<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0001
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-23699
---------------
VISUAL NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 52-1837515
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2092 GAITHER ROAD, ROCKVILLE, MD 20850-4013
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code: (301) 296-2300
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of August 10, 1999, 20,523,549 shares of the registrant's Common Stock,
par value $.01 per share, were issued and outstanding.
1
<PAGE> 2
VISUAL NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -- June 30, 1999 and December 31, 1998............... 3
Consolidated Statements of Operations -- Three and six months ended
June 30, 1999 and 1998.......................................................... 4
Consolidated Statements of Cash Flows -- Three and six months ended
June 30, 1999 and 1998.......................................................... 5
Notes to Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 10
Item 3. Qualitative and Quantitative Disclosure about Market Risk................... 16
PART II. OTHER INFORMATION
Items 1 - 6......................................................................... 17
Signatures.......................................................................... 19
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
VISUAL NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 46,920 $ 50,531
Accounts receivable, net of allowance of $676 and
$493, respectively............................. 8,318 5,038
Inventory........................................... 6,297 5,086
Other current assets................................ 2,487 1,715
-------- ---------
Total current assets........................... 64,022 62,370
Property and equipment, net.............................. 6,503 4,478
-------- ---------
Total assets................................... $ 70,525 $ 66,848
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 8,377 $ 5,575
Accrued compensation................................ 1,412 2,366
Customer deposits................................... -- 4,613
Deferred revenue.................................... 4,805 5,246
Capital lease obligation............................ 208 383
-------- ---------
Total current liabilities...................... 14,802 18,183
-------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,427,747 and 20,095,129 shares
issued and outstanding as of June 30, 1999 and
December 31, 1998, respectively................ 204 201
Deferred compensation............................... (167) (197)
Additional paid-in capital.......................... 75,062 74,215
Accumulated deficit................................. (19,376) (25,554)
-------- ---------
Total stockholders' equity...................... 55,723 48,665
-------- ---------
Total liabilities and stockholders' equity...... $ 70,525 $ 66,848
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
VISUAL NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- -------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue...................................... $ 19,223 $ 11,979 $ 36,005 $ 22,306
Cost of goods sold........................... 6,715 4,360 12,521 8,901
----------- ----------- ----------- -----------
Gross profit............................ 12,508 7,619 23,484 13,405
----------- ----------- ----------- -----------
Operating expenses:
Research and development................ 3,006 2,488 5,908 4,915
Sales and marketing..................... 3,716 3,589 7,193 7,287
General and administrative.............. 1,304 926 2,403 2,116
Merger-related costs.................... -- 7,347 -- 7,347
---------- ----------- ---------- ----------
Total operating expenses........... 8,026 14,350 15,504 21,665
----------- ----------- ----------- ----------
Income (loss) from operations................ 4,482 (6,731) 7,980 (8,260)
Interest income, net......................... 528 666 1,104 1,055
----------- ----------- ----------- -----------
Income (loss) before income taxes............ 5,010 (6,065) 9,084 (7,205)
Income taxes................................. (1,603) 495 (2,906) --
------------ ----------- ------------ ----------
Net income (loss)............................ 3,407 (5,570) 6,178 (7,205)
Dividends and accretion on preferred stock... -- -- -- (171)
----------- ----------- ----------- ----------
Net income (loss) attributable to
common stockholders........................ $ 3,407 $ (5,570) $ 6,178 $ (7,376)
=========== =========== =========== ===========
Basic income (loss) per share................ $ 0.17 $ (0.28) $ 0.30 $ (0.45)
=========== =========== =========== ============
Diluted income (loss) per share............. $ 0.16 $ (0.28) $ 0.28 $ (0.45)
=========== =========== =========== ===========
Pro forma diluted loss per share............ $ (0.38)
===========
Basic weighted average shares outstanding 20,381,282 19,846,267 20,311,782 16,401,905
Diluted weighted average shares
outstanding................................ 21,753,925 19,846,267 21,823,893 16,401,905
Pro forma diluted weighted average
shares outstanding......................... 18,862,904
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
VISUAL NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
JUNE 30,
------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 6,178 $ (7,205)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization................... 1,010 598
Changes in assets and liabilities:
Accounts receivable............................. (3,280) (595)
Inventory....................................... (1,211) (601)
Other current assets............................ (772) (572)
Accounts payable and accrued expenses........... 2,802 6,190
Customer deposits............................... (4,613) (1,114)
Accrued compensation............................ (954) (286)
Deferred revenue................................ (441) (70)
-------- --------
Net cash used in operating activities..... (1,281) (3,655)
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment......... (3,005) (2,015)
-------- --------
Net cash used in investing activities..... (3,005) (2,015)
-------- --------
Cash flows from financing activities:
Exercise of stock options....................... 850 225
Proceeds from issuance of common stock, net of
issuance costs............................... -- 45,448
Payment of Series A dividends................... -- (30)
Net repayments under credit agreements.......... -- (126)
Principal payments on capital lease obligations. (175) (193)
-------- --------
Net cash provided by financing activities. 675 45,324
-------- -------
Net (decrease) increase in cash and cash equivalents...... (3,611) 39,654
Cash and cash equivalents, beginning of period............ 50,531 8,902
-------- -----
Cash and cash equivalents, end of period.................. $ 46,920 $48,556
======== ========
Supplemental cash flow information:
Cash paid for interest............................... $ 34 $ 125
Cash paid for income taxes........................... $ -- $ 495
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
VISUAL NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Visual Networks, Inc. ("Visual" or the "Company") is engaged in developing,
manufacturing and marketing wide-area-network service level management systems.
The Company's operations are subject to certain risks and uncertainties,
including among others, successful implementation of the Company's sales and
distribution model, dependence on significant customers, rapidly changing
technology, current and potential competitors with greater financial,
technological, production, and marketing resources, dependence on sole and
limited source suppliers, dependence on key management personnel, limited
protection of intellectual property and proprietary rights, uncertainty of
future profitability and possible fluctuations in financial results.
Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These financial statements are unaudited and have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, and it is suggested
that these financial statements be read in conjunction with the financial
statements and the notes thereto, included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. In the opinion of management,
the comparative financial statements for the periods presented herein include
all adjustments that are normal and recurring which are necessary for a fair
statement of results for the interim periods. The results of operations for the
three and six months ended June 30, 1999 are not necessarily indicative of the
results for the entire year ending December 31, 1999.
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. The accompanying
consolidated financial statements have been retroactively restated to reflect
the combined financial position and combined results of operations and cash
flows for all periods presented, giving effect to the acquisition as if it had
occurred at the beginning of the earliest period presented.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be cash
equivalents.
Fair Value of Financial Instruments
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments.
Revenue Recognition
The Company generally recognizes revenue from 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 require the Company to provide technical
support and software updates to customers. The Company recognizes product
support and maintenance revenue, including
6
<PAGE> 7
maintenance revenue that is bundled with product sales, ratably over the term
of the contract period, which generally ranges from one to three years.
Inventory
Inventory is stated at the lower of cost or market. Inventory consists of
the following (unaudited, in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- --------------
<S> <C> <C>
Raw materials... $ 1,295 $ 821
Work-in-progress 1,546 1,228
Finished goods.. 3,456 3,037
---------- ----------
$ 6,297 $ 5,086
========== ==========
</TABLE>
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("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 Earnings per Share
Basic earnings per share includes no dilution and is computed by dividing
net income (loss) attributable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
includes the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Options to purchase 2,101,686 of common stock that were outstanding at June
30, 1998 were not included in the computation of diluted loss per share for the
three and six months ended June 30, 1998 as their effect would be
anti-dilutive. The effect of the conversion of preferred stock into 10,605,735
shares of common stock is included in the computation of basic loss per share
from the date of conversion on February 11, 1998. The effect of preferred stock
convertible into 10,605,735 shares of common stock for the period January 1,
1998 through February 10, 1998 was not included in the computation of diluted
loss per share for the six months ended June 30, 1998 as such effect would have
been anti-dilutive. Pro forma diluted weighted average shares outstanding for
the six months ended June 30, 1998 assumes the conversion of all of the
Company's outstanding convertible preferred stock into common stock.
7
<PAGE> 8
The following details the computation of the income (loss) per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ADJUSTMENTS TO NET INCOME (LOSS):
Net income (loss).................. $ 3,407 $ (5,570) $ 6,178 $ (7,205)
Preferred dividends and accretion.. -- -- -- (171)
----------- ----------- ----------- ------------
Net income (loss) attributable to
common stockholders.......... $ 3,407 $ (5,570) $ 6,178 $ (7,376)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARE CALCULATION:
Basic weighted average shares
outstanding:
Average number of shares of
common stock outstanding
during the period ............. 20,381,282 19,846,267 20,311,782 16,401,905
Diluted weighted average shares
outstanding:
Treasury stock effect of options 1,372,643 -- 1,512,111 --
--------- ------------- --------- -------------
Diluted weighted average shares
outstanding........................ 21,753,925 19,846,267 21,823,893 16,401,905
Pro forma diluted weighted average
shares outstanding:
Conversion of preferred stock... 2,460,999
Pro forma diluted weighted
average shares outstanding..... 21,753,925 19,846,267 21,823,893 18,862,904
=========== ============== ============ =============
INCOME (LOSS) PER COMMON SHARE:
Basic income (loss) per share ....... $ 0.17 $ (0.28) $ 0.30 $ (0.45)
======== ======== ======== ========
Diluted income (loss) per share...... $ 0.16 $ (0.28) $ 0.28 $ (0.45)
======== ======== ======== ========
Pro forma diluted loss per share..... $ (0.38)
========
</TABLE>
(2) CREDIT AGREEMENTS:
Effective April 5, 1999, the Company renewed its bank credit agreement for
an additional term of one year. The agreement provides for borrowings up to the
lesser of $7,000,000 or 85% of eligible accounts receivable (the "Revolving
Line") as well as a $1,000,000 capital equipment line. 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 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 June 30, 1999, the Company had no borrowings outstanding under the credit
agreement.
(3) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for all quarters of years
beginning after June 15, 1999. The adoption of this pronouncement will not have
a material impact on the Company's results of operations, financial position or
cash flows.
(4) INITIAL PUBLIC OFFERING
In February 1998, the Company completed an initial public offering ("IPO")
of 4,025,000 shares of common stock, resulting in net proceeds of approximately
$45.4 million. All of the shares sold were issued and sold by the Company.
Concurrent with the closing of the offering, the outstanding shares of Series A
convertible preferred stock and Series B, C, D and E redeemable convertible
preferred stock were converted into 485,890 and 10,119,845 shares of common
stock, respectively.
8
<PAGE> 9
(5) MERGER-RELATED COSTS
In connection with the Net2Net acquisition, the Company recorded
merger-related charges for transaction costs, integration expenses and
restructuring charges of approximately $7.3 million in the three months ended
June 30, 1998. In the three months ended December 31, 1998, the Company
reversed approximately $2.3 million of the aforementioned merger-related costs
as a result of the payment of lower than estimated transaction and
restructuring costs in connection with the Net2Net transaction.
9
<PAGE> 10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
We were incorporated in Maryland in August 1993 as Avail Networks, Inc.
and reincorporated in Delaware in December 1994 as Visual Networks, Inc. From
incorporation through December 1994, our principal objective was to secure
sufficient equity financing to enable us to accelerate product development
efforts. We secured our first round of equity financing in December 1994.
During 1995 and 1996, we devoted substantial resources to developing
Visual UpTime for Frame Relay deployment and to developing sales and marketing
functions and general and administrative infrastructure. Visual UpTime was
first shipped in mid-1995. We began generating significant revenue from sales
of Visual UpTime during 1996.
During 1995 and 1996, most of our sales were to subscribers. In August
1996, we entered into a master reseller agreement with Sprint, under which we
shipped our products through Sprint to Sprint's subscribers. In October 1997,
we entered into a similar master reseller agreement with MCI, which also
resulted in our shipping our products through MCI to MCI's subscribers. Since
1997, we have focused on selling Visual UpTime directly to providers as part of
their network infrastructure. In December 1997, we entered into an agreement
with AT&T, which provides for the sale of our products to AT&T for deployment
as part of AT&T's infrastructure.
On May 15, 1998, we acquired Net2Net in a merger accounted for as a
pooling of interests. The combination with Net2Net will affect the future
results of the operations reported by us. See Note 1 of Notes to Consolidated
Financial Statements.
We realize revenue from sales of hardware, from the licensing of related
software and from maintenance contracts. We generally recognize revenue upon
shipment or delivery of the product and passage of title to the customer. For
sales agreements that provide for evaluation or customer acceptance, we
recognize revenue upon the completion of the evaluation process and acceptance
of the product by the customer. Maintenance contracts call for us to provide
technical support and software updates to customers. We recognize maintenance
revenue, including maintenance revenue that is bundled with product sales,
ratably over the lengths of the maintenance contracts, which currently range
from one to three years.
We currently contract with third parties for board assembly and other
production processes and we have manufacturing operations that perform final
assembly, testing and shipping of our product at our facilities in Rockville,
Maryland and Hudson, Massachusetts. We anticipate maintaining a portion of our
internal manufacturing function for the foreseeable future at our Rockville,
Maryland facility.
Results of Operations for the Three Months Ended June 30, 1999 Compared
with the Three Months Ended June 30, 1998
REVENUE. We recognized $19.2 million in revenue for the three months ended
June 30, 1999, a 60% increase over revenue of $12.0 million for the three
months ended June 30, 1998. The increase was due primarily to the continued
acceptance of Visual UpTime in the Frame Relay and the Asynchronous Transfer
Mode markets, with an increase in sales to providers. Sales to providers
accounted for approximately 70% of revenue for the three months ended June 30,
1999 as compared to approximately 64% for the three months ended June 30, 1998.
GROSS PROFIT. Cost of goods sold consists of subcontracting costs,
component parts, direct compensation costs, warranty and other contractual
obligations, royalties, license fees and other overhead expenses related to
manufacturing operations. Gross profit was $12.5 million for the three months
ended June 30, 1999, as compared to $7.6 million for the three months ended
June 30, 1998, an increase of $4.9 million. Gross margin was 65.1% of revenue
for the three months ended June 30, 1999, as compared to 63.6% of revenue for
the three months ended June 30, 1998. The increase in gross margin percentage
was due primarily to product cost reductions and to changes in product sales
mix. Our future gross margins may be adversely affected by a number of factors,
including product mix, the proportion of sales to providers, competitive
pricing, manufacturing volumes and an increase in component costs.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consists
of compensation for research and development staff, depreciation of test and
development equipment, certain software development costs and costs of
prototype materials. Research and development expense was $3.0 million for the
three months ended June 30, 1999 as compared to $2.5 million for the three
months ended June 30, 1998, an increase of $0.5 million. The increase in
research and development expense was due primarily to increased staffing levels
and related support costs, and purchases of materials used in the development
of new or enhanced products. Research and development expense was 15.7% and
20.8% of revenue for the three months ended June 30, 1999 and 1998,
respectively. We expect that research and development expenditures will
increase in absolute dollars, and may decrease as a
10
<PAGE> 11
percentage of revenue, during the remainder of 1999 and thereafter. The
increase in absolute dollars will support continued development of new or
enhanced products and the exploration of new or complementary technologies.
SALES AND MARKETING EXPENSE. Sales and marketing expense consists of
compensation for the sales and marketing staff, commissions, pre-sales support,
travel and entertainment, trade shows and other marketing programs. Sales and
marketing expense was $3.7 million for the three months ended June 30, 1999, as
compared to $3.6 million for the three months ended June 30, 1998, an increase
of $0.1 million. The increase in sales and marketing expense was due primarily
to continued growth in marketing programs, which offset the effect of the
consolidation of Visual's and Net2Net's sales and marketing functions
subsequent to the May 15, 1998 merger. Sales and marketing expense was 19.3%
and 30.0% of revenue for the three months ended June 30, 1999 and 1998,
respectively. We expect that sales and marketing expenditures will increase in
absolute dollars, and may decrease as a percentage of revenue, during the
remainder of 1999 and thereafter. This increase in absolute dollars is expected
to be incurred as additional personnel are hired, field offices are opened and
promotional expenditures increase to allow us to increase our market
penetration and to pursue market opportunities.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists of finance, administration and general management activities. General
and administrative expense was $1.3 million for the three months ended June 30,
1999 as compared to $0.9 million for the three months ended June 30, 1998, an
increase of $0.4 million. The increase in general and administrative expense
was due primarily to increases in professional services and continued growth in
corporate facilities and network infrastructure, which offset the effect of the
consolidation of Visual's and Net2Net's general and administrative functions
subsequent to the May 15, 1998 merger. General and administrative expense was
6.8% and 7.7% of revenue for the three months ended June 30, 1999 and 1998,
respectively. We expect that general and administrative expenditures will
increase in absolute dollars, and may decrease as a percentage of revenue,
during the remainder of 1999 and thereafter. The increase in absolute dollars
is expected to be required for the expansion of our administrative staff and
internal systems to support expanding operations.
MERGER-RELATED COSTS. In connection with the Net2Net acquisition, we
recorded merger-related costs of $7.3 million in the three moths ended June 30,
1998, consisting of transaction costs, integration expenses and restructuring
charges. Transaction costs of $4.4 million consisted primarily of fees for
investment bankers, attorneys, accountants and other direct costs. Integration
expenses of $0.2 million consisted of incremental and non-recurring costs
necessary to integrate Net2Net and Visual. The restructuring charge of $2.7
million included severance, outplacement and other costs related primarily to
the elimination of certain field offices, the consolidation of our
manufacturing, sales, marketing and administrative functions and the
discontinuance of certain product development efforts. During the three months
ended December 31, 1998, we reversed approximately $2.3 million of the
merger-related costs recorded during the three months ended June 30, 1998. The
reversal resulted from the payment of lower than estimated costs in connection
with the Net2Net transaction and subsequent restructuring and included
approximately $0.3 million in transaction costs and approximately $2.0 million
in restructuring costs. The lower than estimated restructuring cost resulted
from fewer than planned terminations and higher than planned attrition, along
with lower than estimated costs associated with exiting certain contractual
obligations.
INTEREST INCOME, NET. Interest income, net, for the three months ended June
30, 1999 was approximately $0.5 million as compared to $0.7 million for the
three months ended June 30, 1998. The decrease was due to a decrease in
invested cash balances between periods.
INCOME TAXES. Income taxes for the three months ended June 30, 1999 were
$1.6 million, reflecting an effective tax rate of 32%. Income taxes for the
three months ended June 30, 1998 represented a benefit to offset the $0.5
million in income tax expense recorded for the three months ended March 31,
1998, prior to our acquisition of Net2Net on May 15, 1998.
NET INCOME (LOSS). Net income for the three months ended June 30, 1999 was
$3.4 million as compared to a net loss of $5.6 million for the three months
ended June 30, 1998, an increase of $9.0 million. This increase was due
primarily to the effect of merger-related costs on the operating results during
the three months ended June 30, 1998 and increases in revenue and gross profit
achieved in the three months ended June 30, 1999.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE
SIX MONTHS ENDED JUNE 30, 1998
11
<PAGE> 12
REVENUE. We recognized $36.0 million in revenue for the six months ended
June 30, 1999, a 61% increase over revenue of $22.3 million for the six months
ended June 30, 1998. The increase was due primarily to the continued acceptance
of Visual UpTime in the Frame Relay and the Asynchronous Transfer Mode markets,
with an increase in sales to providers. Sales to providers accounted for
approximately 69% of revenue for the six months ended June 30, 1999 as compared
to approximately 60% for the six months ended June 30, 1998.
GROSS PROFIT. Gross profit was $23.5 million for the six months ended June
30, 1999, as compared to $13.4 million for the six months ended June 30, 1998,
an increase of $10.1 million. Gross margin was 65.2% of revenue for the six
months ended June 30, 1999, as compared to 60.1% of revenue for the six months
ended June 30, 1998. The increase in gross margin percentage was due primarily
to product cost reductions and to changes in product sales mix. Our future
gross margins may be adversely affected by a number of factors, including
product mix, the proportion of sales to providers, competitive pricing,
manufacturing volumes and an increase in component costs.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was $5.9
million for the six months ended June 30, 1999 as compared to $4.9 million for
the six months ended June 30, 1998, an increase of $1.0 million. The increase
in research and development expense was due primarily to increase staffing
levels and related support costs, and purchases of materials used in the
development of new or enhanced products. Research and development expense was
16.4% and 22.0% of revenue for the six months ended June 30, 1999 and 1998,
respectively. We expect that research and development expenditures will
increase in absolute dollars, and may decrease as a percentage of revenue,
during the remainder of 1999 and thereafter. The increase in absolute dollars
will support continued development of new enhanced products and the exploration
of new or complementary technologies.
SALES AND MARKETING EXPENSE. Sales and marketing expense was $7.2 million
for the six months ended June 30, 1999, as compared to $7.3 million for the six
months ended June 30, 1998, a decrease of $0.1 million. The decrease in sales
and marketing expense was due primarily to the consolidation of Visual's and
Net2Net's sales and marketing functions subsequent to the May 15, 1998 merger
offset by continued growth in marketing programs. Sales and marketing expense
was 20.0% and 32.7% of revenue for the six months ended June 30, 1999 and 1998,
respectively. We expect that sales and marketing expenditures will increase in
absolute dollars, and may decrease as a percentage of revenue, during the
remainder of 1999 and thereafter. This increase in absolute dollars is expected
to be incurred as additional personnel are hired, field offices are opened and
promotional expenditures increase to allow us to increase our market
penetration and to pursue market opportunities.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense was
$2.4 million for the six months ended June 30, 1999 as compared to $2.1 million
for the six months ended June 30, 1998, an increase of $0.3 million. The
increase in general and administrative expense was due primarily to increases
in professional services and continued growth in corporate facilities and
network infrastructure, which offset the effect of the consolidation of
Visual's and Net2Net's general and administrative functions subsequent to the
May 15, 1998 merger. General and administrative expense was 6.7% and 9.5% of
revenue for the six months ended June 30, 1999 and 1998, respectively. We
expect that general and administrative expenditures will increase in absolute
dollars, and may decrease as a percentage of revenue, during the remainder of
1999 and thereafter. The increase in absolute dollars is expected to be
required for the expansion of our administrative staff and internal systems to
support expanding operations.
MERGER-RELATED COSTS. In connection with the Net2Net acquisition, we
recorded merger-related costs of $7.3 million in the six months ended June 30,
1998, consisting of transaction costs, integration expenses and restructuring
charges. Transaction costs of $4.4 million consisted primarily of fees for
investment bankers, attorneys, accountants and other direct costs. Integration
expenses of $0.2 million consisted of incremental and non-recurring costs
necessary to integrate Net2Net and Visual. The restructuring charge of $2.7
million included severance, outplacement and other costs relating primarily to
the elimination of certain field offices, the consolidation of our
manufacturing, sales, marketing and administrative functions and the
discontinuance of certain product development efforts. During the three months
ended December 31, 1998, we reversed approximately $2.3 million of the
merger-related costs recorded during the six months ended June 30, 1998. The
reversal resulted from the payment of lower than estimated costs in connection
with the Net2Net transaction and subsequent restructuring and included
approximately $0.3 million in transaction costs and approximately $2.0 million
in restructuring costs. The lower than estimated restructuring cost resulted
from fewer than planned terminations and higher than planned attrition, along
with lower than estimated costs associated with exiting certain contractual
obligations.
12
<PAGE> 13
INTEREST INCOME, NET. Interest income, net, for the six months ended June
30, 1999 and 1998, respectively, was approximately $1.1 million.
INCOME TAXES. Income taxes for the six months ended June 30, 1999 were
$2.9 million, reflecting an effective tax rate of 32%.
NET INCOME (LOSS). Net income for the six months ended June 30, 1999 was
$6.2 million as compared to a net loss of $7.2 million for the six months ended
June 30, 1998, an increase of $13.4 million. This increase was due primarily to
the effect of merger-related costs on the operating results during the six
months ended June 30, 1998 and increases in revenue and gross profit achieved
in the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, our combined balance of cash and cash equivalents was
$46.9 million as compared to $50.5 million as of December 31, 1998, a decrease
of $3.6 million. This decrease is primarily attributable to $3.0 million in
capital expenditures.
We require substantial working capital to fund our business, particularly
to finance inventories, accounts receivable, research and development
activities and capital expenditures. We currently have commitments for capital
expenditures for the remainder of 1999 that are not expected to exceed $3.0
million. Our future capital requirements will depend on many factors, including
the rate of revenue growth, if any, the timing and extent of spending to
support product development efforts and expansion of sales and marketing, the
timing and extent of spending to support continued expansion of internal
systems and networks, the timing of introductions of new products and
enhancements to existing products and market acceptance of our products.
In addition to our cash and cash equivalents, our other principal source of
liquidity is our bank credit facility. The credit facility includes a revolving
line of credit providing for borrowings up to the lesser of $7.0 million or 85%
of eligible accounts receivable (as defined in the credit facility) and a $1.0
million capital equipment line. The agreement contains restrictive financial
covenants, including, but not limited to, restrictions related to liquidity,
profitability and net worth, as well as restrictions related to acquisitions,
dispositions of assets, distributions and investments. As of June 30, 1999,
there were no borrowings outstanding under the bank credit facility. We believe
that our current cash position combined with the $7.0 million line of credit
facility are sufficient to meet our capital expenditures and working capital
requirements for the next 18 to 24 months. We may consider from time to time
various alternatives and may seek to raise additional capital through equity or
debt financing or to enter into strategic agreements. There can be no
assurance, however, that any of such financing alternatives will be available
on terms acceptable to us, if at all.
YEAR 2000 COMPLIANCE
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, Oracle 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. The
Project is on schedule for completion by early in the fourth quarter of 1999.
PRODUCT COMPLIANCE
We believe that the products that we are currently shipping have already
achieved Year 2000 compliance as defined within the requirements established by
the U.S. Government detailed in the Federal Acquisition Regulations (FAR)
Section 39 -- Final. Should a Year 2000 compliance issue arise in the future,
we will take whatever steps we deem necessary to correct it in accordance with
our Year 2000 product warranty.
13
<PAGE> 14
Although all previously shipped products are believed to be compliant, we
do not commit to perform tests on product versions that we are no longer
shipping. Should such non-shipping products be found non-compliant, we will not
update them to make them compliant.
We do not guarantee and specifically disclaim any liability for the Year
2000 compliance of operating systems, hardware, software or other products we
did not develop.
ORACLE IMPLEMENTATION & 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. The new Oracle Enterprise Resources Planning
(ERP) application software system has replaced the core legacy systems, and is
expected to make approximately 75 percent of our systems Year 2000 compliant.
The implementation of the ERP software was completed in the first quarter of
1999.
Following replacement of the core legacy systems with ERP software, we
will seek to achieve Year 2000 compliance for other application software,
computer hardware, network equipment and miscellaneous components of our
internal business systems. We anticipate that this effort will be less
significant compared to the replacement of core applications with ERP software.
We intend to achieve Year 2000 compliance for our remaining internal
systems as soon as possible after the ERP implementation. The limited number
of our personal computers and application systems is anticipated to facilitate
rapid progress toward full Year 2000 compliance after ERP is completely
implemented.
We intend to continue to work to achieve Year 2000 compliance for our
systems using a methodology that incorporates several steps. We completed the
following steps during the 3 months ended June 30, 1999:
- Update the inventory of computer hardware, software and miscellaneous
network components,
- Evaluate application development environment compliance,
- Conduct overall assessment of systems infrastructure compliance, and
- Complete business risk analysis.
The following steps are currently in progress:
- Take remedial actions (upgrade, repair, replace, retire or retain),
and
- Develop appropriate contingency plans, and develop and implement
regimes to test Year 2000 compliance for mission-critical systems.
We currently anticipate completing this process early in the fourth quarter
of 1999 in order to avoid Year 2000 impact on remaining core legacy systems.
VENDOR COMPLIANCE
This section includes the process of identifying and prioritizing critical
suppliers at the direct interface level and communicating with them about their
plans and progress in addressing the Year 2000 problem. This process will
include not only component part suppliers for our products, but also providers
of insurance, financial and other services.
14
<PAGE> 15
Our vendor compliance program includes several steps. We completed the
following steps during the 3 months ended June 30, 1999:
- Catalog and classify all vendors, and
- On-site review and testing of out-sourced services or systems.
The following steps are currently in progress:
- Review responses from vendors to determine the level of compliance,
- Determine the timing, method and cost of vendor solutions,
- Assess vendor Year 2000 compliance and business risks, and
- Develop remedial actions or contingency plans, as necessary.
Achievement of vendor Year 2000 compliance is anticipated to be an on-going
effort during 1999. The current target to achieve compliance or complete
contingency plans is early in the fourth quarter of 1999.
CUSTOMER ASSESSMENT
We are developing a program to assess the impact that Year 2000 issues may
have upon our customers and their purchasing decisions. We expect to complete
customer assessment by the end of the third quarter 1999.
COSTS
The estimated total cost of the Year 2000 compliance project, exclusive of
the ERP implementation, is approximately $300,000, of which approximately
$200,000 had been spent as of June 30, 1999. These costs are expected to be
incurred throughout 1999. These costs will be incurred primarily for the use of
outside consultants, setting up Year 2000 testing environments and the
replacement of existing software and hardware.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect 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 result
in a material financial risk to us. 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 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.
15
<PAGE> 16
FACTORS THAT MAY AFFECT FUTURE RESULTS
The market for our products is growing rapidly and our business environment
is characterized by rapid technological changes, changes in customer
requirements and new emerging market segments. Consequently, to compete
effectively, we must make frequent new product introductions and enhancements
and deploy sales and marketing resources to take advantage of new business
opportunities. Our operations are also subject to certain other risks and
uncertainties including, among other things, the effectiveness of actual and
potential competition, the success of our relationships with our current
strategic partners, the continued development of reseller relationships with
new service providers, and the risks associated with acquisitions and
international expansion. Failure to meet any of these challenges could
adversely affect future operating results.
Although a significant majority of our sales to date have been made to
customers in the United States and Canada, we intend to increase our sales
efforts in international markets. We plan to sell our products to international
customers at prices denominated in U.S. dollars. However, if we experience
material levels of sales at prices not denominated in U.S. dollars, we intend
to adopt a strategy to hedge against currency fluctuations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The foregoing discussion contains forward-looking information within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and is subject to the safe harbor created by
those sections. Our future results may be impacted by various important
factors including, but not limited to, our ability to implement our provider
deployment model, our lengthy sales cycle, dependence on our major customers,
risks associated with rapid technological change and the emerging services
market, potential fluctuations in quarterly results, our dependence on sole and
limited source suppliers and fluctuations in component pricing and our
dependence on key employees and other risk factors set forth in our Annual
Report on Form 10-K for the year ended December 31, 1998.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
See Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - - Factors that may affect future results."
16
<PAGE> 17
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of Stockholders on May 26,
1999 (the "Annual Meeting").
(b) At the Annual Meeting of Stockholders, two (2) members of the
Company's Board of Directors, Marc F. Benson and Theodore R. Joseph (the
"Nominees") were elected to serve until the 2002 Annual Meeting of
Stockholders, or until their respective successors are elected and duly
qualified.
(c) The following matters were voted upon at the Annual Meeting:
(i) Both Nominees were elected as directors to serve until the
2002 Annual Meeting of Stockholders, or until their respective successors
are elected and duly qualified, with 99.9% of the shares of Common Stock
present and voting at the meeting voting for both Mr. Benson and Mr. Joseph
(Votes for Mr. Benson: 13,921,703; votes against Mr. Benson or withheld:
11,313. Votes for Mr. Joseph: 13,928,716; votes against Mr. Joseph or
withheld: 4,300.).
(ii) The Visual Networks, Inc. 1999 Employee Stock Purchase Plan
was approved by 98.5% of the shares of Common Stock present and voting at
the meeting (Votes for: 13,720,465; votes against or withheld: 212,551).
(iii) The Company's Amended and Restated Certificate of
Incorporation was approved by 67.5% of the issued and outstanding shares of
Common Stock (Votes for: 13,741,016; votes against or withheld: 192,000)
(iv) The appointment of Arthur Andersen LLP as the Company's
independent auditors was ratified by 99.9% of the shares present and voting
at the meeting (Votes for: 13,931,116; votes against or withheld:
1,900).
ITEM 5. OTHER INFORMATION
None
ITEM 6 (a) EXHIBITS
17
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
----------- -----------------------
<S> <C>
3.1! Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Restated By-Laws of the Registrant.
10.1* 1994 Stock Option Plan.
10.2* 1997 Omnibus Stock Plan.
10.3* Amended and Restated 1997 Directors' Stock Option Plan.
10.4* Third Amended and Restated Stockholders and Registration Rights
Agreement, dated as of September 19, 1996, by and among the Company
and certain stockholders.
10.5*+ Reseller/Integration Agreement, dated August 29, 1997, by and Between
the Company and MCI Telecommunication Corporation.
10.5.1#++ Second Amendment, dated November 4,1998, to the
Reseller/Integration Agreement between the Registrant and MC
Telecommunications Corporation (relating to Exhibit 10.5).
10.6*+ Master Reseller Agreement, dated as of August 23, 1996, between
Sprint/United Management Company and the Company.
10.6.1! Amendment No.2 To Agreement Between Visual Networks and Sprint/United
Management Company dated as of August 12, 1999 (relating to exhibit 10.6).
10.7*+ General Agreement for the Procurement of Equipment, Services and
Supplies and the Licensing of Software, dated as of December 3,
1997, between the Company and AT&T Corp.
10.8* Lease Agreement, dated December 12,1996, by and between the Company
and The Equitable Fire Assurance Society of The United States.
10.8.1* Lease Amendment, dated September 2, 1997, by and between the Company
and The Equitable Life Assurances Society of The United States
(relating to Exhibit 10.8).
10.8.2# Second Lease Amendment, dated February 8,1999, by and between the
Company and TA/Western, LLC, successor to the Equitable Life
Assurance Society of the United States (relating to Exhibit 10.8).
10.9* Omitted.
10.10* Employment Agreement dated December 15, 1994, by and between the
Company and Scott E. Stouffer, as amended.
10.11* Employment Agreement dated December 15, 1994, by and between the
Company and Robert Troutman, as amended.
10.12* Terms of Employment dated June 11, 1997, by and between the Company
and Peter J. Minihane, as amended.
10.15* Loan and Security Agreement dated January 8, 1998, by and between
Silicon Valley Bank and the Company.
10.15.1* Revolving Promissory Note issued by the Company as of January 8,
1998, to Silicon Valley Bank.
10.15.2@ First Amendment to Loan and Security Agreement dated June 30,1998,
by and between Silicon Valley Bank and the Company.
10.15.3@ Amended and Restated Revolving Promissory Note issued by the
Company as of June 30, 1998, to Silicon Valley Bank.
10.15.4@@ Second Amendment to Loan and Security Agreement dated December
1998, by and between Silicon Valley Bank and the Company..
10.15.5@@ Second Amended and Restated Revolving Promissory Note issued
Company on December 28,1998 to Silicon Valley Bank.
10.16** Agreement and Plan of Merger dated April 15, 1998, by and among the
Company, Visual Acquisition, Inc. and Net2Net.
10.17*** Net2Net 1994 Stock Plan, assumed by the Company.
10.18# Sublease Agreement, dated January 28, 1999, between Visual Networks
Operations, Inc. and Compus Services Corporation.
10.19# Sublease Agreement, dated January 8, 1999 between Compus Service
Corporation and Visual Networks Operations, Inc.
10.20! 1999 Employee Stock Purchase Plan
27 Financial Data Schedule.
</TABLE>
- ----------
! Filed herewith
@ Incorporated herein by reference to the Company's Registration
Statement on Form S-1, No. 333-58443.
@@ Incorporated herein by reference to the Company's Registration
Statement on Form S-3, No. 333-73229.
* Incorporated herein by reference to the Company's Registration
Statement on Form S-1, No. 333-41517.
** Incorporated herein by reference to Exhibit 2.1 to the Company's
Current Form on Form 8-K dated May 19, 1998.
18
<PAGE> 19
*** Incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8, No. 333-53153.
# Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
+ Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Company's Application
Requesting Confidential Treatment under Rule 406 of the Act, filed on
December 22, 1997, January 28, 1998 and February 4, 1998.
++ Portion's of this Exhibit were omitted and have been filed separately
with the Secretary of the Commission pursuant to the Company's
Application Requesting Confidential Treatment under Rule 24b-2 of the
Securities Exchange Act of 1934.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
<TABLE>
<CAPTION>
<S> <C>
VISUAL NETWORKS, INC.
BY: /s/ SCOTT E. STOUFFER
---------------------------------------------------------------
Scott E. Stouffer
Chief Executive Officer and President
BY: /s/ PETER J. MINIHANE
---------------------------------------------------------------
Peter J. Minihane
Executive Vice President, Chief Financial Officer and
Treasurer (principal financial and accounting officer)
</TABLE>
August 16, 1999
19
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VISUAL NETWORKS, INC.
Pursuant to Section 242
Of the Corporation Law of the
State of Delaware
Visual Networks, Inc. (hereinafter called the "Corporation"),
organized and existing under and by virtue of the General Corporation Law of
the State of Delaware, does hereby certify as follows:
The date of incorporation of the Corporation is December 13,
1994.
At a meeting of the Board of Directors of the Corporation a
resolution was duly adopted, pursuant to Section 242 of the General Corporation
Law of the State of Delaware, setting forth an amended and restated Certificate
of Incorporation of the Corporation and declaring said amendment and
restatement to be advisable. The stockholders of the Corporation duly approved
said proposed amendment and restatement by the affirmative vote of the holders
of at least a majority of the Common Stock at the Annual Meeting of
Stockholders in accordance with Sections 211 and 242 Of the General Corporation
Law of the State of Delaware. The resolutions setting forth the amendment and
restatement is as follows:
RESOLVED: That the Certificate of Incorporation of the
Corporation be and hereby is amended and restated as follows:
FIRST: The name of the Corporation is Visual Networks, Inc. The
date of filing of its original Certificate of Incorporation with the Secretary
of State was December 13, 1994.
SECOND: This Amended and Restated Certificate of Incorporation
restates and integrates and further amends the Certificate of Incorporation of
the Corporation and all prior amendments thereto by deleting from the
Certificate of Incorporation, as amended, all provisions thereof and
substituting in lieu thereof the Amended and Restated Certificate of
Incorporation set forth in Paragraph 3 below.
THIRD: The text of the Certificate of Incorporation as amended or
supplemented heretofore is further amended and restated hereby to read as
herein set forth in full:
1. Name. The name of the corporation is Visual Networks,
Inc.
2. Registered Office and Agent. The address of its
registered office in the State of Delaware is Corporation Trust Center, 1209
Orange Street, in the City of
<PAGE> 2
Wilmington, County of New Castle. The name of its registered agent at such
address is Corporation Trust Company.
3. Purpose. The purposes for which the Corporation is
formed are to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware, and to possess and
exercise all of the powers and privileges granted by such law and other laws of
Delaware.
4. Authorized Capital. The total number of shares of all
classes of stock which the Corporation shall have authority to issue is
55,000,000 shares, of which (i) 50,000,000 shall be shares of common stock, par
value $0.01 per share (the "Common Stock"), and (ii) 5,000,000 shall be shares
of preferred stock, par value $0.01 per share (the "Preferred Stock").
A. Common Stock
(1) General. The voting, dividend and liquidation rights of the
holders of the Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
(2) Voting. The holders of the Common Stock are entitled to one
vote for each share held at all meetings of stockholders. There shall be no
cumulative voting.
(3) Dividends. Dividends may be declared and paid on the Common
Stock from funds lawfully available therefor as and when determined by the
Board of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
(4) Liquidation. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
(5) Redemption. The Common Stock is not redeemable.
B. Preferred Stock. The Board of Directors expressly is
authorized, subject to limitations prescribed by the Delaware General
Corporation Law and the provisions of this Amended and Restated Certificate of
Incorporation of the Corporation, to provide, by resolution and by filing a
certificate pursuant to the Delaware General Corporation Law, for the issuance
from time to time of the shares of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and other rights of the
shares of each such series and to fix the qualifications, limitations and
restrictions thereon, including, but without limiting the generality of the
foregoing, the following:
-2-
<PAGE> 3
(1) the number of shares constituting that series and the
distinctive designation of that series;
(2) the dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
(3) whether that series shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such voting rights;
(4) whether that series shall have conversion privileges, and,
if so, the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(5) whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption rates;
(6) whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund;
(7) the rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(8) any other relative powers, preferences, and rights of that
series, and qualifications, limitations or restrictions on that series.
5. Term. The Corporation is to have perpetual existence.
6. Bylaws. The bylaws of the corporation may be altered,
amended or repealed by the vote of a majority of all of the directors or by the
vote of holders of a majority of the stock entitled to vote.
7. Limitation on Liability. No director of the Corporation
shall be personally liable to the Corporation or to any stockholder of the
Corporation for monetary damages for breach of fiduciary duty as a director,
provided that this provision shall not limit the liability of a director (i)
for any breach of the director's duty of loyalty to the Corporation of its
stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of Delaware, or (iv) for any transaction from
which the director derived an improper personal benefit.
-3-
<PAGE> 4
If the General Corporation Law of Delaware or any other
statute of theState of Delaware hereafter is amended to authorize the further
elimination or limitation of the liability of directors of the Corporation,
then the liability of a director of the Corporation shall be limited to the
fullest extent permitted by the statutes of the State of Delaware, as so
amended, and such elimination or limitation of liability shall be in addition
to, and not in lieu of, the limitation on the liability of a director provided
by the foregoing provisions of this Article 7.
Any repeal of or amendment to this Article 7 shall be
prospective only and shall not adversely affect any limitation on the liability
of a director of the Corporation existing at the time of such repeal or
amendment.
8. Election of Directors.
(A) General. Elections of directors need not be by
written ballot unless the By-laws of the Corporation shall so provide. Except
as otherwise provided in this Certificate of Incorporation or a certificate of
designation relating to the rights of the holders of any class or series of
Preferred Stock, voting separately by class or series, to elect additional
directors under specified circumstances, the number of directors of the
Corporation shall be as fixed from time to time by or pursuant to the By-lawsof
the Corporation. No director of the Corporation need be a stockholder of the
Corporation.
(B) Classification. The Board of Directors shall be
classified with respect to the time for which they severally hold office into
three separate classes, Class I, Class II and Class III, which shall be as
nearly equal in number as possible, and shall be adjusted from time to time in
the manner specified in the Bylaws of the Corporation to maintain such
proportionality. Each initial director in Class I shall hold office for a term
expiring at the 2000 annual meeting of stockholders. Each initial director in
Class II shall hold office initially for a term expiring at the 1999 annual
meeting of stockholders. Each initial director in Class III shall hold office
for a term expiring at the 1998 annual meeting of stockholders. Notwithstanding
the foregoing provisions of this Article 8, each director shall serve until
such director's successor is duly elected and qualified or until such
director's earlier death, resignation or removal. At each annual meeting of
stockholders, the successors to the class of directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election and until their successors have been duly elected and qualified or
until any such director's earlier death, resignation or removal.
9. Meetings of Stockholders. Meetings of stockholders
may be held within or without the State of Delaware, as the bylaws of the
Corporation may provide. At such time as the Corporation shall be subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended,
any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders, and may not be effected by any consent in writing by such
stockholders, unless such consent is unanimous.
-4-
<PAGE> 5
10. Corporate Records. The books of the Corporation may
be kept (subject to any provision contained in applicable statutes) outside the
State of Delaware at such place or places as may be designated from time to
time by the board of directors or in the bylaws of the Corporation.
11. Right to Amend. The Corporation reserves the right
to amend, alter, change or repeal any provision contained in this certificate
of incorporation and in any certificate amendatory hereof, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders or
others hereunder or thereunder are granted subject to this reservation.
12. Indemnification. The Corporation shall, to the
fullest extent permitted by Section 145 of the General Corporation Law of
Delaware, as amended from time to time, indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was, or has agreed to
become, a director or officer of the Corporation, or is or was serving, or has
agreed to serve, at the request of the Corporation, as a director, officer or
trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise (including any employee benefit plan),
or by reason of any action alleged to have been taken or omitted in such
capacity, against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him or on
his behalf in connection with such action, suit or proceeding and any appeal
therefrom.
Indemnification may include payment by the Corporation of
expenses in defending an action or proceeding in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by the
person indemnified to repay such payment if it is ultimately determined that
such person is not entitled to indemnification under this Article 12, which
undertaking may be accepted without reference to the financial ability of such
person to make such repayment.
The Corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person unless the initiation thereof was approved by the board of
directors of the Corporation.
The indemnification rights provided in this Article 12 (i)
shall not be deemed exclusive of any other rights to which those indemnified
may be entitled under any law, agreement or vote of stockholders or
disinterested directors or otherwise and (ii) shall inure to the benefit of the
heirs, executors and administrators of such persons. The Corporation may, to
the extent authorized from time to time by its board of directors, grant
indemnification rights to other employees or agents of the Corporation or other
persons serving the Corporation and such rights may be equivalent to, or
greater or less than, those set forth in this Article 12.
FOURTH: This Amended and Restated Certificate of
Incorporation shall be effective as of the date set forth below.
-5-
<PAGE> 6
FIFTH: This Amended and Restated Certificate of
Incorporation has been advised by the Board and approved by the holders of at
least a majority of the outstanding capital stock of the Corporation.
IN WITNESS WHEREOF, Visual Networks, Inc. has caused this
Certificate to be signed by Scott Stouffer, its President this 21st day of
July, 1999.
VISUAL NETWORKS, INC.
By: /s/ Scott Stouffer
----------------------------------
Scott Stouffer
President
-6-
<PAGE> 1
EXHIBIT 10.6.1
AMENDMENT NO. 2 TO
SC110NAV05 AGREEMENT
BETWEEN
SPRINT/UNITED MANAGEMENT COMPANY
AND
VISUAL NETWORKS
This Amendment No. 2 (the "Amendment") by and between Sprint/United Management
Company, a Kansas corporation ("Sprint") and Visual Networks, a Delaware
corporation ("Supplier") amends the MASTER RESELLER AGREEMENT dated August 23,
1996, by and between Sprint and Supplier (the "Agreement"). Except as otherwise
indicated, defined terms in this Amendment have the same meaning as in the
Agreement.
I. BACKGROUND
A. Supplier and Sprint entered into the Agreement August 23, 1996.
B. Sprint and Supplier agree to modify the Agreement as set forth in
this Amendment.
In consideration of the promises and agreements contained in this Amendment, the
parties agree as follows:
II. AMENDMENT
The parties agree to modify the paragraph (a) to Article 2.0 of the
Agreement as follows:
This Agreement begins on the Effective Date and will remain in force for
a period of three (3) years and four (4) months, unless terminated as
provided in this Agreement.
III. GENERAL
Other than as set forth above, the Agreement remains unchanged and in
full force and effect. In the event of a conflict between the terms of
the Agreement and this Amendment, this Amendment will control.
This Amendment, executed by authorized representatives of Sprint and
Supplier, is made a part of and incorporates the terms and conditions of
the Agreement.
<TABLE>
<S> <C>
SPRINT/UNITED MANAGEMENT VISUAL NETWORKS
COMPANY
/s/ Frank J. Clifford /s/ Richard H. Deily
--------------------------- ---------------------------
Signature Signature
Frank J. Clifford Richard H. Deily
Lead Negotiator Director Treasury Operations
8/12/99 8/15/99
--------------------------- ---------------------------
Date Date
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 46,920
<SECURITIES> 0
<RECEIVABLES> 8,994
<ALLOWANCES> 676
<INVENTORY> 6,297
<CURRENT-ASSETS> 64,022
<PP&E> 9,715
<DEPRECIATION> 3,212
<TOTAL-ASSETS> 70,525
<CURRENT-LIABILITIES> 14,802
<BONDS> 0
0
0
<COMMON> 204
<OTHER-SE> 55,519
<TOTAL-LIABILITY-AND-EQUITY> 70,525
<SALES> 19,223
<TOTAL-REVENUES> 19,223
<CGS> 6,715
<TOTAL-COSTS> 6,715
<OTHER-EXPENSES> 8,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (528)
<INCOME-PRETAX> 5,010
<INCOME-TAX> 1,603
<INCOME-CONTINUING> 3,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,407
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.16
</TABLE>
