-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBflonIG3XTxQY2BrHrY7DhFogAUX6Ze3l1kSHEtBt+pkX7tFyHVK1DJz1ymAVWz fbKD2PWHF1Nv61vIF2hmnA== 0001012870-98-001990.txt : 19980806 0001012870-98-001990.hdr.sgml : 19980806 ACCESSION NUMBER: 0001012870-98-001990 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980805 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MMC NETWORKS INC CENTRAL INDEX KEY: 0001044660 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770319809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23023 FILM NUMBER: 98677740 BUSINESS ADDRESS: STREET 1: 1134 E ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087311600 MAIL ADDRESS: STREET 1: 1134 E ARQYES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-Q 1 FORM 10-Q 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. MMC NETWORKS, INC. QUARTERLY REPORT ON FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION 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
2 MMC NETWORKS, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
JUNE 30, DECEMBER 31, 1998 1997 --------- ------------- 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 ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS. 3 MMC NETWORKS, INC. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ------------------ 1998 1997 1998 1997 --------- --------- -------- -------- 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 ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS. 4 MMC NETWORKS, INC. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 1998 1997 ------------- ------------ 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
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS. 5 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:
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ======= ======= ======== =======
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 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 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 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.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------- --------------------------- 1998 1997 1998 1997 -------------- ------------- ------------- ------------ 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% ===== ===== ===== =====
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 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 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 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 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 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 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 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 EX-10.1 2 LOAN AGREEMENT EXHIBIT 10.1 - -------------------------------------------------------------------------------- LOAN AGREEMENT MMC NETWORKS, INC. - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- 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
2 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
3 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 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 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 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 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 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 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 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 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 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 "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 "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 (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 "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 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) 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.
REPORTING COVENANT REQUIRED COMPLIES ------------------ -------- -------- 10-Q, 10-K + Annual Report Within 5 days after filing with SEC Yes No Compliance Certificate Quarterly within 50 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES ------------------ -------- ------ -------- 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:
- --------------------------------------------------- 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 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 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:_______________________________________ 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. 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 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 18,698 28,166 6,708 172 704 54,974 6,798 2,724 59,256 6,001 131 0 0 26 53,098 59,256 21,640 21,640 6,426 34,040 0 0 35 3,803 1,255 2,548 0 0 0 2,548 0.09 0.08
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