of our name in the Registration Statement
and under the caption "Legal Matters" in the related Prospectus and consent to
the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours
/s/ Piper Marbury Rudnick & Wolfe LLP
<PAGE> 1
EXHIBIT 10.15
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is entered into as of April 5, 1999,
by and among SILICON VALLEY BANK, a California-chartered bank ("Bank") with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054
and doing business in Virginia as "Silicon Valley East, Inc.," with a loan
production office located at 11600 Sunrise Valley Drive, Suite 400, Reston,
Virginia 20191 and VISUAL NETWORKS, INC., a Delaware corporation ("Company"),
VISUAL NETWORKS OPERATIONS, INC., a Delaware corporation ("Visual Operations"),
VISUAL NETWORKS INVESTMENTS, INC., a California corporation ("Visual
Investments"), VISUAL NETWORKS TECHNOLOGIES, INC., a California corporation
("Visual Technologies"), VISUAL NETWORKS PROTECTION, INC., a Vermont corporation
("Visual Protection") and VISUAL NETWORKS OF TEXAS, LP, a Texas limited
partnership ("Visual Texas", together with Visual Operations, Visual
Investments, Visual Technologies, Visual Protection and the Company being called
collectively, the "Borrowers" and each a "Borrower").
RECITALS
Borrowers wish to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrowers. This Agreement sets forth the terms on
which Bank will advance credit to Borrowers, and Borrowers will repay the
amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following
terms shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to any
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by any Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by any Borrower and each Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means a loan advance under the
Committed Revolving Line.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under
-2-
<PAGE> 2
common control with such Person, and each of such Person's senior executive
officers, directors and partners.
"Bank Expenses" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.
"Borrower's Books" means all of a Borrower's books and records
including, without limitation: ledgers; records concerning such Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Borrowing Base" shall mean an amount equal to eighty five
percent (85%) of Eligible Accounts.
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which banks in the State of California or the State of Maryland
are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the Uniform Commercial Code, as the same may,
from time to time be in effect in the State of Maryland.
"Collateral" means any and all Equipment now or hereafter
purchased with the proceeds of any Equipment Advance now or hereafter made under
the Committed Equipment Line, wherever located together with any and all claims,
rights and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing.
"Committed Revolving Line" means a credit extension of up to
Seven Million Dollars ($7,000,000).
"Committed Equipment Line means a credit extension of up to
One Million Dollars ($1,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that
-3-
<PAGE> 3
Person; and (iii) all obligations arising under any interest rate, currency or
commodity swap agreement, interest rate cap agreement, interest rate collar
agreement, or other agreement or arrangement designated to protect a Person
against fluctuation in interest rates, currency exchange rates or commodity
prices; provided, however, that the term "Contingent Obligation" shall not
include endorsements for collection or deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Credit Extension" means each Advance, Equipment Advance,
Letter of Credit or any other extension of credit by Bank for the benefit of any
Borrower hereunder.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of the Company and its Subsidiaries, as at
such date, plus, to the extent not already included therein, all outstanding
Credit Extensions made under this Agreement, including all Indebtedness that is
payable upon demand or within one (1) year from the date of determination
thereof unless such Indebtedness is renewable or extendable at the option of the
Company or any Subsidiary to a date more than one (1) year from the date of
determination, but excluding Subordinated Debt.
"Daily Balance" means the amount outstanding on the Committed
Revolving Line owed at the end of a given day.
"Default" means an event which, with the giving of notice or
lapse of time, or both, could or would constitute an Event of Default under this
Agreement.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of each Borrower's business that comply with all of the
Borrowers' representations and warranties to Bank set forth in Section 5.4;
provided, that standards of eligibility may be fixed and revised from time to
time by Bank in Bank's reasonable judgment and upon prior notification thereof
to, and consultation with, the Company in accordance with the provisions hereof.
Unless otherwise agreed to by Bank, Eligible Accounts shall not include the
following:
(a) Accounts that the account debtor has failed
to pay within sixty (60) days of invoice due date;
(b) Accounts with respect to an account debtor,
fifty percent (50%) of whose Accounts the account debtor has failed to pay
within sixty (60) days of invoice due date;
(c) Accounts with respect to which the account
debtor is an officer, employee, or agent of any Borrower;
-4-
<PAGE> 4
(d) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on approval, bill
and hold, or other terms by reason of which the payment by the account debtor
may be conditional;
(e) Accounts with respect to which the account
debtor is an Affiliate (other than by virtue of being directly or indirectly
under common ownership or control with any Borrower) of any Borrower;
(f) Accounts with respect to which the account
debtor does not have its principal place of business in the United States and
Accounts arising from products shipped to or services provided to branches or
offices located in the United States of any account debtor that does not have
its principal place of business in the United States;
(g) Accounts with respect to which the account
debtor is a federal, state, or local governmental entity or any department,
agency, or instrumentality thereof;
(h) Accounts with respect to which any Borrower
is liable to the account debtor for goods sold or services rendered by the
account debtor to any Borrower, but only to the extent of any amounts owing to
the account debtor against amounts owed to the any Borrower;
(i) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations to the Borrowers
exceed twenty-five percent (25%) of all Accounts, except with respect to
Sprint/United Management Company, AT&T Corp. and MCI Worldcom, Inc., as to which
the percentage shall be forty percent (40%), to the extent such obligations
exceed the aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect thereto as to which
Bank believes, in its sole discretion, that there may be a basis for dispute
(but only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(k) Accounts the collection of which Bank
reasonably determines to be doubtful.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which any Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section 2.3.
-5-
<PAGE> 5
"Equipment Availability End Date" means the Equipment
Availability End Date One or the Equipment Availability End Date Two, as the
case may be.
"Equipment Term Note" means the two (2) equipment term notes
now or hereafter delivered by the Borrower to the Bank in connection with the
Committed Equipment Line in substantially the form of Exhibit __ and "Equipment
Term Notes means collectively, the equipment term notes which may now or
hereafter be delivered by the Borrower to Bank in connection with the Committed
Equipment Line, together with all renewals, amendments, modifications and
substitutions therefore.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated thereunder.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money
or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments (excluding stock which in accordance with GAAP should be
classified as "preferred stock" of the Company), (c) all capital lease
obligations and (d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
any Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of any Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated thereunder.
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"Letter of Credit" means a letter of credit or similar
undertaking issued by Bank pursuant to Section 2.2.
"Letter of Credit Reserve" has the meaning set forth in
Section 2.2(e).
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, the
Notes, the Negative Pledge, any note or notes executed by any Borrower, and any
other present or future agreement and/or security agreement entered into between
any Borrower and/or for the benefit of Bank in connection with this Agreement,
all as amended, extended or restated from time to time.
"Material Adverse Effect" means a material adverse effect (i)
on the value of the Borrowers' Equipment, Accounts and Inventory (taken as a
whole) or the perfection or priority of Bank's security interest on the
Collateral (taken as a whole), including, but not limited to, the creation of
any liens, other than Permitted Liens on any Borrowers' Accounts, Inventory or
Equipment, (ii) on the ability of any Borrower to repay the Obligations or
otherwise perform its obligations under the Loan Documents, (iii) resulting from
any circumstance or event of whatever nature (including any adverse
determination in any litigation) which does, or could reasonably be expected to
cause an Event of Default.
"Maturity Date" means the latest date on which Equipment
Advances will be due and payable in full on the Equipment Term Notes.
"Negative Pledge" means that certain Negative Pledge Agreement
of even date herewith from the Borrowers in favor of the Bank covering the
Borrowers' Accounts and Inventory, as such agreement may be amended, modified or
restated from time to time.
"Negotiable Collateral" means all of Borrowers' present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper and Borrowers'
Books and Records relating to any of the foregoing.
"Note" means the Revolving Promissory Note or an Equipment
Term Note, and "Notes" means the Revolving Promissory Note and the Equipment
Term Notes.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by any Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from any Borrower to others that Bank may
have obtained by assignment or otherwise.
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"Payment Date" means the fifth calendar day of each month
commencing on the first such date after the Closing Date and ending on the
Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of any Borrower in favor of
Bank arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date
and disclosed in the Schedule 7.4;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in
the ordinary course of business;
(e) Indebtedness secured by Permitted Liens;
(f) Warranty and product support obligations and
related insurance liabilities payable to Affiliates, which arise in the ordinary
course and conduct of any Borrower's business;
(g) Indebtedness in respect of taxes permitted
under Section 6.5; and
(h) Other Indebtedness not exceeding Three
Hundred Thousand Dollars ($300,000) in the aggregate outstanding at any time.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in Schedule 7.7;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank;
(c) Investments pursuant to or arising under
currency agreements or interest rate agreements entered into in the ordinary
course of business;
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(d) Loans or advances to officers and employees
approved by the Company's Board of Directors in an aggregate amount not in
excess of Fifty Thousand Dollars ($50,000) outstanding at any time;
(e) Investments in eligible securities set forth
in Schedule B attached hereto;
(f) Investments pursuant to any investment
guidelines now or hereafter approved by the Company's board of directors; and
(g) Intercompany loans or advances to any
Borrower that is now or hereafter a party to this Agreement.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in Schedule 7.5 or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and as to which adequate reserves are
maintained on any Borrower's Books in accordance with GAAP, provided the same
have no priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired
or held by any Borrower or any of its Subsidiaries to secure the purchase price
of such Equipment or indebtedness incurred solely for the purpose of financing
the acquisition of such Equipment, or (ii) existing on such equipment at the
time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment;
(d) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (a) through (c) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase; and
(e) Liens on Equipment leased by any Borrower or
any Subsidiary pursuant to an operating lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such Equipment (including Liens pursuant to
leases permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement).
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"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prepayment Fee" means a fee on any portion of the Obligations
accruing interest under the Fixed Rate Option (the "Fixed Obligations") that is
repaid before the payment due date. The Prepayment Fee is calculated as follows:
First, Bank determines a "Current Market Rate" based on what the Bank would
receive if it loaned the amount on the prepayment date in a wholesale funding
market matching maturity, principal amount and principal and interest payment
dates (such aggregate payments received being deemed the "Current Market Rate
Amount"). Bank, in its discretion, may select a Treasury Security with a
maturity comparable to the maturity of the Fixed Obligations being prepaid as
the Current Market Rate. Second, Bank will take the prepayment amount and
calculate the present value of each principal and interest payment which,
without prepayment, the Bank would have received during term of the Fixed
Obligations using the applicable interest rate set forth in this Agreement. The
sum of the present value calculations is the "Mark to Market Amount". Third, the
Bank will subtract the Mark to Market Amount from the Current Market Rate
Amount. Any amount greater than zero is the Prepayment Fee.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the
consolidated cash, cash equivalents, accounts receivable and investments with
maturities of fewer than one hundred eighty (180) days of Company determined in
accordance with GAAP.
"Responsible Officer" means each of the Chief Executive
Officer, the President, the Treasurer, the Chief Financial Officer, the Vice
President of Finance, the Director of Treasury Operations and the Controller of
the Company.
"Revolving Maturity Date" means April 5, 2000.
"Revolving Promissory Note" means that certain Revolving
Promissory Note of even date herewith in substantially the form of Exhibit ____
hereto in the maximum principal amount of Seven Million Dollars ($7,000,000)
from the Borrowers in favor of Bank, together with all renewals, amendments,
modifications and substitutions therefore.
"Solvent" with respect to any Person, means that (i) the fair
value of all of such Person's properties and assets exceed the total amount of
its Indebtedness; (ii) it is able to pay its debts as they mature; (iii) it does
not have unreasonably small capital for the business in which it is engaged or
for any business or transaction in which it is about to engage; and (iv) it is
not "insolvent" as such term is defined in Section 101(31) of Title 11 of the
United States Code, 11. U.S.C. Section 101, et seq.
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<PAGE> 10
"Subordinated Debt" means any debt incurred by any Borrower
that is subordinated to the debt owing by Borrowers to Bank on terms acceptable
to Bank (and identified as being such by Borrowers and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than fifty percent (50%) of the
stock of which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by any Borrower, either directly or
through an Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of the Company,
minus, without duplication, (i) the sum of any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of the
Company, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
"Treasury Rate" means fixed a rate equal to the rate of United
States Treasury Securities adjusted to a constant maturity of thirty six (36)
months as quoted by Bank and reported in The Wall Street Journal for that same
date; provided, however, that if the Treasury Rate shall cease to be so
published, Bank may select in its sole and absolute discretion a successor
source for the Treasury Rate.
1.2 Accounting and Other Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations and determinations made hereunder shall be made in accordance with
GAAP. When used herein, the term "financial statements" shall include the notes
and schedules thereto. The terms "including"/ "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
2. LOANS AND TERMS OF PAYMENT
2.1 Credit Extensions under the Committed Revolving Line.
(a) Subject to and upon the terms and conditions
of this Agreement, Bank agrees to make Advances to Borrowers in an aggregate
outstanding amount not to exceed (i) the Committed Revolving Line or the
Borrowing Base, whichever is less, minus (ii) the face amount of all outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit)
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as determined by Bank with reference to the most recent Borrowing Base
Certificate delivered by the Company. Subject to the terms and conditions of
this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and
reborrowed at any time during the term of this Agreement.
(b) Whenever any Borrower desires an Advance,
the Company will notify Bank by facsimile transmission or telephone no later
than 3:00 p.m. Washington, D.C. time, on the Business Day that the Advance is to
be made. Each such notification shall be promptly confirmed by a Payment/Advance
Form in substantially the form of Exhibit B hereto (the "Payment Advance Form")
sent to Bank by confirmed facsimile transmission. Bank is authorized to make
Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer or a designee thereof, and Borrowers shall indemnify
and hold Bank harmless for any damages or loss suffered by Bank as a result of
such reliance. Bank will credit the amount of Advances made under this Section
2.1 to Company's deposit account.
(c) Unless terminated pursuant to sub-section
2.1(d) of this Agreement, the Committed Revolving Line shall terminate on the
Revolving Maturity Date, at which time all Advances under this Section 2.1 and
other Credit Extensions due under the Committed Revolving Line (except as
otherwise expressly specified herein) shall be immediately due and payable.
(d) The Company may at such times as no Credit
Extensions are outstanding under the Committed Revolving Line, terminate the
Committed Revolving Line upon not less than ten (10) days prior written notice
to Bank.
2.2 Letters of Credit.
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued Letters of Credit for the
account of a Borrower in an aggregate outstanding face amount not to exceed (i)
the lesser of the Committed Revolving Line or the Borrowing Base, whichever is
less, minus (ii) the then outstanding principal balance of the Advances;
provided that the face amount of outstanding Letters of Credit (including drawn
but unreimbursed Letters of Credit and any Letter of Credit Reserve) shall not
in any case exceed One Million Five Hundred Thousand Dollars ($1,500,000). Each
Letter of Credit shall have an expiry date no later than ninety (90) days after
the Revolving Maturity Date, provided that Borrowers' Letter of Credit
reimbursement obligation shall be secured by cash on terms acceptable to Bank at
any time after the Revolving Maturity Date if the term of this Agreement is not
extended by Bank. All Letters of Credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank's form of application and letter of credit agreement which
shall be executed and delivered to Bank not less
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than two (2) Business Days prior to the date on which a Letter of Credit is
requested to be opened. In the event of any conflict between the provisions of
this Agreement and the provisions of any form of application and letter of
credit agreement, the provisions of this Agreement shall prevail and control
unless otherwise expressly provided in the such application and letter of credit
agreement. The application and letter of credit agreement shall specify, among
other things: (i) the name and address of the beneficiary of the Letter of
Credit, (ii) the amount of the Letter of Credit, (iii) whether the Letter of
Credit is to be revocable or irrevocable, (iv) the Business Day on which the
Letter of Credit is to be opened and the date on which the Letter of Credit is
to expire, (v) the terms of payment of any draft or drafts which may be drawn
under the Letter of Credit and (vi) any other terms or provisions Borrowers
desire to be contained in the Letter of Credit.
(b) The joint and several obligations of
Borrowers to immediately reimburse Bank for drawings made under Letters of
Credit shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Agreement and such Letters of
Credit, under all circumstances whatsoever, it being understood that to the
extent Advances can be made under the Committed Revolving Line, the Bank will
make such Advances to pay any such drawings. Borrowers shall indemnify, defend,
protect, and hold Bank harmless from any loss, cost, expense or liability,
including, without limitation, reasonable attorneys' fees, arising out of or in
connection with any Letters of Credit.
(c) Prior to or simultaneously with the opening
of each Letter of Credit, Borrowers shall pay to Bank a letter of credit fee in
such amount as Bank customarily charges in connection with the opening,
negotiation, processing and administration of a letter of credit on the date
such Letter of Credit is opened.
(d) A Borrower may request that Bank issue a
Letter of Credit payable in a currency other than United States Dollars. If a
demand for payment is made under any such Letter of Credit, Bank shall treat
such demand as an Advance to Borrowers of the equivalent of the amount thereof
(plus cable charges) in United States currency at the then prevailing rate of
exchange in San Francisco, California, for sales of that other currency for
cable transfer to the country of which it is the currency.
(e) Upon the issuance of any letter of credit
payable in a currency other than United States Dollars, Bank shall create a
reserve under the Committed Revolving Line for letters of credit against
fluctuations in currency exchange rates, in an amount equal to twenty percent
(20%) of the face amount of such letter of credit (the "Letter of Credit
Reserve"). The amount of such reserve may be amended by Bank from time to time
to account for fluctuations in the exchange rate. The availability of funds
under the Committed Revolving Line shall be reduced by the amount of such
reserve for so long as such letter of credit remains outstanding.
2.3 Equipment Advances.
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(a) Subject to and upon the terms and conditions
of this Agreement, at any time from the date hereof through October 31, 1999
(the "Equipment Availability End Date One"), Borrowers may from time to time
request advances (each together with the advances described in subsection (b)
below, an "Equipment Advance" and collectively, the "Equipment Advances") to
Borrowers in an aggregate outstanding amount not to exceed the Committed
Equipment Line. Amounts borrowed pursuant to this Section 2.3(a) may not be
readvanced.
All Equipment Advances made prior to the Equipment
Availability End Date One shall be evidenced by an Equipment Term Note
("Equipment Term Note No. 1") to be executed and delivered by the Borrowers to
Bank on the Closing Date. All Equipment Advances made prior to the Equipment
Availability End Date One shall be repaid in accordance with the terms of
Equipment Term Note No. 1.
(b) At any time from November 1, 1999 through
April 5, 2000 (the "Equipment Availability End Date Two"), Borrowers may from
time to time request advances from Bank in an aggregate amount not to exceed the
Committed Equipment Line. Amounts borrowed pursuant to this Section 2.3(b) may
not be readvanced.
All Equipment Advances made after the Equipment
Availability End Date One, but prior to the Equipment Availability End Date Two
shall be evidenced by an Equipment Term Note ("Equipment Term Note No. 2") to be
executed and delivered by Borrowers to Bank on the Closing Date. All Equipment
Advances made after the Equipment Availability End Date One, but prior to the
Equipment Availability End Date Two shall be repaid in accordance with the terms
of Equipment Term Note No. 2.
(c) To evidence the Equipment Advance or
Equipment Advances, Borrowers shall deliver to Bank, at the time of each
Equipment Advance request, an invoice for the equipment to be purchased,
together with any items requested pursuant to Section 4.2 hereof. Equipment
which may be purchased under the Committed Equipment Line may include new and/or
used equipment, computer equipment, office equipment, lab, test equipment and
furnishings. The Equipment Advances under Equipment Term Note No. 1 shall be
used only to purchase or refinance Equipment purchased on or after January 1,
1999 and Equipment Advances under Equipment Term Note No. 2 shall be used only
to purchase or refinance Equipment purchased after September 30, 1999. Equipment
Advances shall not exceed one hundred percent (100%) of the invoice amount of
such equipment (as such invoices may be verified from time to time by Bank),
excluding taxes, shipping, warranty charges, freight discounts and installation
expense. Transferable software licenses, leasehold improvements or other soft
costs, including sales tax, freight, and install expenses, may, however,
constitute up to twenty five percent (25%) of the Committed Equipment Line. At
no time shall Bank make any Equipment Advances if after giving effect to such
request the aggregate amount then outstanding would exceed the Committed
Equipment Line.
(d) Except as otherwise set forth herein,
interest under each Equipment Term Note shall accrue from the date of each
Equipment Advance until repayment in full at the
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Prime Rate. In addition, the Company shall have the one time option on each
Equipment Term Note, to fix the rate of interest rate applicable on each
Equipment Term Note, to a fixed rate equal to the then applicable Treasury Rate,
plus three hundred basis points (the "Fixed Rate Option"). In the event the
Company desires to convert the interest rate under either Equipment Term Note to
the Fixed Rate Option, the Company shall give Bank written notice of its
intention to do so (an "Interest Rate Notice"), not less than five (5) Business
Days prior to the then applicable Equipment Availability End Date. Once given,
an Interest Rate Notice is not revocable.
(e) Interest under each Equipment Note shall be
payable monthly for each month through the month in which the applicable
Equipment Availability End Date falls. Any Equipment Advances that are
outstanding on such Equipment Availability End Date will be payable in thirty
six (36) equal monthly installments of principal, plus all accrued interest,
beginning on the Payment Date of each month following the Equipment Availability
End Date and ending on the Maturity Date. Equipment Advances, once repaid, may
not be reborrowed. Any amounts accruing interest at the Fixed Rate Option which
are prepaid shall be accompanied by a Prepayment Fee, payable on the date of
prepayment (the "Prepayment Date").
(f) When any Borrower desires to obtain an
Equipment Advance, Company shall notify Bank (which notice shall be irrevocable)
by facsimile transmission to be received no later than 3:00 p.m. Washington,
D.C. time one (1) Business Day before the day on which the Equipment Advance is
to be made. Such notice shall be substantially in the form of Exhibit B. The
notice shall be signed by a Responsible Officer or its designee and include a
copy of the invoice for the Equipment to be financed.
2.4 Overadvances. If, at any time or for any reason, the
outstanding amounts of Credit Extensions under the Committed Revolving Line
exceeds the lesser of (i) the Committed Revolving Line or (ii) the Borrowing
Base, Borrowers shall immediately pay to Bank, in cash, the amount of such
excess.
2.5 Interest Rates, Payments, and Calculations.
(a) Interest Rate. All Advances shall bear
interest, on the average Daily Balance at the rate set forth in the Revolving
Note.
(b) Default Rate. All Obligations shall bear
interest, from and after the occurrence of an Event of Default, at a rate equal
to five (5) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default.
(c) Payments. Interest under the Notes shall be
due and payable on the Payment Date of each month during the term thereof.
Borrowers hereby authorizes Bank to debit and Bank hereby agrees to debit,
Account Number 3300020208 maintained at Bank without notice for payments of
principal and interest due on the Obligations, but with prior notice for any
other amounts owing by any Borrower to Bank, provided, however that after the
occurrence of
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any Event of Default, Borrowers authorize Bank to debit any accounts of any
Borrower maintained with Bank. Bank will notify the Company of all debits which
Bank makes against any Borrower's accounts. Any such debits against any
Borrower's accounts in no way shall be deemed a set-off. Any interest not paid
when due shall be compounded by becoming a part of the Obligations, and such
interest shall thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest under the
Notes shall be increased or decreased effective as of 12:01 a.m. on the day the
Prime Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of a
three hundred sixty (360) day year for the actual number of days elapsed.
2.6 Crediting Payments. Prior to the occurrence of an
Event of Default, Bank shall credit a wire transfer of funds, check or other
item of payment to such deposit account or Obligation as the Company specifies.
After the occurrence of an Event of Default, the receipt by Bank of any wire
transfer of funds, check, or other item of payment shall be immediately applied
to conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 10:00 a.m.
Washington, D.C. time shall be deemed to have been received by Bank as of the
opening of business on the immediately following Business Day. Whenever any
payment to Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not a Business Day, such payment shall
instead be due on the next Business Day, and additional fees or interest, as the
case may be, shall accrue and be payable for the period of such extension.
2.7 Fees. Borrowers shall pay to Bank the following:
(a) Facility Fee. A Facility Fee for the
Committed Revolving Line equal to Seventeen Thousand Five Hundred Dollars
($17,500) and for the Committed Equipment Line equal to Two Thousand Five
Hundred Dollars ($2,500), which fees shall be due on the Closing Date and once
paid shall be fully earned and non-refundable;
(b) Financial Examination and Appraisal Fees.
Bank's customary fees and out-of-pocket expenses for Bank's audits of each
Borrower's Accounts, and for each appraisal of Collateral and financial analysis
and examination of each Borrower performed from time to time by Bank or its
agents, provided that prior to the occurrence of an Event of Default, the
Borrowers shall only be obligated to pay the expenses associated with one (1)
such appraisal or examination, during any twelve (12) month period. Bank will
keep the results of any such appraisal or examination confidential in accordance
with the provisions of Section 12.8 hereof;
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<PAGE> 16
(c) Bank Expenses. Upon demand from Bank,
including, without limitation, upon the date hereof, all Bank Expenses incurred
through the date hereof, including reasonable attorneys' fees and expenses and,
after the date hereof, all Bank Expenses, including reasonable attorneys' fees
and expenses, as and when they become due.
2.8 Additional Costs. In case any law, regulation, treaty
or official directive or the interpretation or application thereof by any court
or any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to
payments of principal or interest or any other amounts payable hereunder by
Borrowers or otherwise with respect to the transactions contemplated hereby
(except for taxes on the overall net income of Bank imposed by the United States
of America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any
deposit insurance, reserve, special deposit or similar requirement against
assets held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with
respect to its performance under this Agreement; and
the result of any of the foregoing is to materially increase the cost to Bank,
materially reduce the income receivable by Bank or impose any expense upon Bank
with respect to any loans, Bank shall notify Borrowers thereof. Borrowers agree
to pay to Bank the amount of such increase in cost, reduction in income or
additional expense as and when such cost, reduction or expense is incurred or
determined, upon presentation by Bank of a statement of the amount and setting
forth Bank's calculation thereof, all in reasonable detail, which statement
shall be deemed true and correct absent manifest error.
2.9 Term. Except as otherwise set forth herein, this
Agreement shall become effective on the Closing Date and, subject to Section
12.7, shall continue in full force and effect for a term ending on the Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default.
2.10 Company as Agent.
(a) For administrative convenience, each Person
included in the term "Borrower" hereby irrevocably appoints the Company as the
Borrower's attorney-in-fact, with power of substitution (with the prior written
consent of Bank in the exercise of its sole and absolute discretion), in the
name of the Company or in the name of the Borrower or otherwise to take any and
all actions with respect to this Agreement, the other Loan Documents, the
Obligations and/or the Collateral (including, without limitation, the proceeds
thereof) as the
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Company may so elect from time to time, including, without limitation, actions
to (i) request Credit Extensions, apply for and direct the benefits of Letters
of Credits, and direct Bank to disburse or credit the proceeds of any Advance or
Equipment Advance directly to an account of the Company, any one or more of such
Persons or otherwise, which direction shall evidence the making of such Advance
or Equipment Advance and shall constitute the acknowledgment by each such Person
of the receipt of the proceeds of such Advance or Equipment Advance or the
benefit of such Letter of Credit, (ii) enter into, execute, deliver, amend,
modify, restate, substitute, extend and/or renew this Agreement, any other Loan
Documents, security agreements, mortgages, deposit account agreements,
instruments, certificates, waivers, letter of credit applications, releases,
documents and agreements from time to time, and (iii) endorse any check or other
item of payment in the name of such Person or in the name of the Company. The
foregoing appointment is coupled with an interest, cannot be revoked without the
prior written consent of Bank, and may be exercised from time to time through
the Company's duly authorized officer, officers or other Person or Persons
designated by the Company to act from time to time on behalf of the Company.
(b) Each Person included in the term "Borrower"
hereby irrevocably authorizes Bank to make Loans to any one or more of such
Persons, and hereby irrevocably authorizes Bank to issue or cause to be issued
Letters of Credit for the account of any or all of such Persons, pursuant to the
provisions of this Agreement upon the written, oral or telephone request any one
or more of the Persons who is from time to time a Responsible Officer of a
Borrower under the provisions of the most recent certificate of corporate
resolutions and/or incumbency of the Person included in the term "Borrower" on
file with Bank and also upon the written, oral or telephone request of any one
of the Persons who is from time to time a Responsible Officer of the Company
under the provisions of the most recent certificate of corporate resolutions
and/or incumbency for the Company on file with Bank.
(c) Bank assumes no responsibility or liability
for any errors, mistakes, and/or discrepancies in the oral, telephonic, written
or other transmissions of any instructions, orders, requests and confirmations
between Bank and any one or more of the Persons included in the term "Borrower"
or Borrower in connection with the Credit Extensions, any Loan, any Letter of
Credit or any other transaction in connection with the provisions of this
Agreement.
2.11 Inter-Company Debt, Contribution. Without implying
any limitation on the joint and several nature of the Obligations, Bank agrees
that, notwithstanding any other provision of this Agreement, the Persons
included in the term "Borrower" may create inter-company indebtedness between or
among the Persons included in the term "Borrower" with respect to the allocation
of the benefits and proceeds of the advances and Loans under this Agreement. The
Persons included in the term "Borrower" agree among themselves, and Bank
consents to that agreement, that each such Person shall have rights of
contribution from all of the such Persons to the extent such Person incurs
Obligations in excess of the proceeds of the Loans received by, or allocated to
purposes for the direct benefit of, such Person. All such indebtedness and
rights shall be, and are hereby agreed by the Persons included in the term
"Borrower" to be,
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subordinate in priority and payment to the indefeasible repayment in full in
cash of the Obligations, and, after the occurrence and during the continuance of
any Event of Default, unless Bank agrees in writing otherwise, shall not be
exercised or repaid in whole or in part until all of the Obligations have been
indefeasibly paid in full in cash. Each Person included in the term "Borrower"
agrees that all of such inter-company indebtedness and rights of contribution
are part of the Collateral and secure the Obligations. Each Person included in
the term "Borrower" hereby waives all rights of counter claim, recoupment and
offset between or among themselves arising on account of that indebtedness and
otherwise. No Person included in the term "Borrower" shall evidence the
inter-company indebtedness or rights of contribution by note or other
instrument, and shall not secure such indebtedness or rights of contribution
with any Lien or security.
2.12 Borrowers are Integrated Group.
(a) Each Person included in the term "Borrower"
hereby represents and warrants to Bank that each of them will derive benefits,
directly and indirectly, from each Letter of Credit and from each Credit
Extension, both in their separate capacity and as a member of the integrated
group to which each such Person belongs and because the successful operation of
the integrated group is dependent upon the continued successful performance of
the functions of the integrated group as a whole, because (i) the terms of the
consolidated financing provided under this Agreement are more favorable than
would otherwise would be obtainable by such Persons individually, and (ii) the
additional administrative and other costs and reduced flexibility associated
with individual financing arrangements which would otherwise be required if
obtainable would substantially reduce the value to such Persons of the
financing.
(b) Each Person included in the term "Borrower"
hereby represents and warrants that with respect to such Person all of the
representations and warranties contained in the Loan Documents are true and
correct with respect to such Person on and as of the date hereof as if made on
and as of such date, both before and after giving effect to this Agreement, and
that no Event of Default or Default has occurred and is continuing or exists or
would occur or exist after giving effect to this Agreement.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension. The
obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of each
Borrower with respect to articles, bylaws, incumbency and resolutions
authorizing the execution and delivery of this Agreement;
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<PAGE> 19
(c) the Notes;
(d) the Negative Pledge;
(e) an opinion of Borrowers' counsel;
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then
due specified in Section 2.7 hereof; and
(h) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The
obligation of Bank to make each Credit Extension, including the initial Credit
Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the
Payment/Advance Form as provided in Section 2.1; and
(b) the representations and warranties contained
in Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would result from such Credit
Extension. The making of each Credit Extension shall be deemed to be a
representation and warranty by Borrowers on the date of such Credit Extension as
to the accuracy of the facts referred to in this Section 3.2 (b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Each Borrower grants and
pledges to Bank a continuing security interest in the Collateral in order to
secure prompt payment of any and all Obligations (other than any Credit
Extension including accrued interest under the Committed Revolving Line) and in
order to secure prompt performance by Borrowers of each of their covenants and
duties under the Loan Documents. Such security interest shall remain in effect
for as long as any and all Obligations (other than any Credit Extension
including accrued interest under the Committed Revolving Line) are outstanding
and such security interest constitutes a valid, first priority security interest
in the Collateral, and will constitute a valid, first priority security interest
in all such Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required. Each
Borrower shall from time to time execute and deliver to Bank, at the request of
Bank, all financing statements and other documents that Bank may reasonably
request in form satisfactory to Bank and pay
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<PAGE> 20
such fees and taxes as required in connection therewith, to perfect and continue
perfected Bank's security interests in the Equipment and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during each Borrower's usual business hours, to inspect each
Borrower's Books and to make copies thereof and to check, test, and appraise the
Equipment in order to verify each Borrower's financial condition or the amount,
condition of, or any other matter relating to, the Equipment, provided that Bank
will use reasonable efforts so as not to interfere with such Borrower's business
operations.
5. REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants with respect to such Borrower as
follows:
5.1 Due Organization and Qualification. Such Borrower and
each Subsidiary of such Borrower is a corporation duly existing and in good
standing under the laws of its state of incorporation and qualified and licensed
to do business in, and is in good standing in, any state in which the conduct of
its business or its ownership of property requires that it be so qualified,
except where a failure to be so qualified could not have a Material Adverse
Effect.
5.2 Due Authorization; No Conflict. The execution,
delivery, and performance of the Loan Documents are within each Borrower's
powers, have been duly authorized, and are not in conflict with nor constitute a
breach of any provision contained in any Borrower's Articles/Certificate of
Incorporation, Bylaws, or Partnership Agreement, as the case may be, nor will
they constitute an event of default under any material agreement to which any
Borrower is a party or by which any Borrower is bound. No Borrower is in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrowers have good and
indefeasible title to the Collateral, free and clear of Liens, other than those
in favor of the Bank.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts
are bona fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. No Borrower has received any notice of actual or imminent Insolvency
Proceeding of any account debtor that is included in any Borrowing Base
Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all
material respects of good and marketable quality, free from all material
defects.
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<PAGE> 21
5.6 Name; Location of Chief Executive Office. Except as
disclosed in Schedule 5.6, no Borrower has done business under any name other
than that specified on the signature page hereof. The chief executive office of
each Borrower is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in Schedule 5.7,
there are no actions or proceedings pending, by or against any Borrower or any
Subsidiary before any court or administrative agency in which an adverse
decision could have a Material Adverse Effect. Borrowers do not have knowledge
of any such pending or threatened actions or proceedings.
5.8 No Material Adverse Change in Financial Statements.
All consolidated financial statements related to the Company, any Borrower and
any Subsidiary that have been delivered by the Company to Bank fairly present in
all material respects the Company's consolidated financial condition as of the
date thereof and the Company's consolidated results of operations for the period
then ended. There has not been a material adverse change in the consolidated
financial condition of Borrowers since the date of the most recent of such
financial statements submitted to Bank on or about the Closing Date.
5.9 Solvency. The Borrowers are Solvent.
5.10 Regulatory Compliance. Each Borrower and each
Subsidiary has met the minimum funding requirements of ERISA with respect to any
employee benefit plans subject to ERISA. No event has occurred resulting from
any Borrower's failure to comply with ERISA that is reasonably likely to result
in any Borrower's incurring any liability that could have a Material Adverse
Effect. No Borrower is an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940.
Borrowers are not engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations G, T and U of the Board of
Governors of the Federal Reserve System). To the best of each Borrower's
knowledge it has complied with all the provisions of the Federal Fair Labor
Standards Act. To the best of each Borrower's knowledge, it has not violated any
statutes, laws, ordinances or rules applicable to it, violation of which could
have a Material Adverse Effect.
5.11 Environmental Condition. None of any Borrower's or
any Subsidiary's properties or assets has ever been used by any Borrower or any
Subsidiary or, to the best of any Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of any Borrower's knowledge, none of any
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by any Borrower or any Subsidiary; and neither any Borrower nor
any Subsidiary has received a summons, citation, notice, or directive from the
Environmental
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<PAGE> 22
Protection Agency or any other federal, state or other governmental agency
concerning any action or omission by any Borrower or any Subsidiary resulting in
the release, or other disposition of hazardous waste or hazardous substances
into the environment.
5.12 Taxes. Each Borrower and each Subsidiary has filed or
caused to be filed all tax returns required to be filed or has applied for and
received extensions of the deadline for filing, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein, except those
being contested in good faith and by appropriate proceedings.
5.13 Subsidiaries. Borrowers do not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.14 Government Consents. To the best of its knowledge,
each Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all governmental authorities that are necessary for the continued operation
of each Borrower's business as currently conducted.
5.15 Full Disclosure. No representation, warranty or other
statement made by any Borrower in any certificate or written statement furnished
to Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading in any material respect.
6. AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees that, until payment in full
of all outstanding Obligations, and for so long as Bank may have any commitment
to make a Credit Extension hereunder, each Borrower shall do all of the
following:
6.1 Good Standing. Each Borrower shall maintain its and
each of its Subsidiaries' corporate existence and good standing in its
jurisdiction of incorporation and maintain qualification in each jurisdiction in
which the failure to so qualify could have a Material Adverse Effect. Each
Borrower shall maintain, and shall cause each of its Subsidiaries to maintain,
to the extent consistent with prudent management of Borrower's business, in
force all licenses, approvals and agreements, the loss of which could have a
Material Adverse Effect.
6.2 Government Compliance. Each Borrower shall meet, and
shall cause each Subsidiary to meet, the minimum funding requirements of ERISA
with respect to any employee benefit plans subject to ERISA. Each Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3 Financial Statements, Reports, Certificates. Company
shall deliver to Bank: (a) as soon as available, but in any event within forty
five (45) days after the end of each
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of the first three (3) fiscal quarters, a company prepared consolidated balance
sheet and income statement covering Company's consolidated operations during
such period, in a form and certified by an officer of the Company (without any
personal liability therefore other than liability based on fraud or criminal
misconduct) reasonably acceptable to Bank; (b) as soon as available, but in any
event within ninety (90) days after the end of Company's fiscal year, audited
consolidated financial statements of Company prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Bank; (c) promptly upon receipt of notice thereof, a report of any
legal actions pending or threatened against any Borrower or any Subsidiary that
could result in damages or costs to any Borrower or any Subsidiary of One
Hundred Thousand Dollars ($100,000) or more; and (e) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
For any calendar month that Credit Extensions have been made
or are outstanding under the Committed Revolving Line, Company shall deliver to
Bank, within thirty (30) days after the last day of each such month, a Borrowing
Base Certificate signed by a Responsible Officer in substantially the form of
Exhibit C hereto, together with aged listings of accounts receivable.
The Company shall deliver to Bank with the quarterly financial
statements described in Section 6.3(a) above, a Compliance Certificate signed by
a Responsible Officer in substantially the form of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit
Borrowers' Accounts at Borrowers' expense, provided that such audits will be
conducted no more often than every twelve (12) months unless an Event of Default
has occurred and is continuing. In addition, within one hundred twenty (120)
days of the Closing Date, Bank may, at the Borrower's expense, audit Borrowers'
Accounts.
6.4 Inventory; Returns. Borrowers shall keep all
Inventory in good and marketable condition, free from all material defects.
Returns and allowances, if any, as between Borrowers and its account debtors
shall be on the same basis and in accordance with the usual customary practices
of Borrowers, as they exist at the time of the execution and delivery of this
Agreement. Borrowers shall promptly notify Bank of all returns and recoveries
and of all disputes and claims, where the return, recovery, dispute or claim
involves more than Two Hundred Thousand Dollars ($200,000).
6.5 Taxes. Borrowers shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Bank, on demand, appropriate certificates attesting
to the payment or deposit thereof; and Borrowers will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon
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request, furnish Bank with proof satisfactory to Bank indicating that Borrowers
or a Subsidiary has made such payments or deposits; provided that Borrowers or a
Subsidiary need not make any payment if the amount or validity of such payment
is (i) contested in good faith by appropriate proceedings, and (ii) is reserved
against (to the extent required by GAAP) by Borrowers.
6.6 Insurance.
(a) Borrowers, at their expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrowers' business are conducted on the date hereof. Borrowers shall also
maintain insurance relating to each Borrower's ownership and use of the
Collateral in amounts and of a type that are customary to businesses similar to
each Borrower's.
(b) All such policies of insurance shall be in
such form, with such companies, and in such amounts as are reasonably
satisfactory to Bank. All such policies of property insurance shall contain a
lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank
as an additional loss payee thereof as its interests may appear and all
liability insurance policies shall show the Bank as an additional insured, and
shall specify that the insurer must give at least twenty (20) days notice to
Bank before canceling its policy for any reason. At Bank's request, Borrowers
shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All proceeds payable under
any such policy shall for any Collateral or any collateral hereafter delivered
to Bank pursuant to Section 9.1 hereof, at the option of Bank, be payable to
Bank to be applied on account of the Obligations.
6.7 Principal Depository. Each Borrower shall maintain
its principal disbursing accounts with Bank.
6.8 Quick Ratio. Company shall maintain on a consolidated
basis, as of the last day of each fiscal quarter, a ratio of Quick Assets to
Current Liabilities, less deferred revenues of at least 1.0 to 1.0.
6.9 Tangible Net Worth. Company shall maintain on a
consolidated basis, as of the last day of each fiscal quarter, a minimum
Tangible Net Worth of not less than $40,000,000 as of the fiscal quarter ending
December 31, 1998. Thereafter, the minimum Tangible Net Worth of the Company
shall "step up" on a quarterly basis, as follows:
The Company shall maintain a minimum Tangible Net Worth equal to the sum of: (i)
eighty percent (80%) of net income for the fiscal quarter then ending, plus (ii)
the minimum Tangible Net Worth required under this Section for the immediately
preceding quarter. For example, for the fiscal quarter ending March 31, 1999,
the Company must have a minimum Tangible Net Worth equal to eight percent (80%)
of net income for the fiscal quarter ending March 31, 1999,
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<PAGE> 25
plus $40,000,000, the Tangible Net Worth required for the prior fiscal quarter
(December 31, 1998).
6.10 Profitability. Company shall not report on a
consolidated basis more than one loss for any fiscal quarter in any fiscal year
and such loss may not exceed Eight Million Dollars ($8,000,000). In addition,
the Company will be profitable as of each fiscal year end. Profitability will be
adjusted for increases of capitalized development costs, if any.
6.11 Further Assurances. At any time and from time to time
Borrowers shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS
Each Borrower covenants and agrees that, so long as any Credit
Extension hereunder shall be available and until payment in full of the
outstanding Obligations or for so long as Bank may have any commitment to make
any Advances, Borrowers will not do any of the following:
7.1 Dispositions. At any time prior to the termination of
the Committed Revolving Line pursuant to Section 2.1, convey, sell, lease,
transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of
its Subsidiaries to Transfer, all or any part of its business or property, other
than: (i) Transfers of Inventory in the ordinary course of business; (ii)
Transfers of non-exclusive licenses and similar arrangements for the use of the
property of any Borrower or its Subsidiaries; (iii) Transfers of worn-out or
obsolete Equipment made in the ordinary course of business; or (iv) other
Transfers not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in the
aggregate.
7.2 Change in Business. Engage in any business, or permit
any of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by any Borrower and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in any
Borrower's ownership, management or directors (other than changes due to death
or legal incapacity). Borrower will not, without thirty (30) days prior written
notification to Bank, relocate its chief executive office and will promptly
notify Bank if it receives notice that the lease for its current location will
not be renewed or will be terminated.
7.3 Mergers or Acquisitions. Merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or into any other
business organization, and no Borrower will acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, unless, (i) Company will be the surviving entity,
(ii) no Event of Default has occurred and is continuing, (iii) no Material
Adverse Effect will be caused by such an occurrence, and (iv) Company and such
other business organization deliver to Bank such instruments, agreements and
such other documents as Bank may request.
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<PAGE> 26
7.4 Indebtedness. At any time prior to the termination of
the Committed Revolving Line pursuant to Section 2.1, create, incur, assume or
be or remain liable with respect to any Indebtedness, or permit any Subsidiary
so to do, other than Permitted Indebtedness, and at all other times, create,
incur, assume or be or remain liable with respect to any Indebtedness, or permit
any Subsidiary so to do, other than Permitted Indebtedness and other
Indebtedness.
7.5 Encumbrances. At any time prior to the termination of
the Committed Revolving Line pursuant to Section 2.1, create, incur, assume or
suffer to exist any Lien with respect to any of its property, or assign or
otherwise convey any right to receive income, including the sale of any
Accounts, or permit any of its Subsidiaries so to do, except for Permitted
Liens, provided, however, at no time may the Borrowers create, incur, assume or
suffer to exist any Lien with respect to the Collateral, other than Liens in
favor of the Bank.
7.6 Distributions. At any time prior to the termination
of the Committed Revolving Line pursuant to Section 2.1, pay any dividends or
make any other distribution or payment on account of or in redemption,
retirement or purchase of any capital stock in excess of Fifty Thousand Dollars
($50,000) in the aggregate, provided that at such time no Event of Default has
occurred and is continuing or would exist after giving effect to such payment
and no Material Adverse Effect will be caused by such an occurrence.
7.7 Investments. At any time prior to the termination of
the Committed Revolving Line pursuant to Section 2.1, directly or indirectly
acquire or own, or make any Investment in or to any Person, or permit any of its
Subsidiaries so to do, other than Permitted Investments.
7.8 Transactions with Affiliates. At any time prior to
the termination of the Committed Revolving Line pursuant to Section 2.1,
directly or indirectly enter into or permit to exist any material transaction
with any Affiliate of any Borrower except for transactions that are in the
ordinary course of such Borrower's business, upon fair and reasonable terms that
are no less favorable to such Borrower than would be obtained in an arm's length
transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Compliance. Become an "investment company" or a
company controlled by an "investment company," within the meaning of the
Investment Company Act of 1940, or become principally engaged in, or undertake
as one of its important activities, the business of extending credit for the
purpose of purchasing or carrying margin stock, or use the proceeds of any
Advance for such purpose; fail to meet the minimum funding requirements of
ERISA; permit a Reportable Event or Prohibited Transaction, as defined in ERISA,
to occur. Fail to comply with the Federal Fair Labor Standards Act or violate
any other law or regulation, which
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<PAGE> 27
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral; or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by any Borrowers under this Agreement:
8.1 Payment Default. If Borrowers fails to pay, within
three (3) days after their due date, any of the Obligations.
8.2 Covenant Default.
(a) If Borrowers fail to perform any obligation or
meet any requirement under Sections 6.7, 6.8, 6.9 or 6.10 or violates any of the
covenants contained in Article 7 of this Agreement, or
(b) If any Borrower fails or neglects to perform,
keep, or observe any other material term, provision, condition, covenant, or
agreement contained in this Agreement, in any of the Loan Documents, or in any
other present or future agreement between any Borrower and Bank and as to any
default under such other term, provision, condition, covenant or agreement that
can be cured, has failed to cure such default within ten (10) days after any
Borrower receives notice thereof or any officer becomes aware thereof; provided,
however, that if the default cannot by its nature be cured within the ten (10)
day period or cannot after diligent attempts by such Borrower be cured within
such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrowers shall have an additional reasonable period
(which shall not in any case exceed thirty (30) days) to attempt to cure such
default, and within such reasonable time period the failure to have cured such
default shall not be deemed an Event of Default (provided that no such Advances
will be required to be made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a
material impairment of the perfection or priority of Bank's security interest in
the Collateral or the value of such Collateral which is not covered by adequate
insurance, or (ii) Bank determines, based upon reliable information available to
it and in the exercise of its reasonable judgment, that there is a reasonable
likelihood that Borrowers will fail to comply with one or more of the financial
covenants set forth in Sections 6.8, 6.9 or 6.10 during the next succeeding
quarterly reporting period for which financial reports have not yet been
received by Bank;
8.4 Attachment. If any material portion of any Borrower's
assets are attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged, bonded over or rescinded
within ten (10) days, or if any Borrower is enjoined, restrained, or in any way
prevented by court order from
-28-
<PAGE> 28
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim in excess of One Hundred Fifty Thousand Dollars
($150,000) in the aggregate becomes a lien or encumbrance upon any material
portion of any Borrower's assets, or if a notice of lien, levy, or assessment
for an amount in excess of One Hundred Fifty Thousand Dollars ($150,000) is
filed of record with respect to any of any Borrower's assets by the United
States Government, or any department, agency, or instrumentality thereof, or by
any state, county, municipal, or governmental agency, and the same is not paid
within ten (10) days after any Borrower receives notice thereof, provided that
none of the foregoing shall constitute an Event of Default where such action or
event is stayed or an adequate bond has been posted pending a good faith contest
by any Borrower (provided that no Advances will be required to be made during
such cure period);
8.5 Insolvency. If any Borrower is no longer Solvent, or
if an Insolvency Proceeding is commenced by any Borrower, or if an Insolvency
Proceeding is commenced against any Borrower and is not dismissed or stayed
within 30 days (provided that no Advances will be made prior to the dismissal of
such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any
agreement for borrowed money to which any Borrower is a party with a third party
or parties resulting in a right by such third party or parties, whether or not
exercised, to accelerate the maturity of any Indebtedness in an amount in excess
of Three Hundred Thousand Dollars ($300,000) or that could have a Material
Adverse Effect;
8.7 Subordinated Debt. If any Borrower makes any payment
on account of Subordinated Debt, except to the extent such payment is allowed
under any subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment
of money in an amount, individually or in the aggregate, of at least One Hundred
Fifty Thousand Dollars ($150,000) shall be rendered against any Borrower and
shall remain unsatisfied and unstayed for a period of ten (10) days (provided
that no Advances will be made prior to the satisfaction or stay of such
judgment); or
8.9 Misrepresentations. If any material misrepresentation
or material misstatement exists now or hereafter in any warranty or
representation set forth herein or in any certificate or writing delivered to
Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to
enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Within five (5) days of the
occurrence of an Event of Default and if at such time any Credit Extensions are
outstanding under the Committed
-29-
<PAGE> 29
Revolving Line, the Borrowers shall, to secure such Credit Extensions under the
Committed Revolving Line, deliver to Bank (at their own expense) signed security
agreements in form and substance satisfactory to Bank in all material respects,
granting to Bank a first lien priority security interest in each Borrower's
Accounts and Inventory, together with UCC financing statements and other
documents that Bank may request to grant and perfect Bank's security interest in
such Accounts and Inventory. In the event any of the Borrower's fails to deliver
such items within five (5) days of said Event of Default, each Borrower hereby
irrevocably appoints Bank (and any of Bank's designed officers or employees) as
each Borrower's true and lawful attorney to sign each Borrower's name on such
security agreement, financing statements or any other documents or instruments
necessary to carry out the provisions of this Section. The appointment of Bank
as each Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Committed Revolving Line has been repaid and terminated and Bank's obligation to
provide Advances thereunder is terminated. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrowers:
(a) Declare all Obligations, whether evidenced
by this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to
or for the benefit of Borrowers under this Agreement or under any other
agreement between Borrowers and Bank;
(c) Demand that Borrowers (i) deposit cash with
Bank in an amount equal to the amount of any Letters of Credit remaining
undrawn, as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrowers shall forthwith deposit and pay such
amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid
or payable over the remaining term of the Letters of Credit;
(d) Without notice to or demand upon any
Borrower, make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Borrowers agree
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Each Borrower authorizes Bank to enter
the premises where the Collateral is located, to take and maintain possession of
the Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to be
prior or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of any Borrower's owned premises, each
Borrower hereby grants Bank a license to enter into possession of such premises
and to occupy the same, without charge, for up to one hundred twenty (120) days
in order to exercise any of Bank's rights or remedies provided herein, at law,
in equity, or otherwise;
-30-
<PAGE> 30
(e) Without notice to any Borrower set off and
apply to the Obligations any and all (i) balances and deposits of any Borrower
held by Bank, or (ii) indebtedness at any time owing to or for the credit or the
account of any Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Bank is hereby granted a license or other
right, solely pursuant to the provisions of this Section 9.1, to use, without
charge, any Borrower's labels, patents, copyrights, mask works, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and, in connection with Bank's exercise of its rights under this Section 9.1,
each Borrower's rights under all licenses and all franchise agreements shall
inure to Bank's benefit;
(g) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including each Borrower's
premises) as Bank determines is commercially reasonable, (but in any event after
ten (10) days prior notice to Company of the date and time of any such sale);
(h) Bank may credit bid and purchase at any
public sale; and
(i) Any deficiency that exists after disposition
of the Collateral as provided above will be paid immediately by Borrowers.
9.2 Power of Attorney. In addition to the rights set
forth in Section 9.1 hereof, effective only upon the occurrence and during the
continuance of an Event of Default, each Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as such Borrower's
true and lawful attorney to: (a) endorse each Borrower's name on any checks or
other forms of payment or security that may come into Bank's possession; and (b)
make, settle, and adjust all claims under and decisions with respect to each
Borrower's policies of insurance with respect to any Collateral. The appointment
of Bank as each Borrower's attorney in fact, and each and every one of Bank's
rights and powers, being coupled with an interest, is irrevocable until all of
the Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 [Omitted].
9.4 Bank Expenses. If Borrowers fail to pay any amounts
or furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement after notice from Bank, then Bank may
do any or all of the following: (a) make payment of the same or any part
thereof; (b) set up such reserves under the Committed Revolving Line as Bank
deems necessary to protect Bank from the exposure created by such failure; or
(c) obtain and maintain insurance policies of the type discussed in Section 6.6
of this Agreement, and take any action with respect to such policies as Bank
deems prudent. Any amounts so paid
-31-
<PAGE> 31
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank
complies with reasonable banking practices, Bank shall not in any way or manner
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
All risk of loss, damage or destruction of the Collateral shall be borne by
Borrowers.
9.6 Remedies Cumulative. Bank's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on any Borrower's part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election, or acquiescence by it. No
waiver by Bank shall be effective unless made in a written document signed on
behalf of Bank and then shall be effective only in the specific instance and for
the specific purpose for which it was given.
9.7 Demand; Protest. Each Borrower waives demand,
protest, notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by Bank on which Borrowers may in any way
be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrowers or to Bank, as the case may be, at
its addresses set forth below:
If to Borrowers: Visual Networks, Inc.
2092 Gaither Road
Rockville, Maryland 20850
Attn: Peter Minihane, Chief Financial Officer
FAX: (301) 296-2309
If to Bank: Silicon Valley Bank
-32-
<PAGE> 32
11600 Sunrise Valley Drive, Suite 400
Reston, Virginia 20191
Attn: Shawn Beckerman, Vice President
FAX: (703) 648-3034
With a Copy to; Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
Attn: Loan Services
Fax: (408) 496-2421
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Maryland, without regard to
principles of conflicts of law. EACH BORROWER ACCEPTS FOR ITSELF AND IN
CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION
OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF MARYLAND
IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF
OR BY REASON OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK
CANNOT AVAIL ITSELF OF THE COURTS OF MARYLAND, EACH BORROWER ACCEPTS
JURISDICTION OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA.
BORROWERS AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
-33-
<PAGE> 33
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrowers without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrowers to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder, provided that in the case of
a sale or transfer of all or a portion of the Obligations evidenced by this
Agreement and the other Loan Documents, Bank will furnish Borrower with prior
written notice of the name and address of the intended transferee.
12.2 Indemnification. Borrowers shall, indemnify, defend,
and hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrowers whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement
cannot be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7 Survival. Except as otherwise specifically provided
herein, all covenants, representations and warranties made in this Agreement
shall continue in full force and effect so long as any Obligations remain
outstanding. The obligations of Borrowers to indemnify Bank with respect to the
expenses, damages, losses, costs and liabilities described in Section 12.2 shall
survive until all applicable statute of limitations periods with respect to
actions that may be
-34-
<PAGE> 34
brought against Bank have run provided that so long as the obligations set forth
in the first sentence of this Section 12.7 have been satisfied, and Bank has no
commitment to make any Credit Extensions or to make any other loans to
Borrowers, Bank shall release all security interests granted hereunder and
redeliver all Collateral held by it in accordance with applicable law.
12.8 Confidentiality. In handling any confidential
information Bank shall exercise the same degree of care that it exercises with
respect to its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrowers, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrowers and
have delivered a copy to the Company, (iii) as required by law, regulations,
rule or order, subpoena, judicial order or similar order, (iv) as may be
required in connection with the examination, audit or similar investigation of
Bank, and (v) as Bank may deem appropriate in connection with the exercise of
any remedies hereunder. Confidential information hereunder shall not include
information that either: (a) is in the public domain or in the knowledge or
possession of Bank when disclosed to Bank, or becomes part of the public domain
after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank
by a third party, provided Bank does not have actual knowledge that such third
party is prohibited from disclosing such information.
-35-
<PAGE> 35
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
WITNESS/ATTEST: VISUAL NETWORKS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE
- ----------------------- -----------------------------------------
Name: Peter J. Minihane
Title: Chief Financial Officer
WITNESS/ATTEST: VISUAL NETWORKS OPERATIONS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE
- ----------------------- -----------------------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS TECHNOLOGIES, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE
- ----------------------- -----------------------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS INVESTMENTS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE
- ----------------------- -----------------------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS PROTECTION, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE
- ----------------------- -----------------------------------------
Name: Peter J. Minihane
Title: Treasurer
-36-
<PAGE> 36
WITNESS/ATTEST: VISUAL NETWORKS OF TEXAS, L.P.
By: Visual Networks of Texas Operations, Inc.,
its general partner
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE
- -------------------------- ---------------------------------------
Name: Peter J. Minihane
Title: Treasurer
SILICON VALLEY EAST, INC.
By: /s/ SHAWN BECKERMAN
--------------------------------------------
Shawn Beckerman
Vice President
SILICON VALLEY BANK
By: /s/ AMY YOUNG
--------------------------------------------
Name: Amy Young
Title: Vice President
-37-
<PAGE> 37
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
----------------
FAX#: (408) TIME:
---------- ----------------
FROM:
---------------------------------------------------------------------------
BORROWER'S NAME
FROM:
---------------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
- --------------------------------------------------------------------------------
AUTHORIZED SIGNATURE
PHONE:
--------------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT#
------------------------------ ------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
All representations and warranties of Borrowers stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Advance confirmed by this Advance
Request; provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
BANK USE ONLY:
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ------------------------------------
Authorized Requester
-----------------------------------
Authorized Signature (Bank)
Phone #
----------------------------
-38-
<PAGE> 38
EXHIBIT C
BORROWING BASE CERTIFICATE
BORROWER: Visual Networks, Inc. Bank: Silicon Valley Bank
Commitment Amount: $7,000,000
<TABLE>
<S> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $
-------- ----------
2. Additions (please explain on reverse) $
----------
3. TOTAL ACCOUNTS RECEIVABLE $
----------
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 60 days over due $
----------
5. Balance of 50% over 60 day over due accounts $
----------
6. Concentration Limits $
----------
7. Foreign Accounts $
----------
8. Governmental Accounts $
----------
9. Contra Accounts $
----------
10. Promotion or Demo Accounts $
----------
11. Intercompany/Employee Accounts $
----------
12. Other (please explain on reverse) $
----------
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
----------
14. Eligible Accounts (#3 minus #13) $
----------
15. LOAN VALUE OF ACCOUNTS (75% of #14) $
----------
BALANCES
16. Maximum Loan Amount $7,000,000
----------
17. Total Funds Available [Lesser of #16 or #15] $
----------
18. Present balance owing on Line of Credit $
----------
19. Outstanding under Sublimits ( LC's) $
----------
20. RESERVE POSITION (#17 minus #18 and #19) $
----------
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
====================================
BANK USE ONLY
RECEIVED BY:
--------------------
DATE:
----------------
REVIEWED BY:
--------------------
COMPLIANCE STATUS: YES / NO
====================================
- ---------------------------
By:
------------------------
Authorized Signer
-39-
<PAGE> 39
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: Visual Networks, Inc.
The undersigned authorized officer of Visual Networks, Inc. certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement any Borrower and Bank (the "Agreement"), (i) Borrowers are in complete
compliance for the period ending _______ with all required covenants except as
noted below and (ii) all representations and warranties of Borrowers stated in
the Agreement are true and correct in all material respects as of the date
hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrowers at any time or date of
determination that Borrowers are not in compliance with any of the terms of the
Agreement, and that such compliance is determined not just at the date this
certificate is delivered.
Please indicate compliance status by circling Yes/No under "Complies" column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C>
Quarterly financial statements Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R Agings Monthly within 30 days Yes No
(if Outstandings under LOC)
</TABLE>
<TABLE>
<CAPTION>
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.0:1.0 :1.0 Yes No
-----
Minimum Tangible Net Worth
12/31/98 $40,000,000 $ Yes No
---------
3/31/99* $ $ Yes No
----------- ---------
6/30/99* $ $ Yes No
----------- ---------
9/30/99* $ $ Yes No
----------- ---------
12/31/99* $ $ Yes No
----------- ---------
3/31/00* $ $ Yes No
----------- ---------
*(Steps Up Quarterly by 80% Net Income)*
Profitability: Quarterly Max. 1 loss not
to exceed 8mm $ Yes No
---------
Annually $1 $ Yes No
---------
</TABLE>
====================================
BANK USE ONLY
RECEIVED BY:
--------------------
DATE:
----------------
REVIEWED BY:
--------------------
COMPLIANCE STATUS: YES / NO
====================================
-40-
<PAGE> 40
Comments Regarding Exceptions:
Sincerely,
Date:
- ------------------------ ------------
SIGNATURE
- ------------------------
TITLE
-41-
<PAGE> 41
SCHEDULE 7.5
PERMITTED ENCUMBRANCES
EXISTING WAREHOUSE LIENS, OR WAREHOUSE LIENS THAT MAY BE CREATED IN THE FUTURE,
THAT ARE JUNIOR AND SUBORDINATE TO ANY LIENS CREATED IN FAVOR OF BANK.
NOTWITHSTANDING THE FOREGOING, SUCH LIENS MAY PERMIT A STORAGE FACILITY TO SELL
ASSETS TO THE EXTENT NECESSARY TO SATISFY OUTSTANDING OVERDUE STORAGE CHARGES.
-42-
<PAGE> 1
EXHIBIT 10.15.1
REVOLVING PROMISSORY NOTE
$7,000,000 Rockville, Maryland
As of April 5, 1999
FOR VALUE RECEIVED, the undersigned, VISUAL NETWORKS TECHNOLOGIES,
INC., a California corporation, VISUAL NETWORKS OPERATIONS, INC., a Delaware
corporation, VISUAL NETWORKS INVESTMENTS, INC., a California corporation, VISUAL
NETWORKS, INC., a Delaware corporation, VISUAL NETWORKS PROTECTION, INC., a
Vermont corporation and VISUAL NETWORKS OF TEXAS, L.P., a Texas limited
partnership (each a "Borrower" and collectively, the "Borrowers") jointly and
severally promise to pay to the order of SILICON VALLEY BANK, a
California-chartered bank ("Bank"), at such place as the holder hereof may
designate, in lawful money of the United States of America, the aggregate unpaid
principal amount of all advances ("Advances") made by Bank to Borrowers in
accordance with the terms and conditions of the Loan and Security Agreement
among Borrowers and Bank dated as of even date herewith (as amended from time to
time, the "Loan Agreement"), up to a maximum principal amount of Seven Million
and No/100 Dollars ($7,000,000.00) ("Principal Sum"), or so much thereof as may
be advanced or readvanced and remains unpaid. Borrowers shall also pay interest
on the aggregate unpaid principal amount of such Advances, as follows:
Commencing as of the date hereof and continuing until repayment in full
of all sums due hereunder, the unpaid Principal Sum shall bear interest at the
variable rate of interest, per annum, most recently announced by Bank as its
"prime rate," whether or not such announced rate is the lowest rate available
from Bank (the "Prime Rate"). The rate of interest charged under this Note shall
change immediately and contemporaneously with any change in the Prime Rate. All
interest payable under the terms of this Note shall be calculated on the basis
of a 360-day year and the actual number of days elapsed.
The unpaid Principal Sum, together with interest thereon at the rate or
rates provided above, shall be payable as follows:
(a) Interest only on the unpaid principal amount shall be
due and payable monthly in arrears, commencing May 5, 1999, and continuing on
the first day of each calendar month thereafter to maturity; and
(b) Unless sooner paid, the unpaid Principal Sum,
together with interest accrued and unpaid thereon, shall be due and payable in
full on April 5, 2000.
-1-
<PAGE> 2
The fact that the balance hereunder may be reduced to zero from time to
time pursuant to the Loan Agreement will not affect the continuing validity of
this Note or the Loan Agreement, and the balance may be increased to the
Principal Sum after any such reduction to zero.
This Note amends and restates in its entirety that certain Second
Amended and Restated Revolving Promissory Note (the "Restated Note") in the
maximum principal amount of $7,000,000 dated as of December __, 1998 from the
Borrowers in favor of the Bank. It is expressly agreed that the indebtedness
evidenced by the Restated Note has not been extinguished or discharged hereby.
The Borrowers agree that the execution of this Agreement is not intended to and
shall not cause or result in a novation with respect to the Restated Note. This
Note is secured as provided in the Loan Agreement. All capitalized terms used
herein and not otherwise defined shall have the meanings given to such terms in
the Loan Agreement.
Borrowers irrevocably waive the right to direct the application of any
and all payments at any time hereafter received by Bank from or on behalf of
Borrowers and Borrowers irrevocably agree that Bank shall have the continuing
exclusive right to apply any and all such payments against the then due and
owing obligations of Borrowers as Bank may deem advisable. In the absence of a
specific determination by Bank with respect thereto, all payments shall be
applied in the following order: (a) then due and payable fees and expenses; (b)
then due and payable interest payments and mandatory prepayments; and (c) then
due and payable principal payments and optional prepayments.
Bank is hereby authorized by Borrowers to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any error in
notation) shall not affect the obligations of Borrowers with respect to Advances
made hereunder, and payments of principal by Borrowers shall be credited to
Borrowers notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
The occurrence of any one or more of the following events shall
constitute an event of default (individually, an "Event of Default" and
collectively, the "Events of Default") under the terms of this Note:
(a) The failure of Borrowers to pay to Bank within three
(3) days of when due any and all amounts payable by Borrowers to Bank under the
terms of this Note; or
(b) The occurrence of an event of default (as defined
therein) under the terms and conditions of any of the other Loan Documents.
-2-
<PAGE> 3
Upon the occurrence of an Event of Default, at the option of Bank, all
amounts payable by Borrowers to Bank under the terms of this Note shall
immediately become due and payable by Borrowers to Bank without notice to
Borrowers or any other person, and Bank shall have all of the rights, powers,
and remedies available under the terms of this Note, any of the other Loan
Documents and all applicable laws. Borrowers and all endorsers, guarantors, and
other parties who may now or in the future be primarily or secondarily liable
for the payment of the indebtedness evidenced by this Note hereby severally
waive presentment, protest and demand, notice of protest, notice of demand and
of dishonor and non-payment of this Note and expressly agree that this Note or
any payment hereunder may be extended from time to time without in any way
affecting the liability of Borrowers, guarantors and endorsers.
Borrowers jointly and severally promise to pay all costs and expense of
collection of this Note and to pay all reasonable attorneys' fees incurred in
such collection, whether or not there is a suit or action, or in any suit or
action to collect this Note or in any appeal thereof. Borrowers waive
presentment, demand, protest, notice of protest, notice of dishonor, notice of
nonpayment, and any and all other notices and demands in connection with the
delivery, acceptance, performance default or enforcement of this Note, as well
as any applicable statutes of limitations. No delay by Bank in exercising any
power or right hereunder shall operate as a waiver of any power or right. Time
is of the essence as to all obligations hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern
the rights and obligations of Borrowers with respect to all obligations
hereunder.
Borrowers acknowledge and agree that this Note shall be governed by the
laws of the State of Maryland, excluding conflicts of laws principles, even
though for the convenience and at the request of Borrowers, this Note may be
executed elsewhere.
EACH BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION, SUIT, OR
PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF MARYLAND, EACH BORROWER ACCEPTS JURISDICTION OF THE COURTS AND
VENUE IN SANTA CLARA COUNTY, CALIFORNIA. EACH BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY
RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A
-3-
<PAGE> 4
MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS
AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
Until such time as the Bank is not committed to extend further credit
to the Borrowers and all Obligations of the Borrowers to the Bank have been
indefeasibly paid in full in cash, and subject to and not in limitation of the
provisions set forth in the next following paragraph below, no Borrower shall
have any right of subrogation (whether contractual, arising under the Bankruptcy
Code or otherwise), reimbursement or contribution from any Borrower or any
guarantor, nor any right of recourse to its security for any of the debts and
obligations of any Borrower which are the subject of this Note. Except as
otherwise expressly permitted by the Loan Agreement, any and all present and
future debts and obligations of any Borrower to any other Borrower are hereby
subordinated to the full payment and performance of all present and future debts
and obligations to the Bank under this Note and the Loan Agreement and the Loan
Documents, provided, however, notwithstanding anything set forth in this Note to
the contrary, prior to the occurrence of a payment Default, the Borrowers shall
be permitted to make payments on account of any of such present and future debts
and obligations from time to time in accordance with the terms thereof.
Each Borrower further agrees that, if any payment made by any Borrower
or any other person is applied to this Note and is at any time annulled, set
aside, rescinded, invalidated, declared to be fraudulent or preferential or
otherwise required to be refunded or repaid, or the proceeds of any property
hereafter securing this Note is required to be returned by the Bank to any
Borrower, its estate, trustee, receiver or any other party, including, without
limitation, such Borrower, under any bankruptcy law, state or federal law,
common law or equitable cause, then, to the extent of such payment or repayment,
such Borrower's liability hereunder (and any lien, security interest or other
collateral securing such liability) shall be and remain in full force and
effect, as fully as if such payment had never been made, or, if prior thereto
any such lien, security interest or other collateral hereafter securing such
Borrower's liability hereunder shall have been released or terminated by virtue
of such cancellation or surrender, this Note (and such lien, security interest
or other collateral) shall be reinstated in full force and effect, and such
prior cancellation or surrender shall not diminish, release, discharge, impair
or otherwise affect the obligations of such Borrower in respect of the amount of
such payment (or any lien, security interest or other collateral securing such
obligation).
The JOINT AND SEVERAL obligations of each Borrower under this Note
shall be absolute, irrevocable and unconditional and shall remain in full force
and effect until the outstanding principal of and interest on this Note and all
other Obligations or amounts due hereunder and under the Loan Agreement and the
Loan Documents shall have been indefeasibly paid in full in cash in accordance
with the terms thereof and this Note shall have been canceled.
-4-
<PAGE> 5
IN WITNESS WHEREOF, Borrowers have caused this Note to be executed
under seal by their duly authorized officers or partners, as the case may be, as
of the date first written above.
WITNESS/ATTEST: VISUAL NETWORKS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Chief Financial Officer
WITNESS/ATTEST: VISUAL NETWORKS OPERATIONS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS TECHNOLOGIES, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS INVESTMENTS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS PROTECTION, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
-5-
<PAGE> 6
WITNESS/ATTEST: VISUAL NETWORKS OF TEXAS, L.P.
By: Visual Networks Texas Operations, Inc., its
general partner
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ---------------------- ------------------------------------
Name: Peter J. Minihane
Title: Treasurer
-6-
<PAGE> 1
EXHIBIT 10.15.2
EQUIPMENT TERM NOTE NO. 1 OF 2
Not to Exceed $1,000,000 Rockville, Maryland
As of April 5, 1999
FOR VALUE RECEIVED, the undersigned, VISUAL NETWORKS TECHNOLOGIES,
INC., a California corporation, VISUAL NETWORKS OPERATIONS, INC., a Delaware
corporation, VISUAL NETWORKS INVESTMENTS, INC., a California corporation, VISUAL
NETWORKS, INC., a Delaware corporation, VISUAL NETWORKS PROTECTION, INC., a
Vermont corporation and VISUAL NETWORKS OF TEXAS, L.P., a Texas limited
partnership (each a "Borrower" and collectively, the "Borrowers") jointly and
severally promise to pay to the order of SILICON VALLEY BANK, a
California-chartered bank doing business in Virginia as "Silicon Valley East,
Inc." ("Bank"), at such place as the holder hereof may designate, in lawful
money of the United States of America, the aggregate unpaid principal amount of
all advances ("Equipment Advances") made by Bank to any of the Borrowers in
accordance with the terms and conditions of the Loan and Security Agreement
among Borrowers and Bank of even date herewith (as amended from time to time,
the "Loan Agreement"), up to a maximum principal amount of One Million Dollars
($1,000,000) ("Principal Sum"), or so much thereof as may be advanced. Equipment
Advances may be made under this Note through the Equipment Loan Availability End
Date One.
Borrowers shall pay interest on the outstanding Principal Sum, as
follows:
Commencing as of the date hereof and continuing until repayment in full
of all sums due hereunder, the unpaid Principal Sum shall bear interest as set
forth in the Loan Agreement. All interest payable under the terms of this Note
shall be calculated on the basis of a 360-day year and the actual number of days
elapsed.
The unpaid Principal Sum, together with interest thereon at the rate or
rates provided above, shall be payable as follows:
(a) Interest only on the unpaid Principal Sum shall be due and
payable monthly in arrears, commencing June 5, 1999, and continuing on the fifth
(5th) day of each calendar month thereafter to maturity; and
(b) In addition to the monthly payments of interest as set forth
above, the unpaid Principal Sum shall be due and payable in equal consecutive
monthly installments in an amount equal to one-thirty-sixth (1/36) of the unpaid
Principal Sum as of the Equipment Loan Availability End Date One, commencing on
November 5, 1999 and continuing on the fifth day of each calendar month
thereafter to maturity; and
-1-
<PAGE> 2
(c) Unless sooner paid, the unpaid Principal Sum, together with
interest accrued and unpaid thereon, shall be due and payable in full on October
5, 2002.
This Note may be prepaid in accordance with the Loan Agreement.
This Note is the "Equipment Term Note No. 1" described in the Loan
Agreement, to which reference is hereby made for a more complete statement of
the terms and conditions under which the loans and advances evidenced hereby are
made. This Note is secured as provided in the Loan Agreement. All capitalized
terms used herein and not otherwise defined shall have the meanings given to
such terms in the Loan Agreement.
After an Event of Default, each Borrower irrevocably waives the right
to direct the application of any and all payments at any time hereafter received
by Bank from or on behalf of the Borrowers and the Borrowers irrevocably agree
that Bank shall have the continuing exclusive right to apply any and all such
payments against the then due and owing joint and several obligations of the
Borrowers as Bank may deem advisable. In the absence of a specific determination
by Bank with respect thereto, all payments shall be applied in the following
order: (a) then due and payable fees and expenses; (b) then due and payable
interest payments and mandatory prepayments; and (c) then due and payable
principal payments and optional prepayments.
Bank is hereby authorized by Borrowers to endorse on Bank's books and
records each Equipment Advance made by Bank under this Note and the amount of
each payment or prepayment of principal of each such Advance received by Bank;
it being understood, however, that failure to make any such endorsement (or any
error in notation) shall not affect the obligations of Borrower with respect to
Equipment Advances made hereunder, and payments of principal by Borrower shall
be credited to Borrower notwithstanding the failure to make a notation (or any
errors in notation) thereof on such books and records.
The occurrence of any one or more of the following events shall
constitute an event of default (individually, an "Event of Default" and
collectively, the "Events of Default") under the terms of this Note:
(a) The failure of Borrowers to pay to Bank within three (3) days
of when due any and all amounts payable by Borrowers to Bank under the terms of
this Note; or
(b) The occurrence of an Event of Default (as defined therein)
under the terms and conditions of any of the other Loan Documents.
Upon the occurrence of an Event of Default, at the option of Bank, all
amounts payable by Borrowers to Bank under the terms of this Note shall
immediately become due and payable by
-2-
<PAGE> 3
Borrowers to Bank without notice to Borrower or any other Person, and Bank shall
have all of the rights, powers, and remedies available under the terms of this
Note, any of the other Loan Documents and all applicable laws. Each Borrower and
all endorsers, guarantors, and other parties who may now or in the future be
primarily or secondarily liable for the payment of the indebtedness evidenced by
this Note hereby severally waive presentment, protest and demand, notice of
protest, notice of demand and of dishonor and non-payment of this Note and
expressly agree that this Note or any payment hereunder may be extended from
time to time without in any way affecting the joint and several liability of
Borrowers, guarantors and endorsers.
Upon the occurrence of an Event of Default, each Borrower hereby
authorizes any attorney designated by Bank or any clerk of any court of record
to appear for each Borrower in any court of record and confess judgment without
prior hearing against each Borrower in favor of Bank for and in the amount of
the unpaid Principal Sum, all interest accrued and unpaid thereon, all other
amounts payable by Borrower to Bank under the terms of this Note or any of the
other Loan Documents, costs of suit, and reasonable attorneys' fees. Each
Borrower hereby releases, to the extent permitted by applicable law, all errors
and all rights of exemption, appeal, stay of execution, inquisition, and other
rights to which Borrower may otherwise be entitled under the laws of the United
States of America or of any state or possession of the United States of America
now in force and which may hereafter be enacted. The authority and power to
appear for and enter judgment against Borrowers shall not be exhausted by one or
more exercises thereof or by any imperfect exercise thereof and shall not be
extinguished by any judgment entered pursuant thereto. Such authority may be
exercised on one or more occasions or from time to time in the same or different
jurisdictions as often as Bank shall deem necessary or desirable, for all of
which this Note shall be a sufficient warrant.
Borrowers jointly and severally promise to pay all costs and expense of
collection of this Note and to pay all reasonable attorneys' fees incurred in
such collection, whether or not there is a suit or action, or in any suit or
action to collect this Note or in any appeal thereof. No delay by Bank in
exercising any power or right hereunder shall operate as a waiver of any power
or right. Time is of the essence as to all obligations hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern
the rights and obligations of Borrowers with respect to all obligations
hereunder.
Each Borrower acknowledges and agrees that this Note shall be governed
by the laws of the State of Maryland, excluding conflicts of laws principles,
even though for the convenience and at the request of Borrowers, this Note may
be executed elsewhere.
EACH BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF
-3-
<PAGE> 4
MARYLAND IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES
OUT OF OR BY REASON OF THIS NOTE; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK
CANNOT AVAIL ITSELF OF THE COURTS OF MARYLAND, EACH BORROWER ACCEPTS
JURISDICTION OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA.
BORROWERS AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS NOTE. EACH PARTY
REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL
AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL.
[REMAINDER OF PAGE LEFT BLANK]
-4-
<PAGE> 5
IN WITNESS WHEREOF, Borrowers have caused this Note to be executed
under seal by their duly authorized officers or partners, as the case may be, as
of the date first written above.
WITNESS/ATTEST: VISUAL NETWORKS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Chief Financial Officer
WITNESS/ATTEST: VISUAL NETWORKS OPERATIONS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS TECHNOLOGIES, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS INVESTMENTS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS PROTECTION, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
-5-
<PAGE> 6
WITNESS/ATTEST: VISUAL NETWORKS OF TEXAS, L.P.
By: Visual Networks Texas Operations, Inc., its
general partner
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ----------------------- ------------------------------------
Name: Peter J. Minihane
Title: Treasurer
-6-
<PAGE> 1
EXHIBIT 10.15.3
EQUIPMENT TERM NOTE NO. 2 OF 2
Not to Exceed $1,000,000 Rockville, Maryland
As of April 5, 1999
FOR VALUE RECEIVED, the undersigned, VISUAL NETWORKS TECHNOLOGIES,
INC., a California corporation, VISUAL NETWORKS OPERATIONS, INC., a Delaware
corporation, VISUAL NETWORKS INVESTMENTS, INC., a California corporation, VISUAL
NETWORKS, INC., a Delaware corporation, VISUAL NETWORKS PROTECTION, INC., a
Vermont corporation and VISUAL NETWORKS OF TEXAS, L.P., a Texas limited
partnership (each a "Borrower" and collectively, the "Borrowers") jointly and
severally promise to pay to the order of SILICON VALLEY BANK, a
California-chartered bank, doing business in Virginia as "Silicon Valley East,
Inc." ("Bank"), at such place as the holder hereof may designate, in lawful
money of the United States of America, the aggregate unpaid principal amount of
all advances ("Equipment Advances") made by Bank to any of the Borrowers in
accordance with the terms and conditions of the Loan and Security Agreement
among Borrowers and Bank of even date herewith (as amended from time to time,
the "Loan Agreement"), up to a maximum principal amount of One Million Dollars
($1,000,000) ("Principal Sum"), or so much thereof as may be advanced. Equipment
Advances may be made under this Note after the Equipment Loan Availability End
Date One and through the Equipment Loan Availability End Date Two.
Borrowers shall pay interest on the outstanding Principal Sum, as
follows:
Commencing as of the date hereof and continuing until repayment in full
of all sums due hereunder, the unpaid Principal Sum shall bear interest as set
forth in the Loan Agreement. All interest payable under the terms of this Note
shall be calculated on the basis of a 360-day year and the actual number of days
elapsed.
The unpaid Principal Sum, together with interest thereon at the rate or
rates provided above, shall be payable as follows:
(a) Interest only on the unpaid Principal Sum shall be due and
payable monthly in arrears, commencing November 5, 1999, and continuing on the
fifth (5th) day of each calendar month thereafter to maturity; and
(b) In addition to the monthly payments of interest as set forth
above, the unpaid Principal Sum shall be due and payable in equal consecutive
monthly installments in an amount equal to one-thirty-sixth (1/36) of the unpaid
Principal Sum as of the Equipment Loan Availability End Date Two, commencing on
May 5, 2000 and continuing on the fifth day of each calendar month thereafter to
maturity; and
-1-
<PAGE> 2
(c) Unless sooner paid, the unpaid Principal Sum, together with
interest accrued and unpaid thereon, shall be due and payable in full on April
5, 2003.
This Note may be prepaid in accordance with the Loan Agreement.
This Note is the "Equipment Term Note No. 2" described in the Loan
Agreement, to which reference is hereby made for a more complete statement of
the terms and conditions under which the loans and advances evidenced hereby are
made. This Note is secured as provided in the Loan Agreement. All capitalized
terms used herein and not otherwise defined shall have the meanings given to
such terms in the Loan Agreement.
After an Event of Default, each Borrower irrevocably waives the right
to direct the application of any and all payments at any time hereafter received
by Bank from or on behalf of the Borrowers and the Borrowers irrevocably agree
that Bank shall have the continuing exclusive right to apply any and all such
payments against the then due and owing joint and several obligations of the
Borrowers as Bank may deem advisable. In the absence of a specific determination
by Bank with respect thereto, all payments shall be applied in the following
order: (a) then due and payable fees and expenses; (b) then due and payable
interest payments and mandatory prepayments; and (c) then due and payable
principal payments and optional prepayments.
Bank is hereby authorized by Borrowers to endorse on Bank's books and
records each Equipment Advance made by Bank under this Note and the amount of
each payment or prepayment of principal of each such Advance received by Bank;
it being understood, however, that failure to make any such endorsement (or any
error in notation) shall not affect the joint and several obligations of
Borrowers with respect to Equipment Advances made hereunder, and payments of
principal by Borrowers shall be credited to Borrowers notwithstanding the
failure to make a notation (or any errors in notation) thereof on such books and
records.
The occurrence of any one or more of the following events shall
constitute an event of default (individually, an "Event of Default" and
collectively, the "Events of Default") under the terms of this Note:
(a) The failure of Borrowers to pay to Bank within three (3) days
of when due any and all amounts payable by Borrowers to Bank under the terms of
this Note; or
(b) The occurrence of an Event of Default (as defined therein)
under the terms and conditions of any of the other Loan Documents.
-2-
<PAGE> 3
Upon the occurrence of an Event of Default, at the option of Bank, all
amounts payable by Borrowers to Bank under the terms of this Note shall
immediately become due and payable by Borrowers to Bank without notice to
Borrowers or any other Person, and Bank shall have all of the rights, powers,
and remedies available under the terms of this Note, any of the other Loan
Documents and all applicable laws. Each Borrower and all endorsers, guarantors,
and other parties who may now or in the future be primarily or secondarily
liable for the payment of the indebtedness evidenced by this Note hereby
severally waive presentment, protest and demand, notice of protest, notice of
demand and of dishonor and non-payment of this Note and expressly agree that
this Note or any payment hereunder may be extended from time to time without in
any way affecting the joint and several liability of Borrowers, guarantors and
endorsers.
Upon the occurrence of an Event of Default, each Borrower hereby
authorizes any attorney designated by Bank or any clerk of any court of record
to appear for each Borrower in any court of record and confess judgment without
prior hearing against each Borrower in favor of Bank for and in the amount of
the unpaid Principal Sum, all interest accrued and unpaid thereon, all other
amounts payable by Borrower to Bank under the terms of this Note or any of the
other Loan Documents, costs of suit, and reasonable attorneys' fees. Each
Borrower hereby releases, to the extent permitted by applicable law, all errors
and all rights of exemption, appeal, stay of execution, inquisition, and other
rights to which Borrower may otherwise be entitled under the laws of the United
States of America or of any state or possession of the United States of America
now in force and which may hereafter be enacted. The authority and power to
appear for and enter judgment against Borrowers shall not be exhausted by one or
more exercises thereof or by any imperfect exercise thereof and shall not be
extinguished by any judgment entered pursuant thereto. Such authority may be
exercised on one or more occasions or from time to time in the same or different
jurisdictions as often as Bank shall deem necessary or desirable, for all of
which this Note shall be a sufficient warrant.
Borrowers jointly and severally promise to pay all costs and expense of
collection of this Note and to pay all reasonable attorneys' fees incurred in
such collection, whether or not there is a suit or action, or in any suit or
action to collect this Note or in any appeal thereof. No delay by Bank in
exercising any power or right hereunder shall operate as a waiver of any power
or right. Time is of the essence as to all obligations hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern
the rights and obligations of Borrowers with respect to all obligations
hereunder.
Each Borrower acknowledges and agrees that this Note shall be governed
by the laws of the State of Maryland, excluding conflicts of laws principles,
even though for the convenience and at the request of Borrowers, this Note may
be executed elsewhere.
-3-
<PAGE> 4
EACH BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION, SUIT, OR
PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
NOTE; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF THE
COURTS OF MARYLAND, EACH BORROWER ACCEPTS JURISDICTION OF THE COURTS AND VENUE
IN SANTA CLARA COUNTY, CALIFORNIA. BORROWERS AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
NOTE. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH
ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
-4-
<PAGE> 5
IN WITNESS WHEREOF, Borrowers have caused this Note to be executed
under seal by their duly authorized officers or partners, as the case may be, as
of the date first written above.
WITNESS/ATTEST: VISUAL NETWORKS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Chief Financial Officer
WITNESS/ATTEST: VISUAL NETWORKS OPERATIONS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS TECHNOLOGIES, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS INVESTMENTS, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
WITNESS/ATTEST: VISUAL NETWORKS PROTECTION, INC.
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
-5-
<PAGE> 6
WITNESS/ATTEST: VISUAL NETWORKS OF TEXAS, L.P.
By: Visual Networks Texas Operations, Inc., its
general partner
/s/ RICHARD H. DEILY By: /s/ PETER J. MINIHANE (SEAL)
- ------------------------- ---------------------------
Name: Peter J. Minihane
Title: Treasurer
-6-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
---------------
<S> <C>
Visual Networks Technologies, Inc. California
Visual Networks Investments, Inc. California
Visual Networks Texas Operations, Inc. Delaware
Visual Networks Operations, Inc. Delaware
Net 2 Net, LLC Delaware
Visual Networks Insurance, Inc. Vermont
Visual Networks, Ltd. Bermuda
Visual Networks of Texas, L.P. Texas
Visual Networks Protection, Inc. Vermont
Visual Networks UK Operations, Inc. Delaware
Inverse Networks Technology California
</TABLE>
<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 part of this registration
statement.
ARTHUR ANDERSEN LLP
Vienna, Virginia
November 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 SEP-30-1999
<CASH> 9,601 51,655 54,938
<SECURITIES> 0 1,002 0
<RECEIVABLES> 4,938 6,441 9,435
<ALLOWANCES> 412 493 759
<INVENTORY> 3,724 5,086 7,320
<CURRENT-ASSETS> 18,512 65,593 73,256
<PP&E> 3,377 8,694 13,697
<DEPRECIATION> 1,083 2,880 5,322
<TOTAL-ASSETS> 21,036 71,780 81,780
<CURRENT-LIABILITIES> 19,294 22,447 32,119
<BONDS> 0 0 0
14,855 0 0
3 0 0
<COMMON> 75 242 247
<OTHER-SE> (13,329) (48,080) (48,548)
<TOTAL-LIABILITY-AND-EQUITY> 21,036 71,780 81,780
<SALES> 29,300 56,088 64,320
<TOTAL-REVENUES> 29,300 56,088 64,320
<CGS> 11,179 20,829 22,204
<TOTAL-COSTS> 11,179 20,829 22,204
<OTHER-EXPENSES> 27,501 44,127 42,407
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (165) (2,413) (1,647)
<INCOME-PRETAX> (9,215) (6,455) 1,356
<INCOME-TAX> 0 0 2,602
<INCOME-CONTINUING> (9,215) (6,455) (1,246)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (9,215) (6,455) (1,246)
<EPS-BASIC> (1.44) (.30) (.05)
<EPS-DILUTED> (1.44) (.30) (.05)
</TABLE>
