<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number : 0-23023
MMC NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0319809
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1134 E. ARQUES AVENUE
SUNNYVALE, CA 94086
(Address of principal offices)
(zip code)
(408) 731-1600
(Registrant's telephone number, including area code)
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 __
-
The number of shares outstanding of the issuer's common stock as of July 28,
1998 was 29,671,837.
<PAGE>
MMC NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 1998 and December 31, 1997.............................. 3
Condensed Statements of Operations for the three and six months
ended June 30, 1998 and 1997........................................................... 4
Condensed Statements of Cash Flows for the six months
months ended June 30, 1998 and 1997................................................... 5
Notes to the Condensed Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 14
Item 2. Changes in Securities...................................................................... 15
Item 3. Defaults Upon Senior Notes................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........................................ 15
Item 5. Other Information.......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
SIGNATURES.................................................................................................... 16
</TABLE>
2
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MMC NETWORKS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $18,698 $45,401
Short-term investments..................................................... 28,166 -
Accounts receivable, net of allowance of $172 and $181..................... 6,536 4,526
Finished goods inventories................................................. 704 570
Prepaid expenses and other current assets.................................. 870 382
------- -------
Total current assets..................................................... 54,974 50,879
Property and equipment, net.................................................. 4,074 3,631
Other assets................................................................. 208 213
------- -------
$59,256 $54,723
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 2,448 $ 2,626
Accrued expenses........................................................... 3,245 1,744
Current portion of capital lease obligations............................... 308 350
------- -------
Total current liabilities................................................ 6,001 4,720
------- -------
Capital lease obligations, net of current portion............................ 131 286
------- -------
Stockholders' equity:
Series A Convertible Preferred Stock: $0.001 par value; 0 and 9,378 shares
authorized; no shares issued or outstanding............................. - -
Series B Convertible Preferred Stock: $0.001 par value; 0 and 4,121 shares
authorized; no shares issued or outstanding............................. - -
Preferred Stock: $0.001 par value; 10,000 and 0 shares authorized; no
shares issued or outstanding............................................ - -
Common Stock: $0.001 par value; 100,000 shares authorized; 29,586
and 29,198 shares issued and outstanding................................ 26 25
Additional paid-in capital................................................. 51,571 50,778
Notes receivable from stockholders......................................... (116) (181)
Retained earnings (Accumulated deficit).................................... 1,643 (905)
------- -------
Total stockholders' equity............................................... 53,124 49,717
------- -------
$59,256 $54,723
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
3
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MMC NETWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $12,017 $ 4,780 $21,640 $ 8,201
Cost of revenues.................................. 3,490 1,417 6,426 2,535
------- ------- ------- -------
Gross profit............................. 8,527 3,363 15,214 5,666
------- ------- ------- -------
Operating expenses:
Research and development, net................. 3,654 1,655 6,798 2,751
Selling, general and administrative........... 2,255 1,497 4,352 2,559
Litigation settlement......................... 1,250 - 1,250 -
------- ------- ------- -------
Total operating expenses................. 7,159 3,152 12,400 5,310
------- ------- ------- -------
Operating income.................................. 1,368 211 2,814 356
------- ------- ------- -------
Other income (expense):
Interest income............................... 495 77 1,024 155
Interest expense.............................. (16) (35) (35) (68)
------- ------- ------- -------
Total other income....................... 479 42 989 87
------- ------- ------- -------
Income before income taxes........................ 1,847 253 3,803 443
Provision for income taxes........................ 555 5 1,255 9
------- ------- ------- -------
Net income........................................ $ 1,292 $ 248 $ 2,548 $ 434
======= ======= ======= =======
Basic income per share............................ $ 0.04 $ 0.02 $ 0.09 $ 0.04
======= ======= ======= =======
Shares used to compute basic income per share..... 29,553 11,423 29,414 11,352
======= ======= ======= =======
Diluted income per share.......................... $ 0.04 $ 0.01 $ 0.08 $ 0.02
======= ======= ======= =======
Shares used to compute diluted income per share... 33,794 28,160 33,756 27,618
======= ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
4
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MMC NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 2,548 $ 434
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................................... 970 386
Issuance of Common Stock in exchange for services................ - 30
Changes in assets and liabilities:
Accounts receivable............................................ (2,010) (1,318)
Inventories.................................................... (134) 280
Prepaid expenses and other assets.............................. (483) (155)
Accounts payable............................................... (178) 450
Accrued expenses............................................... 1,501 252
-------- -------
Net cash provided by operating activities................... 2,214 359
-------- -------
Cash flows from investing activities:
Purchase of short-term investments.................................. (28,166) (1,100)
Acquisition of property and equipment............................... (1,413) (1,005)
-------- -------
Net cash used in investing activities....................... (29,579) (2,105)
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and other................... 794 82
Proceeds from the repayment of notes receivable from stockholders... 65 -
Principal payments on capital lease obligations..................... (197) (192)
-------- -------
Net cash provided by (used in) financing activities......... 662 (110)
-------- -------
Net increase (decrease) in cash and cash equivalents.................. (26,703) (1,856)
Cash and cash equivalents at beginning of period...................... 45,401 4,809
-------- -------
Cash and cash equivalents at end of period............................ $ 18,698 $ 2,953
======== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest.............................................. $ 35 $ 68
Cash paid for income taxes.......................................... $ 1,333 $ 17
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
5
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MMC NETWORKS, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial information
reflects all adjustments, including only normal recurring adjustments, necessary
for the fair presentation of the financial position, results of operations and
cash flows for MMC Networks, Inc. ("the Company") for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997. Results for the interim periods
are not necessarily indicative of results for the entire year.
NOTE 2 - EARNINGS PER SHARE
The following table reconciles the numerator and denominator of the basic and
diluted EPS computations for the three and six month periods ended June 30, 1998
and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income available to
common stockholders....................... $ 1,292 $ 248 $ 2,548 $ 434
======= ======= ======= =======
Shares used to compute basic income
per share................................. 29,553 11,423 29,414 11,352
Effect of dilutive securities:
Convertible Preferred Stock............... - 13,342 - 13,342
Warrants.................................. 31 130 31 121
Stock options............................. 4,210 3,265 4,311 2,803
------- ------- ------- -------
Shares used to compute diluted income
per share................................. 33,794 28,160 33,756 27,618
======= ======= ======= =======
Basic income per share......................... $ 0.04 $ 0.02 $ 0.09 $ 0.04
======= ======= ======= =======
Diluted income per share....................... $ 0.04 $ 0.01 $ 0.08 $ 0.02
======= ======= ======== =======
</TABLE>
NOTE 3 - EQUITY
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 has the authority to issue the undesignated Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in the first quarter of 1998. 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 non-owner 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. For the three and six month periods
ended June 30, 1998 and 1997, comprehensive income approximated net income.
6
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MMC NETWORKS, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") in the first quarter of 1998. This statement establishes standards for the
way companies report information about operating segments in financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The adoption of SFAS 131 has
not resulted in a change in the way the Company reports information and related
disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires that all derivatives be recognized in the statement of
financial position as either assets or liabilities and be measured at fair
value. In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. The accounting prescribed by
SFAS 133 is effective beginning with the first quarter of 2000. The adoption of
SFAS 133 in 2000 is not expected to have a material impact on the Company's
financial position or results of operations.
NOTE 5 - FINANCING AGREEMENTS
The Company had two lines of credit, a $5.0 million revolving bank credit
facility under which borrowings accrued interest at the bank's prime rate and a
$3.0 million bank lease line under which borrowings accrued interest at the
bank's prime rate plus 0.5%. These lines of credit expired in April 1998.
During the first half of 1998, the Company entered into two credit facilities
with a bank, a loan agreement and a non-recourse receivables purchase agreement.
The loan agreement, which expires in May 1999, allows the Company to borrow up
to $8.0 million. Borrowings under the loan agreement bear interest at the bank's
prime rate. The agreement requires that the Company comply with certain
financial covenants. In the event of default, all outstanding borrowings will
accrue interest at a rate of five percentage points above the rate effective
immediately prior to any such default. The non-recourse receivables purchase
agreement, which expires in February 1999, allows the Company to sell up to $2.0
million of its accounts receivable to the bank at a discount rate equal to the
bank's prime rate plus 1.0% per annum, less an administrative fee equal to 0.20%
of the total purchased receivables balance. The receivables purchase agreement
also provides for the Company to grant to the bank a continuing lien on and
security interest in all purchased receivables and related property. To date,
the Company has not utilized either credit facility.
NOTE 6 - LITIGATION SETTLEMENT
During the fourth quarter of 1997, FORE Systems, Inc. filed complaints alleging
patent infringement and trade secret misappropriation against MMC Networks, Inc.
The Company entered into a settlement agreement with FORE in June 1998. In
accordance with the settlement, the Company agreed to a settlement fee and
entered into a patent cross-licensing agreement pursuant to which MMC Networks,
Inc. and FORE granted each other perpetual, with certain exceptions, and fully-
paid licenses to certain patents held by them. The settlement fee and related
legal expenses totaled approximately $1.3 million and was charged to operating
income in the quarter ended June 30, 1998. Excluding the litigation settlement
expenses, net income for the second quarter of 1998 would have been $2.2 million
or $0.06 per share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the interim
condensed financial statements and the notes thereto included in Part I, Item 1
of this Quarterly Report on Form 10-Q and the financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which reflect the Company's
current views with respect to future events which may impact the Company's
results of operations and financial condition. In this report, the words
"anticipates", "believes", "expects", "intends" and similar expressions identify
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties and other factors, including those set forth below under
the caption "Factors Affecting Future Results", which could cause the actual
future results to differ materially from historical results or those described
in the forward-looking statements. Readers are urged to carefully review the
disclosures made by the Company in this Report and in the section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Factors Affecting Future Results" of the Company's Annual Report on
Form 10-K previously filed with the Securities and Exchange Commission that
describe certain risks and factors that may affect the Company's business and
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.
BACKGROUND
The Company is a leading developer and supplier of network
processors--high-performance, open-architecture, software-programmable
integrated circuits 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. 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 ViXTM 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.
8
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RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data expressed as
a percentage of the Company's revenue for the interim periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
1998 1997 1998 1997
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 29.0% 29.6% 29.7% 30.9%
----- ----- ----- -----
Gross profit....................... 71.0% 70.4% 70.3% 69.1%
----- ----- ----- -----
Operating expenses:
Research and development, net........ 30.4% 34.7% 31.4% 33.6%
Selling, general and administrative.. 18.8% 31.3% 20.1% 31.2%
Litigation settlement................ 10.4% 0.0% 5.8% 0.0%
----- ----- ----- -----
Total operating expenses........... 59.6% 66.0% 57.3% 64.8%
----- ----- ----- -----
Operating income....................... 11.4% 4.4% 13.0% 4.3%
Interest income, net................. 4.0% 0.9% 4.6% 1.1%
----- ----- ----- -----
Income before income taxes............. 15.4% 5.3% 17.6% 5.4%
Provision for income taxes............. 4.6% 0.1% 5.8% 0.1%
----- ----- ----- -----
Net income............................. 10.8% 5.2% 11.8% 5.3%
===== ===== ===== =====
</TABLE>
Revenues
Revenues increased by 24.9% to $12.0 million in the second quarter of 1998 from
$9.6 million in the first quarter of 1998 and increased by 151.4% as compared to
$4.8 million for the same quarter of the previous year. The revenue growth from
the first quarter to the second quarter of 1998 was due to increased sales of
the Company's ATMS2000 and AnyFlow5000 product families to new and existing
customers partially offset by the decline of sales of the PS1000 product family
during the same period. Revenues for the six months ended June 30, 1998
increased by 163.9% to $21.6 million as compared to $8.2 million for the same
period in the previous year. This increase is a result of increased sales to new
and existing customers across all of the Company's products lines.
Cost of revenues; Gross profit
Cost of revenues increased to $3.5 million in the second quarter of 1998 from
$2.9 million in the first quarter of 1998 and from $1.4 million in the same
quarter of the previous year. The increase in cost of revenues primarily
reflects the increased volume of shipments from period to period and, as such,
gross profit as a percentage of total revenues stayed relatively constant;
71.0%, 69.5% and 70.4% for the three months ended June 30, 1998, March 31, 1998
and June 30, 1997, respectively. The cost of revenues and related gross profit
for the six months ended June 30, 1998 were $6.4 million and 70.3%,
respectively, as compared to $2.5 million and 69.1%, respectively, for the same
period in the previous year.
Research and development expenses, net
Research and development expenses, net, increased by 16.2% to $3.7 million in
the second quarter of 1998 from $3.1 million in the first quarter of 1998 and
increased by 120.8% as compared to $1.7 million for the same quarter of the
previous year. Research and development expenses as a percentage of total
revenues remained relatively constant; 30.4%, 32.7% and 34.7% for the three
months ended June 30 1998, March 31, 1998 and June 30, 1997, respectively.
Research and development expenses, net, include expenses incurred under a number
of contracts with customers whereby the Company receives partial or complete
reimbursement for expenses incurred. These reimbursements are recorded as an
offset against research and development expenses. During the second quarter of
1998, the Company established a wholly owned subsidiary in
9
<PAGE>
Israel, MMC Networks Israel Ltd, ("MMCIL"), which will function as a design
center. The design center currently employs 4 engineers and is expected to grow
in headcount over the next eighteen months. Research and development expenses
for the six months ended June 30, 1998 were $6.8 million or 31.4% of revenues,
as compared to $2.8 million or 33.6% of revenues for the six months ended June
30, 1997. The increase in research and development expenses from period to
period was due to increased expenditures for the development of new products.
The Company expects quarterly research and development expenses, net, to
continue to increase in absolute dollars over the remainder of 1998.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by 7.5% to $2.3 million
in the second quarter of 1998 from $2.1 million in the first quarter of 1998 and
increased by 50.6% as compared to $1.5 million for the same quarter of the
previous year. The increase in selling, general and administrative expenses
consisted of increased sales commissions resulting from higher revenues,
increased selling and marketing expenses associated with new products,
additional personnel and additional expenses related to being a public company.
Selling, general and administrative expenses decreased as a percentage of
revenues to 18.8% in the second quarter of 1998 compared to 21.8% in the first
quarter of 1998 and 31.3% in the same quarter of the previous year. Selling,
general and administrative expenses for the six months ended June 30, 1998 were
$4.4 million or 20.1% as compared to $2.6 million or 31.2% for the six months
ended June 30, 1997. Selling, general and administrative expenses have continued
to decrease as a percentage of revenue from period to period as revenue growth
outpaced the increase in selling, general and administrative expenses required
to support that growth. The Company expects quarterly selling, general and
administrative expenses to increase in absolute dollars over the remainder of
1998.
Litigation settlement
During the fourth quarter of 1997, FORE Systems, Inc. filed complaints alleging
patent infringement and trade secret misappropriation against MMC Networks, Inc.
The Company entered into a settlement agreement with FORE in June 1998. In
accordance with the settlement, the Company agreed to a settlement fee and
entered into a patent cross-licensing agreement pursuant to which MMC Networks,
Inc. and FORE granted each other perpetual, with certain exceptions, and fully-
paid licenses to certain patents held by them. The settlement fee and related
legal expenses totaled approximately $1.3 million and was charged to operating
income in the quarter ended June 30, 1998.
Interest income, net
The increase in net interest income is due to increased cash and investment
balances from period to period due primarily to the proceeds from the Company's
initial public offering in October 1997.
Provision for income taxes
The provision for income taxes decreased to $555,000 in the second quarter of
1998 from $700,000 in the first quarter of 1998 reflecting an effective tax rate
of 30.0% and 35.8%, respectively. This decrease in the effective tax rate from
period to period is due to the utilization of research and development tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's cash, cash equivalents and short-term
investments totaled $46.9 million and the Company's working capital was
approximately $49.0 million. Net cash totaling $2.2 million was provided by
operating activities during the six months ended June 30, 1998. This increase
was primarily due to net income adjusted for depreciation and amortization of
$3.5 million and an increase in accrued expenses of $1.5 million offset by an
increase in accounts receivable of $2.0 million. Cash used in investing
activities of $29.6 million for the six months ended June 30, 1998 consisted of
the purchase of short-term investments of $28.2 million and the acquisition of
property and equipment of $1.4 million.
The Company had two lines of credit, a $5.0 million revolving bank credit
facility under which borrowings accrued interest at the bank's prime rate and a
$3.0 million bank lease line under which borrowings accrued interest at the
bank's prime rate plus 0.5%. These lines of credit expired in April 1998. The
Company has two additional credit facilities with a bank, a loan agreement which
allows the Company to borrow up to $8.0 million and a non-recourse receivables
purchase agreement which allows the Company
10
<PAGE>
to sell up to $2.0 million of its accounts receivables. To date, the Company has
not utilized either credit facility. See Note 5 - Financing Agreements.
The Company believes that its existing cash balances together with the borrowing
capacity under its two credit facilities and cash flow expected 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 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 accordance with the Plan, the Company initiated a
survey, which is expected to be completed by January 1999, of all its
significant vendors and customers to ensure Year 2000 compliance. Also as part
of the Plan, the Company has completed a full assessment of its own products and
believes all its products are Year 2000 compliant.
Expenses related to the Company's Year 2000 Plan are expensed as incurred and
are not currently expected to have a material effect on the results of
operations of the Company. Although the Company is not aware of any material
operational issues or expenses associated with preparing its internal systems
for the Year 2000, there can be no assurance that the Company or that any third
party which the Company significantly relies on will not experience
unanticipated negative consequences or material expenses caused by undetected
errors or defects which could have a material adverse effect on the Company's
business, results of operations and financial condition.
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.
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
11
<PAGE>
nonrecurring engineering funding and operating expenses, seasonal fluctuations
in demand, intellectual property disputes and general economic conditions.
In addition, in the past the Company has 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.
Customer Concentration.
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) for the periods presented are as follows:
for the three months ended June 30, 1998 there was only one significant
customer, Cisco Systems, Inc. ("Cisco") accounting for 54% of total revenues;
for the three months ended June 30 1997, Cisco, Mitsui Comtek Corp., a non-
stocking sales representative for Japan ("Mitsui"), and the U.S. Computer
Division of Hitachi ("Hitachi") accounted for 23%, 24% and 14% of total
revenues, respectively; for the six months ended June 30, 1998, Cisco and Mitsui
accounted for 43% and 17% of total revenues, respectively; for the six months
ended June 30, 1997, Cisco, Mitsui and Hitachi accounted for 24%, 22% and 19% of
total revenues, respectively.
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, Mitsui and Hitachi, can cease incorporating the Company's products with
limited notice to the Company and with little or no penalty. The Company has no
minimum purchase agreements with its customers.
The Company's future operating results are currently substantially dependent on
Cisco's competitive position in the networking equipment market. The loss of one
or more of the Company's customers in general and Cisco in particular, the
possibility that the introduction of the customer's product may not be
successful, the possibility that design wins with customers do not result in
significant production levels 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.
New Product Development and Technological Change.
The data networking and semiconductor industries are characterized by rapidly
changing technology, frequent product introductions, rapid erosion of average
selling prices and evolving industry standards. Accordingly, the Company's
future performance depends on a number of factors, including the acceptance of
network processors as an alternative to Application-Specific Integrated Circuit
("ASIC") components and general purpose processors and the acceptance by the
Company's customers of third party sourcing for network processors as an
alternative to in-house development as well as 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. 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
12
<PAGE>
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. In addition, 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. The inability of the
Company and its products to achieve market acceptance from network equipment
vendors and to adequately address any of the factors discussed above could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Independent Manufacturers.
Currently, 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. Only one of the Company's products is
currently 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. Given that the Company must place orders approximately
10 to 12 weeks in advance of expected delivery, any sudden increase in customer
demand not anticipated by the Company in advance could result in the inability
to deliver product on a timely basis and, as such, may 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 addition, the Company places orders based on forecast
demand to ensure enough lead time to be able to meet anticipated customer
orders. Any sudden decrease in the anticipated customer demand 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./Integrated Technology
Ltd., Galileo Technology Ltd. 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, manufacturing and
marketing resources than the Company. Failure of the Company to compete
successfully could have a material adverse effect on its operating results.
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. 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
13
<PAGE>
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. 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.
During the fourth quarter of 1997, FORE Systems, Inc. filed complaints alleging
patent infringement and trade secret misappropriation against MMC Networks, Inc.
The Company entered into a settlement agreement with FORE in June 1998. In
accordance with the settlement, the Company agreed to a settlement fee and
entered into a patent cross-licensing agreement pursuant to which MMC Networks,
Inc. and FORE granted each other perpetual, with certain exceptions, and fully-
paid licenses to certain patents held by them. The settlement fee and related
legal expenses totaled approximately $1.3 million and was charged to operating
income in the quarter ended June 30, 1998.
Risks Associated with Expansion of International Business Activities.
The Company is 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. Sales to
Mitsui have declined in the last three quarters and may remain at this lower
level or decline further due to the economic downturn in Japan and Asia in
general, and could have an adverse effect on the Company's revenues in the
future.
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 or 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 or 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. Trading prices of many high technology, data networking and
semiconductor stocks, including the Common Stock of the Company, are at or near
their historical highs and reflect price/earnings ratios substantially above
historical norms. There can be no assurance that the trading price of the
Company's Common Stock will remain at or near its current level.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the fourth quarter of 1997, FORE Systems, Inc. filed complaints alleging
patent infringement and trade secret misappropriation against MMC Networks, Inc.
The Company entered into a settlement agreement with FORE in June 1998. In
accordance with the settlement,
14
<PAGE>
the Company agreed to a settlement fee and entered into a patent cross-licensing
agreement pursuant to which MMC Networks, Inc. and FORE granted each other
perpetual, with certain exceptions, and fully-paid licenses to certain patents
held by them. The settlement fee and related legal expenses totaled
approximately $1.3 million and was charged to operating income in the quarter
ended June 30, 1998.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 28, 1998, the stockholders
voted to (1) elect two Class I directors to serve for three-year terms and (2)
ratify the appointment of Price Waterhouse, LLP (now known as
PricewaterhouseCoopers, LLP) as the independent accountants of the Company for
the fiscal year ending December 31, 1998.
The Class I directors were elected with the following vote:
Nominee For Withheld
- ------- --- --------
Prabhat K. Dubey 23,766,801 6,600
Geoffrey Yang 23,765,801 7,600
Other directors of the Company are as follows:
Class II Directors - Andrew S. Rappaport and Amos Wilnai currently serving for a
term that expires at the Annual Meeting of Stockholders in 1999
Class III Directors - John G. Adler and Irwin Federman currently serving for a
term that expires at the Annual Meeting of Stockholders in 2000.
The appointment of PricewaterhouseCoopers, LLP as the independent accountants
for the fiscal year ended December 31, 1998 was ratified with the following
vote:
Board Proposal For Against Abstentions
- -------------- --- ------- -----------
PricewaterhouseCoopers, LLP - 23,766,801 600 6,000
independent accountants for the
fiscal year ended December 31,
1998
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Loan Agreement dated May 7, 1998 by and
between Silicon Valley Bank and the
Registrant.
27 Financial Data Schedule as of June 30, 1998
and for the 6 months then ended.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months
ended June 30, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 5, 1998 MMC NETWORKS, INC.
/s/ Prabhat K. Dubey
By:-------------------------------------
Prabhat K. Dubey
President, Chief Executive
Officer and Director
/s/ Uday Bellary
By:-------------------------------------
Uday Bellary
Vice President, Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)
16
<PAGE>
EXHIBIT 10.1
- --------------------------------------------------------------------------------
LOAN AGREEMENT
MMC NETWORKS, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1 ACCOUNTING AND OTHER TERMS............................................. 4
--------------------------
2 LOAN AND TERMS OF PAYMENT.............................................. 4
-------------------------
2.1 Credit Extensions............................................... 4
2.2 Interest Rate, Payments......................................... 6
2.3 Fees............................................................ 6
3 CONDITIONS OF LOANS.................................................... 6
-------------------
3.1 Conditions Precedent to Initial Credit Extension................ 6
3.2 Conditions Precedent to all Credit Extensions................... 6
4 REPRESENTATIONS AND WARRANTIES......................................... 6
------------------------------
4.1 Due Organization and Authorization.............................. 6
4.2 Litigation...................................................... 7
4.3 No Material Adverse Change in Financial Statements.............. 7
4.4 Solvency........................................................ 7
4.5 Regulatory Compliance........................................... 7
4.6 Subsidiaries.................................................... 7
4.7 Full Disclosure................................................. 7
5 AFFIRMATIVE COVENANTS.................................................. 8
---------------------
5.1 Government Compliance........................................... 8
5.2 Financial Statements, Reports, Certificates..................... 8
5.3 Taxes........................................................... 8
5.4 Insurance....................................................... 8
5.5 Primary Accounts................................................ 8
5.6 Financial Covenants............................................. 8
6 NEGATIVE COVENANTS..................................................... 9
------------------
6.1 Dispositions.................................................... 9
6.2 Changes in Business, Ownership, Management or Business Locations 9
6.3 Mergers or Acquisitions......................................... 9
6.4 Indebtedness.................................................... 9
6.5 Encumbrance..................................................... 9
6.6 Distributions; Investments...................................... 9
6.7 Transactions with Affiliates.................................... 9
6.8 Subordinated Debt...............................................10
6.9 Compliance......................................................10
7 EVENTS OF DEFAULT..................................................... 10
-----------------
7.1 Payment Default................................................ 10
7.2 Covenant Default............................................... 10
7.3 Material Adverse Change........................................ 10
7.4 Attachment..................................................... 10
7.5 Insolvency..................................................... 11
7.6 Other Agreements............................................... 11
7.7 Judgments...................................................... 11
7.8 Misrepresentations............................................. 11
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
8 BANK'S RIGHTS AND REMEDIES............................................ 11
--------------------------
8.1 Rights and Remedies............................................ 11
8.2 Remedies Cumulative............................................ 11
8.3 Demand Waiver.................................................. 11
9 NOTICES............................................................... 12
-------
10 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER.......................... 12
-------------------------------------------
11 GENERAL PROVISIONS................................................... 12
------------------
11.1 Successors and Assigns........................................ 12
11.2 Indemnification............................................... 12
11.3 Time of Essence............................................... 12
11.4 Severability of Provision..................................... 12
11.5 Amendments in Writing, Integration............................ 12
11.6 Counterparts.................................................. 13
11.7 Survival...................................................... 13
11.8 Confidentiality............................................... 13
11.9 Attorneys' Fees, Costs and Expenses........................... 13
12 DEFINITIONS.......................................................... 13
-----------
12.1 Definitions................................................... 13
</TABLE>
3
<PAGE>
THIS LOAN AGREEMENT dated May 7, 1998, between SILICON VALLEY BANK
("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and
MMC NETWORKS, INC. ("Borrower"), whose address is 1134 Arques Avenue, Sunnyvale,
California 94086-4602 provides the terms on which Bank will lend to Borrower and
Borrower will repay Bank. The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
--------------------------
Accounting terms not defined in this Agreement will be construed following
GAAP Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in this
or any Loan Document. This Agreement shall be construed to impart upon Bank a
duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
-------------------------
2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding (i) the Committed Revolving
Line, minus (ii) the Cash Management Services Sublimit, minus (iii) the amount
of all outstanding Letters of Credit (including drawn but unreimbursed Letters
of Credit), and minus (iv) the Foreign Exchange Reserve. Amounts borrowed under
this Section may be repaid and reborrowed during the term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit A. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based
on instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances and other amounts due under this Agreement are
immediately payable.
2.1.2 LETTERS OF CREDIT.
Bank will issue or have issued Letters of Credit for Borrower's account
not exceeding (i) the Committed Revolving Line minus (ii) the outstanding
principal balance of the Advances minus the Cash Management Sublimit, minus the
Foreign Exchange Reserve; however, the face amount of outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit and any Letter of
Credit Reserve) may not exceed $8,000,000. Each Letter of Credit will have an
expiry date of no later than 180 days after the Revolving Maturity Date, but
Borrower's reimbursement obligation will 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.
2.1.3 FOREIGN EXCHANGE CONTRACT; FOREIGN EXCHANGE SETTLEMENTS.
Borrower may enter foreign exchange contracts (the "Exchange Contracts")
not exceeding an aggregate amount of $8,000,000 (the "Contract Limit"), under
which Bank will sell to or purchase from
4
<PAGE>
Borrower foreign currency on a spot or future basis. Borrower may not request
any Exchange Contracts if it is out of compliance with any provision of this
Agreement. Exchange Contracts must provide for delivery of settlement on or
before the Revolving Maturity Date. The amount available under the Committed
Revolving Line is reduced by the following (the "Foreign Exchange Reserve") on
any given day (the "Determination Date"): (i) on all outstanding Exchange
Contracts on which delivery is to be effected or settlement allowed more than
two business days after the Determination Date, 10% of the gross amount of the
Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which
delivery is to be effected or settlement allowed within two business days after
the Determination Date, 100% of the gross amount of the Exchange Contracts.
Bank may terminate the Exchange Contracts if (a) an Event of Default
occurs or (b) there is not sufficient availability under the Committed Revolving
Line and Borrower does not have available funds in its deposit account for the
Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, Borrower
will reimburse Bank for all fees, costs and expenses in connection with the
Exchange Contracts.
Borrower may not permit the total of all Exchange Contracts on which
delivery is to be effected and settlement allowed in any two business day period
to be more than $8,000,000 (the "Settlement Limit") nor may Borrower permit the
total of all Exchange Contracts outstanding at any one time, to exceed the
Contract Limit. However, the amount which may be settled in any 2 business day
period may be increased above the Settlement Limit up to, but not above the
Contract Limit if:
(i) there is sufficient availability under the Committed Revolving Line
in the amount of the Foreign Exchange Reserve for each Determination Date,
provided that Bank in advance shall reserve the full amount of the Foreign
Exchange Reserve against the Committed Revolving Line; or
(ii) there is insufficient availability under the Committed Revolving Line
for settlements within any 2 business day period, but Bank: (A) verifies
good funds overseas before crediting Borrower's deposit account (if
Borrower sells foreign currency); or (B) debits Borrower's deposit account
before delivering foreign currency overseas (if Borrower purchases foreign
currency).
If Borrower purchases foreign currency, Borrower in advance must instruct
Bank either to treat the settlement as an advance under the Committed Revolving
Line, or to debit Borrower's account for the amount settled.
Borrower will execute all Bank's standard applications and agreements in
connection with the Exchange Contracts and pay all Bank's standard fees and
charges.
Borrower will indemnify Bank and hold it harmless from all claims,
liabilities, demands, obligations, actions, costs and expenses (including
reasonable attorneys' fees) which it incurs arising out of or in any way
relating to any of the Exchange Contracts or any contemplated transactions.
2.1.4 CASH MANAGEMENT SERVICES SUBLIMIT.
Borrower may use up to $8,000,000 for Bank's Cash Management Services,
which may include merchant services, direct deposit of payroll, business credit
card, and check cashing services identified in various cash management services
agreements related to such services (the "Cash Management Services"). All
amounts Bank pays for any Cash Management Services will be treated as Advances
under the Committed Revolving Line.
2.1.5 SUBLIMIT CAP AMOUNT. At no time shall the aggregate outstandings under the
Letter of Credit Sublimit, Foreign Exchange Contract, Foreign Exchange
Settlements and the Cash Management Services Sublimit exceed $8,000,000.
5
<PAGE>
2.2 INTEREST RATE, PAYMENTS.
(a) Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate equal to the Prime Rate. After an Event of Default,
Obligations accrue interest at 5.00 percentage points above the rate effective
immediately before the Event of Default. The interest rate increases or
decreases when the Prime Rate changes. Interest is computed on a 360 day year
for the actual number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable on
the 6th of each month. Bank may debit any of Borrower's deposit accounts
including Account Number ____________ for principal and interest payments or any
amounts Borrower owes Bank. Bank will notify Borrower when it debits Borrower's
accounts. These debits are not a set-off. Payments received after 12:00 noon
Pacific time are considered received at the opening of business on the next
Business Day. When a payment is due on a day that is not a Business Day, the
payment is due the next Business Day and additional fees or interest accrue.
2.3 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of $14,000
due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees
and expenses) incurred through and after the date of this Agreement, are payable
when due.
3 CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 4 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 4 remain true.
4 REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
4.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
6
<PAGE>
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
4.2 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
4.3 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
4.4 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
4.5 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all taxes, except those being contested in good faith with adequate
reserves under GAAP. Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary to continue
its business as currently conducted.
4.6 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
4.7 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements not misleading.
7
<PAGE>
5 AFFIRMATIVE COVENANTS
---------------------
Borrower will do all of the following:
5.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify could have a material adverse
effect on Borrower's business or operations. Borrower will comply, and have each
Subsidiary comply, with all laws, ordinances and regulations to which it is
subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
5.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) within 5 days of filing, copies of
all statements, reports and notices made available to Borrower's 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 along with
Borrower's annual report; (iii) a prompt 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 $100,000 or more; and (iv) budgets, sales
projections, operating plans or other financial information Bank requests.
(b) Within 50 days after the last day of each quarter, Borrower will
deliver to Bank with the 10-Q report a Compliance Certificate signed by a
Responsible Officer in the form of Exhibit B.
5.3 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
5.4 INSURANCE.
Borrower will keep its business insured for risks and in amounts, as Bank
requests.
5.5 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts with
Bank.
5.6 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each quarter:
(i) QUICK RATIO. A ratio of Quick Assets to Current Liabilities of
at least 1.75 to 1.00.
(ii) DEBT/TANGIBLE NET WORTH RATIO. A ratio of Total Liabilities
less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more
than 1.25 to 1.00.
(iii) PROFITABILITY. Borrower will be profitable each quarter and
fiscal year, except that Borrower may suffer one quarterly loss not to exceed
$500,000.
8
<PAGE>
6 NEGATIVE COVENANTS
------------------
Borrower will not do any of the following:
6.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"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; or (iii) of worn-out or obsolete Equipment.
6.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR 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.
6.3 MERGERS OR ACQUISITIONS.
(i) Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, where the cash investment is greater than $5,000,000
(without Bank's prior written consent) or (ii) merge or consolidate a Subsidiary
into another Subsidiary or into Borrower.
6.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
6.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here.
6.6 DISTRIBUTIONS; INVESTMENTS.
Without Bank's prior written consent, directly or indirectly acquire or
own any Person, or make any Investment in any Person, other than Permitted
Investments, or permit any of its Subsidiaries to do so where the required cash
investment is greater than $5,000,000. Pay any dividends or make any
distribution or payment or redeem, retire or purchase any capital stock.
6.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
9
<PAGE>
6.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
6.9 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that 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, if the violation could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
7 EVENTS OF DEFAULT
-----------------
Any one of the following is an Event of Default:
7.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations;
7.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 5 or violates any
covenant in Section 6 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any agreement
between Borrower and Bank and as to any default under a term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the default cannot be cured within 10 days or cannot be cured
after Borrower's attempts within 10 day period, and the default may be cured
within a reasonable time, then Borrower has an additional period (of not more
than 30 days) to attempt to cure the default. During the additional time, the
failure to cure the default is not an Event of Default (but no Credit Extensions
will be made during the cure period);
7.3 MATERIAL ADVERSE CHANGE.
If the Bank determines, based upon information available to it and in the
exercise of its reasonable judgment, that there is a reasonable likelihood that
Borrower will fail to comply with one or more of the financial covenants set
forth in Section 5 during the next succeeding financial reporting period, or
Bank determines in its reasonable judgment, that Borrower's financial condition
has materially deteriorated.
7.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
10
<PAGE>
7.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
7.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any Indebtedness exceeding
$100,000 or that could cause a Material Adverse Change;
7.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
7.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
8 BANK'S RIGHTS AND REMEDIES
--------------------------
8.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 7.5 occurs all Obligations are immediately due
and payable without any action by Bank); and
(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
8.2 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
by law, or in equity. Bank's exercise of one right or remedy is not an election,
and Bank's waiver of any Event of Default is not a continuing waiver. Bank's
delay is not a waiver, election, or acquiescence. No waiver is effective unless
signed by Bank and then is only effective for the specific instance and purpose
for which it was given.
8.3 DEMAND WAIVER.
Borrower waives demand, 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 held by Bank on which Borrower is
liable.
11
<PAGE>
9 NOTICES
-------
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
------------------------------------------
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
11 GENERAL PROVISIONS
------------------
11.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and permitted
assigns of each party. Borrower may not assign this Agreement or any rights
under it without Bank's prior written consent which may be granted or withheld
in Bank's discretion. Bank has 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 under this
Agreement.
11.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
11.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
11.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision in
determining the enforceability of any provision.
11.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by Borrower
and Bank. This Agreement represents the entire agreement about this subject
matter, and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement and
the Loan Documents.
12
<PAGE>
11.6 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, are an original, and all taken together, constitute one Agreement.
11.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 11.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
11.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
11.9 ATTORNEYS' FEES, COSTS AND EXPENSES.
In any action or proceeding between Borrower and Bank arising out of the
Loan Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other costs and expenses incurred, in addition to any other
relief to which it may be entitled.
12 DEFINITIONS
-----------
12.1 DEFINITIONS.
In this Agreement:
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which
the Bank is closed.
"CASH MANAGEMENT SERVICES" are defined in Section 2.1.4.
"CLOSING DATE" is the date of this Agreement.
"COMMITTED REVOLVING LINE" is an Advance of up to $8,000,000.
13
<PAGE>
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"CREDIT EXTENSION" is each Advance, Letter of Credit, Exchange Contract, or
any other extension of credit by Bank for Borrower's benefit.
"CURRENT LIABILITIES" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"EXCHANGE CONTRACT" is defined in Section 2.1.3.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price
of property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is 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 later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
"LETTER OF CREDIT" is defined in Section 2.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
14
<PAGE>
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 7.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other Loan
Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date; and
(b) (i) marketable direct obligations issued or unconditionally guaranteed
by the United States or its agency or any State maturing within 2 years from its
acquisition, (ii) corporate short-term instruments such as commercial paper,
bonds or auction rate preferreds maturing no more than 1 year after their
acquisition and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue.
(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
and 00/100 Dollars ($500,000.00) 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;
15
<PAGE>
(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;
(i) Investments constituting acquisitions permitted under Section 6.3;
(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;
(l) Investments accepted in connection with Transfers permitted by Section
6.1
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or arising
under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
--
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
--
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the ordinary
course of Borrower's business and any interest or title of a lessor, licensor or
under any lease or license, if the leases, subleases, licenses and sublicenses
--
permit granting Bank a security interest;
(e) Liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default under Section 7.7;
(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 on
deposit, whether arising by operation of law or by contract, in connection with
arrangements entered into with banks in the ordinary course of business;
(h) Earn-out and royalty obligations existing on the date hereof or entered
into in connection with an acquisition permitted by Section 6.3; and
(i) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
---
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it is
not Bank's lowest rate.
16
<PAGE>
"QUICK ASSETS" is, on any date, the Borrower's consolidated, unrestricted
cash, cash equivalents, net billed accounts receivable and investments
classified as current assets as determined according to GAAP.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is May 6, 1999.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's
debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
-----
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
---
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
BORROWER:
MMC NETWORKS, INC.
/s/ Uday Bellary
By: __________________________________
Vice President, Finance & Chief
Financial Officer
Title: _______________________________
BANK:
SILICON VALLEY BANK
/s/ Kevin Walsh
By: ________________________________
AVP
Title: _____________________________
17
<PAGE>
EXHIBIT A
---------
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) 496-2426 TIME: ___________________
FROM: MMC NETWORKS, INC.
-------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: __________________________________________________________
PHONE NUMBER: __________________________________________________________________
FROM ACCOUNT # ___________________ TO ACCOUNT # ____________________________
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
- -------------------------- -----------------------
PRINCIPAL INCREASE (ADVANCE) $_______________________________________
PRINCIPAL PAYMENT (ONLY) $_______________________________________
INTEREST PAYMENT (ONLY) $_______________________________________
PRINCIPAL AND INTEREST (PAYMENT) $_______________________________________
OTHER INSTRUCTIONS: ____________________________________________________________
________________________________________________________________________________
All Borrower's representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate; but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that 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 Phone #
- -------------------------------- ----------------------------------
Received By (Bank) Phone #
--------------------------------
Authorized Signature (Bank)
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: MMC NETWORKS, INC.
The undersigned authorized officer of MMC NETWORKS, INC. certifies that
under 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 in the Agreement are true and
correct in all material respects on this date. Attached are the required
documents supporting the certification. The Officer certifies that these are
prepared in accordance with Generally Accepted Accounting Principles (GAAP)
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer acknowledges that no borrowings
may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that 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>
10-Q, 10-K + Annual Report Within 5 days after filing with SEC Yes No
Compliance Certificate Quarterly within 50 days Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.75:1.00 _____:1.00 Yes No
Maximum Debt/Tangible Net
Worth 1.25:1.00 _____:1.00 Yes No
Profitability: Quarterly $_________ Yes No
One quarterly loss not to $500,000 Yes No
exceed:
</TABLE>
- ---------------------------------------------------
BANK USE ONLY
Received by:_______________________________________
AUTHORIZED SIGNER
Date:______________________________________________
Verified:__________________________________________
AUTHORIZED SIGNER
Date:______________________________________________
Compliance Status: Yes No
- ---------------------------------------------------
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
MMC NETWORKS, INC.
___________________________________________
SIGNATURE
___________________________________________
TITLE
___________________________________________
DATE
<PAGE>
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: MMC NETWORKS, INC.
LOAN OFFICER: MIKE ROSE
DATE: MAY 7, 1998
REVOLVING LOAN FEE $14,000.00
CREDIT REPORT 35.00
DOCUMENTATION FEE 750.00
TOTAL FEE DUE $14,785.00
------------- ==========
PLEASE INDICATE THE METHOD OF PAYMENT:
{ } A CHECK FOR THE TOTAL AMOUNT IS ATTACHED.
{X} DEBIT DDA # __________________ FOR THE TOTAL AMOUNT.
{ } LOAN PROCEEDS
BORROWER:
/s/ Uday Bellary
BY:___________________________________
Uday Bellary
/s/ Kevin Walsh 6/16/98
______________________________________
SILICON VALLEY BANK (DATE)
ACCOUNT OFFICER'S SIGNATURE
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of May 7, 1998, by and
between MMC NETWORKS, INC. ("Borrower") and Silicon Valley Bank ("Bank").
In connection with the Loan Agreement being concurrently executed between
Borrower and Bank, Borrower agrees as follows:
1. Borrower shall not sell, transfer, assign, mortgage, pledge, lease,
grant a security interest in, or encumber any of Borrower's documents, fixtures,
investment property, deposit accounts, inventory, equipment, chattel paper,
accounts, contract rights, general intangibles (including intellectual
property), and instruments, without Bank's prior written consent, which consent
shall not be unreasonably withheld.
2. It shall be an event of default under the Existing Loan Documents
and under any of the related documents between Borrower and Bank if there is a
breach of any term of this Negative Pledge Agreement.
BORROWER:
MMC NETWORKS, INC.
/s/ Uday Bellary
By:__________________________________________
Uday Bellary
Name:________________________________________
Vice President, Finance & Chief
Financial Officer
Title:_______________________________________
BANK:
SILICON VALLEY BANK
/s/ Kevin Walsh
By:__________________________________________
Kevin Walsh
Name:________________________________________
AVP
Title:_______________________________________
<PAGE>
CORPORATE BORROWING RESOLUTION
BORROWER: MMC NETWORKS, INC. BANK: SILICON VALLEY BANK
1134 ARQUES AVENUE 3003 TASMAN DRIVE
SUNNYVALE, CA 94086-4602 SANTA CLARA, CA 95054-1191
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
----- --------- -----------------
Vice President, Finance
Uday Bellary Chief Financial Officer /s/ Uday Bellary
_________________________ _______________________ ____________________________
President & Chief
Prabhat K. Dubey Executive Officer /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 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.
<PAGE>
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as, in
the judgment of the officer or officers herein authorized.
ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock, for
such class, series and number, and on such terms, as an officer of Borrower
shall deem appropriate.
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
Borrower and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Borrower; 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 May 7, 1998 and attest that
the signatures set opposite the names listed above are their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
/s/ Uday Bellary
X ______________________________________________
*Assistant Secretary, Uday Bellary
/s/ Prabhat K. Dubey
X ______________________________________________
Chief Executive Officer, 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,698
<SECURITIES> 28,166
<RECEIVABLES> 6,708
<ALLOWANCES> 172
<INVENTORY> 704
<CURRENT-ASSETS> 54,974
<PP&E> 6,798
<DEPRECIATION> 2,724
<TOTAL-ASSETS> 59,256
<CURRENT-LIABILITIES> 6,001
<BONDS> 131
0
0
<COMMON> 26
<OTHER-SE> 53,098
<TOTAL-LIABILITY-AND-EQUITY> 59,256
<SALES> 21,640
<TOTAL-REVENUES> 21,640
<CGS> 6,426
<TOTAL-COSTS> 34,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 3,803
<INCOME-TAX> 1,255
<INCOME-CONTINUING> 2,548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,548
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
