<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 2000
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
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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<S> <C> <C>
DELAWARE 3576 52-1837515
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------
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)
------------
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================================================
PROPOSED
AMOUNT TO BE MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE (1) REGISTRATION FEE
================================================= ============== ==================== =================
<S> <C> <C> <C>
Common stock, par value $.01 per share 3,322,748 $12,096,464.09 $3,193.47
==============================================================================================================================
</TABLE>
(1) Pursuant to Rule 457(c), the proposed maximum aggregate offering price and
registration fee are based upon the average of the high and low prices of Visual
Networks, Inc.'s common stock on November 2, 2000, as reported on the Nasdaq
National Market.
<PAGE> 2
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.
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.
<PAGE> 3
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
NOVEMBER 8, 2000
3,322,748 SHARES
VISUAL NETWORKS, INC.
COMMON STOCK
------------
This prospectus relates to the public offering, which is not being
underwritten, from time to time of up to an aggregate of 3,322,748 shares of
common stock, par value $.01 per share, of Visual Networks, Inc., a Delaware
corporation, by various stockholders. See "Selling Stockholders" on page 15.
Our common stock is traded on the Nasdaq National Market under the
symbol "VNWK". On November 2, 2000, the reported closing price of our common
stock on the Nasdaq National Market was $3.688 per share.
BEGINNING ON PAGE 7, 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.
<PAGE> 4
OUR BUSINESS
We design, manufacture, sell and support comprehensive service
management systems for providers and users of new world connectivity services
and out-sourced Web services. Our systems combine purpose-built software agents
placed at key demarcation points in the network with centralized software
applications for performance monitoring, real-time troubleshooting, fault
management, inventory discovery, and network capacity planning. Visual UpTime,
Visual IP Insight and Visual eWatcher provide network performance measurement
and analysis that allows service providers and Web hosters to achieve the
service levels required by their customers and to lower operating costs
associated with new world networks. The availability of performance monitoring
and troubleshooting agents also allows subscribers to verify service levels
supplied by their service provider and monitor traffic traversing their
networks, a requirement for many subscribers wishing to use public services to
carry mission-critical data traffic. Visual Trinity provides the automated
discovery of network resources, event correlation and root cause determination,
and business impact analysis to enhance the availability and performance of the
e-business network infrastructure, which is fundamental to its ability to
generate revenue, attract and retain customers, and maintain its competitive
position. We believe that our systems are deployed in configurations managing up
to 4,500 circuits and Internet access from up to 1.5 million 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 150,000 circuits and over 35 million desktops. We have developed
relationships with major service providers such as AT&T Corp., Sprint/United
Management Company, Worldcom, Inc., British Telecommunications, Concentric
Network Corporation, Earthlink Network, Inc., Prodigy Communications
Corporation, Verizon, Inc., and BellSouth Communication Systems, Inc. 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. Customers deploying
our systems for the purposes of root-cause fault determination and business
impact analysis include Chase, HypoVereinsbank, Verizon, Bouygues Telecom, ICG
Communications, Inc., National Institute of Health, Everest Broadband Networks
and AT&T Corp. For the six months ended June 30, 2000, we had consolidated
revenue of approximately $59.1 million.
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. On September
30, 1999, we acquired Inverse Network Technology. On May 24, 2000, we acquired
Avesta Technologies, Inc. The Net2Net and Inverse acquisitions have been
accounted for as pooling of interests transactions. The Avesta acquisition has
been accounted for as a purchase business combination.
Our principal executive offices are located at 2092 Gaither Road,
Rockville, Maryland 20850, and our telephone number is (301) 296-2300.
1
<PAGE> 5
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF
VISUAL NETWORKS AND AVESTA TECHNOLOGIES
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000
On February 7, 2000, Visual Networks and Avesta Technologies entered into
an agreement and plan of merger. Upon closing of the merger on May 24, 2000,
Visual Networks acquired all of the outstanding preferred and common stock of
Avesta Technologies. In addition, all of the outstanding Avesta Technologies
stock options and warrants were converted into options and warrants to purchase
shares of Visual Networks common stock. At closing, Avesta Technologies equity
holders received an aggregate of 5,413,530 shares of Visual Networks common
stock, options to purchase 673,338 shares and warrants to purchase 445,463
shares of Visual Networks common stock. In addition, Avesta Technologies equity
holders are entitled to receive up to 2,000,000 shares of Visual Networks common
stock as additional consideration if certain annual sales goals are achieved in
calendar 2000.
The following unaudited pro forma condensed combined financial statements
combine the historical statements of operations of Visual Networks and Avesta
Technologies, including their respective subsidiaries, after giving effect to
the merger. The unaudited pro forma condensed combined statements of operations
for the year ended December 31, 1999, and the six months ended June 30, 2000,
give effect to the merger as if it occurred on January 1, 1999.
The merger has been accounted for using the purchase method of accounting.
The purchase method of accounting allocates the aggregate purchase price to the
assets acquired and liabilities assumed based upon their respective fair values.
The excess of purchase price over the fair value of tangible and identifiable
intangible assets acquired, net of liabilities assumed, has been reflected as
goodwill. The preliminary purchase price allocation and the pro forma
adjustments are based upon currently available information and assumptions that
Visual Networks management believes are reasonable. The final allocation will
be based upon valuations and other studies that are not yet complete. As a
result, the allocation and related pro forma adjustments set forth herein are
subject to revision as additional information becomes available and such revised
allocation could differ from that set forth herein.
The following unaudited pro forma condensed combined financial information
has been prepared from, and should be read in conjunction with, the audited
historical consolidated statements and notes thereto of Visual Networks for the
year ended December 31, 1999, filed on Form 10-K and the unaudited financial
statements and notes thereto of Visual Networks for the six months ended June
30, 2000, filed on Form 10-Q. The following unaudited pro forma condensed
combined financial information has also been prepared from, and should be read
in conjunction with the audited historical consolidated statements and notes
thereto of Avesta Technologies for the year ended December 31, 1999, filed by
Visual Networks on Form S-4 and the unaudited financial statements of Avesta
Technologies for the period from January 1, 2000 to the acquisition date, May
24, 2000. The unaudited condensed financial statements and notes thereto of
Avesta Technologies for the three months ended March 31, 2000 have been included
herein. The unaudited pro forma condensed combined financial statements are not
necessarily indicative of the financial position or operating results that would
have occurred had the merger been completed on January 1, 1999, nor is it
necessarily indicative of future financial position or operating results.
2
<PAGE> 6
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
VISUAL AVESTA(e) ADJUSTMENTS NOTE COMBINED
--------- ---------- ----------- ---- -----------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 91,719 $ 6,970 $ -- $ 98,689
Cost of revenues............................. 30,888 1,882 -- 32,770
--------- ---------- ----------- -----------
Gross profit............................. 60,831 5,088 -- 65,919
--------- ---------- ----------- -----------
Operating expenses:
Research and development................. 16,677 4,099 -- 20,776
Sales and marketing...................... 24,447 12,187 -- 36,634
General and administrative............... 7,928 6,694 -- 14,622
Amortization of acquired intangibles..... -- -- 87,972 (a) 87,972
Merger-related costs..................... 6,776 -- -- 6,776
--------- ---------- ----------- -----------
Total operating expenses............ 55,828 22,980 87,972 166,780
--------- ---------- ----------- -----------
Income (loss) from operations................ 5,003 (17,892) (87,972) (100,861)
Interest income, net......................... 2,270 441 -- 2,711
--------- ---------- ----------- -----------
Income (loss) before income taxes............ 7,273 (17,451) (87,972) (98,150)
Benefit (provision) for income taxes......... (3,722) -- 15,500 (b) 11,778
--------- ---------- ----------- -----------
Net income (loss)............................ $ 3,551 $ (17,451) $ (72,472) $ (86,372)
========= ========== =========== ===========
Basic income (loss) per share................ $ 0.14 $ (2.88)
========= ===========
Diluted income (loss) per share.............. $ 0.13 $ (2.88)
========= ===========
Basic weighted-average shares outstanding.... 24,583 5,414 (c) 29,997
========= =========== ===========
Diluted weighted-average shares outstanding.. 26,547 3,450 (c) 29,997
========= =========== ===========
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3
<PAGE> 7
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
VISUAL (f) AVESTA(f) ADJUSTMENTS NOTE COMBINED
--------- ---------- ----------- ---- -----------
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 59,138 $ 5,810 $ -- $ 64,948
Cost of revenues................................. 18,785 936 -- 19,721
--------- ---------- ----------- -----------
Gross profit................................. 40,353 4,874 -- 45,227
--------- ---------- ----------- -----------
Operating expenses:
Research and development..................... 11,308 3,347 -- 14,655
Write-off of purchased research and development 39,000 -- (39,000) (d) --
Sales and marketing.......................... 16,257 8,519 -- 24,776
General and administrative................... 4,627 3,123 -- 7,750
Amortization of acquired intangibles......... 8,841 -- 35,127 (a) 43,968
--------- ---------- ---------- -----------
Total operating expenses................ 80,033 14,989 (3,873) 91,149
--------- ---------- ------------ -----------
Loss from operations............................. (39,680) (10,115) 3,873 (45,922)
Interest income, net............................. 1,370 116 -- 1,486
--------- ---------- ----------- -----------
Loss before income taxes......................... (38,310) (9,999) 3,873 (44,436)
Benefit for income taxes......................... 1,532 -- 4,689 (b) 6,221
--------- ---------- ----------- -----------
Net loss......................................... $ (36,778) $ (9,999) $ 8,562 $ (38,215)
========== ========== =========== ===========
Basic loss per share............................. $ (1.40) $ (1.25)
========== ===========
Diluted loss per share........................... $ (1.40) $ (1.25)
========== ===========
Basic weighted-average shares outstanding........ 26,189 4,313 (c) 30,502
========= =========== ===========
Diluted weighted-average shares outstanding...... 26,189 4,313 (c) 30,502
========= =========== ===========
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<PAGE> 8
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The merger resulted in an allocation of purchase price to the net tangible
and intangible assets of Avesta Technologies, as well as a write-off of the
portion of the purchase price allocated to in-process technology. Visual
Networks has allocated the purchase price, on a preliminary basis, based upon
the fair values of the assets and the liabilities acquired and allocated the
purchase price accordingly.
The determination of the aggregate purchase price includes the fair value
of the equity securities that were issued by Visual Networks to the Avesta
Technologies equity holders at closing. The fair value of the additional
2,000,000 shares (the "Additional Shares") of Visual Networks common stock that
may be issued to Avesta Technologies equity holders if certain annual sales
goals are achieved in calendar 2000 has not been included in the determination
of the initial purchase price as such shares may not be issued to the Avesta
Technologies equity holders if such sales goals are not met. Such shares will be
included as additional purchase price when and if Avesta Technologies achieves
the specified sales targets. The shares of Visual Networks common stock issued
at closing as consideration have been valued at $59.30 per share based upon the
average closing price of Visual Networks common stock surrounding and including
the date the merger was agreed to and announced.
Avesta Technologies' outstanding options and warrants were converted to
equivalent options and warrants of Visual Networks. The number of shares
exerciseable under these options and warrants and the exercise prices were
adjusted such that Visual Networks options and warrants issued for Avesta
Technologies options and warrants have an equivalent intrinsic value per option
and warrant. The terms and vesting periods of the options and warrants have not
been modified. Accordingly, the estimated fair value of these options and
warrants, based upon the Black-Scholes valuation model, has been included in the
determination of the purchase price.
The aggregate purchase price was determined as follows (in thousands):
<TABLE>
<S> <C>
Fair value of common stock............. $ 321,022
Fair value of options and warrants..... 62,067
Estimated transaction costs
and other............................ 12,032
----------
Aggregate purchase price..... $ 395,121
==========
</TABLE>
The aggregate purchase price was allocated on a preliminary basis to the
net tangible and intangible assets of Avesta Technologies as follows (in
thousands):
<TABLE>
<S> <C>
Net assets acquired.................... $ 1,215
Completed technology................... 129,000
In-process technology.................. 39,000
Assembled workforce.................... 4,000
Trademarks............................. 19,000
Goodwill............................... 244,279
Deferred tax liability................. (41,373)
------------
$ 395,121
============
</TABLE>
(a) Reflects the amortization of goodwill and identifiable intangible assets
resulting from the merger on a straight-line basis. For amortization
purposes, the assembled workforce has been assigned a three-year life,
trademarks have been assigned a seven-year life, goodwill has been assigned
a four-year life, and the completed technology has been assigned a five-year
life.
(b) Reflects the adjustment in the benefit (provision) for income taxes
resulting from the effect of the Avesta Technologies operating losses and
the effect of the Avesta Technologies merger.
(c) The pro forma weighted-average shares outstanding includes Visual Networks'
weighted-average shares outstanding plus the shares issued to Avesta
Technologies stockholders in the merger, excluding the Additional Shares.
The treasury stock effect of options and warrants to purchase Visual
Networks stock for the year ended December 31, 1999 and the six months ended
June 30, 2000 has been excluded from the calculation of pro-forma diluted
weighted-average shares outstanding as such effect would be anti-dilutive.
(d) Reflects the elimination of the one-time charge related to the write-off of
the portion of the purchase price allocated to in-process technology.
(e) Certain historical amounts have been reclassified to conform to the pro
forma condensed combined presentation.
(f) Historical Visual Networks includes the results of operations of Avesta
Technologies from the closing date of the merger, May 24, 2000, through June
30, 2000. Historical Avesta Technologies includes the results of operations
of Avesta Technologies from January 1, 2000 through May 23, 2000.
5
<PAGE> 9
FORWARD-LOOKING STATEMENTS
This document contains and incorporates by reference forward-looking
statements 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. These forward-looking statements are based
upon current information and expectations regarding Visual Networks and its
subsidiaries. These estimates and statements speak only as of the date on which
they are made, are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual outcomes and results could materially differ from what is expressed,
implied or forecasted in such forward-looking statements. These forward-looking
statements generally may be identified by their reference to a future period or
periods or by the use of forward-looking terminology such as "may," "will,"
"intend," "should," "expect," "anticipate," "believe," "estimate," "continue,"
the negatives of those terms or similar expressions. You should understand that
forward-looking statements are estimates reflecting the judgment of management
of Visual Networks, not guarantees of future performance. Such statements are
subject to risks, uncertainties and assumptions, including, but not limited to
those discussed under "Risk Factors" or in our other SEC filings.
6
<PAGE> 10
RISK FACTORS
In addition to the other information provided or incorporated by reference
in this document, you should consider the following factors carefully in
evaluating whether to make your investment decision. You should also refer to
"Forward Looking Statements" on page 6. References to "we", "us" or "our" refer
to Visual Networks on a consolidated basis unless the context suggests
otherwise.
OUR FUTURE SUCCESS DEPENDS UPON THE SUCCESSFUL IMPLEMENTATION OF OUR NEW
BUSINESS STRATEGIC INITIATIVES.
During the past few quarters, we allowed our business strategy to become
less focused, which increased the complexity of our business and adversely
affected our results of operations. In an attempt to refocus our efforts, we
recently adopted a comprehensive, three-pronged plan that will seek to
strengthen our business by:
- realigning our product portfolio - Visual UpTime, Visual IP Insight,
Visual Trinity and Visual eWatcher to broadband and Web outsourcing;
- strengthening our senior management team; and
- concentrating our sales, marketing and R&D initiatives around service
providers and their end-user customers.
As a result of these initiatives, we have begun to:
- consolidate our four research and development centers into two main
centers in Rockville and New York;
- search for a president to focus on day-to-day execution; and
- reduce our workforce by 140 employees and close our facilities in Ottawa,
Canada and Sunnyvale, California.
The failure to successfully implement our new strategy in a timely manner or
achieve the anticipated reductions in operating expenses derived from any
portion of our plan would have a material adverse effect on our business,
financial condition and results of operations.
FAILURE OF BROADBAND ACCESS SERVICES TO ACHIEVE SIGNIFICANT MARKET PENETRATION
COULD IMPACT THE EFFECTIVENESS OF OUR NEW STRATEGIC BUSINESS INITIATIVES.
Part of the new strategic business initiatives is to provide comprehensive
service management for new world networks running over broadband access
facilities such as DSL, fixed wireless, and cable. There is no assurance that
these access technologies will achieve broad-based market acceptance for mission
critical applications for the business customers of the service providers.
Failure of these technologies to achieve broad-based market acceptance could
adversely affect future revenues, 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. Our company 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 June 30, 2000, we had an accumulated deficit of
approximately $68.2 million. Although we reported net income of $3.6 million for
1999, we incurred a consolidated net loss in the six month period ended June 30,
2000, of approximately $36.8 million. The loss in the six month period ended
June 30, 2000, related primarily to the write-off of purchased research and
development and the amortization of acquired intangibles. We also experienced
losses of $9.2 million and $6.5 million in 1997 and 1998, respectively. The loss
in 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 loss in 1998 related primarily to the effect of
merger-related costs and the effect of the Net2Net and Inverse operating losses
prior to the respective dates of acquisition.
WE MAY NOT BE ABLE TO SUSTAIN HISTORICAL REVENUE TRENDS IN THE FUTURE.
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 sustain 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 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. If these companies do not want to
offer this type of service, our future revenues could be significantly lower
than anticipated. Our sales and marketing strategy depends on sales of Visual
UpTime, Visual IP Insight, Visual Trinity and Visual eWatcher to service
provider companies for them to deploy as part of their network infrastructure.
Although we expect that for 2001, a significant portion of our revenue will be
attributable to sales of Visual UpTime, Visual IP Insight, Visual Trinity and
Visual eWatcher to service providers, we cannot be sure that we will be
successful in demonstrating the value of our products to service provider
companies.
We believe that the success of the provider deployment strategy 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, Visual
IP Insight, Visual Trinity and/or Visual eWatcher is deployed;
- our ability to convince the service providers of the operational benefits
of Visual UpTime, Visual IP Insight, Visual Trinity and Visual eWatcher;
- the demand generation for these systems from customers and support for
the systems by 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 new world 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' infrastructure or a slower than expected increase in the
volume of sales by us to these companies could have a material adverse effect on
our business, financial condition and results of operations.
OUR LONG SALES CYCLE REQUIRES US TO EXPEND SIGNIFICANT RESOURCES ON POTENTIAL
SALES OPPORTUNITIES THAT MAY NEVER BE CONSUMMATED.
If we do not 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 incorporation of our product into the infrastructure
of service providers 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, Visual IP
Insight, Visual Trinity and Visual eWatcher, many of which we have little or no
control over, include:
- service provider companies' internal acceptance reviews;
- service provider companies' budgetary constraints and technology
assessment;
- service provider companies' lengthy decision-making processes;
7
<PAGE> 11
- 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, Visual IP Insight, Visual Trinity and Visual
eWatcher 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 providers deploy our products, curtailment or termination of service
provider company marketing programs, reduction in demand by service provider
customers, decreases in service provider company capital budgets or reduction in
the purchasing priority assigned to products such as Visual UpTime, Visual IP
Insight and Visual Trinity, 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 WORLDCOM AS A CUSTOMER COULD HARM OUR BUSINESS.
Our provider deployment strategy depends predominantly on sales to service
provider companies. The loss of any one of Sprint, AT&T or Worldcom, which have
historically provided a majority of our revenue, would result in a substantial
loss of revenue that could have a material adverse effect on our business,
financial condition and results of operations. For the six months ended June 30,
2000, Sprint, AT&T and Worldcom accounted for 17%, 27% and 10%, respectively, of
our consolidated revenue. This concentration should continue as our customer
base will consist predominantly of service provider companies.
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
recurring 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.
THE TERMINATION OF THE SPRINT AND WORLDCOM MERGER MAY PROLONG THE TIME TO
PROFITABILITY WITH RESPECT TO TWO OF OUR MAJOR ACCOUNTS.
Our organizational and strategic integration activities that we were
undertaking with respect to our Sprint and Worldcom accounts must now be
reversed as a result of the termination of the Sprint and Worldcom merger. This
activity may adversely affect the business relationships that we were
establishing in the combined company and may prolong our sales cycles. Either
of these may have a material adverse effect on our business, financial condition
and results of operations.
THE PENDING BREAK-UP OF AT&T COULD LENGTHEN SALES CYCLES AND ADVERSELY AFFECT
OUR BUSINESS.
Potential disruption caused by the pending break-up of AT&T could result in
delays by AT&T's customers in ordering services based on our equipment and
delays in installation of services by AT&T. Both of these conditions could
adversely affect our business, financial condition and results of operations.
The separation by AT&T of its Business unit, Broadband unit and Wireless
unit into three different companies could impact potential synergies realized
from integrated service management across multiple broadband access
technologies, which is an important strength of our systems.
THE CONSOLIDATION OF THE TELECOMMUNICATIONS INDUSTRY, PARTICULARLY WITH RESPECT
TO INTERNET SERVICE PROVIDERS, DSL PROVIDERS AND CLECS, COULD RESULT IN A
LENGTHENED SALES CYCLE.
Many companies in the telecommunications industry, particularly Internet
service providers, DSL providers and competitive local exchange carriers, are
consolidating with each other. As a result, management of these companies is
focused on internal integration and other issues and is less likely to focus on
the purchasing of additional equipment and services. This is likely to affect
our business by lengthening our sales cycle.
WE FACE GROWING COMPETITION THAT COULD MAKE IT DIFFICULT FOR US TO ACQUIRE AND
RETAIN CUSTOMERS.
The market for service management systems for new world connectivity
services and out-sourced Web services 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.
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, particularly when these units are integrated in customer routers
and switches. 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 may experience competition from fault management companies, such as
Micromuse, that provide only a portion of the functionality provided by our
products and services. If the functionality of these systems is sufficient to
meet customer requirements, or these companies add functionality to match our
products and services, the success of such products could have a material
adverse effect on our business, financial condition and results of operations.
OUR DEFENSE OF THE LITIGATION RELATING TO OUR ALLEGED FALSE AND MISLEADING
STATEMENTS IN ADDITION TO A COMPETITOR'S PATENT INFRINGEMENT CLAIM MAY RESULT IN
COSTLY LITIGATION, DIVERT THE EFFORTS AND ATTENTION OF OUR MANAGEMENT, AND BE
UNSUCCESSFUL.
In July 2000, several purported class action complaints were filed against
us and Scott E. Stouffer, our Chairman and CEO, in the United States District
Court for the District of Maryland. The complaints allege that between February
7, 2000 and August 22, 2000, the defendants made false and misleading statements
which had the effect of inflating the market price of our stock, in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints
do not specify the amount of damages sought. We believe that the plaintiffs'
claims are without merit and intend to defend these cases vigorously. We may,
however, incur significant legal costs related to this litigation.
In October 1997, a lawsuit was filed against Avesta and one of its employees
that alleges patent infringement, unfair competition, breach of contract and
interference with contractual relations resulting in unjust enrichment. Avesta
answered the complaint, denying all allegations, and also asserted counterclaims
against the plaintiff for patent misuse, unfair competition and interference
with business and patent invalidity. We intend to vigorously defend itself
against these allegations and we believe that they acted appropriately in
connection with the matters at issue. We cannot presently determine the ultimate
outcome of this action and the effect, if any, on the our financial statements.
A negative outcome could have a material adverse effect on our financial
position.
Failure to prevail in the intellectual property litigation could result in
one or more of the following:
- the payment of substantial monetary and punitive damages;
- the reimbursement of the plaintiff's legal costs;
- the requirement to stop selling one of our major products in its current
form;
- the redesign of that product;
- the requirement to license certain technology from the plaintiff, which
could include significant royalty payments; and
- the indemnification of certain customers against the losses they may incur
due to the alleged infringement.
In addition, we may incur significant legal costs related to this
litigation.
OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND WE MUST ADAPT
QUICKLY TO THESE CHANGES TO COMPETE EFFECTIVELY.
The market for our products 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. The introduction of new
technologies or advances in techniques for network services or the integration
of service level management functionality into other network hardware components
could render our products obsolete or unmarketable. There can be no assurance
that (i) our existing products 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
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<PAGE> 12
material adverse effect on our business, financial condition and results of
operations.
OUR FUTURE SUCCESS DEPENDS ON CONTINUED MARKET ACCEPTANCE OF THE NEW WORLD
NETWORK SERVICES AND OUR ABILITY TO ADAPT TO NEW NETWORK TECHNOLOGIES THAT MAY
DEVELOP.
Because our systems are deployed predominantly on new world networks such as
Frame Relay, ATM, IP, remote access and VPNs, our near-term success will depend
on the continued market acceptance of these technologies as preferred networking
solutions. If these services 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 NEW WORLD
NETWORKS BY BUSINESS AND CONSUMERS FOR E-COMMERCE AND COMMUNICATIONS.
Because our service management products and services 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. If such adoption should
not occur, our business, financial condition and results of operations could be
adversely affected. 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 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 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.
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<PAGE> 13
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.
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<PAGE> 14
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:
- 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;
- most of our suppliers do not have long-term agreements with us, 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.
WE MAY FACE DIFFICULTIES ASSIMILATING AND MAY INCUR COSTS ASSOCIATED WITH ANY
FUTURE ACQUISITIONS.
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.
Our failure to successfully assimilate companies or technologies acquired by
us or the occurrence of unanticipated costs that may arise in connection with
such acquisitions, could have a material adverse effect on our business,
financial condition and results of operations.
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<PAGE> 15
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 1999 and prior periods. 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 Scott E. Stouffer, our Chairman, President and
Chief Executive Officer, and Peter J. Minihane, our Chief Financial 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 condition and results of operations. Our success depends to a
significant degree upon the continuing contributions of our key management and
technical employees, particularly Messrs. Stouffer and Minihane.
OUR INABILITY TO RECRUIT AND RETAIN EMPLOYEES MAY HURT OUR GROWTH PROSPECTS.
We are actively seeking to fill two executive management positions. If we
fail to recruit and retain personnel, it could damage our ability to grow and
expand our business. Our future success depends on our ability to 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.
Failure to 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, financial
condition and results of operations.
WE MUST PROTECT OUR OWN INTELLECTUAL PROPERTY RIGHTS.
Our success is dependent on our proprietary technology and intellectual
property rights. We hold three 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
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<PAGE> 16
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 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 ANTI-TAKEOVER 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.
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<PAGE> 17
14
<PAGE> 18
USE OF PROCEEDS
Visual will not receive any proceeds from the sale of the shares
hereunder.
SELLING STOCKHOLDERS
Each of the Selling Stockholders was a stockholder and an affiliate of
Avesta Technologies. In the merger, the shares of capital stock of Avesta
Technologies owned by the Selling Stockholders were converted, on a pro rata
basis, into shares of Visual's common stock, and Avesta Technologies became our
wholly owned subsidiary. The Selling Stockholders received, in the aggregate,
3,472,748 shares of Visual Networks 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 Avesta Technologies 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 Position, Office or Other
as a Result of Shares Material Relationship
Name the Merger Offered (1) with Avesta
==== ========= ========== ========================
<S> <C> <C> <C>
Kam Saifi 1,640,576 1,490,576 Director, President, Chief
Executive Officer
Information Associates Fund(2) 1,832,172 1,832,172
--------- ---------
Total 3,472,748 3,322,748
========= ===========
</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.
(2) Information Associates Fund is composed of Information Associates,
LP, which owns 1,782,434 shares of Visual common stock and Information
Associates, CV, which owns 49,738 shares of Visual common stock.
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.
PLAN OF DISTRIBUTION
We are registering an aggregate of 3,322,748 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
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<PAGE> 19
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
The consolidated financial statements and schedules of Visual Networks,
Inc. as of December 31, 1998 and 1999, and for each of the three years in the
period ended December 31, 1999, included in the Annual Report on Form 10-K for
the year ended December 31, 1999, have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their reports with respect
thereto, and are included herein (incorporated by reference) in reliance upon
the authority of said firm as experts in giving said reports.
The consolidated financial statements of Avesta Technologies, Inc. as
of December 31, 1998 and 1999, and for each of the three years in the period
ended December 31, 1999, included in the Registration Statement filed by Visual
Networks, Inc. on Form S-4 have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their reports with respect thereto, and are
included herein (incorporated by reference) in reliance upon the authority of
said firm as experts in giving said reports.
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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.
<TABLE>
<CAPTION>
SEC File No.: 000-23699 Period/Filing Date
----------------------- ------------------
<S> <C>
- Annual Report on Form 10-K Year ended December 31, 1999
- Quarterly Report on Form 10-Q Quarter ended March 31, 2000
- Quarterly Report on Form 10-Q Quarter ended June 30, 2000
- Current Report on Form 8-K June 1, 2000
- The audited financial statements of Avesta Technologies April 4, 2000, April 18, 2000 and
filed with our Registration Statement on April 20, 2000
Form S-4, as amended
- Description of our common stock contained in Form 8-A January 1, 1998, and any amendment or
report filed for the purpose of updating
such description.
</TABLE>
You may request a copy of these documents, at no cost, by writing to:
Visual Networks, Inc.
Director 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.
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.
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<PAGE> 21
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 $ 3,150
Legal fees and expenses 5,000
Accounting fees and expenses 5,000
Transfer Agent fees 2,000
Printing expenses 2,000
---------------
Total $ 17,150
---------------
</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
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS.
The following exhibits are filed or incorporated by reference, as stated below:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
5.1 Opinion of Piper Marbury Rudnick & Wolfe LLP regarding legality.
23.1 Consent of Arthur Andersen LLP (audit report of Visual Networks, Inc.).
23.2 Consent of Arthur Andersen LLP (audit report of Avesta Technologies, Inc.).
23.3 Consent of Piper Marbury Rudnick & Wolfe LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
</TABLE>
--------------------------------
II-1
<PAGE> 22
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-2
<PAGE> 23
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 8,
2000.
VISUAL NETWORKS, INC.
By:
/s/ SCOTT E. STOUFFER
------------------------------
Scott E. Stouffer
Chief Executive Officer and President
POWER OF ATTORNEY
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 dates indicated.
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 dates indicated. Each person whose signature appears
below in so signing also makes, 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, with full power of substitution, for him in any and all
capacities, to execute and cause to be filed with the SEC any and all amendments
and post-effective amendments to this Registration Statement, with exhibits
thereto and other documents in connection therewith, and hereby ratifies and
confirms all that said attorney-in-fact or his substitute or substitutes may do
or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SCOTT E. STOUFFER President, Chief Executive Officer November 7, 2000
-------------------------------------- and Director (Principal Executive ---------------------
Scott E. Stouffer Officer)
/s/ PETER J. MINIHANE Executive Vice President, Chief November 7, 2000
--------------------------------------- Financial Officer and Treasurer ---------------------
Peter J. Minihane (Principal Financial Officer)
</TABLE>
II-3
<PAGE> 24
<TABLE>
<S> <C> <C>
/s/ MARC F. BENSON November 6, 2000
---------------------------------------- Director ---------------------
Marc F. Benson
/s/ WILLIAM J. SMITH November 6, 2000
---------------------------------------- Director ---------------------
William J. Smith
</TABLE>
II-4
<PAGE> 25
Appendix A
AVESTA TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED BALANCE SHEET
As of March 31, 2000.................................................. A-2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1999 and 2000.................... A-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 2000.................... A-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................. A-5
</TABLE>
A-1
<PAGE> 26
AVESTA TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
2000
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 6,886
Short-term investments................................... 2,409
Accounts receivable, net of allowance of $430............ 1,943
Prepaid expenses and other current assets................ 812
----------
Total current assets....................................... 12,050
Property and equipment, net................................ 1,595
Intangible assets.......................................... 5,937
Other assets............................................... 421
----------
Total assets..................................... $ 20,003
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................... $ 6,423
Deferred revenue......................................... 6,328
Line of credit........................................... 1,583
Current portion of capital lease obligations............. 20
----------
Total current liabilities.................................. 14,354
Capital lease obligations, net of current portion.......... 50
Deferred rent.............................................. 541
----------
Total liabilities................................ 14,945
----------
Commitments and contingencies (Note 5)
Redeemable convertible preferred stock:
Series A, Series B, Series C, and Series D
redeemable convertible preferred stock, $.01 par
value, 8,829,997 shares authorized in the
aggregate, 8,360,819 shares issued and
outstanding in the aggregate (stated at 35,386
aggregate liquidation preference)..................... ----------
Stockholders' deficit:
Common stock, $0.01 par value; 45,000,000 shares
authorized, 9,670,530 shares issued and
outstanding .......................................... 97
Additional paid-in capital............................... 8,462
Warrants................................................. 2,591
Deferred compensation.................................... (2,808)
Other accumulated comprehensive loss..................... (134)
Accumulated deficit...................................... (38,536)
----------
Total stockholders' deficit...................... (30,328)
----------
Total liabilities and stockholders' deficit...... $ 20,003
==========
</TABLE>
The accompanying notes are an integral part of this
consolidated balance sheet.
A-2
<PAGE> 27
AVESTA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Revenues:
Software license................ $ 1,299 $ 1,658
Service and maintenance......... 376 1,037
----------- ------------
Total revenues.......... 1,675 2,695
----------- ------------
Cost of revenues:
Software license................ 147 262
Service and maintenance......... 170 334
----------- ------------
Total cost of revenues.. 317 596
----------- ------------
Gross profit...................... 1,358 2,099
----------- ------------
Operating expenses:
Research and development........ 808 2,077
Sales and marketing............. 2,047 5,698
General and administrative...... 1,052 2,167
----------- ------------
Total operating expenses 3,907 9,942
----------- ------------
Loss from operations.............. (2,549) (7,843)
Other income (expense):
Interest expense................ (33) (88)
Interest income................. 97 175
----------- ------------
Net loss.......................... $ (2,485) $ (7,756)
============ =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-3
<PAGE> 28
AVESTA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 2000
------------ -----------
<S> <C> <C>
Operating activities:
Net loss................................................... $ (2,485) $ (7,756)
Adjustments to reconcile net loss to net cash used in
operating activities, excluding effects of acquisitions:
Depreciation and amortization............................ 182 220
Deferred rent............................................ -- 97
Stock-based compensation................................. -- 198
Sales discount related to warrants (Note 4).............. -- 870
Changes in assets and liabilities:
Accounts receivable.................................... (1,555) 285
Prepaid expenses and other current assets.............. (115) 117
Accounts payable and accrued expenses.................. 953 1,240
Deferred revenue....................................... 1,649 2,599
----------- ----------
Net cash used in operating activities........................ (1,371) (2,130)
----------- ----------
Investing activities:
Net maturities (purchases) of marketable securities........ (9,469) 3,368
Purchases of fixed assets.................................. (271) (713)
------------ -----------
Net cash provided by (used in) investing activities.......... (9,740) 2,655
----------- ----------
Financing activities:
Proceeds from sale of preferred stock...................... 8,457 --
Proceeds from exercise of stock options.................... 26 54
Net proceeds from line of credit........................... 16 43
Principal payments under capital lease obligations......... (11) (18)
------------ ----------
Net cash provided by financing activities.................... 8,488 79
----------- ----------
Effect of exchange rate changes on cash and cash
equivalents................................................ (3) 1
----------- ----------
Increase (decrease) in cash and cash equivalents............. (2,626) 605
Cash and cash equivalents at beginning of the period......... 3,667 6,281
----------- ----------
Cash and cash equivalents at end of the period............... $ 1,041 $ 6,886
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................... $ 33 $ 88
=========== ==========
Supplemental disclosure of non-cash investing and financing
activities
Assets acquired under capital leases....................... $ 29 $ --
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-4
<PAGE> 29
AVESTA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Avesta Technologies, Inc. and subsidiaries ("Avesta" or the "Company")
provide software that enhances the availability and performance of an
organization's e-business infrastructure. The software enables organizations to
discover and understand how their information technology resources work together
to provide services to users, then monitors, manages and reports on the
availability and performance of those services in real-time.
The Company's operations are subject to certain risks and uncertainties,
including among others, dependence on significant customers, rapidly changing
technology, current and potential competitors with greater financial,
technological, and marketing resources, dependence on key management personnel,
limited protection of intellectual property and proprietary rights, uncertainty
of future profitability and possible fluctuations in financial results.
On February 7, 2000, the Company entered into an agreement and plan of
merger (the "Merger") with Visual Networks, Inc. ("Visual"). Upon closing of the
Merger on May 24, 2000, Visual acquired all of the outstanding preferred and
common stock of the Company. In addition, all of the Company's outstanding stock
options and warrants were converted into options and warrants to purchase shares
of Visual common stock. At closing, Avesta equity holders received an aggregate
of 5,413,530 shares of Visual common stock, options to purchase 673,338 shares
and warrants to purchase 445,463 shares of Visual common stock. In addition,
Avesta equity holders are entitled to receive up to 2,000,000 shares of Visual
common stock as additional consideration if certain annual sales goals are
achieved in 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL INFORMATION
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 notes thereto, included in the Visual Networks, Inc. Registration
Statement on Form S-4. 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 presentation of results for
the interim periods. The results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results for the entire year
ending December 31, 2000.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company restated its financial statements for the three months ended
March 31, 1999 and the nine months ended September 30, 1999. The adjustments for
these periods relate to revenue recognition on software licenses, deferred
compensation and the related amortization in connection with certain options and
restricted stock grants. The effect the these adjustments for the three months
ended March 31, 1999 was to increase net loss by approximately $300,000.
Approximately $226,000 of this amount related to reductions in revenue and
approximately $74,000 related primarily to the amortization of deferred
compensation. The effect of these adjustments for the nine months ended
September 30, 1999 was to increase the net loss by approximately $5,654,000.
Approximately $5,291,000 of this amount related to reductions in revenue and
approximately $363,000 related to the amortization of deferred compensation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Avesta
Technologies, Inc. and its wholly owned subsidiaries. All significant
intercompany account balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The
Company's cash equivalents consist primarily of commercial paper. At December
31, 1999 and March 31, 2000, the Company has substantially all its cash and cash
equivalents in one financial institution.
A-5
<PAGE> 30
SHORT-TERM INVESTMENTS
The Company classifies, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," all of its investments as available for sale. The
investments consist primarily of commercial paper and debt securities and are
stated at fair value, with unrealized gains and losses, net of tax, reported in
other comprehensive income. Realized gains and losses and declines in value,
judged to be other than temporary, on available for sale securities are included
in other income. The costs of investments sold are determined using the specific
identification method. At March 31, 2000, the fair values of the Company's
short-term investments approximated their respective costs. For the three months
ended March 31, 2000, the unrealized gains and losses were insignificant.
PROPERTY AND EQUIPMENT
Fixed assets are stated at cost and depreciated over the estimated useful
lives of the assets using the straight-line method. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
estimated useful lives of the improvements or the term of the applicable leases.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
2000
-----------
<S> <C>
Furniture and fixtures................. $ 234
Leasehold improvements................. 404
Computer equipment and software........ 2,558
--------
3,196
Less -- Accumulated depreciation and
amortization......................... (1,601)
--------
$ 1,595
========
</TABLE>
REVENUE RECOGNITION
Software license revenues are recognized upon the shipment of the software
provided the fee is fixed and determinable, the arrangement does not involve
significant customization of the software and collection of the resulting
receivable is probable. The Company's software license contracts generally do
not provide for a right of return. Revenues from resellers are recorded when the
related products are sold to end-users and collection is probable.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition." SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements, such as software products, upgrades,
enhancements, post-contract customer support, installation and training, to be
allocated to each element based on the relative fair values of the elements. The
fair value of an element must be based on evidence that is specific to the
vendor. The Company adopted SOP 97-2 in 1998 and recognizes software revenue in
accordance with SOP 97-2. Effective December 15, 1998, the AICPA issued SOP
98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions." This SOP amends SOP 98-4, "Deferral of Effective Date of
a Provision of SOP 97-2," to extend the deferral of the application of passages
of SOP 97-2 provided by SOP 98-4 through fiscal years beginning before March 15,
1999, and provides additional guidance regarding the accounting for multiple
element software sales. Amounts allocated to software products are determined
using the residual method in accordance with SOP 98-9, whereby the fair value of
any undelivered service and support elements is deferred and any remaining
amounts are allocated to the software. The revenue allocated to post-contract
customer support is recognized ratably over the term of the support, and revenue
allocated to service elements is recognized as the services are performed.
Revenues for consulting and training services are recognized on a
time-and-materials basis or using the percentage-of-completion method in
accordance with SOP 81-1, "Accounting for Performance of Construction Type and
Certain Production Type Contracts." The percentage-of-completion method
generally applies to revenues from fixed-fee service contracts as well as the
service component of the multiple element contracts. The Company also applies
SOP 81-1 when services provided are critical to the functionality of the
software. Such revenues are recognized as a percentage of costs incurred to date
to the estimated total costs for each contract. The cumulative effect of
revisions in estimates of the percentage to complete is reflected in the period
in which the revisions are made. Provisions for estimated losses on uncompleted
contracts are made on a contract by contract basis and are recognized in the
period in which such losses are determined. Billings in excess of earned
revenues are classified as deferred revenues.
A-6
<PAGE> 31
STOCK-BASED COMPENSATION
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes compensation expense only if the fair
value of the underlying common stock exceeds the exercise price of the stock
option on the date of grant. Deferred compensation is amortized to compensation
expense over the vesting period of the underlying options. In October 1995, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which provides an alternative to APB Opinion No.
25 in accounting for stock-based compensation. As permitted by SFAS No. 123, the
Company continues to account for stock-based compensation in accordance with APB
Opinion No. 25 and has elected the pro forma disclosure alternative of SFAS No.
123.
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.
FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS
The functional currencies of two of the Company's subsidiaries are the
Canadian and Singapore dollars, respectively. The financial statements of these
subsidiaries are translated to U.S. dollars using year-end rates of exchange for
assets and liabilities and average rates during the relevant period for revenues
and expenses. Translation gains and losses are accumulated as a component of
other comprehensive loss in stockholders' equity.
COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in accordance with SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes rules for
the reporting and display of comprehensive income and its components. SFAS No.
130 requires foreign currency translation adjustments and the unrealized gains
and losses on marketable securities, net of tax, to be included in other
comprehensive income (loss).
3. TELECOMS DATA SYSTEMS:
In December 1999, the Company acquired all of the outstanding stock of
Telecoms Data Systems SAS ("TDS") for approximately $1,333,000 in cash and
374,550 shares of common stock. In addition to the purchase price paid at
closing, the seller is entitled to additional payments based on a percentage of
future TDS software revenues, as defined. The right to receive such cash
payments extends for a period of 5 years and payments are due quarterly. In the
event that the Company does not consummate an initial public offering ("IPO")
within 8 months from the date of closing, the former stockholder of TDS has the
right to repurchase the TDS stock and related technology in exchange for the
return of the Avesta common stock and approximately $833,000. In the event that
such repurchase option is exercised, TDS will enter into a license agreement
with the Company providing for the license of TDS products and technology to the
Company for a period of at least five years. The $833,000 cash portion of the
purchase price will be credited against royalties due under the license
agreement. As a result of this repurchase right, the Company has accounted for
this arrangement as an option. Accordingly, the consideration paid to the TDS
stockholder and the related transaction costs have been included in intangible
assets on the accompanying balance sheet as of March 31, 2000. The operating
results of TDS have not been included in the Company's results of operations. In
October 2000, the seller notified the Company of the intent to exercise the
repurchase option.
A-7
<PAGE> 32
4. WARRANTS:
In March 2000, the Company issued 170,000 warrants to purchase common stock
to a customer at an exercise price of $12. The Company recorded the fair value
of the warrants as a sales discount during the three months ended March 31,
2000.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In October 1997, a lawsuit was filed against the Company and one of its
employees that alleges patent infringement, unfair competition, breach of
contract and interference with contractual relations resulting in unjust
enrichment. The Company answered the complaint, denying all allegations, and
also asserted counterclaims against the plaintiff for patent misuse, unfair
competition and interference with business and patent invalidity. The Company
intends to vigorously defend itself against these allegations and management
believes that they acted appropriately in connection with the matters at issue.
The Company cannot presently determine the ultimate outcome of this action and
the effect, if any, on the accompanying financial statements. A negative outcome
could have a material adverse effect on the Company's financial position.
Failure to prevail in the litigation could result in one or more of the
following: (i) the payment of substantial monetary and punitive damages; (ii)
the reimbursement of the plaintiff's legal costs; (iii) the requirement to stop
selling one of the Company's major products in its current form; (iv) the
redesign of that product; (v) the requirement to license certain technology from
the plaintiff, which could include significant royalty payments; and (vi) the
indemnification of certain customers against any losses they may incur due to
the alleged infringement. In addition, the Company has incurred approximately
$2,541,000 in legal costs related to this litigation from its inception through
March 31, 2000 and expects to incur substantial additional costs. The Company
expenses these costs as incurred.
6. CREDIT FACILITY:
In October 1998, the Company entered into a one-year, $3,000,000 revolving
line of credit agreement with a financial institution (the "Facility").
Borrowings under the Facility cannot exceed 85 percent of outstanding eligible
accounts receivable, as defined, and bear interest at the bank's prime rate plus
2 percent. Borrowings under the Facility are secured by all of the Company's
assets, including its intellectual property, and the payment of cash dividends
is restricted. In October 1999, the financial institution renewed the Facility
and increased the amounts available under the Facility to $7,500,000, maturing
in October 2000. The terms of the borrowings remain substantially as described
above. At March 31, 2000, borrowings under the Facility were approximately
$1,583,000. At March 31, 2000, the interest rate on outstanding borrowings was
10.75 percent.
7. SIGNIFICANT CUSTOMERS:
During the three months ended March 31, 2000, two customers accounted for
approximately 54 and 12 percent of revenues, respectively. During the three
months ended March 31, 1999, two customers accounted for approximately 29 and 11
percent of revenues, respectively. At March 31, 2000, two customers accounted
for 81 and 14 percent, respectively, of the Company's accounts receivable
balance.
A-8
