<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
COMMISSION FILE NUMBER: 0-23023
---------------
MMC NETWORKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0319809
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
1134 EAST ARQUES AVENUE, SUNNYVALE, CA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: (408) 731-1600
---------------
Securities registered pursuant to Section 12(b) of the Act:
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
NONE NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.001 par value
(TITLE OF CLASS)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 13,
1998, as reported on the National Market of The Nasdaq Stock Market, was
approximately $213,012,972. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 13, 1998, the registrant had
outstanding 29,274,597 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for registrant's Annual Meeting of
Stockholders to be held May 28, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
The Business section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those detailed in the Company's S-1 registration statement and
those discussed in the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Factors Affecting Future
Results" commencing on page 21 of this Report.
PART I
ITEM 1. BUSINESS
THE COMPANY
MMC Networks, Inc. (the "Company" or "MMC Networks") is a leading developer
and supplier of network processors--high-performance, open-architecture,
software-programmable processors optimized for network applications. The
Company's network processors form the core silicon "engines" of LAN and WAN
switches and routers and are designed to allow network equipment vendors to
rapidly develop high-performance, feature-rich, cost-effective products
supporting a broad range of networking functions. MMC networks' customers
employ the Company's network processors to develop and market multi-gigabit,
wire-speed switches and routers with advanced features such as Layer 3
switching, internetworking of LANs and WANs, security, class of service,
quality of service and network management.
The Company's current products, the PS1000, ATMS2000 and AF5000 families of
network processors, provide the core functionality of high-performance Fast
Ethernet and Asynchronous Transfer Mode ("ATM") networking equipment,
respectively. The Company believes that network equipment vendors are able to
reduce design and development costs and accelerate product development cycles
for high-performance routers and switches by using the Company's products. All
of the Company's products are based on the Company's proprietary VIX/TM/
architecture, which enables network equipment vendors to easily and cost-
effectively implement high-performance, value-added features in their switch
and router products.
The Company was incorporated in California in September 1992 and
reincorporated in Delaware in October 1997. The Company's principal executive
offices are located at 1134 East Arques Avenue, Sunnyvale, California 94086,
and its telephone number is (408) 731-1600.
INDUSTRY BACKGROUND
The proliferation of high-performance personal computers, workstations and
servers along with the growing reliance on increasingly data-intensive
networked applications has resulted in dramatic growth in traffic over data
networks. In addition, as organizations and individuals increasingly rely on
intranets and the Internet, networks have been extended to connect branch
offices, home offices, mobile users and, more recently, customers and
suppliers. The rise in data traffic has been accompanied by substantial growth
in the number of protocols employed in LAN and WAN networking, including
Ethernet, Token Ring, Fiber-Distributed Data Interface ("FDDI"), WAN serial
lines, X.25, Frame Relay and dial-up access. More recently, Fast Ethernet,
Gigabit Ethernet, higher-speed Frame Relay and ATM networks are beginning to
be deployed. These trends continue to drive demand for high-performance
networking equipment that supports internetworking a variety of types of LANs
and WANs.
As the size and performance requirements of networks have grown, network
equipment vendors have increasingly focused on advanced switching and routing
devices to enable large-scale, high-performance networks. Known as Layer 3
switches, IP switches, high-speed routers or switching routers, these devices
are designed to enable a network hierarchy that facilitates the implementation
of such networks. In addition to improved performance and multiprotocol
connectivity, enterprises and network service providers are increasingly
demanding networking equipment that supports a broad variety of advanced
features, without compromising
2
<PAGE>
performance. For example, as the reach of enterprise data networks has spread
to WANs and the Internet, network administrators need security at multiple
points in the network. As businesses become more dependent on intranets and
the Internet, they are increasingly focused on differentiated classes or
priorities of service for certain of their applications and users to make more
efficient use of networking resources. Similarly, new applications such as
video conferencing, multimedia training and Internet telephony require end-to-
end quality of service guaranteed across entire networks. Finally, in order to
implement advanced features and functionality across complex, high speed
networks, network administrators also need better network management
capabilities to help them analyze the traffic flowing through the network, to
anticipate traffic growth and to quickly isolate and solve network problems.
While attempting to respond to customer demands for more performance, new
capabilities, greater security and better management, network equipment
vendors face growing competition, evolving networking standards and increasing
market segmentation. Rapid growth in the data networking industry has
attracted a multitude of new entrants who are competing with or, in many
instances, are being acquired by major network equipment vendors. To compete
effectively, network equipment vendors must improve their time-to-market and
lower their costs while continuing to increase performance and add advanced
features and differentiated functionality. At the same time, network equipment
vendors must support multiple evolving industry standards and protocols and
must address the diverse needs of customers in an increasingly segmented
networking market. For example, a small office may require a simple network
built with one Ethernet LAN switch, a large corporation may require multiple
Fast Ethernet high-speed routers connected to an ATM campus backbone switch,
and an Internet service provider may require a dedicated OC-3 or SDH-1
backbone switch with downlinks that support dedicated and dial-up
connectivity.
In order to address the needs of their increasingly diverse customer base
and provide support for a broad array of networking protocols and
functionalities without substantially degrading performance, network equipment
vendors have employed increasingly capable semiconductor devices in their
networking equipment, the most important being those used as the switching or
routing "engines." Network equipment vendors have traditionally relied on two
general approaches for these semiconductor engines: general purpose processors
which are software-programmable or custom-developed ASICs. Each of these
approaches has advantages but involves significant trade-offs with respect to
performance, feature implementation, time-to-market and cost. Switches and
routers utilizing general purpose processors can be brought to market
relatively rapidly, can be easily adapted to changes in industry protocols and
standards and can be programmed in software to add additional features, but
these benefits are usually not achievable without significant performance
degradation or unacceptably high unit production cost. Alternatively, switches
and routers based on ASICs can be designed to achieve high performance and
produced at relatively low unit cost, but the ASIC development cycle is
usually too time consuming to permit the development of high-performance ASICs
with advanced feature sets while meeting network equipment vendors' time-to-
market constraints. In addition, ASICs involve the risk of additional delays
associated with multiple iterations that may be required in the ASIC
development cycle, provide little flexibility to conform to rapidly evolving
standards and protocols and lack the full feature support that would allow
them to address multiple segments of the networking market. Consequently,
neither approach achieves network equipment vendors' requirements for high
performance and advanced features without imposing an unacceptable time-to-
market and/or cost burden.
MARKET OPPORTUNITY FOR NETWORK PROCESSORS
The Company believes that these market trends have created a significant
opportunity for network processors--high-performance, open-architecture,
software-programmable processors optimized for networking applications. These
network processors enable the design and development of switching and routing
solutions that incorporate advanced features, operate without significant
performance degradation, address evolving standards and multiple market
segments through software programmability, and can be produced in a cost-
efficient manner and within the time-to-market constraints of the competitive
networking equipment market. The Company believes that network processors
offer network equipment vendors the ability to reduce the time and
3
<PAGE>
expense involved in developing customized chip sets for individual network
switching products, while allowing vendors to focus on developing networking
systems which are powerful, cost-effective, differentiated and feature-rich to
satisfy the needs of their increasingly diverse customer bases.
MMC NETWORKS' SOLUTION
MMC Networks is a leading developer and supplier of network processors
enabling a new generation of high-performance networking equipment. These
network processors are designed to allow network equipment vendors to rapidly
develop high-performance, feature-rich, cost-effective, scalable LAN and WAN
switches and routers targeting the specific needs of distinct customer
segments. The Company believes that, by designing-in the Company's network
processors, network equipment vendors can simultaneously reduce development
costs, accelerate time-to-market and focus on enhancing system differentiation
with advanced features and functionality. Using the Company's network
processors as building blocks, MMC Networks' customers are offering or
designing multi-gigabit, wire-speed switches and routers with enhanced
features including internetworking among multiple types of LANs and WANs,
security, class of service, quality of service and network management without
significant performance degradation.
The Company currently offers the PS1000 Fast Ethernet, ATMS2000 ATM and
AF5000 multiservice families of network processors. All of the Company's
products are based on the Company's ViX architecture, which is designed to
enable network equipment vendors to construct cost-effective, high-bandwidth,
high-port-count, feature-rich, modular and stand-alone switches and routers.
The Company's proprietary Per Flow Queuing ("PFQ") technology extends the ViX
architecture to support class of service and quality of service for network
switches.
MMC NETWORKS' STRATEGY
MMC Networks' strategy is to enable network equipment vendors to rapidly
develop and introduce differentiated products by leveraging the high-
performance, feature-rich, software-programmable and cost-effective network
processors offered by the Company. Key elements of the Company's strategy
include the following:
Target High-Growth Markets. MMC Networks' network processors target the
rapidly growing enterprise and service provider markets. These markets require
high-performance, feature-rich, mid- to high-end LAN and WAN networking
equipment solutions. The Company believes that as these markets continue to
grow, they will become increasingly specialized. Consequently, network
equipment vendors will need to deliver a broader mix of products in order to
satisfy increasingly sophisticated and diverse customer performance and
feature requirements. The Company focuses on the design and development of
network processors that enable network equipment vendors to rapidly design and
bring to market a broad variety of differentiated networking solutions meeting
the performance and feature requirements of this evolving market.
Facilitate Customer Success. Increasing competition and evolving networking
standards have exerted and will continue to exert pressure on network
equipment vendors to introduce new products rapidly and cost-effectively. MMC
Networks' network processors are designed to improve network equipment
vendors' time-to-market and lower their development costs by providing them
with software programmable processing functionality to enable them to address
evolving standards and multiple market segments. The Company works closely
with its customers to design network processors that enable performance and
functionality compatible with such customers' current and future needs and
that complement network equipment vendors' product development efforts.
Extend Technology Leadership. MMC Networks has made substantial investments
in the technologies that underlie its network processors, with the goal of
setting new price/performance benchmarks and enabling the widespread use of
sophisticated networking functionality. For example, the Company's ViX
architecture, which forms the basis of all of its products, is designed to
enable network equipment vendors to implement value-added
4
<PAGE>
features without significant performance degradation. MMC Networks is
continually developing new technologies for its network processors, such as
the Company's AF5000 family network processors, which were designed to
integrate the processing of data from different protocols.
Leverage Fabless Semiconductor Model. MMC Networks seeks to leverage the
flexibility of its fabless semiconductor business model to lower technology
and production risks, increase profitability and reduce time-to-market. The
Company's fabless model allows it to focus on its core network processor
design competencies, while minimizing the capital and operating infrastructure
requirements. In addition, the Company's reliance on mainstream semiconductor
design and manufacturing technologies rather than newer, more expensive
manufacturing processes reduces the risks inherent in newer, less proven
process technologies.
TECHNOLOGY
MMC Networks' network processors are high-performance, multi-gigabit, open-
architecture, software-programmable processors with instruction sets that have
been optimized for processing and switching data, voice and video packets and
cells. The Company believes that the key underlying technologies employed in
its network processors give it a substantial competitive advantage. The core
technologies employed in current products include the Company's ViX
architecture, Per-Flow Queuing technology, Direct Replication Engine
technology, Virtual SAR technology and Programmable BitStream Processor
technology.
ViX Architecture. The ViX architecture is a switch fabric architecture that
uses a patented point-to-point connection matrix that permits the use of a
wide, centralized, shared-memory structure, while separating control
information from user data. The ViX architecture's use of "point-to-point
connections" is designed to enable network equipment vendors to easily scale
the number of ports in their switches and routers, unlike shared-bus
architectures that run into clock frequency, bus capacitance and pin count
limitations. The use of a "wide, centralized shared-memory structure" enables
network equipment vendors to scale the bandwidth and amount of buffer memory,
unlike crossbar architectures which become increasingly expensive as bandwidth
and buffer requirements increase. The "separation of control information from
user data" enables network equipment vendors to more easily implement high-
performance processing, queuing, replication and switching functions for
networking applications, unlike shared-bus and crossbar architectures, which
may require complex processors to coordinate multiple functions across
multiple ports and the replication of user data within their buffers. In
addition, the ViX architecture is designed as an open architecture, providing
external access to the appropriate timing and control signals, which enables
network equipment vendors to more easily implement differentiated features and
functionality.
Per-Flow Queuing Technology. All networking switches and routers must buffer
data when networks become congested. Networks that use conventional switches
and routers usually buffer data on a linear, first-in-first-out ("FIFO")
basis. As data accumulates in the buffer, new data sits "behind" all of the
information that previously arrived at the switch/router. High-priority
information sent to that switch or router is not distinguished from other data
and is therefore "stuck" in the back of the buffer until such other data is
sent. MMC Networks' PFQ technology is designed to alleviate the limitations of
FIFO queuing by assigning each piece of data to its own unique queue and then
scheduling the sending of the data according to software-programmable
algorithms developed by the network equipment vendor, thus allowing the switch
or router to implement class of service or quality of service functionality.
Switches and routers incorporating PFQ technology can be designed to support
up to 500,000 queues, providing enough queues for large-scale networks.
Direct Replication Engine Technology. When data must be broadcast to all
ports on a switch or router or "multicast" to select ports, routers and
switches must replicate data packets for each port connection. This process
may significantly degrade performance. MMC Networks' Direct Replication Engine
technology is designed to provide wire-speed multicast and broadcast
capability by leveraging the separation of control information from user data
enabled by the ViX architecture. This capability allows the switch or router
to store a single copy of the data to be transmitted and replicate it to
multiple ports in a single instruction cycle.
5
<PAGE>
Virtual SAR Technology. Conventional switches and routers use expensive
segmentation and reassembly ("SAR") chips to convert frames to cells and vice
versa, thus enabling the internetworking of ATM with Ethernet, frame relay and
other packet-based protocols. The Company's Virtual SAR technology provides
the ability to convert frames to cells and vice versa, thus eliminating the
need for expensive external SAR chips.
Programmable BitStream Processor Technology. MMC Networks' Programmable
BitStream Processor technology performs the processing of packet and cell
headers including such functions as real-time parsing, matching and table
look-up, as well as bit stream manipulations such as adding, deleting,
substituting, appending and pre-pending. This functionality enables network
equipment vendors to build high-performance switches and routers with
additional services that address network security, class of service and
quality of service and improve management throughout the network.
TARGET MARKETS AND PRODUCTS
MMC Networks' products serve two primary markets: the enterprise network
market and the service provider market. The Company's Fast Ethernet and ATM
products are being designed into networking equipment intended for both of
these markets. The following table summarizes selected product and service
applications within each of these markets:
<TABLE>
<CAPTION>
ENTERPRISE NETWORK SERVICE PROVIDER SERVICES
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Wiring Closet Remote Access Internet Voice
Power Workgroup WAN Backbone Frame Relay Cable
Campus Backbone ATM Dial
xDSL
</TABLE>
The Company's PS1000, ATMS2000 and AnyFlow 5000 product families provide the
core functionality for Fast Ethernet and ATM switches and routers developed by
network equipment vendors targeting both the enterprise network and service
provider markets. The Company also offers reference design kits, which assist
customers in their technical evaluation of the Company's products.
The PS1000 Family. The PS1000 network processor family implements the core
functionality of a high-performance Fast Ethernet switch, provides extensions
for layer 3 routing and is optimized for power workgroup, wiring closet and
LAN backbone applications. The PS1000 network processor family enables network
equipment vendors to build low-cost, highly-integrated solutions supporting
scalable port densities from eight to 128 10-Mbps Ethernet ports and up to 32
100-Mbps Fast Ethernet ports with the option of one or two ATM uplinks. The
flexible PS1000 ViX-based architecture allows a high degree of customer
product differentiation in terms of bandwidth segmentation, port type
implementations, support for external frame forwarding, prioritization and
uplinks.
The following table sets forth MMC Networks' PS1000 product family:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- -------------------------------------------------------------------------------
<C> <S>
PS1001 PSP Packet switch processor which provides the central core of the
switching operation
PS1002 FEIU Fast Ethernet interface unit comprised of four 10/100-Mbps full-
duplex Fast Ethernet MAC ports
PS1003 EIU Ethernet interface unit comprised of six 10-Mbps MAC ports and
two 10/100-Mbps MAC ports
PS1004 AIU ATM interface unit that provides an ATM uplink for Ethernet
switches
PS1005 ARL Address resolution logic device that provides full frame
forwarding and filtering logic
PS1007 NCB Network component interconnect ("NCI") bus to CPU bridge
PS1008 NPB NCI bus to PCI bus bridge
</TABLE>
6
<PAGE>
A 16-port full-duplex Fast Ethernet switch can be constructed using a set of
four PS1001s, four PS1002s, four PS 1005s, and either a PS1007 or PS1008. This
chip set is priced at approximately $480 per set in quantities of 1,000 per
year. PS1004 processors may be used to add optional ATM uplinks to the switch.
The ATMS2000 Family. The ATMS2000 network processor family provides the core
functionality of a high-performance ATM switch and the capabilities for layer
3 routing. The ATMS2000 network processor family is optimized for feature-rich
building or campus backbones, power workgroups and WAN access. The ATMS2000
network processor family provides a cost-effective solution for 2.5- or 5-Gbps
switches and routers with port densities of up to 32 OC-3 ports or eight OC-12
ports. The flexible ViX-based architecture enables the centralized
implementation of value-added features such as PFQ, as well as customer-
defined features, without the need to change any of the linecards in the
network.
The following table sets forth MMC Networks' ATMS2000 product family:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- -------------------------------------------------------------------------------
<C> <S>
ATMS2001 Memory access buffer which acts as an interface between the ATMS2002
MBUF PIF and a common memory bank
ATMS2002 Port interface which interfaces the ATMS2000 switch core with ATM
PIF Physical Layer Devices
ATMS2003 Switch controller which manages data queues and provides an
SWC1 interface to the CPU
ATMS2004 Switch controller which manages the reading and writing of data to
SWC2 various external data structures and performs pipeline control
ATMS2101 Optional feature chip set that monitors and polices cell traffic,
Xchecker providing statistics, usage parameter control and/or packet discard
ATMS2110 Optional feature chip set that offloads cell reception and
Xport transmission from the CPU
ATMS2200 Co-processor that implements PFQ
Xstream
</TABLE>
A 32-port OC-3 5-Gbps switch utilizing the Company's ATMS2000 network
processor requires six ATMS2001s, eight ATMS2002s and one each of the ATMS2003
and ATMS2004. This chip set is priced at approximately $2,000 per set in
quantities of 1,000 per year. The ATMS2101, ATMS2110 and ATMS2200 may be used
to add additional features to the network processor.
The AnyFlow 5000 Family. MMC Networks' AnyFlow 5000 network processor family
implements the Company's new Virtual SAR and Programmable BitStream Processor
technologies. The AnyFlow 5000 family employs a modular design which enables a
wide range of networking equipment, including both Ethernet and ATM switches
and routers. The AnyFlow 5000 network processors are designed to provide Layer
3 switching and routing with quality of service and packet/cell
internetworking at a bandwidth of 20 Gbps and with throughput of up to 20
million packets-per-second. AnyFlow network processors scale up to 128 Fast
Ethernet or ATM OC-3 ports, 16 Gigabit Ethernet ports or 32 ATM OC-12 ports.
The AF5000 is MMC Network's newest family of network processors. Samples of
the AnyFlow 5000 products have been available since the fourth quarter of
1997, and the Company anticipates that the products will be shipped in volume
production during the second half of 1998. No assurance can be given that the
AnyFlow product line will become commercially available on a timely basis,
will provide the functional and performance advantages expected by customers,
or will find market acceptance. The success of the Company's products may also
be adversely affected if the Company's customers face any problems related to
such products.
7
<PAGE>
Reference Design Kits. To facilitate the adoption by network equipment
vendors and speed the design cycle for its network processors, MMC Networks
designs and makes available system-level reference design kits. The Company's
reference design kits include a reference machine, schematics, layout details,
documentation and firmware, including device drivers and diagnostic software.
Source code for the reference machines can be licensed from the Company, as
can the bus models for those companies who design their own interfaces to the
network processors.
Products Under Development. The Company expects to continue to enhance and
refine its network processors, while adding additional operational features
designed to make the Company's products more attractive to a wide range of
network equipment vendors.
CUSTOMERS
MMC Networks sells its products to a variety of network equipment vendors.
As of December 31, 1997, the Company had achieved more than 40 design wins
with in excess of 30 network equipment vendors, of which 10 (Cisco, D-link,
Fujitsu, Hitachi, NBase, NEC, Olicom, SNT, Sumitomo and Toshiba) are shipping
networking products that incorporate the Company's network processors. To
qualify as a design win, a network equipment vendor must have (i) purchased
network processor prototypes, a reference design kit or software drivers from
the Company and (ii) commenced development of a product incorporating the
Company's network processors. During the design-in process, the Company works
closely with each customer to assist in resolving technical questions and to
help the customer achieve volume production of its products. Achieving a
design win with a network equipment vendor provides no assurance that such
network equipment vendor will ultimately ship products incorporating the
Company's network processors.
Cisco, Mitsui Comtek Corp., a non-stocking sales representative for Japan,
and the U. S. Computer Division of Hitachi accounted for 28%, 28% and 12%,
respectively, of total revenues for the year ended December 31, 1997 and 51%,
15% and 10%, respectively, of total revenues for the year ended December 31,
1996. Cisco, Ipsilon, Toshiba, and Agile represented 48%, 12%, 11% and 11%,
respectively, of total revenues for the year ended 1995. None of the Company's
customer purchase agreements contains a minimum purchase requirement.
Customers typically purchase the Company's products pursuant to short-term
purchase orders that may be canceled without charge if notice is given within
an agreed-upon period.
SALES, MARKETING AND TECHNICAL SUPPORT
The Company targets customers based on industry leadership, technology
leadership and target applications. The Company maintains close working
relationships with its customers in order to design and develop solutions
which specifically address their needs. The Company markets its products
through a direct sales and marketing organization, headquartered in Sunnyvale,
California, with a sales office in Massachusetts, and through sales
representatives in the United States, Canada, Japan, Taiwan and the United
Kingdom. Sales representatives are selected for their understanding of the
networking marketplace and their ability to provide effective field sales
support for MMC Networks' products. The Company's relationships with many of
its representatives have been established within the last year, and the
Company is unable to predict the extent to which some of these representatives
will be successful in marketing and selling the Company's products.
Sales to U.S. customers account for the substantial majority of MMC
Networks' revenues. Although the Company has a number of international
customers, substantially all of these customers currently order through, and
receive shipments at, their U.S. operations.
The Company has a number of marketing programs designed to inform network
equipment vendors about the capabilities and benefits of the Company's
products. The Company's marketing efforts include participation in industry
trade shows, technical conferences and technology seminars, preparation of
competitive analyses, sales training, publication of technical and educational
articles in industry journals, maintenance of MMC Networks' World Wide Web
site, advertising and direct mail distribution of Company literature.
8
<PAGE>
Technical support to customers is provided through factory system engineers
and, if necessary, product designers and architects. Local field support is
provided in person or by telephone. The Company plans to hire additional
support staff for remote offices, as the need arises. The Company believes
that providing network equipment vendors with comprehensive product service
and support is critical to maintaining a competitive position in the
networking market and is critical to shortening customers' design-in cycles.
The Company works closely with its customers to monitor the performance of its
product designs and to provide support at each stage of customer product
development.
RESEARCH AND DEVELOPMENT
The Company's success will depend to a substantial degree upon its ability
to develop and introduce in a timely fashion new products and enhancements to
its existing products that meet changing customer requirements and emerging
industry standards. MMC Networks has made and plans to continue to make
substantial investments in research and development and to participate in the
development of industry standards.
The Company focuses its development efforts on network processor product
development. Before a new product is developed, the Company's research and
development engineers work with marketing managers and customers to develop a
comprehensive requirements specification. After the product is designed and
commercially released, Company engineers continue to work with customers on
early design-in efforts to understand requirements for future generations and
upgrades. Most of the Company's engineers are involved in algorithm and chip
design and verification. In addition, the Company also has a group of software
engineers and reference machine designers.
The Company's research and development expenditures, net of nonrecurring
engineering funding received from customers, totaled $8.3, $3.3, and $1.8
million in the years ended December 31, 1997, 1996 and 1995, respectively,
representing 38%, 31% and 312% of revenues for such periods, respectively.
Research and development expenses primarily consist of salaries and related
costs of employees engaged in ongoing research, design and development
activities and subcontracting costs. These expenses are reduced by non-
recurring engineering fees paid by the Company's customers to facilitate
product development projects. As of December 31, 1997, there were 45 employees
engaged in research and development. The Company performs its research and
product development activities at its headquarters in Sunnyvale, California.
MANUFACTURING
Currently, the Company outsources all of its semiconductor manufacturing,
assembly and test. The Company's suppliers currently deliver fully assembled
and tested products on a turnkey basis. This "fabless" semiconductor
manufacturing model allows the Company to focus substantially all of its
resources on the design, development and marketing of products and
significantly reduces the capital requirements of the Company.
In 1995 and 1996, MMC Networks subcontracted its semiconductor manufacturing
to Oki Semiconductor and NEC in Japan and Motorola, Inc. in the United States.
In 1997, the Company added TSMC in Taiwan. In 1998, it is expected that a
growing percentage of the Company's production will be contracted to TSMC and
potentially other new suppliers as new products reach volume production. The
Company chose these four manufacturers in large part due to their conformance
with international standards of technology, their capacity, their quality and
their support for the state-of-the-art design tools used by MMC Networks. Only
one of the Company's products is currently manufactured by more than one
supplier.
MMC Networks uses mainstream CMOS processes for the manufacturing of its
products instead of depending on leading edge processes in order to help
reduce technical risks and production capacity constraints. The Company's main
products currently are fabricated in .35, .5 and .8 micron CMOS. The Company
continuously evaluates the benefits, on a product-by-product basis, of
migrating to a smaller geometry process in order to reduce costs, and has
commenced migration of certain products to smaller geometries. The Company
believes that transitioning its products to increasingly smaller geometries
will be important for the Company to remain competitive. No assurance can be
given that future process migration will be achieved without difficulty.
9
<PAGE>
The Company must place orders approximately 12 to 14 weeks in advance of
expected delivery. As a result, the Company has only a limited ability to
react to fluctuations in demand for its products, which could cause the
Company to have an excess or a shortage of inventory of a particular product.
In the future, the Company expects to change its supply arrangements to assume
more of the product manufacturing responsibilities. Such changes will include
contracting for wafer manufacturing and subcontracting for assembly and test
rather than purchasing finished product. The Company has begun investing in
design tools, libraries and personnel with the expectation of assuming greater
manufacturing responsibilities by mid 1998.
COMPETITION
The data networking and semiconductor industries are intensely competitive
and are characterized by constant technological change, rapid rates of product
obsolescence and price erosion. The Company's PS1000, ATMS2000 and AF5000
product families compete with products from companies such as Texas
Instruments, Lucent Technologies, PMC-Sierra, Galileo Technology, Integrated
Telecom and I-Cube. In addition, the Company expects significant competition
in the future from major domestic and international semiconductor suppliers.
The Company also may face competition from suppliers of products based on new
or emerging technologies. Moreover, several established electronics and
semiconductor suppliers have recently entered or indicated an intent to enter
the switching and routing equipment market. In addition, many of the Company's
existing and potential customers, including Cisco, internally develop ASICs,
general purpose processors, network processors and other devices which attempt
to perform all or a portion of the functions performed by the Company's
products.
INTELLECTUAL PROPERTY
The Company's future success and ability to compete are dependent, in part,
upon its proprietary technology. The Company has been granted one patent in
the United States, the claims of which cover certain aspects of its ViX
architecture, and has received notice that two additional patents will issue.
In addition, the Company has filed 24 other patent applications, 13 in the
United States and 11 outside the United States, relating to other aspects of
systems employing the ViX architecture. None of the Company's patent
applications relate to specific products of the Company, such as the ATMS2000
and PS1000 lines of network processors, as the Company believes that it may be
more effective to seek patent protection with respect to its key underlying
technologies, such as aspects of its ViX Architecture.
In addition, the Company claims copyright protection for certain proprietary
software and documentation. The Company also attempts to protect its trade
secrets and other proprietary information through agreements with its
customers, suppliers, employees and consultants, and through other security
measures. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful. In addition, the
laws of certain countries in which the Company's products are or may be
manufactured or sold, including Japan and Taiwan, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the networking industry, its technical
expertise and ability to introduce new products on a timely basis will be more
important in maintaining its competitive position than protection of its
intellectual property and that patent, trade secret and copyright protection
are important but must be supported by expanding the knowledge, ability and
experience of the Company's personnel and introducing and enhancing products.
Although the Company continues to implement protective measures and intends to
defend vigorously its intellectual property rights, there can be no assurance
that these measures will be successful. See Item 3--Legal Proceedings.
EMPLOYEES
As of December 31, 1997, the Company had a total of 88 full-time employees
and 3 full-time contractors. Of the total number of employees, 45 were in
research and development, 17 in marketing and technical support,
10
<PAGE>
nine in sales and 17 in operations and administration. The Company's employees
are not represented by any collective bargaining agreement, and the Company
has never experienced a work stoppage. The Company believes its employee
relations are good.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information regarding the executive
officers and directors of the Company as of December 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Prabhat K. Dubey........ 47 President, Chief Executive Officer and Director
Amos Wilnai............. 58 Chairman of the Board, Executive Vice President, Business Development
Sena C. Reddy........... 49 Executive Vice President, Operations
Uday Bellary............ 43 Vice President, Finance, Chief Financial Officer and Assistant Secretary
Alexander Joffe......... 40 Vice President, Engineering
Brent R. Bilger......... 40 Vice President, Marketing
John A. Teegen.......... 39 Vice President, Sales
John G. Adler(1)........ 60 Director
Irwin Federman(2)....... 62 Director
Andrew S. Rappaport(2).. 40 Director
Geoffrey Y. Yang(1)..... 38 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Prabhat K. Dubey has served as the Company's President and Chief Executive
Officer, and as a director, since he joined the Company in October 1994. From
March 1994 to August 1994, Mr. Dubey was the Chief Operating Officer of
Wireless Access, Inc., a supplier of communications devices and chip sets.
From August 1989 to March 1994, he served as Vice President and General
Manager of the Wireless & Messaging DSP IC Group at Lucent Technologies, a
communications products company and former subsidiary of AT&T Corporation. Mr.
Dubey holds a Ph.D. in Physics from the Indian Institute of Technology and an
M.B.A. from the University of Western Ontario.
Amos Wilnai has served as the Chairman of the Board of Directors since he
founded the Company in September 1992. Since September 1994, Mr. Wilnai has
also served as the Company's Executive Vice President of Business Development.
From September 1992 to October 1994, he was the President of the Company. Mr.
Wilnai has a B.S.E.E. degree from the Technion Institute of Technology in
Israel and an M.S.E.E. degree from the Polytechnic Institute in Brooklyn.
Sena C. Reddy has served as the Company's Executive Vice President of
Operations since he joined the Company in January 1997. Prior to joining the
Company, Mr. Reddy spent more than 11 years at Cirrus Logic Inc., a
semiconductor company, where he served as the Senior Vice President of
Operations from April 1994 to January 1997, Vice President of Manufacturing
from July 1991 to April 1994 and the Director of Wafer Fabrication and
Technology from September 1985 to June 1991. Mr. Reddy holds an M.S.E.E.
degree from Oklahoma State University.
Uday Bellary joined the Company as its Vice President and Chief Financial
Officer in September 1997. From February 1997 until joining the Company, Mr.
Bellary served as Vice President, Finance & Administration and Chief Financial
Officer of DTM Corporation, a manufacturer of computer-driven laser systems
for industrial prototyping. From May 1990 to December 1996, Mr. Bellary served
in various positions at Cirrus Logic Inc., a semiconductor company, most
recently as Director of Finance. Mr. Bellary holds a B.S. degree from Karnatak
University and a DMA from the University of Bombay. He is also a chartered
accountant and a certified public accountant.
11
<PAGE>
Alexander Joffe has served as the Company's Vice President of Engineering
since July 1994. From March 1993 to July 1994, Mr. Joffe was the Company's
Director of Engineering. Prior to joining the Company, Mr. Joffe spent more
than eight years with Motorola Semiconductor Products, a semiconductor
manufacturing subsidiary of Motorola, Inc., where he served most recently as
an engineering manager. Mr. Joffe holds a B.S.E.E. degree from the Technion
Institute of Technology in Israel.
Brent R. Bilger has served as the Company's Vice President of Marketing
since joining the Company in April 1997. Prior to joining the Company, Mr.
Bilger spent more than seven years with Cisco, a network equipment vendor,
where he served most recently as the Director of Marketing for service
providers. Mr. Bilger also served as the Director of Marketing of high-end
routers and ATM products during part of his tenure at Cisco. Mr. Bilger
received a B.A. degree from Dartmouth College, a B.E. degree from Thayer
School of Engineering, Dartmouth College, and an M.S.E.E. degree from Cornell
University.
John A. Teegen has served as the Company's Vice President of Sales since
joining the Company in January 1997. From August 1994 to January 1997, Mr.
Teegen was the Vice President of Worldwide Sales for Intellon Corporation, a
semiconductor company. From August 1987 to August 1994, Mr. Teegen was
employed by VLSI Technology, Inc., also a semiconductor company, where he
served in a variety of sales management positions, most recently as the Vice
President of Consumer and Industrial Sales. Mr. Teegen holds a B.S.E.E. degree
from the University of Florida.
John G. Adler has served as a director of the Company since March 1997. Mr.
Adler served as the Chairman of the Board of Directors of Adaptec, Inc., an
electronic equipment manufacturing company, from May 1990 through August 1997.
Mr. Adler also served as the President of Adaptec, Inc. from May 1985 to
August 1992 and as its Chief Executive Officer from December 1986 to July
1995. Mr. Adler holds a B.S.E.E. degree from University of Mississippi and was
a Sloan Executive Fellow at Stanford University in 1971.
Irwin Federman has served as a director of the Company since July 1994. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture
capital firm, since April 1990. From 1988 to 1990 he was a Managing Director
of Dillon Read & Co., an investment banking firm, and a general partner in its
venture capital affiliate, Concord Partners. Mr. Federman also serves on the
boards of directors of SanDisk Corporation, a memory systems company, Western
Digital Corporation, a disk drive manufacturer, Komag Incorporated, a thin
film media manufacturer, NeoMagic Corporation, a developer of multimedia
accelerators, Checkpoint Software Technology, Ltd., a network security
software company and several privately-held companies. Mr. Federman received a
B.S. degree in Economics from Brooklyn College and was awarded an honorary
Doctorate of Engineering Science from Santa Clara University.
Andrew S. Rappaport has served as a director of the Company since July 1994.
Mr. Rappaport has been a partner of August Capital, LLC, a venture capital
firm, since July 1996. Prior to that time, Mr. Rappaport was the President of
The Technology Research Group, Inc., a Boston-based strategic management
consulting firm which he founded in August 1984. Mr. Rappaport attended
Princeton University.
Geoffrey Y. Yang has served as a director of the Company since July 1994.
Mr. Yang has been a general partner of Institutional Venture Partners, a
venture capital firm, since June 1989. He also serves on the Board of
Directors of Excite, Inc., an Internet navigation service, and numerous
private companies. Mr. Yang holds a B.A. in Economics from Princeton
University, a B.S.E. in Engineering and Management Systems from Princeton
University, as well as an M.B.A. from Stanford University.
There are no family relationships among any of the Company's directors or
executive officers.
ITEM 2. PROPERTIES
The Company's main executive, administrative and technical offices occupy
approximately 35,000 square feet in Sunnyvale, California, under a lease that
expires in March 1999. Effective December 1, 1997, the
12
<PAGE>
Company entered into a lease in Chelmsford, Massachusetts for approximately
4,000 square feet that expires in November 2002, which houses sales and
customer support personnel. The Company believes that its existing facilities
are adequate to meet its requirements through 1998.
ITEM 3. LEGAL PROCEEDINGS
On October 27, 1997, FORE Systems, Inc. filed a complaint in the United
States District Court for the Western District of Pennsylvania alleging that
the Company willfully infringed two of FORE's patents. The complaint seeks
both a preliminary and a permanent injunction against the Company, as well as
recovery of damages. On December 17, 1997, FORE filed an amended complaint
alleging patent infringement of an additional patent, seeking identical relief
on all three patents and, in addition, FORE alleged trade secret
misappropriation against MMC seeking preliminary and permanent injunctive
relief as well as recovery of damages. On January 9, 1998, MMC filed a motion
to dismiss or transfer the Pennsylvania action and to transfer the case to the
Northern District of California. This motion is currently pending. The results
of litigation are inherently uncertain, and there can be no assurance that the
Company will prevail in any litigation with FORE. An adverse result in the
FORE litigation could have a material adverse effect on the Company's
business, financial condition and results of operations.
In the normal course of business, the Company has been named as defendant in
certain actions and could incur liability from such actions; however, any such
liability is not determinable or estimable and in the opinion of management,
the outcome of such litigation is not expected to have a material adverse
effect on the results of operations and financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "MMCN." The following table sets forth the range of the high and low
sale prices by quarter as reported on the Nasdaq National Market since October
29, 1997, the date the Common Stock commenced trading.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
------- ---- --------
<S> <C> <C>
1997: Fourth Quarter (from October 29, 1997)................. $28 $12 5/8
</TABLE>
As of March 13, 1998, the number of common stockholders of record was 166.
The Company currently intends to retain any earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
On October 28, 1997, the Company commenced and completed its initial public
offering (the "IPO") of 4,025,000 shares (including the exercise of the
underwriters' over-allotment option consisting of 525,000 shares) of its
Common Stock, $0.001 par value per share, at a public offering price of $11.00
per share pursuant to a registration statement on Form S-1 (file no. 333-
34005) filed with the Securities and Exchange Commission. All of the shares
registered were sold. Morgan Stanley Dean Witter, Deutsche Morgan Grenfell and
Wessels, Arnold & Henderson were the managing underwriters of the IPO.
The following table indicates the amount and aggregate offering price of the
Common Stock registered and sold in the IPO for the account of the Company.
There were no selling stockholders in the IPO.
<TABLE>
<CAPTION>
AGGREGATE PRICE OF AGGREGATE
AMOUNT OFFERING AMOUNT OFFERING PRICE OF
TITLE OF SECURITY REGISTERED REGISTERED AMOUNT SOLD AMOUNT SOLD
----------------- ---------- ------------------ ------------ -----------------
<S> <C> <C> <C> <C>
Common Stock,
$0.001 par value 4,025,000 shares $44,275,000 4,025,000 shares $44,275,000
</TABLE>
The following table lists the amount of expenses incurred for the Company's
account in connection with the issuance and distribution of the Common Stock
issued in the IPO.
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS TO DIRECTORS
OR OFFICERS OF THE COMPANY OR THEIR
ASSOCIATES; TO PERSONS OWNING TEN PERCENT
OR MORE OF ANY CLASS OF EQUITY SECURITIES
OF THE COMPANY; AND TO AFFILIATES OF THE DIRECT OR INDIRECT
COMPANY PAYMENTS TO OTHERS
----------------------------------------- ------------------
<S> <C> <C>
Underwriting discounts
and commissions........ $0 $ 3,099,250
Finders' fees........... $0 $ 0
Expenses paid to or for
underwriters........... $0 $ 0
Other expenses through
December 31, 1997...... $0 $ 1,103,533
--- -----------
Total expenses.......... $0 $ 4,202,783
Net Proceeds of IPO..... $40,072,217
===========
</TABLE>
14
<PAGE>
The following table lists the amount of net offering proceeds to the Company
used for each of the purposes listed below for the period from October 28,
1997, the effective date of the registration statement, through December 31,
1997.
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS TO DIRECTORS
OR OFFICERS OF THE COMPANY OR THEIR
ASSOCIATES; TO PERSONS OWNING TEN
PERCENT OR MORE OF ANY CLASS OF EQUITY
SECURITIES OF THE COMPANY; AND TO DIRECT OR INDIRECT
AFFILIATES OF THE COMPANY PAYMENTS TO OTHERS
---------------------------------------- ------------------
<S> <C> <C>
Construction of plant,
building and
facilities............. $ 0 $ 0
Purchase and
installation of
machinery and
equipment.............. $0 $ 0
Purchase of real estate. $0 $ 0
Acquisition of other
business(es)........... $0 $ 0
Repayment of
indebtedness........... $0 $ 0
Working capital......... $0 $ 500,000
TEMPORARY INVESTMENT
(SPECIFY)
Asset-backed securities. $ 0 $ 2,000,000
Municipal bonds......... $ 0 $ 8,601,296
Commercial paper........ $ 0 $28,970,921
OTHER PURPOSES (SPECIFY)
Acquisition of minority
equity interests in
other corporations..... $0 $ 0
</TABLE>
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements and notes thereto included
elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 21,930 $ 10,515 $ 577 $ 165 $ --
Cost of revenues.................. 6,542 3,576 304 23 --
-------- -------- -------- ------- ------
Gross profit.................. 15,388 6,939 273 142 --
-------- -------- -------- ------- ------
Operating expenses:
Research and development, net... 8,318 3,312 1,802 132 (186)
Selling, general and
administrative................. 6,240 3,225 1,151 298 184
-------- -------- -------- ------- ------
Total operating expenses...... 14,558 6,537 2,953 430 (2)
-------- -------- -------- ------- ------
Operating income (loss)........... 830 402 (2,680) (288) 2
Interest income, net............ 504 317 104 62 5
-------- -------- -------- ------- ------
Income (loss) before income taxes. 1,334 719 (2,576) (226) 7
Provision for income taxes........ 138 17 -- -- --
-------- -------- -------- ------- ------
Net income (loss)................. $ 1,196 $ 702 $ (2,576) $ (226) $ 7
======== ======== ======== ======= ======
Basic income per share(1)......... $ 0.08 $ 0.07 $ (0.38) $ (0.04) $ 0.00
======== ======== ======== ======= ======
Shares used to compute basic
income per share(1).............. 14,432 10,652 6,808 6,081 6,075
======== ======== ======== ======= ======
Diluted income per share(1)....... $ 0.04 $ 0.03 $ (0.38) $ (0.04) $ 0.00
======== ======== ======== ======= ======
Shares used to compute diluted
income per share(1).............. 29,113 25,745 6,808 6,081 6,075
======== ======== ======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ----
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments................................. $45,401 $6,318 $8,102 $2,920 $23
Working capital.............................. 46,159 7,113 7,177 2,777 19
Total assets................................. 54,723 10,676 9,527 3,322 33
Long-term obligations........................ 286 636 301 100 --
Total stockholders' equity................... 49,717 8,177 7,446 2,830 19
</TABLE>
- --------
(1) For an explanation of the number of shares used to compute basic and
diluted net income per share, see Note 2 of Notes to Financial Statements.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the subsection entitled "Factors Affecting
Future Results" commencing on page 21. The following discussion of the
financial condition and results of operations of the Company should be read in
conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Report.
OVERVIEW
MMC Networks is a leading developer and supplier of network processors--
high-performance, open-architecture, software-programmable processors
optimized for networking applications. From its inception in September 1992
through late 1995, the Company was engaged principally in research and
development, and a substantial portion of the Company's operating expenses
during such period was related to such research and development activities.
The Company commenced volume shipments of its ATMS2000 products in late 1995
and of its PS1000 products in 1996. The Company's operating results in 1997
reflect increased market acceptance and sales of the Company's products. The
Company recognizes revenue at the time of product shipment to its customers.
Product returns and sales allowances, which have not been significant through
December 31, 1997, are estimated and provided for at the time of sale.
Substantially all of the Company's revenues have been derived from sales of
its ATMS2000 and PS1000 product families to a small number of customers. Sales
to the Company's three largest customers in 1997, 1996 and 1995 accounted for
68%, 76% and 71% of total revenues, respectively. The largest of these
customers is Cisco, which accounted for approximately 28%, 51% and 48% of
total revenues in 1997, 1996 and 1995, respectively. The decrease in the
percentage of revenues attributable to Cisco is primarily the result of the
significant increase in revenues from other customers. The level of sales to
any customer can vary substantially from period to period based on the
customer's product development cycle. The Company expects that significant
customer concentration will continue for the foreseeable future. As a result,
the Company's business, financial condition and operating results may be
materially adversely affected by any cancellation, delay or deferral of orders
by any of its significant customers. See "Factors Affecting Future Results--
Customer Concentration."
The Company markets and sells its products primarily through a direct sales
and marketing organization. Substantially all of the Company's sales to date
have been to customers located in the United States, including sales to U.S.-
based affiliates of non-U.S. network equipment vendors. The Company has sales
representatives in the United States, Canada, Israel, Japan, Taiwan and the
United Kingdom.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the years ended
December 31, 1997, 1996 and 1995 expressed as a percentage of the Company's
revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ 100.0% 100.0% 100.0%
Cost of revenues................................ 29.8% 34.0% 52.7%
------- ------- --------
Gross profit................................ 70.2% 66.0% 47.3%
------- ------- --------
Operating expenses:
Research and development, net................. 37.9% 31.5% 312.3%
Selling, general and administrative........... 28.5% 30.7% 199.5%
------- ------- --------
Total operating expenses.................... 66.4% 62.2% 511.8%
------- ------- --------
Operating income (loss)......................... 3.8% 3.8% (464.5%)
Interest income, net.......................... 2.3% 3.0% 18.1%
------- ------- --------
Income (loss) before income taxes............... 6.1% 6.8% (446.4%)
Provision for income taxes...................... 0.6% 0.1% 0.0%
------- ------- --------
Net income (loss)............................... 5.5% 6.7% (446.4%)
======= ======= ========
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Revenues increased to $21.9 million for the year ended December
31, 1997 from $10.5 million for the year ended December 31, 1996. This
increase in revenues reflects the increased acceptance of the Company's
ATMS2000 and PS1000 families of network processors by new and existing
customers.
Cost of Revenues; Gross Profit. Cost of revenues increased to $6.5 million
for the year ended December 31, 1997 from $3.6 million for the year ended
December 31, 1996 as a result of manufacturing costs associated with increased
sales of the Company's network processors to new and existing customers,
including volume shipments of the Company's PS1000 product family. Gross
margin increased to 70.2% for the year ended December 31, 1997 from 66.0% for
the year ended December 31, 1996. Gross margin was lower in 1996 as a result
of higher costs associated with the commencement of volume production during
this period. The Company anticipates that gross margins will decrease slightly
in 1998 as changes in product mix and increased competition, especially with
regards to the more price-sensitive products such as the PS1000 family, exert
pressure on the Company's gross margins.
Research and Development Expenses, Net. Net research and development
expenses increased to $8.3 million for the year ended December 31, 1997 from
$3.3 million for the year ended December 31, 1996 due to the addition of
research and development personnel and associated costs. As a percentage of
total revenues, research and development expenses were 37.9% and 31.5% for the
years ended December 31, 1997 and 1996, respectively, reflecting a substantial
increase in the Company's investment in research and new product development
in 1997. In 1998, the Company expects research and development expenses to
continue to increase in absolute dollars.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $6.2 million for the year ended December
31, 1997 from $3.2 million for the year ended December 31, 1996 due to several
factors: increased sales commissions on higher sales, increased product
marketing costs associated with new products, additional personnel, higher
costs associated with the Company's new headquarters facility, the
establishment of a sales office in Massachusetts and additional costs
associated with being a public company.
18
<PAGE>
In 1998, the Company expects selling, general and administrative expenses to
continue to increase in absolute dollars.
Interest Income, net. Interest income reflects interest earned on average
cash, cash equivalents and short-term investment balances. Interest income was
$630,000 and $427,000 for the years ended December 31, 1997 and 1996,
respectively, reflecting an increase in cash balances and investments from
period to period, due primarily to receipt of net proceeds from the Company's
IPO. Interest expense reflects interest on borrowings against lease lines to
finance the acquisition of capital equipment. Interest expense was $126,000
and $110,000 for the years ended December 31, 1997 and 1996, respectively.
Provision for Income Taxes. The provision for income taxes in 1997 reflects
an effective rate of 10.3%, up from 2.4% in 1996. The federal and state income
taxes payable in 1997 and 1996 relate to federal and state alternative minimum
taxes and certain other permanent tax adjustments. Management expects the
effective tax rate for 1998 to increase as compared to the current year.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Revenues for 1996 and 1995 were $10.5 million and $577,000,
respectively. The Company commenced sales of its network processors in late
1995 and substantially increased shipments to its customers in 1996.
Cost of Revenues; Gross Profit. Cost of revenues was $3.6 million and
$304,000 in 1996 and 1995, respectively, reflecting increased sales in these
periods. Gross margin was 66.0% and 47.3% for 1996 and 1995, respectively. In
1995, the Company commenced shipments of its first ATMS2000 products, and the
cost of revenues reflected the related start-up manufacturing costs during
this period. In 1996, increased gross margin reflected increased production
volumes resulting in lower unit prices paid to the Company's contract
manufacturers.
Research and Development Expenses, Net. Net research and development
expenses were $3.3 million and $1.8 million in 1996 and 1995, respectively.
Research and development expenses as a percentage of revenues were 31.5% and
312.3% in 1996 and 1995, respectively. The increase in research and
development expenses in absolute dollars primarily reflected the addition of
personnel and related costs during these periods. The decrease in research and
development expenses as a percentage of revenues in 1996 reflected the
substantial increase in product shipments in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.2 million and $1.2 million in 1996 and 1995,
respectively. The increase in absolute dollars was due to several factors;
increased commissions on higher sales, increased product marketing costs
associated with new products, additional personnel, costs associated with the
Company's new facility commencing in September 1996 and the establishment of a
sales office in Boston. Selling, general and administrative expenses as a
percentage of total revenues were 30.7% and 199.5% in 1996 and 1995,
respectively. The decrease in selling, general and administrative expenses as
a percentage of revenues reflected the substantial increase in product
shipments in 1996.
Interest Income, net. Interest income totaled $427,000 and $146,000 in 1996
and 1995, respectively. The increase reflects interest earned on higher
balances of cash, cash equivalents and short-term investments resulting from
sales of Preferred Stock in November 1995. Interest expense totaled $110,000
and $42,000 in 1996 and 1995, respectively. The increase in interest expense
resulted from increased borrowing against established lease lines to finance
the acquisition of capital equipment.
Provision for Income Taxes. The provision for income taxes of $17,000 in
1996 represents federal and state alternative minimum taxes. No current
provisions for income taxes were recorded in 1995 as the Company incurred net
operating losses for income tax purposes from July 12, 1994, the date on which
the Company elected
19
<PAGE>
to be taxed as a Subchapter C corporation, through December 31, 1995. In
addition, no deferred benefit for income taxes was recorded in 1995 as the
Company was in a net deferred tax asset position for which a full valuation
allowance was provided.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting of comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from nonowner sources. Examples of
items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gain/loss on available-for-sale securities. The disclosures prescribed by SFAS
130 are effective beginning with the first quarter of calendar 1998. The
adoption of SFAS 130 in 1998 is not expected to have a material impact on the
Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the way companies
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The disclosures prescribed by
SFAS 131 are effective for calendar 1998. The adoption of SFAS 131 in 1998 is
not expected to have a material impact on the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased during 1997 by $40.6
million due primarily to receipt of net proceeds from the IPO of $40.1
million. Net cash provided by operating activities in 1997 of $2.4 million was
the result of net income from operations adjusted for depreciation and
amortization and an increase of accounts payable year over year for a total of
approximately $4.4 million which was partially offset by an increase in
accounts receivable of $2.5 million. Net cash used in investing activities in
1997 was $1.7 million and was due to the sale of short-term investments of
$1.5 million offset by the purchase of capital equipment of $3.2 million. The
net increase in cash and cash equivalents during 1996 of $4.6 million was
primarily attributable to the sale of short-term investments of $6.3 million
partially offset by an increase in accounts receivable of $1.4 million. The
net decrease in cash and cash equivalents during 1995 of $338,000 primarily
resulted from the net loss from operations of $2.6 million and the purchase of
short-term investments of $5.5 million offset by the proceeds from the
issuance of Preferred Stock of $7.2 million.
The Company had working capital of $46.1 million at December 31, 1997 as
compared to $7.1 million at December 31, 1996, and the Company's current ratio
improved to 10.8 to 1 as of December 31, 1997 from 4.8 to 1 as of December 31,
1996.
In April 1997, the Company entered into a $5.0 million revolving bank credit
facility, which bears interest at the bank's prime rate, and a $3.0 million
bank lease line, which bears interest at the bank's prime rate plus .5%. Both
facilities expire in April 1998. At December 31, 1997, there were no
borrowings outstanding under either facility. As of that date, however, the
Company had $636,000 in borrowings under two prior lease facilities. See Notes
4 and 10 of Notes to Financial Statements.
Through December 31, 1997, the Company had acquired approximately $5.4
million in capital assets. A portion of the Company's future capital
expenditures will be devoted to enhancing and expanding the Company's
operational, financial and management information systems. Capital
expenditures through 1998 are expected to be funded in part out of working
capital, and in part through existing and future credit and lease facilities.
The Company uses a number of independent suppliers to manufacture
substantially all of its products. As a result, the Company relies on these
suppliers to allocate to the Company a sufficient portion of foundry capacity
20
<PAGE>
to meet the Company's needs and deliver sufficient quantities of the Company's
products on a timely basis. See "Factors Affecting Future Results --Dependence
on Independent Manufacturers." These arrangements allow the Company to avoid
utilizing its capital resources for manufacturing facilities and work-in-
process inventory and focus substantially all of its resources on the design,
development and marketing of its products. The Company expects to assume more
responsibility for managing product manufacturing in the future, which may
entail additional expenditures. The Company anticipates that any such
expenditures will be funded by working capital.
The Company believes that the net proceeds of the IPO, together with its
existing cash balances and available line of credit and cash flow expected to
be generated from future operations, will be sufficient to meet the Company's
capital requirements through the next twelve months, although the Company
could be required, or could elect, to seek to raise additional capital before
such time. This estimate is a forward-looking statement and the actual period
of time for which the Company's resources will be sufficient will depend on
many factors, including the rate of revenue growth, if any, the timing and
extent of spending to support product development efforts and the expansion of
sales and marketing efforts, the timing and size of business or technology
acquisitions, the timing of introductions of new products and enhancements to
existing products and market acceptance of the Company's products. There can
be no assurance that additional equity or debt financing, if required, will be
available on acceptable terms or at all.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
During the first quarter of 1998, initial contact with both the Company's
accounting system representatives and its significant outside suppliers
indicates Year 2000 compliance and, as such, the Company does not expect to be
required to modify or replace significant portions of its software to properly
utilize dates beyond December 31, 1999. The Company has adopted a Year 2000
plan which includes comprehensive testing of all critical systems for Year
2000 compliance by June 1999. In addition, the plan provides for a full
assessment of any potential Year 2000 issues, if any, related to software
embedded in the Company's products. This assessment is expected to be
completed prior to the release of the Company's Year 2000 Statement covering
the compliance of its products with respect to Year 2000 issues, which is
scheduled for June 1998.
Costs related to the Company's Year 2000 plan will be expensed as incurred
and are not currently expected to have a material effect on the results of
operations of the Company. The Company's estimate of costs related to Year
2000 compliance is a forward-looking statement that is subject to risks and
uncertainties that could cause actual costs to be higher, including whether
management's assumptions of future events prove to be correct.
FACTORS AFFECTING FUTURE RESULTS
As described by the following factors, past financial performance should not
be considered a reliable indicator of future performance and investors should
not use historical trends to anticipate results or trends in future periods.
Limited Operating History; No Assurance of Future Profitability. Although
the Company has experienced significant revenue growth in recent periods and
first achieved profitability in the first quarter of 1996, these results
should not be considered indicative of future revenue growth, if any, nor is
there any assurance that the Company will be profitable in any future period.
Due to anticipated increases in the Company's operating expenses, the
Company's operating results will be adversely affected if the Company's
revenues do not continue to increase. The sales cycle for the Company's
products can range from three to six months or more, with an
21
<PAGE>
additional nine to 18 months or more before a network equipment vendor
customer commences volume production of equipment which incorporates the
Company's products. As a result, there may be a significant delay between the
Company increasing its research and development and sales and marketing
expenses and its generation of higher revenues, if any, from such
expenditures. To remain profitable, the Company must, among other things,
successfully increase the scope of its operations, respond to competitive
developments, continue to attract, retain and motivate qualified personnel and
continue to commercialize products incorporating innovative technologies.
There can be no assurance that the Company will be successful in doing so.
Fluctuations in Operating Results. Fluctuations in the Company's operating
results have occurred in the past and are likely to occur in the future due to
a variety of factors, any of which may have a material adverse effect on the
Company's operating results. In particular, the Company's quarterly results of
operations may vary significantly due to general business conditions in the
networking equipment and semiconductor industries, changes in demand for the
network equipment products of the Company's customers, the timing and amount
of orders from the Company's network equipment vendor customers, cancellations
or delays of customer product orders, new product introductions by the Company
or its competitors, cancellations, changes or delays of deliveries of products
to the Company by its suppliers, increases in the costs of products from the
Company's suppliers, fluctuations in product life cycles, price erosion,
competition, changes in the mix of products sold by the Company, availability
of semiconductor foundry capacity, variances in the timing and amount of
nonrecurring engineering funding and operating expenses, seasonal fluctuations
in demand, intellectual property disputes and general economic conditions. The
Company has at times recognized a substantial portion of its revenues in the
last month of a quarter. Since a large portion of the Company's operating
expenses, including rent, salaries and capital lease expenses, is fixed and
difficult to reduce or modify, if revenue does not meet the Company's
expectations, the material adverse effect of any revenue shortfall will be
magnified by the fixed nature of these operating expenses. All of the above
factors are difficult for the Company to forecast, and these and other factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence Upon Development of the Market for Network Processors. The
Company's future prospects are dependent upon the acceptance of network
processors as an alternative to the Application-Specific Integrated Circuit
("ASIC") components and general purpose processors traditionally utilized by
network equipment vendors. The Company's future prospects are also dependent
upon acceptance by the Company's customers of third party sourcing for network
processors as an alternative to in-house development. Many of the Company's
current and potential customers have substantial technological capabilities
and financial resources and currently develop internally the ASIC components
and program the general purpose processors utilized in their products. These
customers may in the future continue to utilize internally-developed ASIC
components and general purpose processors or may determine to develop or
acquire components, technologies or network processors that are similar to, or
that may be substituted for, the Company's products. The Company must
anticipate market trends and the price, performance and functionality
requirements of such network equipment vendors and must successfully develop
and manufacture products that meet these requirements. In addition, the
Company must make products available to such customers on a timely basis and
at competitive prices. If the Company's network equipment vendor customers
fail to accept network processors as an alternative, if they develop or
acquire the technology to develop such components internally rather than
purchase the Company's products, or if the Company is otherwise unable to
develop strong relationships with network equipment vendors, the Company's
business, financial condition and results of operations would be materially
and adversely affected.
Customer Concentration. The Company's customer base is highly concentrated.
A relatively small number of customers has accounted for a significant portion
of the Company's revenues to date, and the Company expects that this trend
will continue for the foreseeable future. Each of the Company's network
equipment vendor customers, including Cisco and Hitachi, can cease
incorporating the Company's products with limited notice to the Company and
with little or no penalty. The Company's agreements with network equipment
vendor customers do not require minimum purchases. Pursuant to the Company's
agreements with Cisco and certain of its other customers, under certain
circumstances, such customers have the right to manufacture the Company's
22
<PAGE>
network processors for resale as part of their products or to otherwise use
proprietary technology of the Company in their products. The circumstances in
which customers have such rights include certain defaults by the Company, a
change of control of the Company and certain other events relating to the
Company's inability, or potential inability, to supply products to such
customers. In any such event, the Company will not necessarily be entitled to
royalty payments or fees for use of its technology. The obligation of
customers to pay royalties, if any, may be dependent upon the customer's
ability to obtain products at a price lower than that previously charged by
the Company to the customer.
The Company's longstanding relationship with Cisco may inhibit other leading
network equipment vendors from adopting the Company's network processors.
Cisco faces intense competition from vendors such as Bay Networks, Inc., 3Com
Corporation and FORE, none of which currently uses the Company's network
processors. Accordingly, the Company's future operating results may be
substantially dependent on Cisco's competitive position in the networking
equipment market. Any reduction or delay in sales of the Company's products to
its network equipment vendor customers could have a material adverse effect on
the Company's business, operating results and financial condition. There can
be no assurance that the Company will retain its current network equipment
vendor customers or that it will be able to recruit additional customers. The
loss of one or more of the Company's customers or the inability of the Company
to successfully develop relationships with additional significant network
equipment vendors could have a material adverse effect on the Company's
business, financial condition and results of operations.
Erosion of Average Selling Prices. The data networking and semiconductor
industries have experienced rapid erosion of average selling prices ("ASPs")
due to a number of factors, including rapid technological change,
price/performance enhancements and product obsolescence. The Company may
experience substantial period-to-period fluctuations in future operating
results due to ASP erosion. The Company anticipates that ASPs will decrease in
the future in response to product introductions by competitors or the Company
or other factors, including price pressures from significant customers. In
particular, the market for Ethernet switching and routing components has
experienced and is expected to continue to experience significant ASP erosion.
Therefore, the Company must continue to develop and introduce on a timely
basis new products which incorporate features that can be sold at higher ASPs.
Failure to achieve any or all of the foregoing could cause the Company's
revenues and gross margins to decline, which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
New Product Development and Technological Change. The data networking and
semiconductor industries are characterized by rapidly changing technology,
frequent product introductions and evolving industry standards. Accordingly,
the Company's future performance depends on a number of factors, including the
Company's ability to identify emerging technological trends in its target
markets, develop and maintain competitive products, enhance its products by
adding innovative features that differentiate its products from those of
competitors, bring products to market on a timely basis at competitive prices,
properly identify target markets and respond effectively to new technological
changes or new product announcements by others. No assurance can be given that
the Company's design and introduction schedules for any additions and
enhancements to its existing and future products will be met, that these
products will achieve market acceptance, or that the Company will be able to
sell these products at ASPs that are favorable to the Company. In evaluating
new product decisions, the Company must anticipate well in advance future
demand for product features and performance characteristics, as well as
available supporting technologies, manufacturing capacity, industry standards
and competitive product offerings. The technical innovations required for the
Company to remain competitive must be completed before developments in
networking technologies or standards render them obsolete and must be
sufficiently compelling to induce network equipment vendors to favor them over
alternative technologies. Moreover, the Company must generally incur
substantial research and development costs before the technical feasibility
and commercial viability of a product line can be ascertained. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements, or that the Company will be able to secure the financial
resources necessary to fund future development. In particular, no assurance
can be given that the Company's AnyFlow product line
23
<PAGE>
will become commercially available on a timely basis, will provide the
functional and performance advantages expected by customers, or will find
market acceptance. The failure to successfully develop new products on a
timely basis could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Independent Manufacturers. The Company outsources all
manufacturing, assembly and test of its network processors. The Company's
suppliers currently deliver fully assembled and tested products on a turnkey
basis. The semiconductor industry is highly cyclical and, in the past, foundry
capacity has been very limited at times and may become limited in the future.
Currently, only one of the Company's products is manufactured by more than one
supplier. The Company depends on its suppliers to deliver sufficient
quantities of finished product to the Company in a timely manner. Since the
Company places its orders on a purchase order basis and does not have a long-
term volume purchase agreement with any of its existing suppliers, these
suppliers may allocate, and in the past have allocated, capacity to the
production of other products while reducing deliveries to the Company on short
notice. The Company has recently experienced delays in obtaining an adequate
supply of certain of its products from one supplier, as well as certain
problems regarding the quality of the products delivered by that supplier, and
as a result has begun obtaining such products from an alternative supplier.
There can be no assurance that the Company will not have similar or more
protracted problems in the future with existing or new suppliers. In the event
of a loss of, or a decision by the Company to change, a key supplier or
foundry, qualifying a new supplier or foundry and commencing volume production
could involve delay and expense, resulting in lost revenues, reduced operating
margins and possible detriment to customer relationships and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Given that the Company must place orders approximately 12 to 14 weeks in
advance of expected delivery, any failure of global semiconductor
manufacturing capacity to increase in line with demand could cause foundries
to allocate available capacity to larger customers or customers with long-term
supply contracts. The inability of the Company to obtain adequate foundry
capacity at acceptable prices, or any delay or interruption in supply, could
reduce the Company's product revenues or increase the Company's cost of
revenues and could have a material adverse effect on the Company's business,
financial condition and results of operations.
In the future, the Company expects to change its supply arrangements to
assume more of the product manufacturing responsibilities. The assumption of
greater manufacturing responsibilities involves additional risks including not
only the risks discussed above, but also risks associated with variances in
production yields, obtaining adequate test and assembly capacity at reasonable
cost and other general risks associated with the manufacture of
semiconductors. In addition, the Company also expects that it may enter into
volume purchase agreements pursuant to which the Company must commit to
minimum levels of purchases and which may require up-front investments. The
inability of the Company to effectively assume greater manufacturing
responsibilities or manage volume purchase arrangements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition. The data networking and semiconductor industries are intensely
competitive and are characterized by constant technological change, rapid
rates of product obsolescence and price erosion. The Company's PS1000,
ATMS2000 and AF5000 product families compete with products from companies such
as Texas Instruments Incorporated, Lucent Technologies, Inc., PMC-Sierra Inc.,
Galileo Technology Ltd., Integrated Telecom Technology, Inc. and I-Cube, Inc.
In addition, the Company expects significant competition in the future from
major domestic and international semiconductor suppliers. The Company also may
face competition from suppliers of products based on new or emerging
technologies. Moreover, several established electronics and semiconductor
suppliers have recently entered or indicated an intent to enter the switching
and routing equipment market. In addition, many of the Company's existing and
potential customers internally develop ASICs, general purpose processors,
network processors and other devices which attempt to perform all or a portion
of the functions performed by the Company's products. Many of the Company's
current and prospective competitors offer broader product lines and have
significantly greater financial, technical,
24
<PAGE>
manufacturing and marketing resources than the Company. Failure of the Company
to compete successfully could have a material adverse effect on its operating
results.
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage the Company's reputation and
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or
bugs will not be found in new products after commencement of commercial
production, resulting in additional development costs, loss of, or delays in,
market acceptance, diversion of technical and other resources from the
Company's other development efforts, claims by the Company's customers or
others against the Company, or the loss of credibility with the Company's
current and prospective customers. Any such event would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Growth in Demand for Networking Equipment. The Company's
future success is in large measure dependent on continued growth in the market
for networking equipment, in particular the market for mid- to high-end
switches and routers which are manufactured and sold by the Company's
customers. The market for these products has in the past and may in the future
fluctuate significantly based upon numerous factors, including the lack of
industry standards, adoption of alternative technologies, capital spending
levels and general economic conditions. There can be no assurance with respect
to the rate or extent to which the networking equipment market will grow, if
at all, nor can there be any assurance that the Company will not experience a
decline in demand for its products. Any decrease in the growth of the
networking equipment market or decline in demand for the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Protection of Intellectual Property. The Company relies primarily on a
combination of nondisclosure agreements and other contractual provisions as
well as patent, trademark, trade secret and copyright law to protect its
proprietary rights. There can be no assurance that any patents will issue
pursuant to the Company's current or future patent applications or that
patents issued pursuant to such applications will not be invalidated,
circumvented, challenged or licensed to others. In addition, there can be no
assurance that the rights granted under any such patents will provide
competitive advantages to the Company or be adequate to safeguard and maintain
the Company's proprietary rights. Failure of the Company to enforce and
protect its intellectual property rights could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that such intellectual property rights can be
successfully asserted in the future or will not be invalidated, circumvented
or challenged. From time to time, third parties, including competitors of the
Company, may assert patent, copyright and other intellectual property rights
to technologies that are important to the Company. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future, that assertions by third parties will not result in costly
litigation or that the Company would prevail in any such litigation or be able
to license any valid and infringed patents from third parties on commercially
reasonable terms, if at all.
On October 27, 1997, FORE filed a complaint in the United States District
Court for the Western District of Pennsylvania alleging that the Company
willfully infringed two of FORE's patents. The complaint seeks both a
preliminary and a permanent injunction against the Company, as well as
recovery of damages. On December 17, 1997, FORE filed an amended complaint
alleging patent infringement of an additional patent, seeking identical relief
on all three patents and, in addition, FORE alleged trade secret
misappropriation against MMC seeking preliminary and permanent injunctive
relief as well as recovery of damages. On January 9, 1998, MMC filed a motion
to dismiss or transfer the Pennsylvania action and to transfer the case to the
Northern District of California. This motion is currently pending. The results
of litigation are inherently uncertain, and
25
<PAGE>
there can be no assurance that the Company will prevail in any litigation with
FORE. An adverse result in the FORE litigation could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Furthermore, there can be no assurance that the Company will not in the
future become subject to other patent infringement claims and litigation or
interference proceedings to determine the priority of inventions. The defense
and prosecution of intellectual property suits, interference proceedings and
related legal and administrative proceedings are both costly and time
consuming. Any such suit or proceeding involving the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. Litigation, regardless of the outcome, is likely to
result in substantial cost and diversion of resources of the Company. Any
infringement claim or other litigation against or by the Company could
materially adversely affect the Company's business, financial condition and
results of operations.
Dependence on Key Personnel and Hiring of Additional Personnel. The
Company's success depends to a significant degree upon the continued
contributions of its key management, engineering and other personnel, many of
whom would be difficult to replace. The Company does not have employment
contracts with any of its key personnel and only maintains limited key man
life insurance on two of its officers. In addition, the Company believes that
its success depends to a significant extent on the ability of its management
to operate effectively, both individually and as a group. The Company must
continue to attract and retain highly skilled managerial, engineering and
other personnel. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting and retaining
such personnel. The loss of the services of any of the key personnel, the
inability to attract or retain qualified personnel in the future or delays in
hiring required personnel, particularly engineers, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Management of Growth. The Company has experienced a period of rapid growth
and expansion which has placed, and continues to place, a significant strain
on its resources. To accommodate this growth, the Company will be required to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of its accounting and other
internal management systems, all of which may require substantial management
effort. There can be no assurance that such efforts can be accomplished
successfully. Any failure to improve the Company's operational, financial and
management information systems in response to growth, or to hire, train,
motivate or manage its employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with Expansion of International Business
Activities. Substantially all of the Company's sales to date have been to
customers located in the United States, including sales to U.S.-based
affiliates of non-U.S. network equipment vendors. If the Company's
international sales increase, the Company will be subject to additional risks
inherent in international operations. All of the Company's international sales
to date are U.S. dollar-denominated. As a result, an increase in the value of
the U.S. dollar relative to foreign currencies could make the Company's
products less competitive in international markets. In addition, the Company
procures a portion of its manufacturing, assembly and test services from
suppliers located outside the United States. International business activities
may be limited or disrupted by the imposition of governmental controls, export
license requirements, restrictions on the export of critical technology,
currency exchange fluctuations, political instability, trade restrictions and
changes in tariffs. Demand for the Company's products could also be adversely
affected by seasonality of international sales and economic conditions in the
Company's primary overseas markets. These international factors could have a
material adverse effect on future sales of the Company's products to
international customers and, consequently, on the Company's business,
financial condition and results of operations. While the Company has not
experienced any revenue shortfall to date as a result of recent financial
difficulties of Asian economies, any decrease in demand by Company customers
for the Company's products caused by decreased sales by such customers in Asia
could have an adverse effect on the Company's revenues in the future.
26
<PAGE>
Need for Additional Capital. The Company may require substantial additional
working capital to fund its business, particularly to finance inventories and
accounts receivable and for product development. Any such additional financing
may result in significant dilution to the Company's then existing investors.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities, or that may otherwise offer growth
opportunities. Future acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's operating
results and/or the price of the Company's Common Stock. Acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has no
or limited prior experience and potential loss of key employees of acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel
that might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Expected Volatility of Stock Price. In recent years the stock market in
general, and the market for shares of high technology, data networking and
semiconductor companies in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. The trading price of the Company's Common Stock is
expected to be subject to extreme fluctuations in response to both business-
related issues, such as quarterly variations in operating results,
announcements of new products by the Company or its competitors, the gain or
loss of significant network equipment vendor customers, and stock market-
related influences, such as changes in analysts' estimates, the presence or
absence of short-selling of the Company's Common Stock and events affecting
other companies that the market deems to be comparable to the Company. In
addition, technology stocks have from time to time experienced extreme price
and volume fluctuations that often have been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. Moreover,
the trading prices of many high technology, data networking and semiconductor
stocks are at or near their historical highs and reflect price/earnings ratios
substantially above historical norms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and supplemental data required
by this item and set forth at the pages indicated in item 14(a) of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that
the registrant will file a definitive Proxy Statement pursuant to Regulation
14A (the "Proxy Statement") no later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
Certain information regarding the directors and officers of the Company is
contained herein under Item 1, "Executive Officers and Directors of the
Company."
Information regarding directors appearing under the caption "Election of
Directors--Directors and Nominees for Director" in the Proxy Statement is
hereby incorporated by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Election of Directors--Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth under the caption,
"Additional Information Relating to Directors and Officers of the Company -
Executive Compensation" in the Company's Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth under the caption "Security
Ownership" in the Company's Proxy Statement, which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth under the captions
"Election of Directors--Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions" in the Company's Proxy Statement,
which information is incorporated herein by reference.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.................................. 30
Balance Sheets at December 31, 1997 and 1996....................... 31
Statements of Operations for each of the three years ended December
31, 1997.......................................................... 32
Statements of Stockholders' Equity for each of the three years
ended December 31, 1997........................................... 33
Statements of Cash Flows for each of the three years ended December
31, 1997.......................................................... 34
Notes to Financial Statements...................................... 35
2. FINANCIAL STATEMENTS SCHEDULE
Schedule II--Valuation and Qualifying Accounts..................... 49
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MMC Networks, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) on page 29 present fairly, in all material respects, the
financial position of MMC Networks, Inc. at December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 16, 1998
30
<PAGE>
MMC NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $45,401 $ 4,809
Short-term investments..................................... -- 1,509
Accounts receivable, net of allowances of $181 and $133.... 4,526 2,025
Inventories................................................ 570 511
Prepaid expenses and other current assets.................. 382 122
------- -------
Total current assets..................................... 50,879 8,976
Property and equipment, net.................................. 3,631 1,616
Other assets................................................. 213 84
------- -------
$54,723 $10,676
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 2,626 $ 586
Accrued expenses........................................... 1,744 789
Deferred revenue and customer deposits..................... -- 100
Current portion of capital lease obligations............... 350 388
------- -------
Total current liabilites................................. 4,720 1,863
------- -------
Capital lease obligations, net of current portion............ 286 636
------- -------
Commitments and contingencies (Note 10)
Stockholders' equity:
Series A Convertible Preferred Stock: $0.001 par value;
9,378 shares authorized; 0 and 9,255 shares issued and
outstanding............................................... -- 3,055
Series B Convertible Preferred Stock: $0.001 par value;
4,121 shares authorized; 0 and 4,087 shares issued and
outstanding............................................... -- 7,192
Common Stock: $0.001 par value; 100,000 and 60,000 shares
authorized; 29,198 and 11,121 shares issued and
outstanding............................................... 25 7
Additional paid-in capital................................. 50,778 249
Notes receivable from stockholders......................... (181) (225)
Accumulated deficit........................................ (905) (2,101)
------- -------
Total stockholders' equity............................... 49,717 8,177
------- -------
$54,723 $10,676
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
MMC NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues............................................ $21,930 $10,515 $ 577
Cost of revenues.................................... 6,542 3,576 304
------- ------- -------
Gross profit.................................... 15,388 6,939 273
------- ------- -------
Operating expenses:
Research and development, net..................... 8,318 3,312 1,802
Selling, general and administrative............... 6,240 3,225 1,151
------- ------- -------
Total operating expenses........................ 14,558 6,537 2,953
------- ------- -------
Operating income (loss)............................. 830 402 (2,680)
------- ------- -------
Other income (expense):
Interest income................................... 630 427 146
Interest expense.................................. (126) (110) (42)
------- ------- -------
Total other income.............................. 504 317 104
------- ------- -------
Income (loss) before income taxes................... 1,334 719 (2,576)
Provision for income taxes.......................... 138 17 --
------- ------- -------
Net income (loss)................................... $ 1,196 $ 702 $(2,576)
======= ======= =======
Basic income (loss) per share....................... $ 0.08 $ 0.07 $ (0.38)
======= ======= =======
Shares used to compute basic income (loss) per
share.............................................. 14,432 10,652 6,808
======= ======= =======
Diluted income (loss) per share..................... $ 0.04 $ 0.03 $ (0.38)
======= ======= =======
Shares used to compute diluted income (loss) per
share.............................................. 29,113 25,745 6,808
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
MMC NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLES EARNINGS
---------------- -------------- PAID-IN FROM (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT) TOTAL
------- ------- ------ ------ ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 9,255 $ 3,055 6,097 $ 2 $ -- $ -- $ (227) $ 2,830
Issuance of Series B
Convertible Preferred
Stock, net of issue
costs of $28........... 4,087 7,192 -- -- -- -- -- 7,192
Exercise of stock
options................ -- -- 4,268 4 121 (125) -- --
Net loss................ -- -- -- -- -- -- (2,576) (2,576)
------- ------- ------ --- ------- ----- ------ -------
Balance at December 31,
1995................... 13,342 10,247 10,365 6 121 (125) (2,803) 7,446
Exercise of stock
options................ -- -- 741 1 122 (100) -- 23
Issuance of Common Stock
in exchange for
services............... -- -- 15 -- 6 -- -- 6
Net income.............. -- -- -- -- -- -- 702 702
------- ------- ------ --- ------- ----- ------ -------
Balance at December 31,
1996................... 13,342 10,247 11,121 7 249 (225) (2,101) 8,177
Conversion of Preferred
Stock upon the
completion of the
initial public
offering............... (13,342) (10,247) 13,342 13 10,234 -- -- --
Issuance of Common
Stock, net of issue
costs of $1,104........ -- -- 4,025 4 40,068 -- -- 40,072
Repurchase of Common
Stock and reduction of
loan receivable from
stockholder............ -- -- (170) -- (114) 114 -- --
Exercise of warrant..... -- -- 121 -- -- -- -- --
Exercise of stock
options and other...... -- -- 744 1 311 (70) -- 242
Issuance of Common Stock
in exchange for
services............... -- -- 15 -- 30 -- -- 30
Net income.............. -- -- -- -- -- -- 1,196 1,196
------- ------- ------ --- ------- ----- ------ -------
Balance at December 31,
1997................... -- $ -- 29,198 $25 $50,778 $(181) $ (905) $49,717
======= ======= ====== === ======= ===== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
MMC NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 1,196 $ 702 $(2,576)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 1,186 479 97
Issuance of Common Stock in exchange for services. 30 6 --
Changes in assets and liabilities:
Accounts receivable............................. (2,501) (1,388) (427)
Inventories..................................... (59) (357) (154)
Prepaid expenses and other assets............... (389) (114) (26)
Accounts payable................................ 2,040 (31) 598
Accrued expenses................................ 955 594 128
Deferred revenue and customer deposits.......... (100) (750) 575
------- ------ -------
Net cash provided by (used in) operating
activites.................................... 2,358 (859) (1,785)
------- ------ -------
Cash flows from investing activities:
Sale (purchase) of short-term investments........... 1,509 6,343 (5,520)
Acquisition of property and equipment............... (3,201) (673) (162)
------- ------ -------
Net cash provided by (used in) investing
activities................................... (1,692) 5,670 (5,682)
------- ------ -------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred
Stock, net......................................... -- -- 7,192
Proceeds form issuance of Common Stock, net......... 40,072 -- --
Proceeds from exercise of stock options............. 242 23 --
Principal payments on capital lease obligations..... (388) (275) (63)
------- ------ -------
Net cash provided by (used in) financing
activites.................................... 39,926 (252) 7,129
------- ------ -------
Net increase (decrease) in cash and cash equivalents.. 40,592 4,559 (338)
Cash and cash equivalents at beginning of period...... 4,809 250 588
------- ------ -------
Cash and cash equivalents at end of period............ $45,401 $4,809 $ 250
======= ====== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest.............................. $ 126 $ 110 $ 42
Cash paid for income taxes.......................... $ 13 $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of property and equipment through
capital leases..................................... $ -- $ 880 $ 352
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
MMC Networks, Inc. (the "Company") was incorporated in California on
September 25, 1992 as a Subchapter S corporation and became a Subchapter C
corporation effective July 12, 1994. The Company is a leading developer and
supplier of network processors--high-performance, open-architecture, software-
programmable processors optimized for networking applications. The Company
sells its products primarily in the United States.
Certain equity transactions
In August 1997, the Company's Board of Directors authorized, and the
stockholders subsequently approved, the reincorporation of the Company in
Delaware and the associated exchange of one share of each class and series of
stock of the predecessor Company for one share of each corresponding class and
series of stock of the Delaware successor. As a result of the reincorporation,
the Company is authorized to issue 100,000,000 shares of Common Stock. On
January 13, 1998, the Company amended its Certificate of Incorporation to
authorize 10,000,000 shares of undesignated Preferred Stock. The Board of
Directors will have the authority to issue the undesignated Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
Initial public offering
In October 1997, the Company completed its initial public offering and sold
4,025,000 shares of its Common Stock to the public at a price of $11.00 per
share. The Company received approximately $40.1 million of cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously
each outstanding share of Convertible Preferred Stock was automatically
converted into one share of Common Stock. (See Note 6.)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Short-term investments
consist primarily of commercial paper and U.S. Treasury securities with
maturities of more than three months when purchased. The Company has
categorized its short-term investments as available-for-sale. At December 31,
1996, the fair market value of the Company's short-term investments
approximated cost.
Inventories
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
35
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, generally three years.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived
assets and recognizes impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. No such impairments have been identified to date.
Revenue recognition; customer concentration
Revenues are recognized upon shipment of product to customers. Funds
received in advance of product shipment are deferred and recognized upon
shipment of the product. The Company's normal policy is to not accept returns
except for defective products. Anticipated costs related to product warranties
are charged to operations as revenues are recognized. The Company has not
experienced significant warranty claims to date.
The percentage of total revenues accounted for by the Company's significant
customers (significant customers are those customers accounting for more than
10% of the Company's total revenues) are as follows: Cisco, Mitsui Comtek
Corp., a non-stocking sales representative for Japan, and the U. S. Computer
Division of Hitachi accounted for 28%, 28% and 12%, respectively, of total
revenues for the year ended December 31, 1997 and 51%, 15% and 10%,
respectively, of total revenues for the year ended December 31, 1996. For the
year ended December 31, 1995, Cisco, Ipsilon, Toshiba, and Agile represented
48%, 12%, 11% and 11% of total revenues, respectively.
Research and development
Research and development expenses are charged to operations as incurred. The
Company on occasion receives non-recurring engineering funding for development
projects to apply or enhance the Company's technology to a particular
customer's needs. Such funding is recognized over the term of the respective
contract using the percentage-of-completion method. At the time of
recognition, amounts received under research and development contracts are
offset against research and development expenses. (See Note 9.)
Software development expenses
Software development expenses are included in research and development and
are expensed as incurred. The Company capitalizes certain software development
expenses once technological feasibility is established, which the Company
defines as the completion of a working model. The capitalized expense is then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current sales to total projected product sales, whichever is greater.
To date, the period between achieving technological feasibility and the
general availability of such software has been short, and software development
expenses qualifying for capitalization have been insignificant. Accordingly,
the Company has not capitalized any software development expenses.
Income taxes
The Company accounts for income taxes using an asset and liability approach,
which requires the recognition of taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax consequences
of events that have been recognized in the Company's financial statements or
tax returns. The measurement of current and deferred tax liabilities and
assets are based on the provisions of the enacted tax law;
36
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
Stock-based compensation
The Company accounts for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. The
Company provides additional pro forma disclosures as required under Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation." (See Note 6.)
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash,
cash equivalents and short-term investments primarily in market rate accounts,
commercial paper, state and municipal securities and U.S. Treasury bills. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. The Company
provides an allowance for doubtful accounts receivable based upon the expected
collectibility of such receivables and to date has not experienced any
material losses.
At December 31, 1997, Cisco and Mitsui Comtek Corp., a non-stocking sales
representative for Japan, each represented 27% of trade receivables. At
December 31, 1996, Cisco, the U.S. Computer Division of Hitachi, and Mistsui
Comtek Corp., represented 32%, 34% and 16% of trade receivables, respectively.
Stock splits
In July 1997 and December 1996 the Company effected a 3-for-2 and 2-for-1
stock split, respectively, of its Common Stock and Convertible Preferred
Stock. The accompanying financial statements have been retroactively adjusted
to reflect these splits.
Net income (loss) per share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") in the fourth quarter of 1997. All
calculations are in accordance with SFAS 128 and the guidance contained in
Staff Accounting Bulletin 98 ("SAB 98") issued in February 1998. All prior
period net income (loss) presented has been restated in accordance with SFAS
128 and SAB 98. SFAS 128 requires presentation of both basic and diluted EPS
on the face of the income statement. Basic EPS is computed by dividing net
income available to common stockholders (numerator) by the weighted average
shares of common stock outstanding (denominator) during the period. Basic EPS
excludes the dilutive effect of potential common stock. Diluted EPS gives
effect to all dilutive potential common stock outstanding during the period.
In computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of
potential common stock.
37
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table reconciles the numerators and denominators of the basic
and diluted EPS computations for the years ended December 31, 1997 and 1996.
For the year ended December 31, 1995, basic and diluted EPS were the same.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC INCOME PER SHARE:
Net income available to common
stockholders........................ $1,196 14,432 $0.08 $702 10,652 $0.07
===== =====
EFFECT OF DILUTIVE SECURITIES:
Convertible Preferred Stock.......... -- 11,118 -- 13,342
Warrants............................. -- 114 -- 50
Stock options........................ -- 3,449 -- 1,701
------ ------ ---- ------
DILUTED INCOME PER SHARE:
Net income available to common
stockholders and assumed
conversions......................... $1,196 29,113 $0.04 $702 25,745 $0.03
====== ====== ===== ==== ====== =====
</TABLE>
At December 31, 1997 and 1996, options to purchase a total of 29,500 shares
of common stock with an average exercise price of $15.94 and 877,500 shares of
common stock with an average exercise price of $1.74, respectively, are
considered anti-dilutive because the options' exercise price was greater than
the average fair market value of the Company's common stock for the years then
ended and, as such, are excluded from the calculation of diluted net income
per share.
Due to the net loss in 1995, all potential common stock outstanding is
considered anti-dilutive and is excluded from the calculation of diluted net
income (loss) per share. Potential common stock outstanding as of December 31,
1995 includes options to purchase 1,479,939 shares of common stock at an
average exercise price of $0.03, warrants to purchase 123,000 shares of common
stock at an exercise price of $0.33 outstanding the entire year, Series A
Convertible Preferred Stock outstanding the entire year convertible into
9,255,000 shares of common stock and Series B Convertible Preferred Stock
issued in November 1995 convertible into 4,086,780 shares of common stock.
(See Note 6.)
Dependence on independent manufacturers
The Company outsources all manufacturing, assembly and test of its network
processors. The Company's suppliers currently deliver fully assembled and
tested products on a turnkey basis. The semiconductor industry is highly
cyclical and, in the past, foundry capacity has been very limited at times and
may become limited in the future. Currently, only one of the Company's
products is manufactured by more than one supplier. The Company depends on its
suppliers to deliver sufficient quantities of finished product to the Company
in a timely manner. Since the Company places its orders on a purchase order
basis and does not have a long-term volume purchase agreement with any of its
existing suppliers, these suppliers may allocate, and in the past have
allocated, capacity to the production of other products while reducing
deliveries to the Company on short notice. During 1997, the Company
experienced delays in obtaining an adequate supply of certain of its products
from one supplier, as well as certain problems regarding the quality of the
products delivered by that supplier, and as a result has begun obtaining such
products from an alternative supplier. There can be no assurance that the
Company will not have similar or more protracted problems in the future with
existing or new suppliers. In the event of a loss of, or a decision by the
Company to change, a key supplier or foundry, qualifying a new supplier or
foundry and
38
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
commencing volume production could involve delay and expense, resulting in
lost revenues, reduced operating margins and possible detriment to customer
relationships.
Recent accounting pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting of comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from nonowner sources. Examples of
items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gain/loss on available-for-sale securities. The disclosures prescribed by SFAS
130 are effective beginning with the first quarter of calendar 1998. The
adoption of SFAS 130 in 1998 is not expected to have a material impact on the
Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the way companies
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The disclosures prescribed by
SFAS 131 are effective for calendar 1998. The adoption of SFAS 131 in 1998 is
not expected to have a material impact on the Company's financial statements.
NOTE 3 -- COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials................................................ $ -- $ 99
Finished goods............................................... 570 412
------- ------
$ 570 $ 511
======= ======
Property and equipment:
Computers and equipment...................................... $ 1,935 $1,397
Purchased software........................................... 3,157 751
Furniture and fixtures....................................... 316 59
------- ------
5,408 2,207
Less accumulated depreciation and amortization................. (1,777) (591)
------- ------
$ 3,631 $1,616
======= ======
Accrued liabilities:
Accrued compensation and benefits............................ $ 807 $ 293
Other accrued liabilities.................................... 937 496
------- ------
$ 1,744 $ 789
======= ======
</TABLE>
NOTE 4 -- BANK LINES OF CREDIT
In April 1997, the Company entered into a revolving credit facility
agreement and lease line agreement with a bank. The revolving line of credit
provides for working capital advances of up to $5 million, and borrowings
39
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
bear interest at the bank's prime rate. The lease line allows for advances of
up to $3 million, and borrowings bear interest at the bank's prime rate plus
0.5%. The lines expire in April 1998. Borrowings under the lines are secured
by the assets of the Company. Among other provisions, the Company is required
to maintain certain financial covenants. In addition, payment of dividends is
prohibited without the bank's prior consent. At December 31, 1997, there were
no amounts outstanding under either facility.
NOTE 5 -- INCOME TAXES
The provision for income taxes of $138,000 and $17,000 for the years ended
December 31, 1997 and 1996, respectively, represents current federal and state
income taxes payable.
No current provision for income taxes was recorded in 1995 as the Company
incurred net operating losses for income tax purposes.
The effective tax rate for the year ended December 31, 1997 reconciles to
the statutory tax rates as follows:
<TABLE>
<S> <C>
Federal statutory rate................................................ 34%
State taxes, net of federal benefit................................... 6
Permanent differences................................................. 2
Utilization of net operating loss carryforwards....................... (32)
---
Effective tax rate.................................................... 10%
===
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryforwards................... $ -- $ 737 $ 994
Research and development credit carryforwards...... 500 314 111
Inventory reserves and basis differences........... 505 129 4
Accrued expenses................................... 197 187 64
Deferred revenue and customer deposits............. -- -- 341
Other.............................................. 179 126 71
------ ------ ------
Total deferred tax assets........................ 1,381 1,493 1,585
Valuation allowance................................ (1,381) (1,493) (1,585)
------ ------ ------
Net deferred tax assets.......................... $ -- $ -- $ --
====== ====== ======
</TABLE>
Because the Company emerged from the development stage in 1996 and,
consequently, does not have an extensive history of profitability, management
believes that the available objective evidence creates sufficient uncertainty
regarding the realizability of deferred tax assets such that a full valuation
allowance is required at December 31, 1997, 1996 and 1995.
At December 31, 1997, the Company had research and development tax credit
carryforwards for federal and state income tax purposes of $350,000 and
$150,000, respectively. The federal research and development credit
carryforwards expire from 2009 through 2012. The state research and
development credit carryforwards expire from 1999 through 2002.
40
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6 -- CAPITAL STOCK
Convertible Preferred Stock
The Company has authorized 13,498,737 shares of Convertible Preferred Stock,
of which 9,378,000 shares have been designated Series A Convertible Preferred
Stock ("Series A") and 4,120,737 shares have been designated Series B
Convertible Preferred Stock ("Series B"). In November 1995 and July 1994, the
Company issued 4,086,780 shares of Series B at $1.77 per share and 9,255,000
shares of Series A at $0.33 per share, respectively. Each outstanding share of
Preferred Stock was converted into one share of Common Stock upon the
completion of the Company's initial public offering. (See Note 1.)
1997 Stock Plan
In August 1997, the Company's Board of Directors adopted, and the
stockholders subsequently approved, the 1997 Stock Plan (the "1997 Plan"). The
1997 Plan is intended to serve as the successor equity incentive program to
the Company's 1993 Plan (the "Predecessor Plan"). Outstanding options under
the Predecessor Plan were incorporated into the 1997 Plan upon the
effectiveness of the Company's initial public offering. No further option
grants were made under the Predecessor Plan. The incorporated options will
continue to be governed by their existing terms which are essentially the same
as options granted under the 1997 Plan described below. The following shares
have been reserved for issuance under the 1997 Plan: (a) 1,500,000 shares of
Common Stock plus any shares which have been reserved but unissued under the
Predecessor Plan; (b) any shares returned to the Predecessor Plan as a result
of termination of options under such plan; and (c) shares added to the 1997
Plan pursuant to automatic annual increases on the date of each annual meeting
of the stockholders beginning with the 1999 annual meeting equal to the lesser
of (i) 1,000,000 shares, (ii) 5% of all then outstanding shares of Common
Stock of the Company, or (iii) a lesser amount determined by the Board. Unless
terminated sooner, the 1997 Plan will terminate automatically in August 2007.
The 1997 Plan provides for the grant of incentive stock options ("ISOs") to
employees, officers and employee directors and nonstatutory stock options
("NSOs") and stock purchase rights ("SPRs") to employees, directors and
consultants. ISOs granted to participants owning stock possessing more than
10% of the voting power of all classes of stock must have an exercise price at
least equal to 110% of the fair market value on the date of grant and are for
periods not to exceed five years. All other options granted under the plan
must have an exercise price at least equal to the fair market value on the
date of grant and are for periods not to exceed ten years. Options granted
under the 1997 Plan generally shall vest at a rate of 25% on the first
anniversary of the date of grant and as to 1/48 of the underlying shares per
month thereafter.
Stock purchase rights are for periods and prices determined by the Board.
Shares purchased through the exercise of SPRs are subject to repurchase by the
Company at the original price paid by the purchaser in the event that the
purchaser's employment with the Company terminates. The repurchase right
lapses at a rate determined by the Board. No stock purchase rights have been
granted to date under either the 1997 Plan or the Predecessor Plan.
1997 Director Option Plan
In August 1997, the Company's Board of Directors adopted, and the
stockholders subsequently approved, the 1997 Director Option Plan (the
"Director Plan"). The Director Plan provides for the grant of nonstatutory
stock options to non-employee directors. Options granted under the Director
Plan are for periods not to exceed ten years and are granted at exercise
prices not less than the fair market value on the date of grant. The Director
Plan provides that each non-employee director will automatically be granted a
nonstatutory option to purchase 40,000 shares of Common Stock (the "First
Option") on the date which such person first becomes a non-
41
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
employee director, unless immediately prior to becoming a non-employee
director, such person was an employee director of the Company. In addition to
the First Option, each non-employee director will automatically be granted an
option to purchase 10,000 shares (a "Subsequent Option") on the date two days
after the announcement of the Company's fiscal year-end earnings of each year,
if on such date he or she will have served on the Board of Directors for at
least the preceding six months.
Each First Option and each Subsequent Option will have a term of 10 years.
Each First Option will vest as to 25% of the optioned stock one year from the
date of grant, and as to an additional 1/48 of the optioned stock each full
month thereafter, provided the person continues to serve as a Director on such
dates. Each Subsequent Option will vest as to 1/12 of the optioned stock each
full month after the date of grant. A total of 150,000 shares of Common Stock
have been reserved for issuance under the Director Plan, plus annual increases
equal to (i) the number of shares of stock underlying options granted under
the Director Plan in the immediately preceding year, or (ii) a lesser amount
determined by the Board.
As of December 31, 1997, a total of 18,375,000 shares have been reserved for
issuance under the plans. A summary of activity under such plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1994.............. 2,351,811 5,073,189 0.03
Granted................................... (846,000) 846,000 0.03
Exercised................................. -- (4,268,250) 0.03
Canceled.................................. 171,000 (171,000) 0.03
---------- ----------
Balance at December 31, 1995.............. 1,676,811 1,479,939 0.03
Authorized................................ 3,300,000 -- --
Granted................................... (3,265,500) 3,265,500 0.79
Exercised................................. -- (741,534) 0.17
Canceled.................................. 810,000 (810,000) 0.29
---------- ----------
Balance at December 31, 1996.............. 2,521,311 3,193,905 0.71
Authorized................................ 7,650,000 -- --
Granted................................... (3,213,500) 3,213,500 3.53
Exercised................................. -- (743,830) 0.36
Canceled.................................. 431,688 (431,688) 0.97
---------- ----------
Balance at December 31, 1997.............. 7,389,499 5,231,887 2.47
========== ==========
</TABLE>
The weighted-average estimated grant-date fair values of options granted
under the plans during the years ended December 31, 1997, 1996 and 1995,
determined using either the minimum value model or the Black-Scholes model as
prescribed by SFAS 123, were $1.16, $0.20, and $0.01 respectively.
For options granted during the years ended December 31, 1996 and for the
period from January 1, 1997 to August 19, 1997 (the day prior to the filing of
the Company's initial registration statement), the Company calculated the fair
value of its stock options using the minimum value model and the following
assumptions: annual dividend yield of 0.0%; risk-free interest rates of 5.63%
to 7.31% in 1995, 5.28% to 6.55% in 1996 and 5.86% to 6.66% for the period
from January 1, 1997 to August 19, 1997; and an expected option term of 4
years. For options granted during the period from August 20, 1997 to December
31, 1997, the Company calculated the fair value of its stock options using the
Black-Scholes model and the following assumptions: annual dividend yield of
0.0%; expected stock price volatility of 70%; risk-free interest rates of
5.69% to 6.16%; and an expected option term of 4 years.
42
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
RANGE OF WEIGHTED- WEIGHTED- WEIGHTED-
EXERCISE NUMBER AVERAGEREMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
-------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.03 442,953 7.13 $ 0.03 179,156 $ 0.03
0.18 to 0.42 354,845 8.21 0.24 58,031 0.21
0.67 to 1.10 733,464 8.45 0.75 180,146 0.71
2.00 to 2.67 2,302,125 9.10 2.09 137,125 2.01
3.33 to 5.33 946,500 9.41 4.28 -- --
6.67 to 7.00 422,500 9.71 7.00 -- --
15.94 29,500 10.00 15.94 -- --
--------- -------
$ 0.03 to 15.94 5,231,887 8.89 $ 2.47 554,458 $ 0.76
========= =======
</TABLE>
1997 Employee Stock Purchase Plan
In August 1997, the Company's Board of Directors adopted, and the
stockholders subsequently approved, the 1997 Employee Stock Purchase Plan (the
"1997 Purchase Plan"). The 1997 Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code and contains 24-month offering
periods, with four six-month purchase periods included in each offering
period. The 1997 Purchase Plan permits employees to purchase Common Stock of
the Company through payroll deductions of up to 10% of the participant's
compensation. The price of stock purchased under the 1997 Purchase Plan shall
be 85% of the lower of the fair market value of the Common Stock at the
beginning of the offering period or at the end of the purchase period. A total
of 300,000 shares of Common Stock has been reserved for issuance under the
1997 Purchase Plan. Shares reserved for issuance under the 1997 Purchase Plan
are subject to automatic annual increases equal to the lesser of (i) 400,000
shares, (ii) 0.8% of all then outstanding shares of Common Stock of the
Company or (iii) a lesser amount determined by the Board.
The fair value of shares granted under the 1997 Purchase Plan was calculated
using the Black-Scholes model as prescribed by SFAS No. 123 assuming the
following weighted-average assumptions: annual dividend yield of 0.0%,
expected stock price volatility of 70%, risk-free interest rate of 5.58%, and
an expected term of 1.3 years. The weighted-average estimated fair value of
shares granted under the 1997 Purchase Plan during 1997 was $4.63 per share.
Had the Company recorded compensation based on the estimated grant-date fair
value, using either the minimum value model or the Black-Scholes model as
discussed above and as prescribed by SFAS 123, for options granted under the
option plans and the 1997 Purchase Plan, the Company's net income (loss) and
basic and diluted income (LOSS) per share would have been reduced to the pro
forma amounts below for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- ------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss) as reported........................ $1,196 $ 702 $(2,576)
Pro forma net income (loss).......................... 619 662 (2,576)
Basic income (loss) per share as reported............ $ 0.08 $0.07 $ (0.38)
Pro forma basic income (loss) per share.............. 0.04 0.06 (0.38)
Diluted income (loss) per share as reported.......... $ 0.04 $0.03 $ (0.38)
Pro forma diluted income (loss) per share............ 0.02 0.03 (0.38)
</TABLE>
43
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Because the determination of the fair value of all options granted after the
Company filed its initial registration statement includes a volatility factor
and because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995, the pro forma effect on net income
(loss) for the years ended December 31, 1997, 1996 and 1995 shown above is not
representative of the pro forma effect on net income (loss) in future years.
NOTE 7 -- OTHER EMPLOYEE BENEFITS
Effective January 1994, the Company adopted a 401(k) plan for its employees
whereby eligible employees may contribute up to 20% of their earnings, on a
pre-tax basis, subject to the maximum amount permitted by the Internal Revenue
Code. At the discretion of the Board of Directors, the Company may make
contributions under the 401(k) plan. To date, the Company has not made any
such contributions.
NOTE 8 -- NOTES RECEIVABLE FROM STOCKHOLDERS
In October and November 1995, the Company made full recourse loans with
principal amounts totaling $125,000 to certain employees pursuant to the
Company's 1993 Plan. The loans are secured by 4,268,250 shares of the
Company's Common Stock. The loans are non-interest bearing and are due in
October and November 2000 or earlier in the event of the borrower's
termination of employment with the Company.
In December 1996 and January 1997, the Company accepted full recourse
promissory notes with principal amounts of $100,000 and $70,000, respectively,
from an officer upon the exercise of certain stock options pursuant to the
Company's 1993 Plan. The notes bear interest at 5.75% per annum and are due
upon the earlier of three years from the date of the note or six months
following termination of employment with the Company. In the fourth quarter of
1997, after the resignation of the officer, the Company repurchased a portion
of the underlying shares at the original exercise price for a total of
$114,000 which were subsequently retired in exchange for the reduction of a
corresponding portion of the related stockholder receivable. In conjunction
with this repurchase, the Company extended the due date of the remaining
outstanding balance to the earlier of (i) forty days after the expiration of
the 180-day period specified in the Lock-up Agreement entered into by the
former officer in favor of the underwriters of the Company's initial public
offering or (ii) June 30, 1998. The outstanding balance under these notes as
of December 31, 1997 is $56,000.
In March 1997, the Company accepted a full recourse promissory note with a
principal amount of $100,000 from one of its officers. The note bears interest
at 6.07% per annum, is secured by 1,800,000 shares of the Company's Common
Stock and is due upon the earlier of October 31, 1999 or six months following
termination of employment with the Company.
NOTE 9 -- RESEARCH AND DEVELOPMENT CONTRACTS
During the years ended December 31, 1997, 1996 and 1995 the Company
performed research and development which was funded under a number of
contracts. The Company recognized $716,000, $863,000 and $280,000,
respectively, as offsets against research and development expenses. These
contracts, which vary in term and are with parties unrelated to the Company,
provide for non-refundable funding (irrespective of the results) of research
and development of certain technologies owned by the Company which will
enhance the Company's products to meet specific customers' needs. To date,
funding received under any of the research and development contracts has not
been individually significant.
44
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under noncancelable lease agreements which
expire from March 1999 through November 2002. Rent expense under noncancelable
operating leases was $612,000, $245,000 and $112,000 during the years ended
December 31, 1997, 1996 and 1995, respectively.
In 1994, the Company entered into a master lease agreement with a leasing
company for the acquisition of property and equipment. The leasing company's
commitment to fund purchases of capital equipment under this agreement expired
on January 15, 1996. During 1996 the Company leased $54,000 of property and
equipment under this agreement which have been classified as capital leases.
These capital leases terminate at various dates through 1999. In connection
with the master lease agreement the Company issued a warrant to purchase
123,000 shares of Series A at $0.33 per share. The estimated fair value of the
warrant was not material on the date of issuance. The warrant was to expire on
the earlier of October 2003 or upon the fourth anniversary of an initial
public offering of the Company's Common Stock. Upon the completion of the
Company's initial public offering, the warrant to purchase 123,000 shares of
Series A was automatically converted to a warrant to purchase an equal number
of shares of Common Stock at the same exercise price. In November 1997, the
warrant was exercised. As consideration for the exercise, 1,739 shares of the
Company's Common Stock with an in-the-money value of $41,000 were surrendered
resulting in no net proceeds to the Company.
In February 1996, the Company entered into a new master lease agreement with
a leasing company for the acquisition of property and equipment. The agreement
provides for up to $750,000 for equipment purchases made through June 30,
1997, all of which had been utilized as of December 31, 1996. Capital leases
under this agreement terminate at various dates through 1999. In connection
with the master lease agreement the Company issued a warrant to purchase
33,963 shares of Series B at $1.77 per share. The estimated fair value of the
warrant was not material on the date of issuance. The warrant expires in
January 2003. Upon the completion of the Company's initial public offering,
the warrant to purchase 33,963 shares of Series B was automatically converted
to a warrant to purchase an equal number of shares of Common Stock at the same
exercise price. A total of 33,963 shares of Common Stock have been reserved
for issuance upon exercise of the warrant. The warrant had not been exercised
as of December 31, 1997.
As of December 31, 1997 and 1996, property and equipment recorded under
capital leases, consisting primarily of computer equipment and purchased
software, totaled $1,372,000 with related accumulated amortization of $957,000
and $517,000, respectively.
Future minimum lease payments under all noncancelable operating and capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FOR THE YEAR ENDED DECEMBER 31, LEASES LEASES
------------------------------- --------- -------
<S> <C> <C>
1998....................................................... $608 $401
1999....................................................... 188 301
2000....................................................... 44 --
2001....................................................... 44 --
2002....................................................... 40 --
---- ----
Total minimum payments................................... $924 702
====
Less amount representing interest.......................... 66
----
Present value of lease obligations....................... 636
Less current portion....................................... 350
----
Lease obligations, net of current portion................ $286
====
</TABLE>
45
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
Other
In the fourth quarter of 1997, FORE Systems, Inc. filed a complaint in the
United States District Court for the Western District of Pennsylvania alleging
trade secret misappropriation against the Company and that the Company
willfully infringed three of FORE's patents. The complaint seeks both a
preliminary and a permanent injunction against the Company, as well as
recovery of damages. The results of litigation are inherently uncertain, and
there can be no assurance that the Company will prevail in any litigation with
FORE. An adverse result in the FORE litigation could have a material adverse
effect on the Company's business, financial condition and results of
operations.
46
<PAGE>
3.EXHIBITS
The exhibits listed under Item 14(c) hereof are filed as part of this report
on Form 10-K.
(b) Reports on Form 8-K filed in the fourth quarter of 1997.
(c) Exhibits
The following exhibits are filed with this Report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation filed on January
13, 1998.
3.2* Bylaws of the Registrant.
4.1* Form of Common Stock Certificate.
10.1* Form of Indemnification Agreement for directors and executive
officers of the Company.
+10.2* 1993 Stock Plan.
+10.3* 1997 Employee Stock Purchase Plan.
+10.4* 1997 Stock Plan.
+10.5* 1997 Director Option Plan.
10.6* First Amended and Restated Shareholder Rights Agreement dated
November 16, 1995, by and among the Registrant and the
Shareholders named therein.
10.7* Sublease, dated June 14, 1996, by and between Olivetti Advanced
Technology Center, Inc. and the Registrant, and the Lease
Agreement, dated December 22, 1994, by and between Herman
Christensen, Jr., Raymond Christensen and Olivetti Advanced
Technology Center, Inc.
10.8*++ Development, License and Purchase Agreement, effective as of
December 19, 1994 (the "Cisco Agreement"), by and between Cisco
Systems, Inc. and the Registrant, as amended by the First
Amendment to the Cisco Agreement, effective as of January 30,
1996, and Amendment Number 2 to the Cisco Agreement, dated July
7, 1997.
10.9* Supplier Escrow Agreement, dated as of April 21, 1997, by and
between the Registrant, Hitachi Computer Products (America), Inc.
and SourceFile.
10.10 Loan and Security Agreement dated April 21, 1997, by and between
Silicon Valley Bank and the Registrant.
10.11 Lease dated October 23, 1997, by and between New Boston Mill Road
Limited Partnership and the Registrant.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (see Page 48).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed as exhibits to the Registrant's Registration Statement on
Form S-1 (File No. 33-34005), filed with Securities Exchange Commission on
October 27, 1997.
++ Confidential treatment granted with respect to certain portions.
+ Denotes a compensation plan in which an executive officer or director
participates.
(d) Financial Data Schedules. See Item 14(a)(2) above.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 20, 1998 MMC NETWORKS, INC.
By: /s/ Prabhat K. Dubey
-----------------------------------
Prabhat K. Dubey
President, Chief Executive
Officer and Director
Each person whose signature appears below constitutes and appoints Prabhat
K. Dubey, and Uday Bellary, jointly and severally, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Prabhat K. Dubey President, Chief Executive March 20, 1998
- ----------------------------- Officer and Director
Prabhat K. Dubey (Principal Executive
Officer)
/s/ Uday Bellary Vice President, Finance, March 20, 1998
- ----------------------------- Chief Financial Officer and
Uday Bellary Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ Amos Wilnai Director March 20, 1998
- -----------------------------
Amos Wilnai
/s/ Irwin Federman Director March 20, 1998
- -----------------------------
Irwin Federman
/s/ Andrew S. Rappaport Director March 20, 1998
- -----------------------------
Andrew S. Rappaport
/s/ Geoffrey Y. Yang Director March 20, 1998
- -----------------------------
Geoffrey Y. Yang
48
<PAGE>
SCHEDULE II
MMC NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTION
BALANCE AT CHARGED TO FROM BALANCE
BEGINNING STATEMENT OF ALLOWANCE/ AT END
OF PERIOD OPERATIONS RESERVE OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1995...... $ -- $ 45 $-- $ 45
==== ==== === ====
Year ended December 31, 1996...... $ 45 $ 88 $-- $133
==== ==== === ====
Year ended December 31, 1997...... $133 $ 48 $-- $181
==== ==== === ====
INVENTORY VALUATION RESERVE
Year ended December 31, 1995...... $ -- $ 24 $-- $ 24
==== ==== === ====
Year ended December 31, 1996...... $ 24 $203 $-- $227
==== ==== === ====
Year ended December 31, 1997...... $227 $620 $33 $814
==== ==== === ====
</TABLE>
49
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MMC NETWORKS, INC.
MMC Networks, a corporation organized and existing under the laws of the State
of Delaware, does hereby certify:
1. The name of the corporation is MMC Networks, Inc. MMC Networks, Inc.
was originally incorporated under the same name, and the original Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
August 11, 1997.
2. Pursuant to Sections 242 and 228 of the General Corporation Law of the
State of Delaware, the amendments and restatement herein set forth have been
duly approved by the Board of Directors and stockholders of MMC Networks, Inc.
3. Pursuant to Section 245 of the General Corporation Law of the State of
Delaware, this Amended and Restated Certificate of Incorporation restates and
integrates and amends the provisions of the Certificate of Incorporation of this
corporation.
4. The text of the Restated Certificate of Incorporation as is hereby
restated and amended to read in its entirety as follows:
FIRST
The name of the Corporation is MMC Networks, Inc. (the "Corporation").
SECOND
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, County of New Castle, Delaware 19805. The name
of its registered agent at such address is Corporation Service Company.
THIRD
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
<PAGE>
FOURTH
A. The total number of shares which the Corporation shall have authority
to issue is 110,000,000 shares of capital stock.
B. Of such authorized shares, one hundred million (100,000,000) shares
shall be designated "Common Stock", and have a par value of $.001.
C. Of such authorized shares, ten million (10,000,000) shares shall be
designated "Preferred Stock", and have a par value of $.001. The Preferred
Stock may be issued from time to time in one or more series. The Board of
Directors of the Corporation is authorized to determine or alter the powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock, and
within the limitations or restrictions stated in any resolution or resolutions
of the Board of Directors originally fixing the number of shares constituting
any series, to increase or decrease (but not below the number of shares of any
such series then outstanding) the number of shares of any such series subsequent
to the issuance of shares of that series, to determine the designation of any
series, and to fix the number of shares of any series. In case the number of
shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
FIFTH
The Corporation is to have perpetual existence.
SIXTH
Elections of directors need not be by written ballot unless a stockholder
demands election by written ballot at the meeting and before voting begins.
SEVENTH
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
EIGHTH
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
-2-
<PAGE>
NINTH
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as it may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Restated Certificate of Incorporation inconsistent with this
Article, shall eliminate or reduce the effect of this Article in respect of any
matter occurring, or any cause of action, suit or claim that, but for this
Article, would accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.
TENTH
Section 1. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected, and until their successors have been duly elected and
qualified; except that if any such election shall be not so held, such election
shall take place at stockholders' meeting called and held in accordance with the
Delaware General Corporation Law. The directors of the Corporation shall be
divided into three classes as nearly equal in size as is practicable, hereby
designed Class I, Class II and Class III. The term of office of the initial
Class I directors shall expire at the next succeeding annual meeting of
stockholders, the term of office of the initial Class II directors shall expire
at the second succeeding annual meeting of stockholders and the term of office
of the initial Class III directors shall expire at the third succeeding annual
meeting of the stockholders. For the purposes hereof, the initial Class I,
Class II and Class III directors shall be those directors so designated by the
incorporator. At each annual meeting of stockholders, directors to replace
those of a Class whose terms expire at such annual meeting shall be elected to
hold office until the third succeeding annual meeting and until their respective
successors shall have been duly elected and qualified. If the number of
directors is hereafter changed, any newly created directorships or decrease in
directorships shall be so apportioned among the classes as to make all classes
as nearly equal in number as if practicable.
Section 2. The number of directors which constitute the whole Board of
Directors of the Corporation shall be designated in the Bylaws of the
Corporation.
Section 3. Vacancies occurring on the Board of Directors for any reason
may be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum, at any meeting of the Board of
Directors. A person so elected by the Board of Directors to fill a vacancy
shall hold office until the next succeeding annual meeting of stockholders of
the Corporation and until his or her successor shall have been duly elected and
qualified.
ELEVENTH
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the
-3-
<PAGE>
statutes) outside of the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the Bylaws of the
Corporation.
TWELFTH
The stockholders of the Corporation may not take action by written consent
in lieu of a meeting but must take any actions at a duly called annual or
special meeting.
THIRTEENTH
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law or this Restated Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all of the then outstanding shares of the Corporation entitled
to vote shall be required to alter, amend or repeal Articles TENTH, TWELFTH or
THIRTEENTH or any provision thereof, unless such amendment shall be approved by
a majority of the directors of the Corporation not affiliated or associated with
any person or entity holding (or which has announced an intention to obtain) 20%
or more of the voting power of the Corporation's outstanding capital stock.
FOURTEENTH
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
IN WITNESS WHEREOF, MMC Networks, Inc., has caused this Amended and
Restated Certificate of Incorporation to be executed by Prabhat K. Dubey, its
President and Chief Executive Officer attested by Amos Wilnai, its Chairman and
Executive Vice President, this 5th day of November, 1997.
/s/ PRABHAT K. DUBEY
-------------------------------------
Prabhat K. Dubey
President and Chief Executive Officer
ATTEST
/s/ AMOS WILNAI
- -------------------------------------
Amos Wilnai
Chairman of the Board and
Executive Vice President
-4-
<PAGE>
EXHIBIT 10.10
MMC NETWORKS, INC.
LOAN AND SECURITY AGREEMENT
DATED APRIL 21, 1997
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of April 21, 1997, by
and between SILICON VALLEY BANK ("Bank") and MMC NETWORKS, INC. ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"ACCOUNTS" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" OR "ADVANCES" means a loan advance under Sections 2.1
and 2.2 hereof.
"AFFILIATE" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"BANK EXPENSES" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, (including fees and
expenses of appeal or review, or those incurred in any Insolvency Proceeding)
whether or not suit is brought.
"BORROWER'S BOOKS" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
-1-
<PAGE>
"BUSINESS DAY" means any day that is not a Saturday, Sunday. or
other day on which banks in the State of California are authorized or required
to close.
"CLOSING DATE" means the date of this Agreement
"CODE" means the California Uniform Commercial Code.
"COLLATERAL" means the property described on Exhibit A attached
hereto.
"COMMITTED REVOLVING LINE" means a Credit Extension of up to
Ten Million Dollars ($10,000,000).
"COMMITTED EQUIPMENT LINE" means a Credit Extension of up to
Three Million Dollars ($3,000,000).
"CONTINGENT OBLIGATION" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"CREDIT EXTENSION" means each Advance, Equipment Advance,
Letter of Credit, or any other extension of credit by Bank for the benefit of
Borrower hereunder.
"CURRENT LIABILITIES" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
-2-
<PAGE>
"EQUIPMENT" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"EQUIPMENT ADVANCE" has the meaning set forth in Section 2.1.4.
"EQUIPMENT AVAILABILITY DATE" has the meaning set forth in
Section 2.1.4.
"EQUIPMENT MATURITY DATE" means April 21, 2001.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"INDEBTEDNESS" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"INITIAL PUBLIC OFFERING" means the closing of an initial
public offering of the Borrower's shares of common stock in a publicly traded
market with aggregate cash proceeds satisfactory to the Bank.
"INSOLVENCY PROCEEDING" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"INVENTORY" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"INVESTMENT" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
-3-
<PAGE>
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"LETTER OF CREDIT" means a letter of credit or similar
undertaking issued by Bank pursuant to SECTION 2.1.2.
"LETTER OF CREDIT RESERVE" has the meaning set forth in Section
2.1.2.
"LIEN" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"LOAN DOCUMENTS" means, collectively, this Agreement, any note
or notes executed by Borrower, the Negative Pledge Agreement, and any other
present or future agreement entered into between Borrower and/or for the benefit
of Bank in connection with this Agreement, all as amended, extended or restated
from time to time.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan Documents.
"NEGOTIABLE COLLATERAL" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper.
"OBLIGATIONS" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"PAYMENT DATE" means the twenty-first calendar day of each
month commencing on the first such date after the Closing Date and ending on the
later of Revolving Maturity Date or the Equipment Maturity Date.
"PERMITTED INDEBTEDNESS" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
-4-
<PAGE>
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENT" MEANS:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank;
(c) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business;
(d) Investments consisting of receivables owing to Borrower or
its Subsidiaries by Persons and advances to customers or suppliers, in each
case, if created, acquired or made in the ordinary course of business; provided
that this paragraph (d) shall not apply to Investments owing by Subsidiaries to
Borrower;
(e) Investments consisting of (i) compensation of employees,
officers and directors of Borrower or its Subsidiaries so long as the Board of
Directors of Borrower determines that such compensation is in the best interests
of Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, (iii) loans to employees,
officers or directors relating to the purchase of equity securities of Borrower
or its Subsidiaries pursuant to employee stock purchase plans approved by
Borrower's board of directors, (iv) other loans to officers and employees
approved by the Board of Directors in an aggregate amount not in excess of Five
Hundred Thousand Dollars ($500,000) outstanding at any time;
(f) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business;
(g) Investments pursuant to or arising under currency
agreements or interest rate agreements entered into in the ordinary course of
business;
(h) Investments consisting of prepaid royalties and other
credit extensions to, customers and suppliers who are not Affiliates, in the
ordinary course of business;
-5-
<PAGE>
(i) Investments constituting acquisitions permitted under
SECTION 7.3;
(j) Deposit accounts of Borrower in which Bank has a Lien prior
to any other Lien;
(k) Deposit accounts of any Subsidiaries maintained in the
ordinary course of business;
(1) Investments accepted in connection with transfers permitted
by Section 7.1; and
(m) Other Investments aggregating not in excess of Two Hundred
and Fifty Thousand Dollars ($250,000) at any time.
"PERMITTED LIENS" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, provided the same have no priority
over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Leases or subleases and non-exclusive licenses and
sublicenses granted to others in the ordinary course of Borrower's business not
interfering in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, and any interest or title of a lessor, licensor
or under any lease or license;
(e) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under SECTION 8.8;
(f) Easements, reservations rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property not constituting a Material Adverse Effect;
(g) Liens that are not prior to the Lien of Bank which
constitute rights of set-off of a customary nature or bankers' Liens with
respect to amounts of deposit, whether
-6-
<PAGE>
arising by operation of law or by contract, in connection with arrangements
entered into with banks in the ordinary course of business;
(i) Earn-out and royalty obligations existing on the date
hereof or entered into in connection with an acquisition permitted by SECTION
7.3; and
(j) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a), (c), and (d) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"PERSON" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"PRIME RATE" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"QUICK ASSETS" means, as of any applicable date, the
consolidated cash, cash equivalents, accounts receivable and investments with
maturities of fewer than 90 days of Borrower determined in accordance with GAAP.
"RESPONSIBLE OFFICER" means each of the Chief Executive
Officer, the President, the Chief Financial Officer and the Controller of
Borrower.
"REVOLVING MATURITY DATE" means April 20, 1998.
"SCHEDULE" means the schedule of exceptions attached hereto, if
any.
"SUBORDINATED DEBT" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"SUBSIDIARY" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity of
which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or one
or more Affiliates of such Person.
"TANGIBLE NET WORTH" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries minus, without
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development
-7-
<PAGE>
expenses except prepaid expenses, and (c) all reserves not already deducted from
assets, and (ii) Total Liabilities.
"TOTAL LIABILITIES" means as of any applicable date, any date
as of which the amount thereof shall be determined, all obligations that should,
in accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations and determinations made hereunder shall be made in accordance with
GAAP. When used herein, the term "financial statements" shall include the notes
and schedules thereto. The terms "including"/ "includes" shall always be read
as meaning "including (or includes) without limitation", when used herein or in
any other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 REVOLVING ADVANCES. Borrower promises to pay to the order of
Bank, in lawful money of the United States of America, the aggregate unpaid
principal amount of all Advances made by Bank to Borrower hereunder. Borrower
shall also pay interest on the unpaid principal amount of such Advances at rates
in accordance with the terms hereof.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding
amount not to exceed (a) until the Initial Public Offering: (i) Five Million
Dollars ($5,000,000) minus (ii) the face amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit), and (b) from and
after the Initial Public Offering and subject to Section 3.3: (i) the Committed
Revolving Line minus (ii) the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit). Subject to the terms and
conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may
be repaid and reborrowed at any time during the term of this Agreement.
(b) Whenever Borrower desires an Advance, Borrower will
notify Bank by facsimile transmission or telephone no later than 3:00 p.m.
Pacific time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of EXHIBIT B hereto. Bank is authorized to make Advances
under this Agreement, based upon instructions received from a Responsible
Officer or a designee of a Responsible Officer, or without instructions if in
Bank's discretion such Advances are necessary to meet Obligations which have
become due and remain unpaid. Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer or a designee thereof, and Borrower shall indemnify and hold Bank
harmless for any damages or loss suffered by Bank as a result of such reliance.
Bank will credit the amount of Advances made under this SECTION 2.1 to
Borrower's deposit account.
-8-
<PAGE>
(c) The Committed Revolving Line shall terminate on the
Revolving Maturity Date, at which time all Advances under this SECTION 2.1 and
other amounts due under this Agreement (except as otherwise expressly specified
herein) shall be immediately due and payable.
2.1.1 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement,
Bank agrees to issue or cause to be issued Letters of Credit for the account of
Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of
the Committed Revolving Line or the Borrowing Base, whichever is less, minus
(ii) the then outstanding principal balance of the Advances; provided that the
face amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit and any Letter of Credit Reserve) shall not in any case exceed
(i) Five Million Dollars ($5,000,000) or (ii) from and after the Initial Public
Offering, Ten Million Dollars ($10,000,000). Each Letter of Credit shall have an
expiry date no later than one hundred eighty (180) days after the Revolving
Maturity Date provided that Borrower's Letter of Credit reimbursement obligation
shall be secured by cash on terms acceptable to Bank at any time after the
Revolving Maturity Date if the term of this Agreement is not extended by Bank.
All Letters of Credit shall be, in form and substance, acceptable to Bank in its
sole discretion and shall be subject to the terms and conditions of Bank's form
of standard Application and Letter of Credit Agreement.
(b) The obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorneys'
fees, arising out of or in connection with any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of
Credit payable in a currency other than United States Dollars. If a demand for
payment is made under any such Letter of Credit, Bank shall treat such demand as
an Advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(d) Upon the issuance of any letter of credit payable in a
currency other than United States Dollars, Bank shall create a reserve under the
Committed Revolving Line for letters of credit against fluctuations in currency
exchange rates, in an amount equal to ten percent (10%) of the face amount of
such letter of credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Committed Revolving Line shall be reduced by the amount of
such reserve for so long as such letter of credit remains outstanding.
-9-
<PAGE>
2.2 EQUIPMENT ADVANCES.
(a) Subject to and upon the terms and conditions of this
Agreement, at any time from the date hereof through April 21, 1998 (the
"Equipment Availability End Date"), Bank agrees to make advances (each an
"Equipment Advance" and collectively, the "Equipment Advances") to Borrower in
an aggregate outstanding amount not to exceed the Committed Equipment Line. To
evidence the Equipment Advance or Equipment Advances, Borrower shall deliver to
Bank, at the time of each Equipment Advance request, an invoice for the
Equipment, software and leaseholds to be purchased. The Equipment Advances shall
be used only to purchase Equipment, software and leaseholds and shall not exceed
One Hundred Percent (100%) of the invoice amount of such equipment, software and
leaseholds approved from time to time by Bank, excluding taxes, shipping,
warranty charges, freight discounts and installation expense.
(b) Interest shall accrue from the date of each Equipment
Advance at the rate specified in SECTION 2.3(A)(ii), and shall be payable
monthly for each month through the month in which the Equipment Availability End
Date falls. Any Equipment Advances that are outstanding on the Equipment
Availability End Date will be payable in thirty-six (36) equal monthly
installments of principal, and all accrued interest, beginning on the Payment
Date of each month following the Equipment Availability End Date and ending no
later than the Equipment Maturity Date. Equipment Advances, once repaid, may not
be reborrowed.
(c) When Borrower desires to obtain an Equipment Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission to be received no later than 3:00 p.m. Pacific time one (1)
Business Day before the day on which the Equipment Advance is to be made. Such
notice shall be substantially in the form of EXHIBIT B. The notice shall be
signed by a Responsible Officer or its designee and include a copy of the
invoice for the Equipment to be financed.
Borrower promises to pay to the order of Bank, in lawful money of the United
States of America, the aggregate unpaid principal amount of all Advances made by
Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid
principal amount of such Advances at rates in accordance with the terms hereof.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in SECTION 2.3(B), (i)
any Advances under the Committed Revolving Line shall bear interest, on the
average daily balance thereof, at a per annum rate equal to the Prime Rate, and
(ii) any Advances under the Committed Equipment Line shall bear interest, on the
average daily balance thereof, at a per annum rate equal to one-half of one
(0.5) percentage point above the Prime Rate.
(b) DEFAULT RATE. All Obligations shall bear interest, from
and after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
-10-
<PAGE>
(c) PAYMENTS. Interest hereunder shall be due and payable on
each Payment Date.. Borrower hereby authorizes Bank to debit any accounts with
Bank, including, without limitation, Account Number 3300051545 for payments of
principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will notify Borrower of all debits which Bank has made
against Borrower's accounts. Any such debits against Borrower's accounts in no
way shall be deemed a set-off. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment, whether directed to Borrower's deposit
account with Bank or to the Obligations or otherwise, shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment in respect of the Obligations unless such payment is of immediately
available federal funds or unless and until such check or other item of payment
is honored when presented for payment. Notwithstanding anything to the contrary
contained herein, any wire transfer or payment (other than a wire transfer of
immediately available funds) received by Bank after 12:00 noon Pacific time
shall be deemed to have been received by Bank as of the opening of business on
the immediately following Business Day. Whenever any payment to Bank under the
Loan Documents would otherwise be due (except by reason of acceleration) on a
date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. (i) A Facility Fee for the Committed
Revolving Line equal to Sixteen Thousand Two Hundred and Fifty Dollars
($16,250.00), of which Ten Thousand Dollars ($10,000.00) has been paid and Six
Thousand Two Hundred and Fifty Dollars ($6,250.00) shall be due subject to
Section 3.3 and is fully earned and non-refundable and (ii) A Facility Fee for
the Committed Equipment Line equal to Seven Thousand Five Hundred Dollars
($7,500.00), which fee has been paid and is fully earned and non-refundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary
fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and
for each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents;
-11-
<PAGE>
(c) BANK EXPENSES. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses, and, after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as
and when they become due.
2.6 ADDITIONAL COSTS. In case any change in any law, regulation,
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error; provided, however, that the Borrower
shall not be liable for any such amount attributable to any period prior to the
date one hundred eighty (180) days prior to the date of such statement. Bank
agrees that it will allocate all such increased costs among its customers
similarly affected in good faith and in a manner consistent with Bank's
customary practice.
2.7 TERM. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the later of the
Revolving Maturity Date or the Equipment Maturity Date. Notwithstanding the
foregoing, Bank shall have the right to terminate its obligation to make
Advances under this Agreement immediately and without notice upon the occurrence
and during the continuance of an Event of Default. Notwithstanding termination
of this Agreement, Bank's lien on the Collateral shall remain in effect for so
long as any Obligations (excluding Obligations under Sections 2.6 and 12.2 to
the extent they remain inchoate at the time outstanding payment Obligations are
paid in full) are outstanding.
-12-
<PAGE>
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of
Bank to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) a negative pledge agreement covering intellectual property;
(d) financing statements (Forms UCC-1);
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due specified in
SECTION 2.5 hereof; and
(g) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO REVOLVING ADVANCES UP TO $5,000,000.
The obligation of Bank to make Revolving Advances under the Committed Revolving
Line up to Five Million Dollars ($5,000,000), is further subject to the
following conditions:
(a) completion of an accounts receivable audit satisfactory to
Bank.
3.3 CONDITIONS PRECEDENT TO INCREASE THE AMOUNT AVAILABLE UNDER THE
COMMITTED REVOLVING LINE TO $10,000,000. The obligation of Bank to increase the
amount available under the Committed Revolving Line to Ten Million Dollars
($10,000,000), is further subject to the following conditions:
(a) closing of the Initial Public Offering; and
(b) receipt by Bank of the Facility Fee in the amount of Six
Thousand Two Hundred and Fifty Dollars ($6,250.00).
3.4 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Bank to
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in SECTION 2.1; and
-13-
<PAGE>
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the dare of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, (except to the extent they relate specifically to an
earlier date, in which case such representations and warranties shall continue
to have been true and accurate as of such date) and no Event of Default shall
have occurred and be continuing, or would result from such Advance. The making
of each Advance shall be deemed to be a representation and warranty by Borrower
on the date of such Advance as to the accuracy of the facts referred to in this
Section 3.4(b).
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt payment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that Bank may place a "hold" on any Deposit Account
pledged as Collateral to secure the Obligations. Notwithstanding termination of
this Agreement, Bank's Lien on the Collateral shall remain in effect for so long
as any Obligations are outstanding, in each case, to the extent a security
interest in the Collateral can be perfected by a filing, or, in the case of
Collateral consisting of instruments, documents, chattel paper, or certificated
securities, to the extent the Bank takes possession of such Collateral.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that flank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the
-14-
<PAGE>
conduct of its business or its ownership of property requires that it be so
qualified (except for states as to which any failure so to qualify would not
have a Material Adverse Effect).
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default would reasonably be expected to have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.5 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed
in the Schedule, Borrower has not done business and will not without at least
thirty (30) days prior written notice to Bank do business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.6 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which a likely adverse decision would reasonably be expected to have a Material
Adverse Effect or a material adverse effect on Borrower's interest or Bank's
security interest in the Collateral
5.7 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
5.8 SOLVENCY. Borrower is able to pay its debts (including trade
debts) as they mature.
5.9 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that would reasonably be expected to have a Material Adverse
Effect. Borrower is not an "investment company" or a
-15-
<PAGE>
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940. Borrower is not engaged principally, or as one
of its important activities, in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of Regulations G, T
and U of the Board of Governors of the Federal Reserve System). Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable to
it, violation of which could have a Material Adverse Effect.
5.10 ENVIRONMENTAL CONDITION. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the release, or other disposition of hazardous waste or
hazardous substances into the environment.
5.11 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed on a timely basis, and has paid, or
has made adequate provision for the payment of, all taxes reflected therein.
5.12 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.13 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted,
except where the failure to obtain such consent, approval or authorization, to
make any such declaration or filing or to give any such notice would not
reasonably be expected to have a Material Adverse Effect.
5.14 FULL DISCLOSURE. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank by Borrower in connection with the transaction contemplated by this
Agreement, taken as a whole contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained in such certificates or statements not misleading (it being recognized
by the Bank that the projections and forecasts provided by Borrower are not to
be viewed as facts and that actual results during the period or periods covered
by any such projections and forecasts may differ from the projected or
forecasted results).
-16-
<PAGE>
6. Affirmative Covenants
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain or cause to be
maintained its and each of its Subsidiaries' corporate existence and good
standing in its jurisdiction of incorporation and maintain qualification in each
jurisdiction in which the failure to so qualify would be expected to have a
Material Adverse Effect. Borrower shall maintain, and shall cause each of its
Subsidiaries to maintain, to the extent consistent with prudent management of
Borrower's business, in force all licenses, approvals and agreements, the loss
of which would reasonably be expected to have a Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Bank: (a) when there are Advances outstanding under the Committed
Revolving Line or the Committed Equipment Line, as soon as available, but in any
event within fifteen (15) days after the end of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during such period, in a form and certified by an officer of Borrower
reasonably acceptable to Bank; (b) when there are no Advances outstanding under
the Committed Revolving Line or the Committed Equipment Line, as soon as
available, but in any event within thirty (30) days after the end of each
quarter, a company prepared consolidated balance sheet and income statement
covering Borrower's consolidated operations during such period, in a form and
certified by an officer of Borrower reasonably acceptable to Bank; (c) as soon
as available, but in any event within ninety (90) days after the end of
Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP), consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (d) from and after the
Initial Public Offering, within five (5) days of filing, copies of all
statements, reports and notices sent or made available generally by Borrower to
its security holders or to any holders of Subordinated Debt and all reports on
Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (e)
promptly upon receipt of notice thereof, a report of any legal actions pending
or threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000)
or more; and (f) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.
-17-
<PAGE>
When there are Advances outstanding under the Committed Revolving Line or
the Committed Equipment Line, within fifteen (15) days after the last day of
each month, Borrower shall deliver to Bank with the monthly financial statements
a Compliance Certificate signed by a Responsible Officer in substantially the
form of EXHIBIT C hereto. When there are no Advances outstanding under the
Committed Revolving Line or the Committed Equipment Line, within thirty (30)
days after the last day of each quarter, Borrower shall deliver to Bank with the
quarterly financial statements a Compliance Certificate signed by a Responsible
Officer in substantially the form of EXHIBIT C hereto.
Prior to the initial Advance under the Committed Revolving Line, an audit
of Borrower's Accounts shall be completed, with results satisfactory to Bank.
When there are Advances outstanding under the Committed Revolving Line, Bank
shall have a right from time to time hereafter to audit Borrower's Accounts at
Borrower's expense, provided that such audits will be conducted no more often
than every six (6) months unless an Event of Default has occurred and is
continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is (i) contested in good faith
by appropriate proceedings , (ii) is reserved against (to the extent required by
GAAP) by Borrower and (iii) no lien other than a Permitted Lien results.
6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
-18-
<PAGE>
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as are reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 QUICK RATIO. (i) When there are Advances outstanding under the
Committed Revolving Line or the Committed Equipment Line, Borrower shall
maintain, as of the last day of each calendar month, a ratio of Quick Assets to
Current Liabilities of at least 1.75 to 1.00; or (ii) when there are no Advances
outstanding under the Committed Revolving Line or the Committed Equipment Line,
Borrower shall maintain, as of the last day of each calendar quarter, a ratio of
Quick Assets to Current Liabilities of at least 1.75 to 1.00
6.9 DEBT-NET WORTH RATIO. (i) When there are Advances outstanding
under the Committed Revolving Line or the Committed Equipment Line, Borrower
shall maintain, as of the last day of each calendar month; a ratio of Total
Liabilities to Tangible Net Worth of not more than 1.25 to 1.00; or (ii) when
there are no Advances outstanding under the Committed Revolving Line or the
Committed Equipment Line, Borrower shall maintain, as of the last day of each
calendar quarter, a ratio of Total Liabilities to Tangible Net Worth of not more
than 1.25 to 1.00.
6.10 PROFITABILITY. Borrower shall be profitable for each fiscal
quarter, except Borrower may suffer a loss for one fiscal quarter in any fiscal
year not to exceed Five Hundred Thousand Dollars ($500,000).
6.11 MINIMUM DEBT SERVICE. Borrower shall maintain, as of the last
calendar day of each quarter, a Debt Service ratio of at least 1.50 to 1.00,
provided, however, that Borrower may report a Debt Service ratio of less then
1.50 to 1.00 for one fiscal quarter in any fiscal year. "DEBT SERVICE" is
defined as earnings after taxes plus interest plus depreciation, divided by the
current portion of long term debt plus interest.
6.12 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
-19-
<PAGE>
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than Transfers: (i)
of inventory in the ordinary course of business, (ii) of non-exclusive licenses
and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business; (iii) that constitute payment
of normal and usual operating expenses in the ordinary course of business;; or
(iii) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, OR MANAGEMENT, BUSINESS
LOCATIONS. Engage in any business, or permit any of its Subsidiaries to engage
in any business, other than the businesses currently engaged in by Borrower and
any business substantially similar or related thereto (or incidental thereto),
or suffer a change in Borrower's ownership other than the sale by Borrower of
equity securities of Borrower. Borrower will not, without at least thirty (30)
days prior written notification to Bank, relocate its chief executive office or
add any new offices or business locations.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock, except for repurchases of stock from former employees of
Borrower in accordance with the terms of repurchased or similar agreements
between Borrower and such employees in an aggregate amount not to exceed Two
Hundred and Fifty Thousand Dollars ($250,000), provided, however, that
immediately prior to and following such repurchases there exists no Event of
Default under the Loan Documents.
-20-
<PAGE>
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for such
purpose; fail to meet the minimum funding requirements of ERISA; permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral; or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of
the Obligations.
-21-
<PAGE>
8.2 COVENANT DEFAULT.
(a) If Borrower fails to perform any obligation under Sections
6.3, 6.6, 6.7, 6.8, 6.9, 6.10, or 6.11 or violates any of the covenants
contained in Article 7 of this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or observe
any other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within ten (10) days after the occurrence thereof;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period (which
shall not in any case exceed thirty (30) days) to attempt to cure such default,
and within such reasonable time period the failure to have cured such default
shall not be deemed an Event of Default (provided that no Advances will be
required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material
adverse change in the business, operations, or condition (financial or
otherwise) of the Borrower, or (ii) is a material impairment of the prospect of
repayment of any portion of the Obligations or (iii) is a material impairment of
the value or priority of Bank's security interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Advances will be made prior to the dismissal of such Insolvency Proceeding);
-22-
<PAGE>
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate or writing delivered to Bank by Borrower
or any Person acting on Borrower's behalf pursuant to this Agreement or to
induce Bank to enter into this Agreement or any other Loan Document.
9. Bank's Rights And Remedies
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
-23-
<PAGE>
(e) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's premises, Borrower hereby grants Bank a
license to enter such premises and to occupy the same, without charge in order
to exercise any of Bank's rights or remedies provided herein, at law, in equity,
or otherwise;
(f) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section 9.1,
to use, without charge, Borrower's labels, patents, copyrights, mask works,
rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral and, in connection with Bank's exercise of its rights
under this Section 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(h) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order it deems appropriate;
(i) Bank may credit bid and purchase at any public sale, or at
any private sale as permitted by law; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims
-24-
<PAGE>
under and decisions with respect to Borrower's policies of insurance; and (e)
settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; provided Bank may exercise such power of attorney to sign the name
of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated.
9.3 ACCOUNTS COLLECTION. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Committed Revolving Line or the Committed Equipment Line as Bank deems
necessary to protect Bank from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type discussed in Section 6.6 of
this Agreement, and take any action with respect to such policies as Bank deems
prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b)any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
-25-
<PAGE>
9.7 DEMAND; PROTEST; Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: MMC Networks, Inc.
1134 E. Arques Avenue
Sunnyvale, CA 94086
Attn: William R. Walker
FAX: 408/731-1660
If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Mike Rose
FAX: 408/748-9478
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS
-26-
<PAGE>
LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall, indemnify, defend, protect
and hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b)all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run;
provided
-27-
<PAGE>
that so long as the obligations referred to in the first sentence of this
Section 12.7 have been satisfied, and Bank has no commitment to make any
Advances or to make any other loans to Borrower, Bank shall release all security
interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank, and (v) as Bank may deem
appropriate in connection with the exercise of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
-28-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
MMC NETWORKS, INC.
By: /s/ William R. Walker
--------------------------------
Title: Secretary
-----------------------------
SILICON VALLEY BANK
By: /s/ Michael J. Rose
--------------------------------
Title: Vice President
-----------------------------
-29-
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment property,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
-1-
<PAGE>
(g) All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
-2-
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:___________________________________
FAX: (408) ________________ TIME:___________________________________
FROM: MMC NETWORKS. INC.
------------------------------------------------------------------------
BORROWER'S NAME
FROM:___________________________________________________________________________
AUTHORIZED SIGNER'S NAME
________________________________________________________________________________
AUTHORIZED SIGNATURE
PHONE:__________________________________________________________________________
FROM ACCOUNT # __________ TO ACCOUNT #
- --------------------------------------------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $____________________________________
PRINCIPAL PAYMENT (ONLY) $____________________________________
INTEREST PAYMENT (ONLY) $____________________________________
PRINCIPAL AND INTEREST (PAYMENT) $____________________________________
OTHER INSTRUCTIONS: ____________________________________________________________
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Advance confirmed by this Advance
Request; provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
- --------------------------------------------------------------------------------
BANK USE ONLY:
TELEPHONE REQUEST:
------------------
The following person is authorized to request the loan payment
transfer/loan advance on the advance designated account and is known to me.
_____________________________
Authorized Requester
__________________________________
Authorized Signature (Bank)
Phone #___________________________
- --------------------------------------------------------------------------------
-3-
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: MMC NETWORKS, INC.
The undersigned authorized officer of MMC Networks, Inc. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending _________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement. and
that such compliance is determined not just at the date this certificate is
delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
<S> <C> <C>
Monthly financial statements Monthly within 15 days* Yes No
Annual (CPA Audited) FYE within 90 days Yes No
10Q and 10K Within 5 days after filing with the SEC** Yes No
A/R Audit Initial and Semi-Annual*** Yes No
</TABLE>
*When there are Advances outstanding under the Committed Revolving line or the
Committed Equipment line, otherwise, quarterly within 30 days.
**From and after the Initial Public Offering.
***When there are Advances outstanding under the Committed Revolving Line.
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio**** 1.75:1.0 _____:1.0 Yes No
Maximum Debt/Tangible Net Worth**** 1.25:1.0 _____:1.0 Yes No
Minimum Debt Service 1.50:1.0***** _____:1.0 Yes No
Profitability: Quarterly****** $________ $________ Yes No
</TABLE>
****Measured on a monthly basis when there are Advances outstanding under the
Committed Revolving Line or the Committed Equipment Line.
*****May fall below 1.5 to 1.0 for one fiscal quarter in any fiscal year,
measured for the Equipment Line only.
******May suffer a maximum loss of $500,000 for one fiscal quarter in any fiscal
year.
==============================================
BANK USE ONLY
RECEIVED BY:____________________
DATE:___________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
==============================================
Comments Regarding Exceptions:
Sincerely,
_______________________
SIGNATURE
_______________________
TITLE
-1-
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of April 21, 1997, by MMC
Networks, Inc. ("Borrower") in favor of Silicon Valley Bank ("Bank") in
connection with the Loan and Security Agreement ("Loan Agreement") between
Borrower and Bank dated of even date herewith.
Borrower hereby agrees as follows:
1. Unless otherwise defined herein the following terms shall have the
following meanings (such meanings being equally applicable to both the singular
and plural forms of the terms defined):
"Copyrights" mean all of the following in which Borrower now holds or
hereafter acquires any interest: (a) all copyrights, whether registered or
unregistered, held pursuant to the laws of the United States, any State thereof
or any other country; (b) registrations, applications and proceedings in the
United States Copyright Office or in any similar office or agency of the United
States, any state thereof or any other country; (c) any continuations, renewals
or extensions thereof; and (d) any registrations to be issued in any pending
applications.
"Patents" means all of the following in which Borrower now holds or
hereafter acquires any interest: (a) letters patent of the United States or any
other country, all registrations and recordings thereof, and all applications
for letters patent of the United States or any other country and all rights
corresponding thereto, including, without limitation, registrations, recordings
and applications in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof or any other
country or political subdivision thereof and (b) all reissues, divisions,
continuations, renewals, continuations-in-part or extensions thereof.
"Trademarks" means any of the following now owned or hereafter
acquired by Borrower: (a) any trademarks, tradenames, corporate names, business
names, trade styles, service marks, logos, other source or business identifiers,
prints and labels on which any of the foregoing have appeared or appear, designs
and general intangibles of like nature, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and any applications in
connection therewith, including, without limitation, registrations, recordings
and applications in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof or any other
country or any political subdivision thereof and (b) any reissues, extensions or
renewals thereof.
2. Other than granting non-exclusive licenses in the normal course of
business, Borrower shall not sell, transfer, assign, mortgage, pledge, lease,
grant a security interest in, or encumber any of Borrower's intellectual
property, including, without limitation, the following:
1
<PAGE>
a. Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
b. Any and all design rights which may be available to Borrower now
or hereafter existing, created, acquired or held;
c. All Patents;
d. All Copyrights;
e. Any Trademarks or servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Borrower connected with and symbolized by
such Trademarks;
f. Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights, Patents
or Trademarks, and all license fees and royalties arising from such use to the
extent permitted by such license or rights; and
h. All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
3. It shall be an event of default under the Loan Agreement if there is a
breach of any term of this Negative Pledge Agreement.
MMC NETWORKS, INC.
By: /s/ William R. Walker
------------------------------------
Name: William R. Walker
----------------------------------
Title: Secretary
---------------------------------
Accepted and acknowledged By:
SILICON VALLEY BANK
By: /s/ Michael J. Rose
------------------------------------
Name: Michael J. Rose
----------------------------------
Title: Vice President
---------------------------------
2
<PAGE>
IMPORTANT - READ INSTRUCTIONS ON BACK BEFORE FILING OUT FORM - DO NOT DETACH
STUB
- --------------------------------------------------------------------------------
================================================================================
THIS SPACE FOR USE OF FILING OFFICER
FINANCING STATEMENT- FOLLOW INSTRUCTIONS CAREFULLY
This Financing Statement is presented for filing pursuant to the Uniform
Commercial Code and will remain effective, with certain executions, for 5 years
from date of filing.
<TABLE>
- ---------------------------------------------------------------------------------------------
A. NAME & TEL # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional)
- ---------------------------------------------------------------------------------------------
C. RETURN COPY TO: (Name and Mailing Address)
Silicon Valley Bank
Attn: Loan Services
3003 Tasman Drive
Santa Clara, CA 95054
- ----------------------------------------------------------------------------------------------
D. OPTIONAL DESIGNATION (If applicable): LESSOR/LESSEE CONSIGNOR/CONSIGNEE NON-UCC FILING
- ------------------------------------------------------------------------------------------------------------------------------------
1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1a. ENTITY'S NAME
MMC Networks, Inc.
OR --------------------------------------------------------------------------------------------------------------------------------
1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
1134 E. Arques Avenue Sunnyvale CA USA 94086
- ------------------------------------------------------------------------------------------------------------------------------------
1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D. #, if any
ADD'NL INFO RE OR COUNTRY OF
ENTITY DEBTOR ORGANIZATION [_] NONE
- ------------------------------------------------------------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME -insert only one debtor name (2a or 2b)
---------------------------------------------------------------------------------------------------------------------------------
2a. ENTITY'S NAME
OR --------------------------------------------------------------------------------------------------------------------------------
2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
- ------------------------------------------------------------------------------------------------------------------------------------
2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D. #, if any
ADD'NL INFO RE OR COUNTRY OF
ENTITY DEBTOR ORGANIZATION [_] NONE
- ------------------------------------------------------------------------------------------------------------------------------------
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNED EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b)
- ------------------------------------------------------------------------------------------------------------------------------------
3a. ENTITY'S NAME
Silicon Valley Bank
OR -------------------------------------------------------------------------------------------------------------------------------
3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
3003 Tasman Drive Santa Clara CA USA 95054
- ------------------------------------------------------------------------------------------------------------------------------------
4. This FINANCING STATEMENT covers the following types or items of property:
All rights, title and interest of Debtor in, to and under the personal
property set forth in Exhibit A attached hereto and incorporated
herein by reference.
- ------------------------------------------------------------------------------------------------------------------------------------
5. CHECK [_] THIS FINANCING STATEMENT is signed by the Secured Party 7. If filed in Florida (check one)
BOX instead of the Debtor to perfect a security [_] Documentary [_] Documentary stamp
interest (a) in collateral already subject to a security interest stamp tax paid tax not applicable
(if applicable) in another jurisdiction when it was brought into this state, or
when the debtor's location was charged to this state, or (b) in
accordance with other statutory provisions (additional date may
be required)
- ------------------------------------------------------------------------------------------------------------------------------------
6. REQUIRED SIGNATURE(S) MMC Networks Inc. 8.[_] This FINANCING STATEMENT is to be filled (for record)
(or recorded) in the REAL ESTATE RECORDS
/s/ William R. Walker Attach Addendum (if applicable)
- ------------------------------------------------------------------------------------------------------------------------------------
Silicon Valley Bank 9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s)
[ADDITIONAL FEE]
[optional]
[_] All Debtors [_] Debtor 1 [_] Debtor 2
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT A
FINANCING STATEMENT
Between
SILICON VALLEY BANK,
as Secured Party
AND
MMC NETWORKS, INC.,
as Debtor
________________________________________________________________________________
The Collateral shall consist of all right, title and interest of Debtor in
and to the following:
(A) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(B) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Debtor's custody or possession or in transit
and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
(C) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(D) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Debtor
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Debtor, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Debtor;
(E) All documents, cash, deposit accounts, securities, investment property,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Debtor's books relating to the foregoing;
1.
<PAGE>
(F) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(G) All Debtor's books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
2.
<PAGE>
IMPORTANT - READ INSTRUCTIONS ON BACK BEFORE FILLING OUT FORM - DO NOT DETACH
STUB
- --------------------------------------------------------------------------------
================================================================================
THIS SPACE FOR USE OF FILING OFFICER
FINANCING STATEMENT- FOLLOW INSTRUCTIONS CAREFULLY
This Financing Statement is presented for filing pursuant to the Uniform
Commercial Code and will remain effective, with certain executions, for 5 years
from date of filing.
<TABLE>
- ---------------------------------------------------------------------------------------------
A. NAME & TEL # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional)
- ---------------------------------------------------------------------------------------------
C. RETURN COPY TO: (Name and Mailing Address)
Silicon Valley Bank
Attn: Loan Services
3003 Tasman Drive
Santa Clara, CA 95054
- ---------------------------------------------------------------------------------------------
D. OPTIONAL DESIGNATION (If applicable): LESSOR/LESSEE CONSIGNOR/CONSIGNEE NON-UCC FILING
- ------------------------------------------------------------------------------------------------------------------------------------
1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1a. ENTITY'S NAME
MMC Networks, Inc.
OR --------------------------------------------------------------------------------------------------------------------------------
1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
1134 E. Arques Avenue Sunnyvale CA USA 94086
- ------------------------------------------------------------------------------------------------------------------------------------
1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D. #. if any
ADD'NL INFO RE OR COUNTRY OF
ENTITY DEBTOR ORGANIZATION [_] NONE
- ------------------------------------------------------------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME -insert only debtor name (2a or 2b)
---------------------------------------------------------------------------------------------------------------------------------
2a. ENTITY'S NAME
MMC Networks, Inc.
OR --------------------------------------------------------------------------------------------------------------------------------
2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
1134 E. Arques Avenue
- ------------------------------------------------------------------------------------------------------------------------------------
2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D. #. if any
ADD'NL INFO PE OR COUNTRY OF
ENTITY DEBTOR ORGANIZATION [_] NONE
- ------------------------------------------------------------------------------------------------------------------------------------
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b)
- ------------------------------------------------------------------------------------------------------------------------------------
3a. ENTITY'S NAME
SILICON VALLEY BANK
OR -------------------------------------------------------------------------------------------------------------------------------
3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
3003 Tasman Drive Santa Clara CA USA 95054
- ------------------------------------------------------------------------------------------------------------------------------------
4. This FINANCING STATEMENT covers the following types of items of property:
See attached exhibit A
- ------------------------------------------------------------------------------------------------------------------------------------
5. CHECK [_] THIS FINANCING STATEMENT is required by the Secured Party 7. If filed in Florida (check one)
BOX instead of the Debtor to perfect a security interest (s) [_] Documentary [_] Documentary stamp
if applicable in collateral already subject to a security interest in stamp tax paid tax not applicable
another jurisdiction when it was brought into this state, or
when the debtor's location was changed to this state, or (b) in
accordance with other statutory provisions [additional date may
be required]
- ------------------------------------------------------------------------------------------------------------------------------------
6. REQUIRED SIGNATURE(S) MMC NETWORKS INC. 8.[_] This FINANCING STATEMENT is to be filed (for record)
(or recorded) in the REAL ESTATE RECORDS
/s/ William R. Walker Attach Addendum (if applicable)
- ------------------------------------------------------------------------------------------------------------------------------------
Silicon Valley Bank 9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s)
[ADDITIONAL FEE]
[optional]
[_] All Debtors [_] Debtor 1 [_] Debtor 2
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of April 21, 1997, by MMC
Networks, Inc. ("Borrower") in favor of Silicon Valley Bank ("Bank") in
connection with the Loan and Security Agreement ("Loan Agreement") between
Borrower and Bank dated of even date herewith.
Borrower hereby agrees as follows:
1. Unless otherwise defined herein the following terms shall have the
following meanings (such meanings being equally applicable to both the singular
and plural forms of the terms defined):
"COPYRIGHTS" mean all of the following in which Borrower now holds or
hereafter acquires any interest: (a) all copyrights, whether registered or
unregistered, held pursuant to the laws of the United States, any State thereof
or any other country; (b)registrations, applications and proceedings in the
United States Copyright Office or in any similar office or agency of the United
States, any state thereof or any other country; (c) any continuations, renewals
or extensions thereof; and (d) any registrations to be issued in any pending
applications.
"PATENTS" means all of the following in which Borrower now holds or
hereafter acquires any interest: (a) letters patent of the United States or any
other country, all registrations and recordings thereof, and all applications
for letters patent of the United States or any other country and all rights
corresponding thereto, including, without limitation, registrations, recordings
and applications in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof or any other
country or political subdivision thereof and (b) all reissues, divisions,
continuations, renewals, continuations-in-part or extensions thereof.
"TRADEMARKS" means any of the following now owned or hereafter
acquired by Borrower: (a) any trademarks, tradenames, corporate names, business
names, trade styles, service marks, logos, other source or business
identifiers, prints and labels on which any of the foregoing have appeared or
appear, designs and general intangibles of like nature, now existing or
hereafter adopted or acquired, all registrations and recordings thereof, and any
applications in connection therewith, including, without limitation,
registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country or any political subdivision thereof and (b)
any reissues, extensions or renewals thereof.
2. Other than granting non-exclusive licenses in the normal course of
business, Borrower shall not sell, transfer, assign, mortgage, pledge, lease,
grant a security interest in, or encumber any of Borrower's intellectual
property, including, without limitation, the following:
<PAGE>
A. Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
B. Any and all design rights which may be available to Borrower now
or hereafter existing, created, acquired or held;
C. All Patents;
D. All Copyrights;
E. Any Trademarks or servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Borrower connected with and symbolized by
such Trademarks;
F. Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
G. All licenses or other rights to use any of the Copyrights, Patents
or Trademarks, and all license fees and royalties arising from such use to the
extent permitted by such license or rights; and
H. All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
3. It shall be an event of default under the Loan Agreement if there is a
breach of any term of this Negative Pledge Agreement.
MMC NETWORKS, INC.
By: /s/ William Walker
--------------------------
Name: William R. Walker
------------------------
Title: Secretary
-----------------------
Accepted and acknowledged By:
SILICON VALLEY BANK
By: /s/ Michael J. Rose
--------------------------
Name: Michael J. Rose
------------------------
Title: Vice President
-----------------------
2
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: MMC Networks, Inc. Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $10,000.000, and a Variable Rate, Equipment Loan of a principal
amount up to $3,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: working capital and
purchase of equipment.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line
--------------
Amount paid to Borrower directly: $________
Undisbursed Funds $________
Principal $________
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $________
$________ Loan Fee
$________ Accounts Receivables Audit
Other Charges Paid in Cash: $________
$________ UCC Search Fees
$________ UCC Filing Fees
$________ Patent Filing Fees
$________ Trademark Filing Fees
$________ Copyright Filing Fees
$________ Outside Counsel Fees and Expenses
Total Charges Paid in Cash $________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered ________________________ the amount of any loan
payment. If the funds in the account are insufficient to cover any payment,
Bank shall not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF APRIL 21, 1997.
BORROWER:
/s/ William R. Walker
- -------------------------
Authorized Officer
-2-
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
Grantor: MMC Networks, Inc. Bank: Silicon Valley Bank
INSURANCE REQUIREMENTS. MMC Networks, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory. Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be canceled or diminished without a
minimum of twenty (20) days' prior written notice to
Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Bank. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of April 21, 1997, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations" or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED APRIL 21,
1997.
GRANTOR:
X /s/ William R. Walker
-------------------------
Authorized Officer
================================================================================
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
================================================================================
-3-
<PAGE>
CORPORATE BORROWING RESOLUTION
Borrower: MMC Networks, Inc. Bank: Silicon Valley Bank
1134 E. Arques Avenue 3003 Tasman Drive
Sunnyvale, CA 94086 Santa Clara, CA 95054
I, the undersigned Secretary or Assistant Secretary of MMC Networks, Inc.
("Borrower"), hereby certify that Borrower is a corporation duly organized and
existing under and by virtue of the laws of the State of California.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by
other duly authorized corporate action in lieu of a meeting), duly called and
held, at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of Borrower, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
William R. Walker Chief Financial Officer /s/ William R. Walker
----------------------
Prabhat K. Dubey Chief Executive /s/ Prabhat K. Dubey
----------------------
- -------------------- ------------------------- ----------------------
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of Borrower
and Bank, such sum or sums of money as in their judgment should be borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan documents
of Borrower, on Bank's forms, at such rates of interest and on such terms as may
be agreed upon, evidencing the sums of money so borrowed or any indebtedness of
Borrower to Bank, and also to execute and deliver to Bank one or more renewals,
extensions, modifications, refinancings; consolidations, or substitutions for
one or more of the loan documents, or any portion of the loan documents.
GRANT SECURITY. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations to
Bank
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to Borrower or in which Borrower may have an interest, and
either to receive cash for the same
-1-
<PAGE>
or to cause such proceeds to be credited to the account of Borrower with Bank,
or to cause such other disposition of the proceeds derived therefrom as they may
deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements,
including agreements waiving the right to a trial by jury, as they may in their
discretion deem reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of
the Corporation and occupy the positions set opposite their respective names;
that the foregoing Resolutions now stand of record on the books of the
Corporation; and that they are in full force and effect and have not been
modified or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on April 21, 1997 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ William R. Walker
---------------------------------------
*Secretary or Assistant Secretary
X /s/ Prabhat K. Dubey
---------------------------------------
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
-2-
<PAGE>
SILICON VALLEY BANK
Documentation Checklist
Borrower: MMC Networks, Inc.
- --------------------------------------------------------------------------------
Required Executed
-------- --------
Loan and Security Agreement with Exhibits [X] [X]
Negative Pledge Agreement [X] [X]
Financing Statement (Form UCC-1) [X] [X]
Initial Disbursement Request and [X] [X]
Authorization [X] [X]
Agreement to Provide Insurance [X] [X]
Borrowing Resolutions [X] [X]
================================================================================
If you have questions concerning any of these documents, please contact:
Christine E. Ewing
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino
Palo Alto, CA 94306-2155
Phone: 415/843-5194
Fax: 415/857-0663
<PAGE>
EXHIBIT 10.11
This lease made and entered into this 23rd day of October, 1997 by and
between NEW BOSTON MILL ROAD LIMITED PARTNERSHIP, a Delaware Limited
Partnership, having a business address at One Longfellow Place, Suite 3612,
Boston, Massachusetts 02114 (hereinafter called "Landlord") and MMC NETWORKS,
INC. (hereinafter called "Tenant").
SECTION I. PREMISES. Landlord leases to Tenant, and Tenant hereby hires and
---------- --------
takes from Landlord the following described premises subject to the mortgages as
hereinafter provided.
The "premises" are that portion of a building in the Town of Chelmsford,
Commonwealth of Massachusetts, having a mailing address of 25 Industrial Avenue,
Chelmsford, Massachusetts 01824 (hereinafter called the "Building"),
substantially as shown cross-hatched or outlined on the Lease Plan, Exhibit A,
hereto attached and made a part hereof, consisting of approximately 4,000 square
feet of net rentable area on the first floor of the Building as shown on Exhibit
A. The Building and the parcel of land on which it is located are hereinafter
referred to as the "Property".
Landlord reserves and excepts all rights of ownership and use in all
respects outside the premises, including, without limitation, the Building and
all other structures and improvements and plazas, parking areas, and common
areas on the Property, except that at all times during the term of this Lease,
Tenant shall have a reasonable means of access from the street to the premises.
Without limitation of the foregoing reservation of rights by Landlord, it is
understood that with regard to the Building, Landlord in its sole discretion
shall have the right to change, relocate and eliminate facilities therein, to
permit the use of or lease all or part thereof or exhibition and displays to
sell, lease or dedicate all or part thereof to public use; and further that
Landlord shall have the right to make changes in, additions to and eliminations
from the Building, and other structures and improvements on the Property,
provided the same shall not materially and adversely interfere with Tenant's
access to and/or use of the premises for the purposes permitted hereunder.
SECTION II. USE. Tenant shall have the right to use, in common with others
----------- ---
so entitled, all common areas associated with the Building and located in the
Building or on the Property including all hallways, loading dock, access ways,
walkways, nonexclusive parking areas, courtyards and landscaped areas. Tenant
shall at all times during the term of this lease have a means of access to the
premises 24 hours a days 365 days a year. Tenant shall use the premises for
research and development and related offices, or for general offices, provided
that Tenant shall not use, permit nor suffer anything to be done or anything to
be brought into or kept in the premises or on the Property which in Landlord's
sole judgment occasions discomfort or annoyance to any other tenants or
occupants of the Building and parking area or which may tend to impair the
reputation or appearance of the Building or the Property or tend to interfere
with the
<PAGE>
proper and economic operation of the Building, parking area or the Property by
Landlord, or which shall violate the Certificate of Occupancy for the Building
or any law or regulation of any governmental body.
SECTION III. TERM. The term of this Lease shall be five (5) years,
------------ ----
commencing upon the "substantial completion" of Landlord's Work, as that term is
hereinafter defined, (the "Commencement Date"), and terminating sixty (60)
months thereafter, plus the remaining portion of any unexpired calendar month at
the end of the term hereof.
SECTION IV. RENT. Tenant shall pay rent at the annual rate of Nine ($9.00)
----------- ----
Dollars per square foot for the net rentable space of the premises, as set forth
in Section I of this Lease. So long as the rentable area of the premises shall
be 4,000 square feet, the annual and monthly rent due and payable hereunder
shall be as follows:
Annual Rental Rate Monthly Rental Rate
------------------ -------------------
$36,000 $3,000
The rent shall be paid in equal installments of one-twelfth (1/12) of the
annual rent each in advance of the first day of each calendar month.
Tenant shall pay a proportionate part of such monthly installment for any
fraction of a calendar month at the beginning or end of the lease term.
In the event that the rent is not paid within ten (10) days of the date
when due, Landlord shall assess and Tenant shall pay a late charge in an amount
equal to interest at the rate of one and one-half (1 1/2%) percent per month on
the unpaid balance from the date said rent became due.
Tenant shall pay the rent without demand or notice and without deduction,
abatement, counterclaim, or set-off, to the Landlord in care of New Boston
Management Services, Inc., Agent for New Boston Mill Road Limited Partnership,
One Longfellow Place, Suite 3612, Boston, Massachusetts 02114-2434, or at such
other place as designated from time to time by Landlord.
SECTION V. CONSTRUCTION AND PREPARATION OF THE PREMISES.
---------- --------------------------------------------
(a) Landlord's Work. Landlord shall do the work shown as the work to be
---------------
performed by Landlord on, and in accordance with, final plans and specifications
prepared by Tenant's Architect (hereinafter referred to as the "Build-Out
Drawings"), which Build-Out Drawings are attached hereto and made a part hereof.
The work shown thereon as the work to be performed by Landlord shall be done in
a good and workmanlike manner in accordance with all laws, rules, regulations
and ordinances applicable thereto (hereinafter referred to as "Landlord's
Work"), and shall be done by Landlord's choice of contractors (hereinafter
referred to as "General Contractor"). Landlord's, approval of the Build-Out
Drawings shall not impose any responsibility or liability on Landlord as to the
compliance of said Build-Out Drawings to
-2-
<PAGE>
applicable law, or as to the completeness or adequacy of said Build-Out Drawings
to meet Tenant's requirements. The Build-Out Drawings shall be initialed by an
authorized officer of Tenant indicating the same are approved and are final,
stamped by a registered architect, and shall be of a form and completeness so as
to permit the issuance of a Town of Chelmsford Building Permit therefor. Tenant
shall have no authority to make any changes to the Build-Out Plans after
approval of the same by Landlord, whether by change order or otherwise, absent
Landlord's prior written consent. Such approval, if given, shall be conditioned
upon Tenant agreeing to pay all the increased costs, if any, associated with
making the subject change, and agreeing that Tenant's obligation to pay rent
shall commence as if such change had not been agreed to by Landlord, and
substantial completion had not been delayed by the number of days required to
perform the work reflected in the change order. Landlord's Work shall be done at
Landlord's expense except as otherwise provided herein. To the extent practical,
Landlord shall give advance notice to the Tenant of the approximate date upon
which Landlord's Work shall be substantially completed, which Landlord
anticipates shall occur thirty (30) days subsequent to commencement of
Landlord's Work. "Substantial completion" or "substantially completed" shall
mean that Landlord's Work has been completed, except for minor details of
mechanical adjustment, decoration and finish which do not materially interfere
with Tenant's ability to use and occupy the premises for the purposes permitted
hereunder. The taking of possession of the premises by Tenant shall be
conclusive evidence of the acceptance of the premises by Tenant and that the
premises are in good and satisfactory condition, in accordance with Landlord's
obligations hereunder.
Prior to the commencement of Landlord's Work, Landlord shall provide Tenant
with the General Contractor's estimate of the cost of performing Landlord's
Work. Landlord shall provide an allowance of Ten ($10.00) Dollars per square
foot of the premises towards the actual costs of performing Landlord's Work
(hereinafter referred to as the "TI Contribution"); the costs of performing
Landlord's Work in excess of said Ten ($10.00) Dollars per square foot of the
premises shall be borne by Tenant (hereinafter referred to as the "Excess TI").
Landlord shall deduct from the TI Contribution the cost of installing ductwork
to three (3) new rooftop HVAC units servicing the premises to be installed by
Landlord; provided however, the cost of the HVAC units themselves shall be borne
by Landlord. Tenant shall reimburse the Excess TI to Landlord in two
installments, fifty percent (50%) of which shall be paid prior to commencement
of Landlord's Work (and three days after written demand therefor) and shall be
based upon said General Contractor's estimate, and fifty percent (50%) of which
shall be paid upon substantial completion of Landlord's Work and shall reflect a
reconciliation of the actual Excess TI amount. In that Landlord will not
commence Landlord's Work until such time as it receives payment from Tenant for
the first Excess TI Installment, for each day which elapses after the date on
-3-
<PAGE>
which such payment Tenant shall pay to Landlord a penalty equal to one days'
worth of rent. Space planning and architectural fees shall be separately
contracted for and paid by Tenant; Landlord shall provide no additional
allowance therefor.
(b) Tenant's Work. Tenant shall do the work shown on Build-Out Drawings,
-------------
as the work on the part of the Tenant, in a good and workmanlike manner in
accordance with "plans and specifications" (as hereinafter defined) which have
Landlord's written approval prior to the commencement of Tenant's work, which
approval shall not be unreasonably withheld or delayed. Tenant shall furnish and
install any and all necessary trade fixtures, equipment and other items
necessary for the proper conduct of Tenant's business. "Plans and
Specifications", as used in this Section V(b) and in Section XIV shall mean
documents and drawings sufficient for contract bidding and work completion. All
of the foregoing work and all work Tenant may undertake pursuant to Section XIV
of this Lease shall be done in accordance with all laws, rules, regulations and
ordinances applicable thereto, including, if necessary, compliance with the
Americans With Disabilities Act, and the acquisition by Tenant of a Town of
Chelmsford Building Permit. In no event shall Landlord be required to provide or
install any trade fixtures or equipment.
Tenant agrees to employ for any work it may do pursuant to Sections V(b) and
XIV of this Lease one or more responsible contractors whose labor will work in
harmony with other labor working in and on the Building and Property and with
suppliers of materials for use in construction in and on the Building and
Property, and especially Tenant agrees that he will not do or permit to be done
anything which would cause any labor difficulty in connection with any
construction in and the Building and Property.
Tenant shall require all such contractors employed by Tenant to carry
Worker's Compensation Insurance in accordance with statutory requirements and to
carry Comprehensive Public Liability Insurance and Automobile Liability
Insurance covering such contractors in or about the premises in amounts not less
that Five Hundred Thousand ($500,000) Dollars combined single limits for
property damage, for injury or death of more than one person in a single
accident and to submit certificates of insurance evidencing such coverage to
Landlord prior to commencement of such work. Tenant agrees to indemnify and hold
harmless Landlord from all claims, actions, demands and causes of actions
occasioned by Tenant's contractors being on or about the premises, the Building
or the Property, and from Tenant's contractors performing work in the premises.
All contractors, subcontractors, mechanics, laborers, materialmen, and
others who perform any work, labor or services, or furnish any materials, or
otherwise participate in the labor or services, or furnish any materials, or
otherwise participate in the improvement of the premises shall be and are hereby
given notice that Tenant is not authorized to subject Landlord's
-4-
<PAGE>
interest in the premises to any claim for mechanics', laborers' and
materialmen's liens, and all persons dealing directly or indirectly with Tenant
may not look to the premises as security for payment. Tenant shall save Landlord
harmless from and against all expenses, liens, claims or damages to either
property or person which may or might arise by reason of the making of any such
additions, improvements, alterations and/or installations.
SECTION VI. BUILDING AND EQUIPMENT.
----------- ----------------------
A. Landlord's Obligations. Landlord shall keep in serviceable condition
---------------------
and repair the structure and exterior of the Building, including the foundation,
roof, exterior walls, structural floor slabs and columns, the water and sewer
connection to a single point in the premises, the electrical service to a single
distribution point serving the premises, and the gas service to a single
distribution point serving the premises (except for such equipment and service
lines installed by Tenant and except otherwise provided in this Lease), and the
exterior parking area serving the Building. The Landlord shall comply with
applicable governmental rules, regulations, laws and ordinances affecting the
Building, unless the violation is caused by Tenant or Tenant's use of the
premises. The Landlord shall keep the sidewalks, stairways, and all other means
of ingress and egress for the premises and all public portions of the Building
in serviceable repair and in a reasonably clean and safe condition. Landlord
shall provide snow and ice removal in the parking areas and in the common
walkways and access ways. Landlord reserves the right to interrupt, curtail,
stop and suspend the furnishing of any services and operation of the plumbing
and electrical, heating and air conditioning systems when necessary by reason of
accident or emergency or for repairs, alterations, replacements or improvements,
which may become necessary or when it cannot secure supplies or labor or by
reason of any other cause beyond its control, without liability or any abatement
of rent being due thereby.
B. Tenant's Obligations. Tenant will maintain the premises including all
--------------------
mechanical and electrical and plumbing systems within the premises; also
included all portions of the heating, ventilating and air conditioning systems
servicing the premises (wherever located) (together, the "HVAC System"); all
partitions, walls (other than the structure of load bearing walls), doors,
loading docks and windows of the premises; and all other portions thereof in the
condition each of the same were in at the time of the delivery thereof to
Tenant, but in all events in good and tenantable working order, condition and
repair and will repair and replace the same when necessary so as to comply with
the foregoing, except only for reasonable wear and tear and damage caused by
casualty for which and to the extent Landlord is required to purchase casualty
insurance as provided in this Lease. Tenant shall be entitled to the protections
and benefits of any manufacturer's warranties in connection with the three (3)
new rooftop HVAC units to be installed by Landlord. Tenant agrees that it shall
enter into a preventative maintenance contract for the maintenance of the HVAC
System required of it hereunder, which shall be performed by
-5-
<PAGE>
a professional maintenance company reasonably satisfactory to Landlord.
Notwithstanding the foregoing, in the event any major part of the HVAC System
which has been properly maintained by Tenant as hereinabove called for no longer
can be maintained by Tenant, but based on industry standards must be replaced,
then Tenant shall properly replace the same and to the extent, reasonably
determined, the useful life of such replaced part exceeds the remaining term of
this Lease (including option periods, if any), then upon completion of such
replacement and the payment of the cost thereof to the supplier by Tenant,
Landlord will reimburse to Tenant so much of the actual and reasonable costs
thereof as is proportionately attributable to that portion of the useful life of
such part as extends beyond the then remaining term (including option periods,
if any) of this Lease. Tenant shall maintain the hot water heaters serving the
premises, as though such hot water heater were part of the HVAC System. Tenant
shall be responsible for the safe, sanitary and lawful disposal of its trash and
garbage, and shall obtain and maintain its own trash dumpster therefor.
SECTION VII. FLOOR LOAD, HEAVY MACHINERY. Tenant shall not place a load upon
------------ ---------------------------
any floor of the premises exceeding the floor load per square foot area which
floor was designed to carry and which is allowed by law. Landlord reserves the
right to prescribe the position of all file cabinets, business machinery and
mechanical equipment (including safes) which Tenant may place in the premises.
Business machines and mechanical equipment shall be placed and maintained by
Tenant at Tenant's expense in settings sufficient to prevent transmission of
noise and vibration to any other part of the Building in which the premises are
located. Any moving of any machinery and/or equipment into, out of, or within
the premises shall be done only with the prior written consent of Landlord in
each instance, which consent shall not be unreasonably withheld, and shall be at
the sole risk and hazard of Tenant and Tenant will indemnity and save Landlord
harmless against and from any liability, loss, injury, claim or suit resulting
directly or indirectly from such moving. In the event riggers shall be required
to accomplish such moving, only persons holding a Master Rigger's License shall
perform the work. Tenant shall not in any way break, cut into, or damage the
exterior perimeter walls or insulating panels of the Building in installing,
ventilating or exhausting its equipment or in any other manner.
SECTION VIII. SERVICES. Subject to the provisions of Section XI hereof,
------------- --------
Landlord shall provide at its own expense:
(a) Electricity for normal lighting of the outside of the Building and
parking lot areas.
(b) Electric service to one distribution point serving only the premises.
(c) Gas service to roof mounted heating and air conditioning units serving
only the premises.
-6-
<PAGE>
SECTION IX. UTILITIES. Tenant shall pay for all utilities, which may
----------- ---------
include, gas and electricity, and telephone services furnished to the premises
by Landlord or any other supplier, and to the heating, ventilating and air
conditioning units serving the premises. Electricity and gas shall be separately
metered to Tenant and shall be billed directly to Tenant by the appropriate
public utility company. The listing of any utility service in the previous
sentence shall not constitute a representation that such utility service is
available to the premises.
SECTION X. RENTABLE AREA. The "Net Rentable Area" shall be the area stated
---------- -------------
in Exhibit A and Section I of this Lease. The net rentable is determined in
accordance with measurement standards set forth in this Section X. The net
rentable area is determined by measuring from the glass line of the Building to
the middle of walls demising the premises from another premises and to the
outside of corridor walls.
SECTION XI. ADDITIONAL RENT. In addition to the rent set forth in Section IV
----------- ---------------
of this Lease and as part of the rent due pursuant to the terms of this Lease,
Tenant shall pay Landlord as Additional Rent its proportionate share of the
Taxes and the Operating Costs as set forth in this Section XI. As used in this
Section XI the following words and terms shall have the following meaning:
(a) "Taxes" shall mean the real estate taxes and assessments imposed upon
Landlord with respect to Map 122, Plot 9, Parcel 243, commonly known as 25
Industrial Avenue, Chelmsford, Massachusetts, as such parcel is defined in the
records of the Assessor's Office of Chelmsford on January 1, 1995 including all
structures located thereon, and any and all other taxes, levies, betterments,
assessments and charges arising from the ownership and/or operation of said
Parcel 243 and all the structures located thereon which are or shall be imposed
by a National, State or Municipal or other authorities which are or may become a
lien upon Landlord and/or said Parcel 243, but excluding any fee or penalty
levied on Landlord for late payment thereof. If, or to the extent that, due to a
future change in the method of taxation any franchise, income, profit or other
tax shall be levied against Landlord in substitution or in lieu of any tax which
would otherwise constitute a real estate tax, such franchise, income, profit or
other tax shall be deemed to constitute "Taxes" for the purposes hereof,
otherwise "Taxes" shall in no event include franchise, income, profit, gift,
inheritance, succession or transfer taxes. It is recognized and agreed by
Landlord and Tenant that it is their intention by this paragraph to include in
"Taxes" that which in tax year 1996 was commonly known in Chelmsford as "real
estate taxes", including that portion covered by the school tax rate, and any
type of tax or assessment which may, throughout the term hereof be substituted,
in whole or in part therefore. If, in any tax year after the tax year 1996, the
Town of Chelmsford or any of its departments, shall require Landlord to pay for
any service which during the fiscal tax year 1996 was provided by said Town of
Chelmsford or any of its departments without requiring payment by Landlord,
-7-
<PAGE>
then all such payments due on account of services rendered during any tax year
after the tax year 1996 shall, for purposes of this Section XI(a) be considered
and treated as real estate taxes for the tax year for which such payments are
due. Without in any way limiting the generality of the preceding sentence some
of the services for which the Town of Chelmsford or any of its departments might
require payment are: police protection, fire protection, public schools, library
services, park services, building inspections. Water and sewer use charges are
covered elsewhere in this Lease and the same shall not enter into the
calculations made under this Section XI(a).
(b) "Tenant's Proportionate Share" for taxes shall be eight and 10/100
percent (8.1%).
(c) "Tax Year" shall mean the twelve month period commencing July 1, 1996,
and each twelve month period commencing on an anniversary of said date during
the term of the lease.
(d) Tenant's Payment of Tenant's Proportionate Share of Taxes. Tenant
shall make monthly payments of Additional Rent to Landlord to cover Tenant's
Proportionate Share of Taxes that are expected to be incurred during the current
calendar year and each subsequent calendar year thereafter falling entirely or
partly within the term of this Lease. The amount of such monthly payments shall
be determined as follows: On the Commencement Date and at the beginning of each
calendar year thereafter Landlord shall submit to Tenant a statement setting
forth Landlord's reasonable estimates (based on costs of which Landlord is aware
and other reasonable assumptions of Landlord) of the amount of Taxes that are
expected to be incurred during such calendar year, and the computation of
Tenant's Proportionate Share of such anticipated Taxes. Tenant shall pay to
Landlord on the first day of each calendar month following receipt of such
statement an appropriate amount to amortize on a monthly basis Tenant's
Proportionate Share of anticipated Taxes. Tenant's payment of its Proportionate
Share of Taxes, shall be made without deduction, setoff or demand in accordance
with the provisions of Section IV of this Lease. If at any time during the term
of this Lease, Landlord, in Landlord's reasonable judgment determines it
appropriate to revise the estimates of Taxes which have been submitted, then
Landlord may submit such revised estimates to Tenant, and then commencing with
the next monthly payment to be made by Tenant, appropriate adjustment shall be
made to the amount being paid by Tenant on account of Tenant's Proportionate
Share of anticipated Taxes. Within one hundred twenty (120) days after the
expiration of each fiscal year during the Lease Term, Landlord shall submit to
Tenant a statement certified by Landlord's comptroller certifying (i) Tenant's
Proportionate Share of the actual Taxes incurred during the preceding fiscal
year, (ii) the aggregate amount of the estimated payments, if any, made by
Tenant on account thereof, and (iii) any credit to which Tenant is entitled.
Tenant shall deduct any overpayment from its next estimated payment or payments
for Taxes. If Tenant's actual liability for such Taxes exceeds the estimated
payments, if any, made by Tenant on account thereof, then
-8-
<PAGE>
Tenant shall pay to Landlord within ten (10) days after notice thereof the total
amount of such deficiency as Additional Rent.
Appropriate credit against Taxes shall be given for any refund obtained by
reason of a reduction in any Taxes by the Courts or other governmental agency
responsible therefor. The original computation as well as reimbursement or
payments of additional charges, if any, or allowances, if any under the
provisions of this Section XI shall be based on the original assessed valuations
with adjustments to be made at a later date when the tax refund, if any, shall
be paid to Landlord by the taxing authority. Expenditures for legal fees and for
other similar or dissimilar expenses incurred in obtaining the tax refund shall
be charged against the tax refund before the adjustments are made for the Tax
Year. In no event shall Tenant be entitled to receive a credit against Taxes for
any fiscal Tax Year in an amount greater than Tenant's share of the Taxes for
such fiscal Tax Year.
(e) "Operating Costs" shall mean all costs incurred and expenditures of
whatever nature made by the Landlord, whether directly or by allocation, in the
operation, management, repair, cleaning and maintenance of the Building,
premises, Property, related equipment and facilities and appurtenant parking and
landscaped areas, heating and cooling equipment (except to the extent the same
are separately borne by tenants), including but not limited to the following:
1. All costs for fire, extended coverage, casualty, liability,
workmen's compensation, rental interruption insurance, and all other bonds and
insurance as may be required by the holder or guarantor of the mortgage upon the
Building in which the premises are located, or otherwise reasonably required.
2. Water and sewer charges.
3. Landscaping and snow removal.
4. Intentionally Deleted.
5. Electricity and gas charges except to the extent that the same are
separately metered or apportioned to tenants, including without limitation, the
cost of electric current for the operation of public lights inside and outside
the Building, and the parking area.
6. Security service equipment and contracts, if any.
7. Exterminating services and contracts.
8. Wages including all fringe benefits, federal and state payroll,
unemployment and old age taxes paid by Landlord on account of all employees who
are employed in, about or on account of the land, Building or other improvements
of which the premises are a part; it being understood and agreed that there
shall be an equitable allocation of the wages of any employees who are not
exclusively devoted to the Property. Employees shall include administrative and
overhead personnel, but in no event shall wages include amounts paid to
employees above the level of asset manager.
-9-
<PAGE>
9. The cost of labor and materials used in cleaning the Building,
surrounding areaways and windows in the Building, the Property, and the parking
area.
10. Supplies.
11. All costs for permits and fees, except those associated with work
undertaken solely for an individual tenant.
12. The cost of any capital improvements made to the Building after
the commencement of the term of this Lease, and either (i) intended to reduce
other Operating Costs or (ii) to comply with law not in effect as of the
Commencement Date, such cost thereof to be amortized over such improvement's or
addition's useful life together with interest on the unamortized balance at the
rate which is 2% above the prime rate from time to, time charged by BankBoston,
or its successor, or such higher rate as may be paid by Landlord for funds
borrowed to construct such said capital improvements or additions, it being
agreed that in each lease year there shall be included in Operating Costs only
such years allocable share of the amortization and interest described in this
Section XI(e)12.
13. All management fees paid for the Manager of the Building, and all
asset management fees. So long as Landlord is New Boston Mill Road Limited
Partnership, management fees shall be three and one-half percent (3 1/2%) of
gross rents and asset management fees shall be one and one-half percent (1 1/2%)
of gross rents. Successors in interest to New Boston Mill Road Limited
Partnership shall include in Operating Costs no portion of management fees and
asset management fees in excess of such fees for comparable properties in the
same geographical area.
Notwithstanding anything contained herein to the contrary, in no event shall
Operating Costs include any of the following:
(i) interest, principal, late charges, default fees, prepayment
penalties or premiums on any debt owed by Landlord, including any mortgage debt,
and depreciation;
(ii) costs of correcting any construction defects in the Building;
(iii) costs incurred in connection with the leasing of any space in the
Building, including legal fees, space planners' fees, brokerage commissions and
advertising expenses;
(iv) costs for which Landlord is reimbursed by any third party;
(v) any bad debt loss, rent loss, or reserves for bad debts or rent
loss;
(vi) fines, penalties and interest;
(vii) Landlord's political or charitable contributions;
(viii) attorneys' fees, costs, disbursements and other expenses
incurred in connection with negotiations or disputes with Building tenants,
other Building occupants, or prospective tenants or occupants;
-10-
<PAGE>
(ix) leasehold improvement costs incurred by Landlord for tenants or
other occupants of the Building;
(x) advertising and promotional expenses incurred in connection with
efforts to lease space in the Building;
(xi) expenses directly resulting from the negligence of Landlord, its
agents, servants or employees;
(xii) expenses directly attributable to the operation of the business
of the partnership or corporation which constitutes Landlord, as the same are
distinguished from the costs of operation of the Building, including partnership
or corporation accounting and legal matters unrelated to the operation of the
Building;
(xiii) costs of selling, syndicating, financing, mortgaging or
hypothecating any of Landlord's interest in the Building;
(xiv) costs of defending against or asserting any claims, disputes,
potential disputes, arbitration, or litigation with any tenants in the Building;
(xv) costs of compliance with applicable laws arising from the
presence of hazardous materials or substances in or about the Building or
Property, unless caused by Tenant, its agents, servants or employees; and
(xvi) costs arising from latent defects in the Building.
(f) "Tenant's Proportionate Share for Operating Costs" shall be eight and
10/100 percent (8.1%). In the event that the Building is enlarged or diminished
so as to increase or decrease the net rentable area of the Building, Tenant's
Proportionate Share for Operating Costs shall be adjusted to reflect accurately
the portion of the net rentable area leased by Tenant.
(g) Tenant's Payment of Tenant's Proportionate Share of Operating Costs.
Tenant shall make monthly payments of Additional Rent to Landlord to cover
Tenant's Proportionate Share of Operating Costs that are expected to be incurred
during the current calendar year and each subsequent calendar year thereafter
falling entirely or partly within the term of this Lease. The amount of such
monthly payments shall be determined as follows: on the Term Commencement Date
and at the beginning of each calendar year thereafter, Landlord shall submit to
Tenant a statement setting forth Landlord's reasonable estimates (based on costs
of which Landlord is aware and other reasonable assumptions of Landlord) of the
amount of Operating Costs that are expected to be incurred during such calendar
year, and the computation of Tenant's Proportionate Share of such anticipated
Operating Costs. Tenant shall pay to Landlord on the first day of each month
following receipt of such statement an appropriate amount to amortize on a
monthly basis Tenant's Proportionate Share of the anticipated Operating Costs,
Tenant's payment of its Proportionate Share of Operating Costs shall be made
without deduction, set off, or demand in accordance with the provisions of
Section IV of this
-11-
<PAGE>
Lease. If at any time during the term of this Lease Landlord in Landlord's
reasonable judgment determines it appropriate to revise the estimates of
Operating Costs which have been submitted, then Landlord may submit such revised
estimates to Tenant, and then commencing with the next monthly payment to be
made by Tenant, appropriate adjustment shall be made to the amount being paid by
Tenant on account of Tenant's Proportionate Share of anticipated Operating
Costs. Within one hundred twenty (120) days after the expiration of each
calendar year during the term of this Lease, Landlord shall submit to Tenant a
statement certified by Landlord's comptroller certifying (i) Tenant's
Proportionate Share of the actual Operating Costs incurred during the preceding
calendar year, (ii) the aggregate amount of the estimated payments, if any, made
by Tenant on account thereof, and (iii) any credit to which Tenant is entitled.
Tenant shall deduct the overpayment from its next estimated payment or payments
for Operating Costs for the then current year. If Tenant's actual liability for
such Operating Costs exceeds the estimated payments, if any, made by Tenant on
account thereof, then Tenant shall pay to Landlord within ten (10) days after
notice thereof the total amount of such deficiency as Additional Rent due under
this Lease.
PARTIAL YEARS: CHANGE OF TAX YEAR: If the Commencement Date or the
Termination Date occurs in the middle of a calendar year or Tax Year, Tenant
shall be liable for only that portion of the Operating Costs or Taxes as the
case may be, in respect of such calendar year or Tax Year represented by a
fraction, the numerator of which is the number of days of the herein term which
falls within the calendar year or Tax Year, and the denominator of which is
three hundred sixty-five (365).
EFFECT OF TAKING: In the event of any taking of the Building or the land
upon which it stands under circumstances whereby this Lease shall not terminate
under the provisions of Section XVII, and in the event the taking includes a
portion of the premises or the Building, Tenant's Proportionate Share for taxes
shall be adjusted pro-rata to reflect the proportion of the premises and/or
Building remaining after such taking.
SURVIVAL OF OBLIGATIONS: Any obligation under this Section XI of Tenant or
Landlord which shall not have been paid at the expiration of the term of this
Lease shall survive such expiration and shall be paid when and as the amount of
same shall be determined to be due.
SECTION XII. REMOVAL OF GOODS AND TENANT'S REPAIRS. At the expiration of
------------ -------------------------------------
the term, Tenant will remove its goods and effects (except as elsewhere provided
herein) and will peaceably yield up to the Landlord the premises in as good
order and condition as when delivered to it, excepting ordinary wear and tear
(which shall not be deemed to include holes in walls or floors or special wiring
caused by installation of Tenant's fixtures or equipment), repairs required to
be made by Landlord and damage by fire or casualty.
-12-
<PAGE>
The Tenant shall be responsible for all damages or injury to the premises,
fixtures, appurtenances and equipment of Landlord, and to the Building and the
Property, caused by Tenant's installation or removal of furniture, fixtures or
equipment.
SECTION XIII. SALES TAX. In the event that any sales tax shall be levied
------------- ---------
by the Commonwealth of Massachusetts, or the Town of Chelmsford, or any other
authority having jurisdiction, upon the rent and Additional Rent received by
Landlord from Tenant, the exact amount of such tax shall be paid by Tenant to
Landlord at the same time each installment of rent and Additional Rent is paid
to the Landlord.
SECTION XIV. IMPROVEMENTS AND ALTERATIONS. The Tenant may place such
------------ ----------------------------
partitions, fixtures, (including light fixtures), personal property, machinery,
motors and the like (subject to Section VII) in the premises and may make, at
its own expense, such improvements and alterations as have the prior written
approval of Landlord in each instance provided that all work done by Tenant in
the premises shall be done in accordance with all zoning, building, fire and
other codes applicable thereto; provided however, Landlord's prior written
approval shall not be required in connection with the performance of Tenant of
non-structural interior renovations to the premises which do not affect building
systems. All fixtures, equipment, improvements and appurtenances attached to or
built into the premises prior to or during the term shall be and remain part of
the premises as of the end of the term unless specifically excluded elsewhere in
this Lease. In the case of damage or destruction of such items during the term,
Tenant shall have the right to recover its loss from any insurance company with
which it has insured the same notwithstanding that any of such things might be
considered part of the premises at the end of the term. Tenant shall remove all
of its trade fixtures and equipment at the end of the term. Landlord may not
require removal of pipes, wires and the like from the walls, ceilings or floors,
provided that the Tenant properly cuts, caps and disconnects such pipes and
wires and seals them off in a safe and lawful manner flush with the applicable
wall, floor or ceiling and redecorates the area consistent with the remainder of
the premises. Tenant shall be responsible for any damage to the Building caused
by malfunction of equipment or the removal of its property as aforesaid.
SECTION XV. INSPECTION. The Landlord and any mortgagee of the Building or
----------- ----------
of the Building and land, or of Landlord's interest therein, and their
representatives shall after reasonable prior notice (except in the case of
emergency for which no notice shall be required) have the right at all times to
enter the premises to inspect the same and to make repairs or replacements
therein as required by this Lease and to introduce conduits and pipes or ducts;
provided, however, that the Landlord shall use reasonable effort not to unduly
disturb the Tenant's use and occupancy, or to permanently diminish the useable
square footage of the premises or to materially interfere with Tenant's use and
occupancy thereof.
-13-
<PAGE>
SECTION XVI. CASUALTY. If the premises or any part thereof shall be damaged
------------ --------
by fire or other casualty, Landlord shall proceed with reasonable diligence, and
at the expense of Landlord, to repair or cause to be repaired such damage.
Landlord's responsibility to restore the premises shall be limited to Landlord's
obligations as set forth on the attached Build-Out Drawings and shall be subject
to all zoning and building codes then applicable; Tenant shall at Tenant's
expense restore and repair the premises to the extent of Tenant's obligations as
set forth in the Build-Out Drawings and shall be subject to all zoning and
building codes then applicable. All repairs to and replacement of Tenant's
property and property which Tenant may be required to remove as provided in
Sections XII and XIV shall be made by and at the expense of Tenant. If the
premises or any part thereof shall have been rendered unfit for use and
occupation hereunder by reason of such damage, the yearly rent and Additional
Rent, or a just and proportionate part thereof, according to the nature and
extent to which the premises shall have been so rendered unfit, shall be
suspended or abated until the premises (except as to the property which is to be
repaired by or at the expense of Tenant) shall have been restored as nearly as
practicably may be to the condition in which they are immediately prior to such
fire or other casualty. Landlord shall not be liable for delays in the making of
any such repairs which are due to government regulations, casualties, and
strikes, unavailability of labor and materials, and other causes beyond the
control of Landlord, nor shall Landlord be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting from delays in
repairing such damage. In case the Building is so damaged by such fire or other
casualty that substantial alteration or reconstruction of the Building shall be
required, then, whether or not the premises shall have been damaged by such fire
or other casualty, this Lease and the term hereof may be terminated at the
election of Landlord or Tenant by a notice in writing of its election so to
terminate which shall be given to the other party within sixty (60) days
following such fire or other casualty, the effective termination date of which
shall be not less then thirty (30) days after the date on which such termination
notice is received. In the event of any such termination, this Lease and the
term hereof shall expire as of such effective termination date and the yearly
rent and Additional Rent shall be apportioned as of such date; and if the
premises or any part thereof shall have been rendered unfit for use and
occupation by reason of such damage, the yearly rent and Additional Rent for the
period from the date of the fire or other casualty to the effective termination
date, or a just and proportionate part thereof, according to the nature and
extent to which the premises shall have been rendered unfit, shall be abated. In
the event neither party having the right to so terminate this lease does so, and
in the further event that Landlord fails to repair or cause to be repaired the
damage caused to the premises on or before the date which is 180 days subsequent
to the date of the fire or other casualty, then Tenant shall have the right to
terminate this lease by written notice given to Landlord within ten (10) days
following the expiration of said 180 day
-14-
<PAGE>
period, said termination to be effective not less than forty-five (45) days
after the date of such notice; provided however, in the event Landlord shall
thereafter substantially complete the repair of the damage caused to the
premises on or before the date which is 210 days subsequent to the date of the
fire or other casualty, Tenant's termination notice shall be nullified, and this
lease shall remain in full force and effect as if such notice had not been sent.
SECTION XVII. EMINENT DOMAIN CONDEMNATION. In the event that the premises
------------- ---------------------------
or any part thereof, or the whole or any part of the Building shall be taken or
appropriated by eminent domain or shall be condemned for any public or quasi-
public use, or (by virtue of any such taking, appropriation or condemnation)
shall suffer any damage (direct or indirect or consequential) for which Landlord
or Tenant shall be entitled to compensation, then (and in any such event) this
Lease and the term hereof may be terminated at the election of Landlord by a
notice in writing of its election so to terminate which shall be given by
Landlord to Tenant within sixty (60) days following the date on which Landlord
shall have received official notice of such taking, appropriation or
condemnation. In the event that a substantial part of the premises or of the
means of access thereto shall be so taken, appropriated or condemned, then (and
in any such event) this Lease and the term hereof may be terminated at the
election of Tenant by a notice in writing of its election so to terminate which
shall be given by Tenant to Landlord within sixty (60) days following the date
on which Tenant shall have received official notice of such taking,
appropriation or condemnation.
Upon the giving of any such notice of termination (either by Landlord or
Tenant) this Lease and the term hereof shall terminate on or retroactively as of
the date on which Tenant shall be required to vacate any part of the premises or
shall be deprived of a substantial part of the means of access thereto,
provided, however, that Landlord may in Landlord's notice elect to terminate
this Lease and the term hereof retroactively as of the date on which such
taking, appropriation or condemnation become legally effective. In the event of
any such termination, this Lease and the term hereof shall expire as of such
effective termination date and the yearly rent and Additional Rent shall be
apportioned of such date. If neither party (having the right to do so) elects to
terminate, Landlord will, with reasonable diligence and at Landlord's expense,
restore the remainder of the premises, or the remainder of the means of access,
as nearly as practicably may be to the same condition as obtained prior to such
taking, appropriation or condemnation, in which event the yearly rent and
Additional Rent shall be adjusted, (i) a just proportion of the yearly rent and
Additional Rent, according to the nature and extent of the taking, appropriation
or condemnation and the resulting permanent injury to the premises and the means
of access thereto, shall be permanently abated, (including in such abatement the
adjustments in Tenant's Proportionate Share for Taxes as provided in Section XI,
and a just adjustment in Tenant's Proportionate Share for Operating Costs) and
(ii) a just proportion of the
-15-
<PAGE>
remainder of the yearly rent, and Additional Rent according to the nature and
extent of the taking, appropriation or condemnation and resultant injury
sustained by the premises and the means of access thereto shall be abated until
the premises and the means of access thereto shall have been restored as fully
as may be for permanent use and occupation by Tenant hereunder. There is
expressly reserved to Landlord all rights to compensation and damages created,
accrued or accruing by reason of any such taking, appropriation or condemnation.
It is expressly understood and agreed that the provisions of this Section XVII
shall not apply to any taking, appropriation or condemnation for governmental
occupancy for a period reasonably estimated to be less than one (1) year in
duration. During such period, the rent hereunder shall be abated
proportionately. If the period of governmental occupancy is reasonably estimated
at more than one year, Tenant may elect to terminate this Lease by notice to
Landlord, in the manner aforesaid. It is agreed that Tenant reserves all rights
to moving and relocation expense claims as may be available to it from the
condemning authority in accordance with statutes or regulations.
SECTION XVIII. INDEMNIFICATION. Tenant shall save Landlord harmless, and
-------------- ---------------
will exonerate and indemnify Landlord from and against any and all claims,
liabilities or penalties asserted by or on behalf of any person, firm or public
authority:
(a) On account of or based upon any injury to person, or loss of or damage
to property, sustained or occurring on the premises on account of or based upon
the act, omission, fault, or neglect of Tenant, its servants, agents, employees,
licensees, invitees and guests.
(b) On account of or based upon any injury to person or loss of or damage
to property, sustained or occurring elsewhere (other than on the premises) in or
about the Building and Property (and, in particular, without limiting the
generality of the foregoing on or about the stairways, public corridors,
sidewalks, concourses, arcades, approaches, areaways, roof, outside parking
areas, or other appurtenances and facilities used in connection with the
Building or premises) arising out of the use or occupancy of the Property,
Building or premises by the Tenant or by any person claiming by, through or
under Tenant, unless caused by or resulting from Landlord's negligence, and in
addition to and not in limitation of either of the foregoing subdivisions (a) or
(b).
(c) On account of or based upon (including monies due on account of) any
work or things whatsoever done (other than by Landlord or its contractors, or
agents or employees of either) on the premises during the term of this Lease and
during the period of time, if any, prior to the Term Commencement Date that
Tenant may have been given access to the premises; and, in respect of any of the
foregoing, from and against all costs, expenses (including reasonable attorney's
fees), and liabilities incurred in or in connection with any such claim, or any
action or proceeding brought thereon; and in case any action or proceeding be
brought against Landlord by reason of any such claim, Tenant, upon notice from
Landlord, shall, at Tenant's expense, resist or
-16-
<PAGE>
defend such action or proceeding and employ counsel therefor reasonably
satisfactory to Landlord, it being agreed that such counsel as may act for
insurance underwriters of Tenant engaged in such defense shall be deemed
satisfactory.
SECTION XIX. PROPERTY OF TENANT. In addition to and not in limitation of
------------ ------------------
the foregoing, Tenant covenants and agrees that all of its merchandise,
furniture and property of every kind, nature and description which may be in or
upon the premises or Building, the Property, in the public corridors, or on the
sidewalks, areaways, and approaches thereto, or outside parking areas during the
term hereof, shall be at the sole risk and hazard of Tenant, and that if the
whole or any part thereof shall be damaged, destroyed, stolen or removed by any
cause whatsoever, no part of said damage or loss shall be charged to or borne by
Landlord, except to the extent caused by the negligence or misconduct of
Landlord or Landlord's contractors, agents, servants and/or employees Tenant
agrees to carry adequate insurance to protect itself against said loss or
damage.
SECTION XX. INJURY AND DAMAGE. Landlord shall not be liable for any injury
----------- -----------------
or damage to persons or property resulting from fire, explosion, falling
plaster, steam, gas, electricity, electrical disturbance, water, rain or snow,
or leaks from any part of the Building, the Property, or parking area, or from
the pipes, appliances, or plumbing works or from the roof, street or subsurface
or from any other place or from dampness or by any other cause of whatever
nature, whether caused by other tenants or persons in the Building, or on the
Property, or in any parking area or caused by operations in construction of any
private, public or quasi-public work; nor shall Landlord be liable for any
latent defect in the premises or in the Building.
SECTION XXI. ASSIGNMENT, MORTGAGING, AND SUBLETTING. Tenant covenants and
------------ --------------------------------------
agrees that neither this Lease nor the term and estate hereby granted, nor any
interest herein or therein, will be assigned, mortgaged, pledged, encumbered or
otherwise transferred, and that neither the premises, nor any part thereof will
be encumbered in any manner by reason of any act or omission on the part of
Tenant, or used or occupied, or utilized for desk space or for mailing
privileges, by anyone other than Tenant, or for any use or purpose other than as
stated herein, or be sublet or offered or advertised for subletting, without the
prior written consent of Landlord in every case, which consent shall not be
unreasonably withheld or delayed. Not in limitation of the foregoing, Tenant's
request for Landlord's consent to subletting or assignment shall be submitted in
writing, it being understood and agreed however that Tenant shall have no right
to assign or sublet this lease, or any interest therein or thereunder to any
individual or entity with whom Landlord is then negotiating for the rental of
other vacant space in the Building. It is hereby expressly understood and
agreed, however, if Tenant is a corporation, that the assignment, or transfer of
this Lease, and the term and estate granted, to a subsidiary, affiliate or
parent corporation of Tenant, or to any corporation into which Tenant is
-17-
<PAGE>
merged or with which Tenant is consolidated, which corporation shall have a net
worth at least equal to that of Tenant immediately prior to such assignment,
transfer, merger or consolidation, (such corporation being hereinafter called
"Assignee"), without the prior written consent of Landlord shall not be deemed
to be prohibited hereby, if, and upon the express condition that, Assignee and
Tenant shall promptly execute, acknowledge, and deliver to Landlord an agreement
in form and substance satisfactory to Landlord whereby Assignee shall agree to
be bound by and upon the covenants, agreements, terms, provisions and conditions
set forth in this Lease on the part of Tenant to be performed and whereby
Assignee shall expressly agree that the provisions of this Section XXI shall,
notwithstanding such assignment transfer, continue to be binding upon it with
respect to all future assignments and transfers.
The listing of any name other than that of Tenant, whether on the doors of
the premises or on the Building directory, or otherwise, shall not operate to
vest any right or interest in this Lease or in the premises or be deemed to be
the written consent of Landlord mentioned in this Section XXI, it being
expressly understood that such listing is a privilege extended by Landlord
revocable at will by written notice to Tenant.
If this Lease be assigned, or if the premises or any part thereof be sublet
or occupied by anybody other than Tenant, Landlord may, after default by Tenant,
collect rent from the Assignee, subtenant or occupant, and apply the net amount
collected to the rent herein reserved, but no such assignment, subletting,
occupancy or collection shall be deemed a waiver of this covenant, or the
acceptance of the Assignee, subtenant or occupant as a tenant, or a release of
Tenant from the further performance by Tenant of covenants on the part of Tenant
herein contained. The consent by Landlord to an assignment or subletting shall
not in any way be construed to relieve Tenant from obtaining the express consent
in writing of Landlord to any further assignment or subletting. No assignment,
subletting or use of the premises by an affiliate of Tenant shall affect the
purpose for which the premises may be used stated in Section II.
SECTION XXII. SIGNS, BLINDS AND DRAPERIES. No signs or blinds may be put on
------------- ---------------------------
or in any window by Tenant. Tenant may hang its own draperies, provided that
they shall not in any way interfere with the Building standard blinds or be
visible from the exterior of the Building and that such draperies are so hung
and installed that when drawn, the Building standard blinds are automatically
also drawn. Any signs or letters in the public corridors or on the doors must be
submitted to Landlord for written approval before installation, which
installation shall be at the sole expense of Tenant. Tenant's company name shall
be listed on the common area directories. Provided that Tenant obtains and
maintains and all governmental approvals and permits therefor, Tenant shall be
permitted at its sole cost and expense to place its company name on the entry
door to the premises, which signage shall be subject to the prior
-18-
<PAGE>
review and approval of Landlord, and must be consistent with the size, color,
material and method of installation of other tenant signage.
SECTION XXIII. INSURANCE. Tenant will not do or omit to do to keep anything
-------------- ---------
in, upon or about the premises which may prevent the obtaining of any fire,
liability or other insurance upon or written in connection with the premises or
the Building, the Property or any parking area or which may make any such
insurance void or voidable, or which may create any extra premiums or increase
the rate of any such insurance over that normally applicable to the office
buildings unless the Tenant pays such extra or increased premiums.
SECTION XXIV. INFLAMMABLES, ODORS. Tenant shall not bring or permit to be
------------- -------------------
brought, or keep, in or on the premises or elsewhere in the Building or
Property, any inflammable, combustible or explosive fluids, material, chemical
or substance, or cause or permit any odors of cooking or other processes, or any
unusual or other objectionable odors to emanate from or permeate the premises.
SECTION XXV. DEFAULT. If the Tenant shall default in the performance of any
------------ -------
of its obligations and if such default shall continue for ten (10) days after
written notice thereof by the Landlord to the Tenant, hereinafter referred to as
grace period, except that if the Tenant cannot reasonably cure any such default
within said ten (10) day period, this period may be extended for a reasonable
time, provided that the Tenant commences to cure such default within ten (10)
day period and proceeds diligently thereafter to effect such cure, and further
provided that Tenant shall be entitled to only one ten (10) day grace period in
any twelve month period, or if the Tenant shall be adjudicated bankrupt or
insolvent according to law, or shall make an assignment for the benefit of
creditors, then Landlord may lawfully enter the premises or any part thereof in
the name of the whole or mail a notice of termination addressed to Tenant at the
premises and repossess the same as of the former estate of the Landlord and
expel the Tenant and those claiming under the Tenant without being deemed guilty
of any manner of trespass and without prejudice to any other remedies which the
Landlord may have for arrears of rent or preceding breach of covenant, and upon
entry or mailing as aforesaid, this Lease shall terminate and the Tenant
covenants that in case of such termination, it will indemnity the Landlord
against all loss of rent, reletting expenses, and brokerage, which the Landlord
may incur by reason of such termination during the residue of the term. In order
to compute such damages, the Landlord may elect to receive as damages upon
termination under this Section XXV either (i) the amount by which, at the
termination of this Lease, the aggregate of the rent and Additional Rent
(projected on the basis of experience under the lease) projected over the period
from such termination until the normal expiration date of the term exceeds the
aggregate projected rental value of the premises for such period, or (ii)
amounts equal to the rent and Additional Rent which would have been payable had
the lease not so terminated, payable upon the due dates as specified
-19-
<PAGE>
herein (subject to offset for net rents actually received from reletting after
subtraction of the expenses or reletting).
Suit or suits for the recovery of such damages, or any installments
thereof, may be brought by Landlord from time to time at its election, and
nothing contained herein shall be deemed to require Landlord to postpone suit
until the date when the term of this Lease would have expired if it had not been
terminated hereunder.
Nothing herein contained shall be construed as limiting or precluding the
recovery by Landlord against Tenant of any sums or damages to which, in addition
to the damages particularly provided above, Landlord may lawfully be entitled by
reason of any default hereunder on the part of Tenant.
SECTION XXVI. SUBORDINATION. Except as expressly set forth below, this
------------- -------------
lease is subject and subordinate in all respects to all mortgages which may now
or hereafter be placed on or affect the real property of which the premises are
a part, or Landlord's interest or estate therein, and to each advance made
and/or hereafter to be made under any such mortgages, and to all renewals,
modifications, consolidations, replacements and extensions thereof and all
substitutions therefor. This Section XXVI shall be self-operative and no further
instrument of subordination shall be required. In confirmation of such
subordination, Tenant shall execute and deliver promptly any certificate that
Landlord and/or any mortgagee and their respective successors in interest may
request. Notwithstanding the generality of the foregoing provisions of this
Section XXVI, Tenant agrees that any such mortgagee shall have the right at any
time to subordinate any such mortgages or other instruments of security to this
Lease on such terms and subject to such conditions as such mortgagee may deem
appropriate in its discretion. Tenant further covenants and agrees upon demand
by Landlord's mortgagee at any time, before or after the institution of any
proceedings for the foreclosure of any such mortgages or other instruments of
security, or sale of the Building pursuant to any such mortgages or other
instruments of security (which agreement shall survive any such foreclosure
sale), to attorn to such mortgagee or such purchaser upon any such sale and to
recognize such purchaser as Landlord under this Lease, provided that Tenant's
possession shall not be disturbed except under the terms of this Lease, and
further agrees to execute any and all documents as such mortgagee may require to
confirm such attornment. Notwithstanding anything contained herein to the
contrary, Landlord shall obtain and provide to Tenant within thirty (30) days of
the final execution and delivery of this lease a Subordination, Non-Disturbance
and Attornment Agreement ("SNDA") in commercially reasonable form from
Landlord's mortgagee subsequent to the final execution and delivery of this
Lease, and shall obtain and provide to Tenant a SNDA in commercially reasonable
form from all future mortgagees. It is understood and agreed by Landlord that
Tenant's subordination of its leasehold interest hereunder to the interest of
any future mortgagees
-20-
<PAGE>
shall be conditioned upon the execution and delivery of a SNDA in commercially
reasonable form, which SNDA Tenant shall execute and deliver within ten (10)
days of request by Landlord.
SECTION XXVII. NOTICES. From time to time, Tenant on at least ten (10) days
-------------- -------
prior written request by Landlord, will deliver to Landlord a statement in
writing certifying that this Lease is unmodified and in full force and effect
(or if there shall have been modifications, that the same is in full force and
effect as modified and stating the modifications) and the dates to which the
rent and other charges have been paid and stating whether or not the Landlord is
in default in performance of any covenant, agreement or condition contained in
this Lease and, if so, specifying each such default of which Tenant may have
knowledge.
Any notice or demand by Tenant to Landlord shall be served in hand or by
Sheriff, Constable or certified mail, postage prepaid, or recognized overnight
courier, addressed to Landlord as set forth below, until otherwise directed in
writing by the Landlord, and any notice or demand by Landlord to Tenant shall be
served in hand or by Sheriff, Constable or certified mail, postage prepaid, or
recognized overnight courier, to the Tenant as set forth below.
To Landlord: New Boston Mill Road Limited Partnership
One Longfellow Place, Suite 3612
Boston, Massachusetts 02114
with a copy to: Rappaport, Aserkoff & Rappaport
One Longfellow Place, Suite 3611
Boston, Massachusetts 02114
Attn: Edward Gelles, Esq.
To Tenant: MMC Networks, Inc.
25 Industrial Drive
Chelmsford, Massachusetts 01824
with a copies to: MMC Networks, Inc.
1134 E. Arques Avenue
Sunnyvale, California 94086
Andrew Pearlstein, Esq.
Goldstein & Manello, P.C.
265 Franklin Street
Boston, Massachusetts 02110
It is agreed that certified mail shall be conclusively deemed received one
day after it is mailed, postage prepaid, and that an item sent by recognized
overnight courier shall be conclusively deemed received the day it is scheduled
to be delivered.
SECTION XXVIII. RULES AND REGULATIONS. Tenant will faithfully observe and
--------------- ---------------------
comply with the Rules and Regulations annexed hereto and such other further
Rules and Regulations as Landlord hereafter at any time or from time to time may
make and may communicate in writing to Tenant, which in the judgment of Landlord
shall be necessary for the reputation, operation, safety, care or appearance of
the Building, the Property, the outside parking areas, or the preservation of
good order in the said Building, the Property, parking area,
-21-
<PAGE>
or the operation of maintenance of the Building, or the equipment thereof, or
the Property, or the comfort of tenants or others in the Building; provided,
however, that in the case of any conflict between the provisions of this Lease
and any such Rules and Regulations, the provisions of this Lease shall control,
and provided further, that nothing contained in this Lease shall be construed to
impose upon Landlord any duty of obligation to enforce the Rules and Regulations
or the terms, covenants or conditions in any other lease as against any other
tenant and Landlord shall not be liable to Tenant for violation of the same by
any other tenant, or any other tenant's servants, employees, agents, visitors,
invitees or licensees.
SECTION XXIX. QUIET ENJOYMENT. The Tenant, on paying the said rent and
------------- ---------------
performing the covenants of this Lease on its part to be performed shall and may
peaceably and quietly have, hold and enjoy the premises for the term aforesaid
and any extension thereof.
SECTION XXX. BINDING AGREEMENT. This lease shall bind and enure to the
------------ ------------------
benefit of the parties hereto and their respective heirs, representatives,
successors and assigns. This lease contains the entire agreement of the parties
and may not be modified except by instrument in writing signed by the parties
hereto.
SECTION XXXI. PARTNERSHIP. During such time as the Landlord shall be a
------------- ------------
limited partnership, Tenant agrees that it shall not hold any partner of
Landlord personally responsible for any of the covenants of Landlord under this
Lease, and in the event it has a claim against Landlord, Tenant shall look only
to Landlord's interest in the Building for recovery of any judgment from
Landlord; it being specifically agreed that neither the Landlord nor anyone
claiming by, through or under Landlord shall ever be personally liable for any
such judgment, or for the payment of any monetary obligation to Tenant.
SECTION XXXII. SEISIN. In the event of a sale or other disposition of the
-------------- ------
Building and/or land underlying it by Landlord, Landlord shall be entirely free
and relieved from the performance and observance thereafter of all covenants and
obligations of Landlord hereunder, it being understood and agreed in that the
successor to Landlord's ownership shall thereupon and thereafter assume and
perform and observe, any and all of such covenants and obligations of Landlord.
SECTION XXXIII. INSURANCE. Tenant shall maintain in full force and effect
--------------- ---------
the following insurance written by one or more responsible companies licensed to
do business in Massachusetts in form and content reasonably satisfactory to
Landlord, including, except as to (2) of this Section XXXIII, at the request of
Landlord, Landlord as an additional insured as its interest may appear under the
lease, and Tenant shall keep deposited with the Landlord copies of all policies
of insurance, or certificates thereof, with endorsements on such policies or
certificates to the effect that such insurance shall not be canceled by the
insurer without at least fifteen (15) days prior notice to Landlord.
-22-
<PAGE>
(1) Comprehensive general liability insurance on an occurrence basis in an
amount not less than One Million Dollars ($1,000,000) combined single limit for
property damage and for any personal injury, including death, to one or more
than one person arising out of any one incident.
(2) Worker's compensation insurance covering all employees, and, if Tenant
shall contract with any independent contractor for the furnishing of labor,
materials or services to Tenant, Tenant shall require such independent
contractor to maintain workmen's compensation insurance covering all its
employees and all the employees of any subcontractor.
(3) Personal Property - Landlord shall not be liable to Tenant for and
Tenant shall carry his own insurance to protect against:
(i) Damage to or loss of property entrusted to employees of the
Landlord.
(ii) Loss of property through thefts regardless of where the theft
takes place.
(iii) Damage to property regardless of where the damage takes place.
(iv) Damage to or loss of property caused by other tenants or
occupants of the building or caused by visitors to or in the building.
It is specifically understood that Landlord's insurance does not cover any
personal property of Tenant and Tenant shall not make any claim for loss of or
damage to such property against Landlord or Landlord's insurance carrier and
shall not permit its insurance carrier to make any claim for loss or damage to
such property against Landlord or Landlord's insurance carrier.
SECTION XXXIV. SUBROGATION, INSURANCE PREMIUMS.
-------------- -------------------------------
(a) The Landlord discharges and releases the Tenant to the extent of the
Landlord's fire or casualty insurance coverage, but only with respect to loss
and damage occurring during such times as the Landlord's policies of fire and
casualty insurance shall contain an operative clause or endorsement providing
that such discharge or release shall not affect the policy or the right of the
Landlord to recover thereunder, even if such fire or other casualty may have
been brought about by the fault or neglect of Tenant, its agents or employees,
for or on account of any and all claims and liabilities arising out of any loss
or damage during the term hereof, or any extension or renewal thereof, to any
property of the Landlord caused by (1) fire and such risks as are customarily
comprehended by the term "extended coverage" in endorsements to fire insurance
policies, and (2) such other risks as are covered by insurance which the
Landlord may desire to procure.
(b) Tenant discharges and releases the Landlord, to the extent of Tenant's
fire and casualty insurance coverage, but only with respect to loss and damage
occurring during such times as Tenant's policies of fire and casualty insurance
shall contain an operative clause or endorsements providing that such discharge
or release shall not affect the policy or the right of the Tenant to recover
thereunder, even if such fire or other casualty may have been brought out
-23-
<PAGE>
by the fault or neglect of the Landlord, its agents or employees, for or on
account of any and all claims and liabilities arising out of any loss or damage
during the term hereof, and any extension or renewal thereof, to any property of
Tenant caused by (1) fire or such other risks as are customarily comprehended by
the term "extended coverage" in endorsements to fire insurance policies, and (2)
such other risks as are covered by insurance which Tenant may desire or be
obligated to procure.
(c) In consideration of the foregoing, each of the parties hereto agrees
with the other party that (1) such insurance policies or any extension or
renewal thereof shall, if the insurance carrier permits, include a clause or
endorsement which provides in substance that the insurance company waives any
right of subrogation which it might otherwise have against the Landlord or
Tenant, as the case may be, and (2) upon demand of the other party hereto, will
reimburse the other party for any extra premium costs, if any, incurred by the
latter in obtaining such clause or endorsement, or at its option, in lieu
thereof, shall relieve such other party of the discharge or release described
above.
Upon demand, in writing, by either party hereto, the other party agrees to
furnish to it a statement of the amount and type of insurance coverage and the
names of the insurance companies and to request its insurance companies to give
notice to such other party of any cancellation or discontinuance of any part of
such coverage.
SECTION XXXV. SHORING. If an excavation shall be made upon land adjacent to
------------- -------
the premises, or shall be authorized to be made, Tenant shall afford to the
person causing or authorized to cause such excavation, license to enter upon the
premises for the purpose of doing such work as said person shall deem necessary
to preserve the Building from injury or damage and to support the same by proper
foundations without any claims for damages or indemnity against Landlord, or
diminution or abatement of rent.
SECTION XXXVI. REZONING. Tenant agrees that he will not oppose any
-------------- --------
application for rezoning or variance instituted by Landlord, his successors or
assigns.
SECTION XXXVII. SEPARABILITY. If any provisions or any part of any provision
--------------- ------------
of this Lease or if the application of any provisions of any part of this Lease
to any person, entity, or circumstance shall be held invalid by a court of
competent jurisdiction, such invalidity shall have no effect on any other
provision or any part of any provision of this Lease or its application to any
other person, entity, or circumstance.
SECTION XXXVIII. WAIVER OF TRIAL BY JURY. Landlord and Tenant agree that
---------------- -----------------------
they shall, and hereby do, waiver trial by jury in any action arising out of
Tenant's use and occupancy of the premises.
SECTION XXXIX. NO WAIVER. No act or thing done by Landlord or Landlord's
-------------- ---------
agents during the term of this Lease shall constitute an eviction by Landlord,
nor shall be deemed
-24-
<PAGE>
an acceptance of a surrender of said premises, and no agreement to accept such
surrender shall be valid unless in writing signed by Landlord. The failure of
Landlord to seek redress for violation of, or to insist upon the strict
performance of this Lease, or any of the rules and regulations set forth in this
Lease or hereafter adopted by Landlord, shall not constitute a waiver in any
respect nor prevent a subsequent act, which originally constituted a violation
from having all force and effect of an original violation. The receipt by
Landlord of rent with knowledge of the breach of any covenant of this Lease
shall not be deemed a waiver of such breach. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly rent herein stipulated shall be
deemed to be other than on account, nor shall any endorsement or statement on
any check, nor any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance or such rent or pursue any
other remedy in this Lease provided.
SECTION XL. HOLDING OVER. In the event Tenant or any party claiming by,
----------- ------------
through or under Tenant shall hold over the premises or any part thereof after
the termination of this Lease, such holding over shall constitute and be
construed as a tenancy at sufferance only, provided that all the terms of this
Lease shall apply except that the rent set forth in Section IV shall be
calculated at a daily rate equal to one hundred fifty percent (150%) of the rent
reserved in said Section IV. Nothing contained in this Section XL shall be
construed as Landlord's consent to Tenant holding over.
SECTION XLI. INTENTIONALLY DELETED.
------------ ---------------------
SECTION XLII. CAPTIONS, PLURAL, GENDER. The captions are inserted only as a
------------- ------------------------
matter of convenience and for reference and in no way define, limit or describe
the scope of this Lease nor the intent of any provisions hereof. Whenever a
masculine or singular pronoun is used in this Lease, it shall include the
feminine and plural thereof whenever the context so permits or requires.
SECTION XLIII. BROKERAGE. Tenant covenants that it has dealt with no broker
-------------- ---------
other than the broker specified at the end of this Section XLIII, as Tenant's
Broker and as Landlord's Broker, in locating the premises by this Lease and in
negotiating this Lease and Tenant further covenants and agrees that it shall
hold Landlord harmless from any and all claims which may be asserted by any real
estate broker other than the broker specified at the end of this Section XLIII,
as Tenant's Broker and as Landlord's Broker, who claims that he showed or
referred the Tenant to the Landlord or to the premises for any transaction
involving or resulting in this Lease or premises hereby.
Tenant's Broker:
-25-
<PAGE>
Landlord covenants that it has dealt with no broker other than the broker
specified at the end of this Section XLIII, as Tenant's Broker and as Landlord's
Broker, in locating the premises by this Lease and in negotiating this Lease and
Landlord further covenants and agrees that it shall hold Tenant harmless from
any and all claims which may be asserted by any real estate broker other than
the broker specified at the end of this Section XLIII, as Tenant's Broker and as
Landlord's Broker, who claims that he showed or referred the Landlord to the
Tenant or to the premises for any transaction involving or resulting in this
Lease or premises hereby.
Landlord's Broker: Spaulding & Slye
125 High Street
Boston, Massachusetts 02110
SECTION XLIV. HAZARDOUS WASTE.
------------- ---------------
(a) For the purpose of this Section XLIV - "Hazardous Substance" shall
mean any waste, substance or other material which may be dangerous to health or
environment, including, without limitation, all "hazardous wastes", Hazardous
materials", Hazardous substance", "toxic substance", "oil", "infectious medical
waste" and "hazardous medical waste" as defined in any federal, state, or local
law, regulation or ordinance, or otherwise.
(b) Tenant shall not dump, flush or in any way introduce any Hazardous
Substances, which are regulated under the Resource Conservation and Recovery Act
of 1976, as amended, (42 U.S.C. Section 6901, et. seq. "RCRA") the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as amended (42
U.S.C. 9601 et. seq. "CERCLA"), the Superfund Amendments and Reauthorization Act
of 1986 ("SARA"), Public Law 99-499, 100 Stat 1613, et seq., and/or any other
--------
applicable Municipal, federal, state law, into the sewerage, drainage or other
waste disposal system serving the premises, the building of which the same form
a part or the land on which it stands (the "Property").
(c) Tenant shall not generate, use, store or dispose of Hazardous
Substances regulated under RCRA, CERCLA, SARA and/or any other applicable
Municipal, federal or state environmental law, in or on the premises, the
building of which the same form a part or the Property, nor transport Hazardous
Substances from the premises, the Building of which the same form a part or the
Property except in compliance with RCRA, CERCLA, SARA, and any other applicable
Municipal, federal or state environmental law.
(d) Tenant shall promptly notify Landlord in writing of any incident in
the premises or the building of which the same form a part or the Property which
might require the filing of a notice under any statute described in Section
XLIV(b) of this Lease.
(e) Tenant shall indemnify and hold Landlord harmless from any and all
costs, liabilities, demands, claims, civil or criminal actions, or causes of
action, civil or criminal penalties, fines, losses, lien's, assessments,
damages, liabilities, costs, disbursements, expenses or
-26-
<PAGE>
fees of any kind or any nature (including without limitation all clean-up costs
and attorney's fees) which may at any time be imposed upon, incurred by or
asserted or awarded against Landlord arising out of or on account of Tenant's
failure to comply with the provisions of Section XLIV of this Lease, where due
to any action or non-action of Tenant.
SECTION XLV. SECURITY DEPOSIT. Subject to the terms hereof, Landlord shall
------------ ----------------
hold and retain a security deposit in the amount of Twelve Thousand Dollars
($12,000) throughout the term hereof as security for the faithful performance by
Tenant of each and every term, condition, covenant and provision of this Lease.
Landlord may apply all or any portion of the security deposit to repair damage
to the leased premises or to the restoration thereof or to any rent, including
Tenant's proportionate share of Taxes and Operating Costs which may be due from
Tenant to Landlord. In the event that Landlord shall so apply all or any portion
of the said security deposit, Tenant shall immediately upon notice, restore the
same to its full amount. All or any portion of the security deposit remaining at
the expiration or other termination of this Lease which has not been so applied
shall be returned to Tenant.
If but only if Tenant shall not have been in default of any of the terms and
conditions of this Lease beyond applicable notice and cure periods, Three
Thousand Dollars ($3,000) of the security deposit shall be applied to Tenant's
rental obligations for the thirteenth (13th) calendar month of the term hereof;
if but only if Tenant shall not have been in default of any of the terms and
conditions of this Lease beyond applicable notice and cure periods, Three
Thousand Dollars ($3,000) of the security deposit shall be applied to Tenant's
rental obligations for the twenty-fifth (25th) calendar month of the term
hereof.
SECTION XLVI. MULTIPLE COUNTERPARTS. This lease may be executed
------------- ---------------------
simultaneously in two or more counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of
the date and year first above written.
Landlord:
NEW BOSTON MILL ROAD
LIMITED PARTNERSHIP
By: New Boston Fund, Inc.,
Its General Partner
By /s/ J.Rappaport
------------------------------
Its
Tenant
MMC NETWORKS, INC.
By /s/ Amos Willnai
------------------------------
Its Chairman
-27-
<PAGE>
EXHIBIT A
25 INDUSTRIAL AVENUE
CHELMSFORD, MA
FLOOR PLAN
<PAGE>
EXHIBIT "B"
Plans and Specs to be inserted
<PAGE>
RULES AND REGULATIONS
The following Rules and Regulations constitute a part of the Lease and of
Tenant's obligations thereunder in respect of Tenant's use and occupancy of the
Premises in the Building.
I. BUILDING HOURS
1.1. Intentionally Deleted.
1.2. Intentionally Deleted.
1.3. Intentionally Deleted.
1.4. You are advised, for the protection and safety of your personnel, to
lock front doors at the end of each working day. Front doors also should be
locked whenever your receptionist leaves the area.
1.5. If you have night-line telephone service, please submit a list of
numbers and personnel to the Building Management Office. This will enable the
Landlord to contact your office after 6:00 p.m. on the occasions when visitors
call after normal working hours.
1.6. If you wish to remove fixtures or materials from your premises after
6:00 p.m. or to have work performed after 6:00 p.m., by someone who does not
have a Building pass, the Building Management Office must be notified in advance
in writing.
II. DELIVERIES AND PARKING
2.1. Intentionally Deleted.
2.2. All larger deliveries must be made from the designated Building
loading dock area. Large deliveries can be expedited by notifying the Building
Management Office 24 hours in advance. The receiving area can accommodate
certain types and sizes of vehicles. All hand trucks used for deliveries must be
equipped with rubber bumpers and tires.
2.3. The loading dock may be used only for deliveries. No vehicles are
allowed to stand or park in this area after unloading nor are vehicles allowed
to park at the loading dock for service calls. You should advise your vendors
and suppliers of this rule. Any vehicles abusing the truck dock privileges are
subject to being towed at the owner's expense.
III. GENERAL USE OF BUILDING AND PREMISES
3.1. Tenants are not permitted to place or store property on the sidewalks,
passageways, parking areas or courtyards adjacent to the Building or in the
elevators, vestibules, stairways, or corridors (except as may be necessary for
brief periods during deliveries).
3.2. No bicycles or animals may be brought into or kept in or about the
Building or premises.
3.3. Rubbish, rags, sweepings, acid and any and all harmful or damaging
substances may not be deposited in the lavatories or in the janitor closets.
Please make arrangements with the Building Management Office for disposal of any
unusual trash.
IV. REPAIRS AND SERVICES
4.1. You are responsible for all general repairs and maintenance of your
Premises including, but not limited to, Tenant supplied supplementary air
conditioning, exterior doors, and exterior signs. All repairs, installations, or
alterations to the Building or its fixtures must first be approved and scheduled
by the Building Manager.
4.2. All requests for work to be done in your Premises by any of the
Building Management Staff should be directed to the Building Manager. Building
employees are not permitted to perform any work outside their regular duties
except upon special instructions from the Building Manager.
<PAGE>
4.3. All schedules for the performance of your construction and repair work
must be coordinated by the Building Manager to avoid conflicts with various
building construction and maintenance schedules. Tenants must inform the
Building Manager, at least 72 hours before any work is to begin, of the nature
of the work, where and when it is to be performed, the name of the contractor or
concern doing the work, and the name of the individual who will supervise the
performance of the work. You will be required to obtain from the persons doing
work certificates of insurance coverage, signed lien waivers, and payment and
performance bond in form and substance satisfactory to the Landlord. Work may
not begin until such requirements have been satisfied.
V. FLOOR LOAD - HEAVY MACHINERY
5.1 You may not place a load upon any floor in the Premises or Building
exceeding the floor load which such floor was designed to carry and which is
allowed by law. Landlord reserves the right to prescribe the weight and
positions of all business machines and mechanical equipment, including safes,
all of which shall be so placed as to distribute the weight. You shall place and
maintain your business machines and mechanical equipment in settings sufficient,
in Landlord's judgment, to absorb and prevent vibration, noise and annoyance.
You may not move any safe, heavy machinery, heavy equipment, freight, bulky
matter or fixtures into or out of the Building without Landlord's prior consent,
which consent may include a requirement to provide insurance, naming Landlord as
an insured, in such amounts as Landlord may deem reasonable. Notwithstanding the
foregoing, proper placement of all such business machines, etc. in the Premises
shall be your responsibility as Tenant.
5.2. If any such safe, machinery, equipment, freight, bulky matter or
fixtures requires special handling, you must employ only persons holding a
Master Riggers's License to do such work; and all work in connection therewith
must comply with applicable laws and regulations. Any such moving shall be at
your own sole risk and hazard and you, as Tenant, will defend, exonerate,
indemnify and save Landlord harmless against and from any liability, loss,
injury, claim or suit resulting directly or indirectly from such moving.
VI. ELECTRICAL SYSTEM: ENERGY CONSERVATION: WATER
6.1. In order to assure that the Building's electrical standards are not
exceeded and to avert possible adverse effect on the Building's electric system,
you may not, without Landlord's prior consent, connect any fixtures, appliances
or equipment to the Building's electric distribution system other than standard
office equipment, such as typewriters, pencil sharpeners, adding machines, hand-
held or desk top calculators, dictaphones, office computers and copies.
6.2. Notwithstanding anything to the contrary contained in the Lease,
Landlord reserves the right to implement policies and procedures it deems, in
its reasonable judgment, to be necessary or expedient in order to conserve
and/or preserve energy and related services, or to be necessary or required in
order to comply with applicable government laws, rules, regulations, codes,
orders and standards.
6.3. If you shall use water for any purpose other than for ordinary
lavatory and drinking purposes, Landlord may assess a reasonable charge for the
additional water so used, or install a water meter and thereby measure your
water consumption for all water purposes. In the latter event, you shall pay the
cost of the meter and the cost of installation thereof and shall keep such meter
and installation equipment in good working order and repair. You agree to pay
for water consumed, as shown on such meter, together with the sewer charge based
on such meter charges, as and when bills are rendered, and in default in making
such payment Landlord may pay such charges and collect the same from you as an
additional charge.
6.4. The windows of the Building are designed for superior insulation and
to reduce glare. Building standard blinds or drapes present and elegant
appearance and contribute to the effectiveness of the Building's heating and
cooling systems. You should keep the blinds or drapes closed when windows are
exposed to the sun's rays in summer and keep them open when the sun is bright
enough to provide warmth during the winter months.
VII. SIGNS AND ADVERTISING
Except as hereinafter provided, you may not place on the exterior of the
Premises (including both interior and exterior surfaces or doors and interior
surfaces of windows) or on any part of the Building outside the Premises, any
signs, symbol, advertisement or the like
<PAGE>
visible to the public view outside of the Premises. Landlord shall withhold
consent for signs or lettering on the entry doors to the Premises, unless such
signs conform to Building standards adopted by Landlord. All signage must be in
accordance with a plan or sketch of the sign to be placed on such entry doors
submitted to and approved by Landlord in advance. Neither Landlord's name, nor
the name of the Building or any Center, Office Park or other complex of which
the Building is a part, or the name of any other structure erected therein shall
be used without Landlord's consent in any advertising material (except on
business stationery or as an address in advertising matter), nor shall any such
name, as aforesaid, be used in any undignified, confusing, detrimental or
misleading manner.
VIII. LIFE SAFETY AND EMERGENCY PROCEDURES
In case of emergency situations such as power failure, water leaks or
serious injury, call the Building Management Office immediately. In case of fire
or smoke, pull the nearest alarm (located on your floor) and then call the
Building Management Office
IX. SMOKE FREE ENVIRONMENT
Smoking is not permitted in the lobby, hallways, corridors or stairs.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-40173) of MMC Networks, Inc. of our report dated
January 16, 1998 appearing on page 30 of this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 45,401 4,809
<SECURITIES> 0 1,509
<RECEIVABLES> 4,526 2,025
<ALLOWANCES> 181 133
<INVENTORY> 570 511
<CURRENT-ASSETS> 50,879 8,976
<PP&E> 3,631 1,616
<DEPRECIATION> 1,186 479
<TOTAL-ASSETS> 54,723 10,676
<CURRENT-LIABILITIES> 4,720 1,863
<BONDS> 0 0
0 0
0 10,247
<COMMON> 25 7
<OTHER-SE> 49,692 (2,077)
<TOTAL-LIABILITY-AND-EQUITY> 54,723 10,676
<SALES> 21,930 10,515
<TOTAL-REVENUES> 22,560 10,942
<CGS> 6,542 3,576
<TOTAL-COSTS> 21,226 10,223
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 88 48
<INTEREST-EXPENSE> 126 110
<INCOME-PRETAX> 1,334 719
<INCOME-TAX> 138 17
<INCOME-CONTINUING> 1,196 702
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,196 702
<EPS-PRIMARY> 0.08 0.07
<EPS-DILUTED> 0.04 0.03
</TABLE>
